By LIZ RAPPAPORT and JAMES T. AREDDY
Shaky auctions of Treasury notes this week reignited concerns about whether the government can attract buyers from China and elsewhere to soak up trillions in new debt.
A fuse was lit this week when traders noted China's apparent absence from direct participation in two Treasury bond auctions. While China may have bought Treasurys just before the auctions, market participants read the country's actions as a worrying sign that China and other foreign investors may be ratcheting back purchases at a time when the U.S. is seeking to fund a $1.8 trillion budget deficit.
This week alone, the U.S. deluged the bond market with more than $200 billion in record-size sales. The U.S. has had little trouble finding buyers in recent months. But that demand is fading, and the Treasury market has become volatile. Many are selling in favor of riskier assets such as corporate bonds, stocks or even higher-yielding debt of other countries. This portends higher interest rates for the Treasury, and it may need to find alternative sources of cash like issuing more inflation protected Treasury bonds.
Tension on Wall Street trading desks began building late last week when the Treasury surprised the market with plans for a record week of sales. A Monday sale of $90 billion in Treasury bills with maturities of as much as a year went well. But China appeared absent from the following two sales, which totaled $81 billion of debt, traders say.
By Thursday morning, trading-desk heads were frantically working with clients to ensure a better fate for the $28 billion seven-year note auction. It did fare far better, allaying some concerns.
"We believe by maintaining the deepest, most liquid market in the world, we will continue to attract capital from a broad array of investors," said Andrew Williams, a spokesman for the Treasury Department.
The seven-year Treasury note rose after the auction, gaining 3/32 point Thursday to 99 25/32, which lowered its yield to 3.285%. The 10-year Treasury also gained in price on the day, up 6/32 to yield 3.641%.
Details about the auctions aren't revealed by the government until weeks later. Overseas buyers initially are lumped together into a category known as "indirect bidders," giving little insight into the origins of demand. It may be months until more thorough data on foreign-government buying are released by the U.S. Treasury. Foreign investors had been substantial bidders in recent Treasury auctions, even though their holdings of Treasury debt had started to wane. But this week's auctions renewed worries that central banks and other buyers will start selling more aggressively.
"If this trend continues, it could reflect foreign buyers' increasing concerns about the creditworthiness of the U.S.," said James Bianco, president of Bianco Research.
The worries over China shine a light on the potential vulnerability of the U.S. as it tries to fund is budget hole. Last year, China led foreign investors in selling mortgage securities guaranteed by government entities Fannie Mae and Freddie Mac, according to Treasury Department data. They also sold corporate bonds as the global financial crisis ramped up. They have not dipped back into these asset classes despite a huge rally in corporate bonds and mortgage debt this year.
While no one at State Administration of Foreign Exchange, which manages China's $2 trillion, would comment on the latest Treasury auctions, the government has left little doubt it fears the portfolio is at risk.
Clipped comments from government officials, amplified by state media editorials, point to a worry the U.S. will ultimately address its massive debt obligations by permitting inflation to rise or letting the U.S. dollar sink -- factors that would erode the value of Treasurys owned by foreign investors such as China.
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AFP/Getty Images
Treasury Secretary Timothy Geithner waits to greet Chinese vice premier Wang Qishan before the opening session of the Economic Track of US-China Strategic and Economic Dialogue at the Treasury Department in Washington on July , 2009.
At economic talks in Washington this week, senior Chinese officials gave their Obama administration counterparts an earful about the burgeoning U.S. budget deficit. China made clear it wants the U.S. to "protect its investment assets" for the good of the bilateral relationship, as the state-run Xinhua news agency reported.
The gravity of Beijing's concern was reiterated with blanket coverage of the talks in Chinese newspapers, which generally praised Washington for treating seriously its concerns. Global Times, a nationalistic English-language paper, published a front-page photo showing U.S. Federal Reserve Board Chairman Ben Bernanke appearing anxious, perched on the edge of a chair and listening as Chinese Vice Premier Wang Qishan makes a point.
The Chinese are also in a bind. If they sow doubts about the solvency of the U.S. government, they risk driving down the value of the $800 billion in U.S. Treasurys they already own.
The Chinese government's Treasury strategy is a closely guarded secret, and analysts were hard-pressed to identify any evidence that might suggest an adjustment was suddenly under way. "We worry about the devaluation of the U.S. dollar, but not at this stage," said Yang Hui, a bond salesman at Citic Securities Co. in Beijing.
Fed's Paper Facility Falls to $67.3 Billion
The Federal Reserve's holdings in a facility set up to support the commercial-paper market fell to $67.3 billion in the week ended July 29 from about $106 billion last week, according to data released Thursday.
This week, three-month paper was maturing, and companies likely took their funds out of the Fed's Commercial Paper Funding Facility.
"We are seeing a significant improvement in sentiment around commercial paper, which is encouraging people to leave the Fed's protective custody," said Joseph Abate, money-markets strategist at Barclays Capital in New York.
The facility held about $334 billion at the end of 2008.
—Anusha Shrivastava
Write to Liz Rappaport at liz.rappaport@wsj.com and James T. Areddy at james.areddy@wsj.com
Friday, July 31, 2009
Liquidity woe for high-yield Asian bonds
--fewer issuance, lack of liquidity, increasing defaults increase the risk of Asian HY bonds.
Liquidity woe for high-yield Asian bonds
By Lindsay Whipp in Tokyo
Published: July 31 2009 03:00 Last updated: July 31 2009 03:00
Returns on Asian high-yielding corporate bonds have significantly outperformed their peers in developed markets so far this year, with non-financial companies showing returns of 53 per cent, according to the Bank of America Merrill Lynch indices.
That compares with 28 per cent for the US and 34 per cent in Europe.
Markit's iTraxx Asia ex-Japan high-yield credit default swap index has also narrowed significantly from its October peak of 1,500 basis points, to 600 basis points on July 28, indicating improving demand for such bonds.
However, the high-yield market is a long way from its pre-crisis heyday of abundant liquidity when investors had a huge appetite for risk. Significant hurdles to regaining this point remain, analysts say.
First, the dollar-denominated non-investment grade market for Asia-Pacific borrowers, an important gauge of international investor sentiment, remains moribund. The only issuance this year has been from Power Sector Assets & Liabilities Management (Psalm), which raised $1bn in May, and which Moody's rated B1, four notches below investment grade.
However, Psalm is a quasi-Philippine government entity - a status that may provide investors with a level of reassurance they may not get from independent companies.
By contrast, US high-yield debt sales have reached $55.4bn so far this year, an increase of more than half from 2008, according to Dealogic.
Instead of raising money in dollars, companies in Asia are selling debt in local currency. There have been $16.3bn worth of such local currency high-yield bond issues this year in the Asia-Pacific region excluding Japan, the data shows.
Second, the Asia ex-Japan high-yield dollar bond secondary market is severely lacking liquidity as hedge funds and investment bank proprietary trading desks reduce their participation.
Brayan Lai, a credit analyst at Calyon Corporate & Investment Bank in Hong Kong, estimates that liquidity is probably still less than a quarter of what it was two years ago. This means much sharper price moves compared with more normal market conditions.
"Bid-offer spreads are still pretty wide," Mr Lai said. "There are a certain number of distressed players and hedge funds who remain in Asia but it's still quite thin compared with the market four or five years ago."
Mr Lai continued: "If you've invested in these issues, you have to take a much longer term view. Liquidity is very thin, so you have to treat it very much like a bank treats a loan it gives to a company, you're basically locked in for that period of time."
The third hurdle relates to the upward trend in defaults that is putting off investors. According to Standard & Poor's, defaults on bonds in the Asia-Pacific region have increased to 12 cases since the beginning of the year, including subsidiaries of companies based outside the region. There were seven defaults in the whole of 2008, S&P says.
Ian Thompson, chief credit officer at S&P, estimates that defaults are likely to peak this year to about 10 per cent of the speculative grade debt. That's similar to the levels seen during the Asian financial crisis in 1998.
The sectors that appear to have suffered the most defaults are in the property, export-related and construction industries.
Mr Thompson said: "Credit is a lagging indicator. For some [companies] they've got pressures now and maybe [there is pressure] in sectors that won't recover as quickly. By and large, there should be a spike in defaults and a spike in negative outlooks followed by improvement."
Included in these default numbers is what S&P characterises as "distressed buying back" of bonds, with investors agreeing to the distressed terms as they feel they will get a better deal than going through the bankruptcy process.
"It's apparent there's a loss of economic value and loss on the part of the investors, we view that as a distressed exchange and view distressed exchanges as akin to default," Mr Thompson said.
Calyon's Mr Lai remains cautious about the outlook for high-yield debt in Asia. He says the economic situation remains difficult and this can have repercussions on the growth companies that largely make up the high-yield sector, as they are usually relatively leveraged and are dependent on a benign macro environment for profits.
"The economic situation looks tough with no clear certainty when the tide will turn, which means high-yield credits could come under more distress," Mr Lai said.
"I wholly recommend staying in Asian investment-grade credit because of above reasons, better risk/reward dynamics and also for much better liquidity, given that the market composes fewer players today."
Liquidity woe for high-yield Asian bonds
By Lindsay Whipp in Tokyo
Published: July 31 2009 03:00 Last updated: July 31 2009 03:00
Returns on Asian high-yielding corporate bonds have significantly outperformed their peers in developed markets so far this year, with non-financial companies showing returns of 53 per cent, according to the Bank of America Merrill Lynch indices.
That compares with 28 per cent for the US and 34 per cent in Europe.
Markit's iTraxx Asia ex-Japan high-yield credit default swap index has also narrowed significantly from its October peak of 1,500 basis points, to 600 basis points on July 28, indicating improving demand for such bonds.
However, the high-yield market is a long way from its pre-crisis heyday of abundant liquidity when investors had a huge appetite for risk. Significant hurdles to regaining this point remain, analysts say.
First, the dollar-denominated non-investment grade market for Asia-Pacific borrowers, an important gauge of international investor sentiment, remains moribund. The only issuance this year has been from Power Sector Assets & Liabilities Management (Psalm), which raised $1bn in May, and which Moody's rated B1, four notches below investment grade.
However, Psalm is a quasi-Philippine government entity - a status that may provide investors with a level of reassurance they may not get from independent companies.
By contrast, US high-yield debt sales have reached $55.4bn so far this year, an increase of more than half from 2008, according to Dealogic.
Instead of raising money in dollars, companies in Asia are selling debt in local currency. There have been $16.3bn worth of such local currency high-yield bond issues this year in the Asia-Pacific region excluding Japan, the data shows.
Second, the Asia ex-Japan high-yield dollar bond secondary market is severely lacking liquidity as hedge funds and investment bank proprietary trading desks reduce their participation.
Brayan Lai, a credit analyst at Calyon Corporate & Investment Bank in Hong Kong, estimates that liquidity is probably still less than a quarter of what it was two years ago. This means much sharper price moves compared with more normal market conditions.
"Bid-offer spreads are still pretty wide," Mr Lai said. "There are a certain number of distressed players and hedge funds who remain in Asia but it's still quite thin compared with the market four or five years ago."
Mr Lai continued: "If you've invested in these issues, you have to take a much longer term view. Liquidity is very thin, so you have to treat it very much like a bank treats a loan it gives to a company, you're basically locked in for that period of time."
The third hurdle relates to the upward trend in defaults that is putting off investors. According to Standard & Poor's, defaults on bonds in the Asia-Pacific region have increased to 12 cases since the beginning of the year, including subsidiaries of companies based outside the region. There were seven defaults in the whole of 2008, S&P says.
Ian Thompson, chief credit officer at S&P, estimates that defaults are likely to peak this year to about 10 per cent of the speculative grade debt. That's similar to the levels seen during the Asian financial crisis in 1998.
The sectors that appear to have suffered the most defaults are in the property, export-related and construction industries.
Mr Thompson said: "Credit is a lagging indicator. For some [companies] they've got pressures now and maybe [there is pressure] in sectors that won't recover as quickly. By and large, there should be a spike in defaults and a spike in negative outlooks followed by improvement."
Included in these default numbers is what S&P characterises as "distressed buying back" of bonds, with investors agreeing to the distressed terms as they feel they will get a better deal than going through the bankruptcy process.
"It's apparent there's a loss of economic value and loss on the part of the investors, we view that as a distressed exchange and view distressed exchanges as akin to default," Mr Thompson said.
Calyon's Mr Lai remains cautious about the outlook for high-yield debt in Asia. He says the economic situation remains difficult and this can have repercussions on the growth companies that largely make up the high-yield sector, as they are usually relatively leveraged and are dependent on a benign macro environment for profits.
"The economic situation looks tough with no clear certainty when the tide will turn, which means high-yield credits could come under more distress," Mr Lai said.
"I wholly recommend staying in Asian investment-grade credit because of above reasons, better risk/reward dynamics and also for much better liquidity, given that the market composes fewer players today."
Thursday, July 30, 2009
The spend is nigh
Jul 30th 2009 HONG KONG
From The Economist print edition
The second article in our series on global rebalancing asks whether China can reduce its trade surplus by consuming more
A REBALANCED global economy requires America to consume less and save more. That means the world’s three big surplus economies—China, Germany and Japan—will have to save less and spend more. None is under more scrutiny than China, whose vast current-account surplus has been fingered by some as the ultimate cause of the financial crisis. The case against China is exaggerated but a surplus of more than $400 billion in 2008, or 10% of GDP, was clearly too big. Can China right its trade imbalances, and if so, how will it achieve rapid growth in future?
The good news is that the surplus is already shrinking. The strong rebound in China’s economy in the second quarter—pushing GDP 7.9% higher than a year ago—came entirely from domestic demand. This sucked in more imports, while exports continued to slump. China’s merchandise trade surplus narrowed to $35 billion in the same quarter, 40% down on a year earlier. Yu Song and Helen Qiao of Goldman Sachs calculate that the decline is even more impressive in real terms (adjusting for changes in export and import prices), with the surplus shrinking to less than one-third of its level a year ago (see chart 1). They even suggest that a monthly trade deficit is possible within the next year.
Another way to look at the huge swing in China’s trade is that net exports (exports minus imports) contributed 2.6 percentage points of the country’s GDP growth in 2007, but shaved almost three points off its growth in the first half of this year.
Most economists think that China’s trade surplus will remain large. The jump in imports in the second quarter included heavy stockpiling of commodities, which will not last; copper imports, for example, were 150% higher than a year ago. Yet the underlying surplus is clearly shrinking. Paul Cavey of Macquarie Securities forecasts that China’s current-account surplus will fall to under 6% of GDP this year and 4% in 2010, down from a peak of 11% in 2007. Exports amounted to 35% of GDP in 2007; this year, reckons Mr Cavey, that ratio will drop to 24.5%.
On the surface, therefore, China is fulfilling the long-standing demand of Western governments that it shift its engine of growth from exports to domestic demand. Thanks to the biggest fiscal stimulus and loosening of credit of any large economy, China’s real domestic demand is likely to grow by at least 10% this year. In fact, the popular perception that China has always relied on export-led growth is rather misleading. Its current-account surplus did soar from 2005 onwards but until then was rather modest. And over the past ten years net exports accounted, on average, for only one-tenth of its growth.
The problem is more that the mix of domestic demand between consumption and investment is unbalanced, and becoming even more so. In 2008 private consumption accounted for only 35% of GDP, down from 49% in 1990 (see chart 2). By contrast, investment had risen from 35% to 44% of GDP. This year the bulk of the government’s stimulus is going into infrastructure, further swelling investment’s share. Chinese capital spending could exceed that in America for the first time, while its consumer spending will be only one-sixth as large. This is China’s most glaring economic imbalance.
Spending lots of money on building railways, roads and power grids is the most effective way for the government to prop up demand in the short term—especially since China, as a poor country, needs better infrastructure. However, the pace of investment is unsustainable. Even before this year’s infrastructure boom capital spending was too great, causing many economists to worry about excess capacity and the risk that bank loans could sour.
China deserves credit for the speed with which it responded to the global downturn. Now it needs to focus on structural reforms not just to keep domestic demand growing strongly and to reduce its trade surplus further, but also to derive more of its growth from consumption and less from investment.
Before exploring how China can do so, it is important first to clear up a misunderstanding. It is often argued that China runs a current-account surplus because its consumer spending has been sluggish. On the contrary, China has the world’s fastest-growing consumer market, increasing by 8% a year in real terms in the past decade. Retail sales have leapt by 17% in real terms in the past 12 months, although this figure may be inflated by government purchases. Even so, China’s consumer spending has grown more slowly than the overall economy. As a result consumption as a share of GDP has fallen and is extremely low by international standards: only 35%, compared with 50-60% in most other Asian economies and 70% in America.
Economists disagree about the main reason why the consumption ratio has fallen—and hence about the best way to lift it. The most popular explanation is that Chinese households have been saving a bigger slice of their income because of an inadequate social safety net. They have squirrelled away more money to cover the future cost of health care, education and pensions. According to Eswar Prasad, an economist at Cornell University, the saving rate of urban households has jumped from 20% to 28% of their disposable income over the past decade. After exploring all the possible causes, he concludes that uncertainty about the private burden of health care and education is indeed the main culprit. The effect has been worsened by an undeveloped financial system, making it hard for households to borrow.
PanosThe Beijing government is acting: it doubled spending on health care, education and social security between 2005 and 2008. But the total amount remains low at only 6% of GDP, compared with an average of around 25% in OECD countries. This year the government has increased pensions coverage and payments to low-income households. It has also pledged to provide basic health care for 90% of the population by 2011, although the new spending appears to be less than 0.5% of GDP each year. If such measures ease households’ worries about future health care, they could encourage them to save less. But it will take years for them to have much effect on consumer behaviour.
Slicing up saving
More to the point, an inadequate welfare state does not fully explain why consumption has fallen as a share of GDP. The first niggle is that most workers lost their state-provided health care and education almost a decade ago, after the reform of state-owned firms, so this cannot really explain why saving has continued to rise more recently. Louis Kuijs, an economist at the World Bank in Beijing, suggests that the extra saving may owe as much to greater income inequality as to the lack of a welfare state. Rich people save a lot more and their numbers have increased.
A second flaw in the thesis is that although urban households have been saving more, rural households have become less thrifty over the past decade. As a result China’s average household-saving rate has risen more modestly. Mr Kuijs calculates that total household saving has risen from 21% of GDP in 1998 to 24% in 2008. Households accounted for only one-fifth of the increase in total domestic saving over the period. Most of the increase in saving came from companies (see chart 3).
This matters for two reasons. First, if anyone saves too much, it is companies, not households. Second, you need to look elsewhere for the cause of China’s falling consumption ratio. The drop in consumer spending as a share of GDP over the past decade has been almost four times larger than the rise in household saving.
The more important reason why consumption has fallen is that the share of national income going to households (as wages and investment income) has fallen, while the share of profits has risen. Workers’ share of the cake has dwindled because China’s rapid growth has generated surprisingly few jobs. Growth has been capital-intensive, focusing on heavy industries such as steel rather than more labour-intensive services. Profits (the return to capital) have outpaced wage income.
Capital-intensive production has been encouraged by low interest rates and by the fact that most state-owned firms do not pay any dividends, allowing them to reinvest all their profits. The government has also favoured manufacturing over services by holding down the exchange rate as well as by suppressing the prices of inputs such as land and energy.
Simply urging households to spend a bigger slice of their income will not be enough to shift China’s growth towards consumption. Beefing up the welfare state is important but policy also needs to focus on how to lift household income and reduce corporate saving, says Mr Kuijs. Making growth more labour-intensive will require lots of difficult reforms. China needs financial-sector liberalisation to lift the cost of capital for state-owned companies and improve access to credit for private ones, especially in services. Higher deposit rates would also boost household income. Distortions in the tax system which favour manufacturing and barriers to private-sector participation in some service industries should be scrapped. State-owned firms ought to be forced to pay bigger dividends. The prices of subsidised industrial inputs should be raised. Land reform and the removal of restrictions on migration from rural to urban areas would also help to lift incomes and thus consumption.
China has barely started on these important reforms. That may be because they involve much harder political decisions than creating a welfare state. They require the government to loosen its control over the economy, something which Beijing will do slowly and reluctantly.
Last but not least, China needs to allow its exchange rate to rise. This would lift consumers’ real purchasing power, discourage excessive investment in manufacturing and help to reduce the trade deficit further. It would also alleviate the risk of a protectionist backlash abroad. From July 2005 (when China abandoned its dollar peg) to February 2009, the yuan rose by 28% in real trade-weighted terms, according to the Bank for International Settlements. But alarmed by the collapse of exports, China has virtually repegged the yuan to the dollar over the past 12 months. As the greenback fell this year, it dragged the yuan down with it. Since February the yuan’s real trade-weighted value has lost 8%.
Economists disagree about the extent to which the yuan is undervalued. In the IMF’s “Article IV” assessment of China, published on July 22nd, officials were split over whether the currency was “substantially undervalued”. Morris Goldstein and Nicholas Lardy, of the Peterson Institute for International Economics, have done some of the most extensive work on China’s exchange rate. In a new study, they estimate that the yuan is undervalued by 15-25%, based on the adjustment needed to eliminate the current-account surplus.
The American government has softened its demands for revaluation, largely because it needs China to keep buying Treasury bonds to fund its own stimulus spending. At the Strategic and Economic Dialogue meeting between American and Chinese officials on July 27th and 28th in Washington, DC, the yuan’s exchange rate was barely discussed. However, the case for appreciation remains strong.
China’s recent efforts to boost domestic spending have helped to maintain robust growth and reduce its trade surplus. But excessive levels of investment are not a recipe for sustained rapid growth. Unless it is prepared to embrace difficult structural reforms and to allow the yuan to climb, China’s commitment to rebalancing will remain half-hearted. In the long run that will be bad news for China itself as well as for the rest of the world.
From The Economist print edition
The second article in our series on global rebalancing asks whether China can reduce its trade surplus by consuming more
A REBALANCED global economy requires America to consume less and save more. That means the world’s three big surplus economies—China, Germany and Japan—will have to save less and spend more. None is under more scrutiny than China, whose vast current-account surplus has been fingered by some as the ultimate cause of the financial crisis. The case against China is exaggerated but a surplus of more than $400 billion in 2008, or 10% of GDP, was clearly too big. Can China right its trade imbalances, and if so, how will it achieve rapid growth in future?
The good news is that the surplus is already shrinking. The strong rebound in China’s economy in the second quarter—pushing GDP 7.9% higher than a year ago—came entirely from domestic demand. This sucked in more imports, while exports continued to slump. China’s merchandise trade surplus narrowed to $35 billion in the same quarter, 40% down on a year earlier. Yu Song and Helen Qiao of Goldman Sachs calculate that the decline is even more impressive in real terms (adjusting for changes in export and import prices), with the surplus shrinking to less than one-third of its level a year ago (see chart 1). They even suggest that a monthly trade deficit is possible within the next year.
Another way to look at the huge swing in China’s trade is that net exports (exports minus imports) contributed 2.6 percentage points of the country’s GDP growth in 2007, but shaved almost three points off its growth in the first half of this year.
Most economists think that China’s trade surplus will remain large. The jump in imports in the second quarter included heavy stockpiling of commodities, which will not last; copper imports, for example, were 150% higher than a year ago. Yet the underlying surplus is clearly shrinking. Paul Cavey of Macquarie Securities forecasts that China’s current-account surplus will fall to under 6% of GDP this year and 4% in 2010, down from a peak of 11% in 2007. Exports amounted to 35% of GDP in 2007; this year, reckons Mr Cavey, that ratio will drop to 24.5%.
On the surface, therefore, China is fulfilling the long-standing demand of Western governments that it shift its engine of growth from exports to domestic demand. Thanks to the biggest fiscal stimulus and loosening of credit of any large economy, China’s real domestic demand is likely to grow by at least 10% this year. In fact, the popular perception that China has always relied on export-led growth is rather misleading. Its current-account surplus did soar from 2005 onwards but until then was rather modest. And over the past ten years net exports accounted, on average, for only one-tenth of its growth.
The problem is more that the mix of domestic demand between consumption and investment is unbalanced, and becoming even more so. In 2008 private consumption accounted for only 35% of GDP, down from 49% in 1990 (see chart 2). By contrast, investment had risen from 35% to 44% of GDP. This year the bulk of the government’s stimulus is going into infrastructure, further swelling investment’s share. Chinese capital spending could exceed that in America for the first time, while its consumer spending will be only one-sixth as large. This is China’s most glaring economic imbalance.
Spending lots of money on building railways, roads and power grids is the most effective way for the government to prop up demand in the short term—especially since China, as a poor country, needs better infrastructure. However, the pace of investment is unsustainable. Even before this year’s infrastructure boom capital spending was too great, causing many economists to worry about excess capacity and the risk that bank loans could sour.
China deserves credit for the speed with which it responded to the global downturn. Now it needs to focus on structural reforms not just to keep domestic demand growing strongly and to reduce its trade surplus further, but also to derive more of its growth from consumption and less from investment.
Before exploring how China can do so, it is important first to clear up a misunderstanding. It is often argued that China runs a current-account surplus because its consumer spending has been sluggish. On the contrary, China has the world’s fastest-growing consumer market, increasing by 8% a year in real terms in the past decade. Retail sales have leapt by 17% in real terms in the past 12 months, although this figure may be inflated by government purchases. Even so, China’s consumer spending has grown more slowly than the overall economy. As a result consumption as a share of GDP has fallen and is extremely low by international standards: only 35%, compared with 50-60% in most other Asian economies and 70% in America.
Economists disagree about the main reason why the consumption ratio has fallen—and hence about the best way to lift it. The most popular explanation is that Chinese households have been saving a bigger slice of their income because of an inadequate social safety net. They have squirrelled away more money to cover the future cost of health care, education and pensions. According to Eswar Prasad, an economist at Cornell University, the saving rate of urban households has jumped from 20% to 28% of their disposable income over the past decade. After exploring all the possible causes, he concludes that uncertainty about the private burden of health care and education is indeed the main culprit. The effect has been worsened by an undeveloped financial system, making it hard for households to borrow.
PanosThe Beijing government is acting: it doubled spending on health care, education and social security between 2005 and 2008. But the total amount remains low at only 6% of GDP, compared with an average of around 25% in OECD countries. This year the government has increased pensions coverage and payments to low-income households. It has also pledged to provide basic health care for 90% of the population by 2011, although the new spending appears to be less than 0.5% of GDP each year. If such measures ease households’ worries about future health care, they could encourage them to save less. But it will take years for them to have much effect on consumer behaviour.
Slicing up saving
More to the point, an inadequate welfare state does not fully explain why consumption has fallen as a share of GDP. The first niggle is that most workers lost their state-provided health care and education almost a decade ago, after the reform of state-owned firms, so this cannot really explain why saving has continued to rise more recently. Louis Kuijs, an economist at the World Bank in Beijing, suggests that the extra saving may owe as much to greater income inequality as to the lack of a welfare state. Rich people save a lot more and their numbers have increased.
A second flaw in the thesis is that although urban households have been saving more, rural households have become less thrifty over the past decade. As a result China’s average household-saving rate has risen more modestly. Mr Kuijs calculates that total household saving has risen from 21% of GDP in 1998 to 24% in 2008. Households accounted for only one-fifth of the increase in total domestic saving over the period. Most of the increase in saving came from companies (see chart 3).
This matters for two reasons. First, if anyone saves too much, it is companies, not households. Second, you need to look elsewhere for the cause of China’s falling consumption ratio. The drop in consumer spending as a share of GDP over the past decade has been almost four times larger than the rise in household saving.
The more important reason why consumption has fallen is that the share of national income going to households (as wages and investment income) has fallen, while the share of profits has risen. Workers’ share of the cake has dwindled because China’s rapid growth has generated surprisingly few jobs. Growth has been capital-intensive, focusing on heavy industries such as steel rather than more labour-intensive services. Profits (the return to capital) have outpaced wage income.
Capital-intensive production has been encouraged by low interest rates and by the fact that most state-owned firms do not pay any dividends, allowing them to reinvest all their profits. The government has also favoured manufacturing over services by holding down the exchange rate as well as by suppressing the prices of inputs such as land and energy.
Simply urging households to spend a bigger slice of their income will not be enough to shift China’s growth towards consumption. Beefing up the welfare state is important but policy also needs to focus on how to lift household income and reduce corporate saving, says Mr Kuijs. Making growth more labour-intensive will require lots of difficult reforms. China needs financial-sector liberalisation to lift the cost of capital for state-owned companies and improve access to credit for private ones, especially in services. Higher deposit rates would also boost household income. Distortions in the tax system which favour manufacturing and barriers to private-sector participation in some service industries should be scrapped. State-owned firms ought to be forced to pay bigger dividends. The prices of subsidised industrial inputs should be raised. Land reform and the removal of restrictions on migration from rural to urban areas would also help to lift incomes and thus consumption.
China has barely started on these important reforms. That may be because they involve much harder political decisions than creating a welfare state. They require the government to loosen its control over the economy, something which Beijing will do slowly and reluctantly.
Last but not least, China needs to allow its exchange rate to rise. This would lift consumers’ real purchasing power, discourage excessive investment in manufacturing and help to reduce the trade deficit further. It would also alleviate the risk of a protectionist backlash abroad. From July 2005 (when China abandoned its dollar peg) to February 2009, the yuan rose by 28% in real trade-weighted terms, according to the Bank for International Settlements. But alarmed by the collapse of exports, China has virtually repegged the yuan to the dollar over the past 12 months. As the greenback fell this year, it dragged the yuan down with it. Since February the yuan’s real trade-weighted value has lost 8%.
Economists disagree about the extent to which the yuan is undervalued. In the IMF’s “Article IV” assessment of China, published on July 22nd, officials were split over whether the currency was “substantially undervalued”. Morris Goldstein and Nicholas Lardy, of the Peterson Institute for International Economics, have done some of the most extensive work on China’s exchange rate. In a new study, they estimate that the yuan is undervalued by 15-25%, based on the adjustment needed to eliminate the current-account surplus.
The American government has softened its demands for revaluation, largely because it needs China to keep buying Treasury bonds to fund its own stimulus spending. At the Strategic and Economic Dialogue meeting between American and Chinese officials on July 27th and 28th in Washington, DC, the yuan’s exchange rate was barely discussed. However, the case for appreciation remains strong.
China’s recent efforts to boost domestic spending have helped to maintain robust growth and reduce its trade surplus. But excessive levels of investment are not a recipe for sustained rapid growth. Unless it is prepared to embrace difficult structural reforms and to allow the yuan to climb, China’s commitment to rebalancing will remain half-hearted. In the long run that will be bad news for China itself as well as for the rest of the world.
Credit Thaw Is Spurring Appetite for Bank IOUs
By CARRICK MOLLENKAMP, NEIL SHAH AND STEPHEN FIDLER
Investors have developed a voracious demand for short-term debt issued by U.S. and European banks, and an important global lending benchmark has fallen to an all-time low -- welcome signs that bank credit markets have improved.
But beneath the demand for short-term bank debt, known as commercial paper, and a drop in the London interbank offered rate, or Libor, significant kinks remain lodged in the bank markets: Banks are using the fresh cash to repay existing debt, or simply hoarding it. That cash buildup is potentially stymieing efforts by regulators to circulate funds to borrowers and the most needy banks.
In contrast to the panicked days early this year, bank commercial paper "flies off the screen," said one New York trader.
The market for this short-term bank debt runs from 7 a.m. to about 2 p.m. in New York. But investor demand has been so strong that some banks are turning away buyers by late morning.
Commercial paper is short-term IOUs issued to raise money for short periods. Libor reflects the rates at which banks can borrow at maturities ranging from overnight to one year. The rates are calculated daily in London when a panel of banks report their borrowing costs.
In recent months, Libor has fallen sharply, reflecting a broader thaw as investors' confidence in the financial system returns. As of Wednesday, three-month dollar Libor stood at its lowest level on record: 0.4875%, down from 4.81875% at the peak of the crisis in October.
Meanwhile, one measure of risk in the banking system -- the difference between three-month dollar Libor and the U.S. Federal Reserve's expected target rate -- is approaching 0.25 percentage point, a level that former U.S. Federal Reserve Chairman Alan Greenspan once said would signal the end of the financial crisis. The fact that central bankers are providing cheap money has lessened the value of Libor.
'Return in Confidence'
There is the possibility that three-month dollar Libor could fall yet further. The most healthy U.S. and European banks are selling three-month commercial paper at a range of 0.3 percentage point, or nearly 0.2 percentage point below the three-month Libor, according to one New York desk that trades commercial paper. That suggests Libor might fall further if it tracked the cost of selling the short-term IOUs.
"You've got a return in confidence," said Joseph Abate, money-markets strategist at Barclays Capital.
That is good news for banks as well as borrowers. Libor is used as a benchmark for interbank loans as well as for borrowings for homeowners and credit-card borrowers.
Separately, the gap or difference between three-month and one-month dollar Libor has shrunk, a sign banks are willing to lend to one another for more than a month. Historically, that gap has been zero.
Yet Libor's fall mightn't be a sign banks have restored confidence in one another. Rather, it is that emergency central-bank programs have stabilized the markets that make up the plumbing of the global financial system.
Last month, the European Central Bank lent banks in the euro zone some €442 billion ($626 billion) in one-year loans, at the ECB's key rate of 1%. Demand for the ECB's cash was heavy, a sign Europe's banks may still be having trouble funding their businesses.
Euro Parking
What is more, European banks are parking tens of billions of euros at a deposit facility maintained by the European Central Bank. In the past week or so, banks have deposited between €170 billion and €195 billion at the ECB, according to ECB data and Morgan Stanley.
That is a clear sign "euro area financial markets are not distributing cash to the interbank and nonfinancial markets as well as they might be," Morgan Stanley interest-rate strategist Laurence Mutkin said in a report, adding, "Only a fall in use of the deposit facility would demonstrate banks' willingness to lend rather than hoard cash."
An ECB spokesman declined to comment on the report.
All these factors have created an odd market dynamic: Banks are increasingly flush with cash. But they are choosing not to lend it, and borrowers are opting not to seek funds.
Alistair Darling
On Wednesday, the Bank of England and the ECB separately reported that Europe's banks remain leery of lending despite massive government aid and pressure from officials such as U.K. Treasury chief Alistair Darling and ECB President Jean-Claude Trichet. On Monday, for example, Mr. Darling called in the heads of the U.K.'s seven largest banks and urged them to step up lending to small- and medium-size firms.
In the U.S. and Europe, one problem is a lack of actual borrower demand, especially as consumers and companies themselves seek to reduce their debts. In a speech Wednesday, New York Federal Reserve President William Dudley said banks are still working through large credit losses and that the market for offloading loans to investors remains limited.
"This means that credit availability will be constrained for some time to come, and this will serve to limit the pace of recovery," Mr. Dudley said.
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com
Investors have developed a voracious demand for short-term debt issued by U.S. and European banks, and an important global lending benchmark has fallen to an all-time low -- welcome signs that bank credit markets have improved.
But beneath the demand for short-term bank debt, known as commercial paper, and a drop in the London interbank offered rate, or Libor, significant kinks remain lodged in the bank markets: Banks are using the fresh cash to repay existing debt, or simply hoarding it. That cash buildup is potentially stymieing efforts by regulators to circulate funds to borrowers and the most needy banks.
In contrast to the panicked days early this year, bank commercial paper "flies off the screen," said one New York trader.
The market for this short-term bank debt runs from 7 a.m. to about 2 p.m. in New York. But investor demand has been so strong that some banks are turning away buyers by late morning.
Commercial paper is short-term IOUs issued to raise money for short periods. Libor reflects the rates at which banks can borrow at maturities ranging from overnight to one year. The rates are calculated daily in London when a panel of banks report their borrowing costs.
In recent months, Libor has fallen sharply, reflecting a broader thaw as investors' confidence in the financial system returns. As of Wednesday, three-month dollar Libor stood at its lowest level on record: 0.4875%, down from 4.81875% at the peak of the crisis in October.
Meanwhile, one measure of risk in the banking system -- the difference between three-month dollar Libor and the U.S. Federal Reserve's expected target rate -- is approaching 0.25 percentage point, a level that former U.S. Federal Reserve Chairman Alan Greenspan once said would signal the end of the financial crisis. The fact that central bankers are providing cheap money has lessened the value of Libor.
'Return in Confidence'
There is the possibility that three-month dollar Libor could fall yet further. The most healthy U.S. and European banks are selling three-month commercial paper at a range of 0.3 percentage point, or nearly 0.2 percentage point below the three-month Libor, according to one New York desk that trades commercial paper. That suggests Libor might fall further if it tracked the cost of selling the short-term IOUs.
"You've got a return in confidence," said Joseph Abate, money-markets strategist at Barclays Capital.
That is good news for banks as well as borrowers. Libor is used as a benchmark for interbank loans as well as for borrowings for homeowners and credit-card borrowers.
Separately, the gap or difference between three-month and one-month dollar Libor has shrunk, a sign banks are willing to lend to one another for more than a month. Historically, that gap has been zero.
Yet Libor's fall mightn't be a sign banks have restored confidence in one another. Rather, it is that emergency central-bank programs have stabilized the markets that make up the plumbing of the global financial system.
Last month, the European Central Bank lent banks in the euro zone some €442 billion ($626 billion) in one-year loans, at the ECB's key rate of 1%. Demand for the ECB's cash was heavy, a sign Europe's banks may still be having trouble funding their businesses.
Euro Parking
What is more, European banks are parking tens of billions of euros at a deposit facility maintained by the European Central Bank. In the past week or so, banks have deposited between €170 billion and €195 billion at the ECB, according to ECB data and Morgan Stanley.
That is a clear sign "euro area financial markets are not distributing cash to the interbank and nonfinancial markets as well as they might be," Morgan Stanley interest-rate strategist Laurence Mutkin said in a report, adding, "Only a fall in use of the deposit facility would demonstrate banks' willingness to lend rather than hoard cash."
An ECB spokesman declined to comment on the report.
All these factors have created an odd market dynamic: Banks are increasingly flush with cash. But they are choosing not to lend it, and borrowers are opting not to seek funds.
Alistair Darling
On Wednesday, the Bank of England and the ECB separately reported that Europe's banks remain leery of lending despite massive government aid and pressure from officials such as U.K. Treasury chief Alistair Darling and ECB President Jean-Claude Trichet. On Monday, for example, Mr. Darling called in the heads of the U.K.'s seven largest banks and urged them to step up lending to small- and medium-size firms.
In the U.S. and Europe, one problem is a lack of actual borrower demand, especially as consumers and companies themselves seek to reduce their debts. In a speech Wednesday, New York Federal Reserve President William Dudley said banks are still working through large credit losses and that the market for offloading loans to investors remains limited.
"This means that credit availability will be constrained for some time to come, and this will serve to limit the pace of recovery," Mr. Dudley said.
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com
Time to stop worrying and learn to love the recovery
By Tim Bond
Published: July 30 2009 03:00 Last updated: July 30 2009 03:00
Never has a bull market climbed a steeper wall of worry. In spite of a proliferation of positive economic indicators, the consensus remains gloomy. Bullish economists are rarer than hens' teeth.
The average forecast for third-quarter US gross domestic product growth is a weak 0.8 per cent, which would be by far the slowest first quarter of any recovery on record. Since 1945, the average annualised real US growth rate in the first two quarters of recovery is 7 per cent. History provides abundant evidence that the deeper the recession, the stronger the bounce. Even the recovery from the Great Depression conformed to this rule, real US GDP grew 10.8 per cent in 1934 and 8.9 per cent in 1935.
Yet today's consensus assumes this time things will be different. The persistence of such pessimism is striking given a strong Asian recovery is visible, with output, employment and demand all following V-shaped trajectories, and regional industrial production rapidly bouncing back above the previous peak. Yet this recovery is dismissed by western analysts, who appear unable or unwilling to believe the region is capable of endogenous growth. That 2009 will be the second year in a row in which the increase in Chinese domestic demand exceeds that of the US is a point roundly ignored.
The fate of the Chinese economy is supposedly in thrall to the US consumer, in spite of clear and persistent evidence to the contrary. The US economy, which provides a home to 17 per cent of China's exports, is still seen as the arbiter of growth in Asia. This obstinate adherence to an outdated assessment of economic dependence is not the only gaping intellectual flaw.
The 9.5 per cent US unemployment rate is also viewed as an obstacle to recovery. This objection ignores the many contrary examples of high unemployment rates and subsequent recoveries, not least in the US. Thus in 1982, US unemployment hit 10.8 per cent, yet GDP soared at an average annual pace of 7.7 per cent over the next six quarters.
Similarly, few commentators consider the possibility that the large post-Lehman rise in US unemployment was a mistake on the part of panicky managements. Yet this is precisely what trends in labour productivity growth, not to mention common sense, tell us occurred. In the first half of 2008, labour productivity growth averaged 3.3 per cent, while the unemployment rate rose to 5.6 per cent. At that point, there was no evidence US companies were overstaffed. Thereafter, output collapsed, yet business productivity growth remained positive, registering an average yearly pace of over 2 per cent, as companies shed labour at a faster pace than they reduced output. Businesses, like markets, panicked after Lehman went under. Employment and output were both reduced far more than it turned out to be necessary, as businesses temporarily and understandably assumed a worst case scenario.
Just as global output is performing a V-shaped recovery, there is a big risk US employment will do the same, with monthly payrolls showing surprising growth by the end of 2009.
If unemployment is one half of the bearish consensus, de-leveraging is seen as the other main obstacle to recovery. Yet increases in private leverage never play a significant role in recoveries. Indeed, since 1950, US private sector borrowing ex-mortgages has declined an average 0.1 per cent of GDP in the first year of recovery, with non-financial business borrowing declining 0.6 per cent of GDP.
A regression of the household savings rate on the wealth-to-income ratio tells us the former has made the appropriate adjustment to declines in the latter. In fact, the rally in the stock market, the low level of interest rates and the stabilisation in house prices all tend to limit the risk of a further sizeable increase in the savings rate. So over the rest of this year, the standard cyclical timing of a US economic turning point tells us pessimistic expectations are likely to collide with the economic reality of a strong recovery. The net result is almost inevitable, in the shape of an inexorable continuation of the equity rally.
The writer is head of asset allocation at Barclays Capital
Published: July 30 2009 03:00 Last updated: July 30 2009 03:00
Never has a bull market climbed a steeper wall of worry. In spite of a proliferation of positive economic indicators, the consensus remains gloomy. Bullish economists are rarer than hens' teeth.
The average forecast for third-quarter US gross domestic product growth is a weak 0.8 per cent, which would be by far the slowest first quarter of any recovery on record. Since 1945, the average annualised real US growth rate in the first two quarters of recovery is 7 per cent. History provides abundant evidence that the deeper the recession, the stronger the bounce. Even the recovery from the Great Depression conformed to this rule, real US GDP grew 10.8 per cent in 1934 and 8.9 per cent in 1935.
Yet today's consensus assumes this time things will be different. The persistence of such pessimism is striking given a strong Asian recovery is visible, with output, employment and demand all following V-shaped trajectories, and regional industrial production rapidly bouncing back above the previous peak. Yet this recovery is dismissed by western analysts, who appear unable or unwilling to believe the region is capable of endogenous growth. That 2009 will be the second year in a row in which the increase in Chinese domestic demand exceeds that of the US is a point roundly ignored.
The fate of the Chinese economy is supposedly in thrall to the US consumer, in spite of clear and persistent evidence to the contrary. The US economy, which provides a home to 17 per cent of China's exports, is still seen as the arbiter of growth in Asia. This obstinate adherence to an outdated assessment of economic dependence is not the only gaping intellectual flaw.
The 9.5 per cent US unemployment rate is also viewed as an obstacle to recovery. This objection ignores the many contrary examples of high unemployment rates and subsequent recoveries, not least in the US. Thus in 1982, US unemployment hit 10.8 per cent, yet GDP soared at an average annual pace of 7.7 per cent over the next six quarters.
Similarly, few commentators consider the possibility that the large post-Lehman rise in US unemployment was a mistake on the part of panicky managements. Yet this is precisely what trends in labour productivity growth, not to mention common sense, tell us occurred. In the first half of 2008, labour productivity growth averaged 3.3 per cent, while the unemployment rate rose to 5.6 per cent. At that point, there was no evidence US companies were overstaffed. Thereafter, output collapsed, yet business productivity growth remained positive, registering an average yearly pace of over 2 per cent, as companies shed labour at a faster pace than they reduced output. Businesses, like markets, panicked after Lehman went under. Employment and output were both reduced far more than it turned out to be necessary, as businesses temporarily and understandably assumed a worst case scenario.
Just as global output is performing a V-shaped recovery, there is a big risk US employment will do the same, with monthly payrolls showing surprising growth by the end of 2009.
If unemployment is one half of the bearish consensus, de-leveraging is seen as the other main obstacle to recovery. Yet increases in private leverage never play a significant role in recoveries. Indeed, since 1950, US private sector borrowing ex-mortgages has declined an average 0.1 per cent of GDP in the first year of recovery, with non-financial business borrowing declining 0.6 per cent of GDP.
A regression of the household savings rate on the wealth-to-income ratio tells us the former has made the appropriate adjustment to declines in the latter. In fact, the rally in the stock market, the low level of interest rates and the stabilisation in house prices all tend to limit the risk of a further sizeable increase in the savings rate. So over the rest of this year, the standard cyclical timing of a US economic turning point tells us pessimistic expectations are likely to collide with the economic reality of a strong recovery. The net result is almost inevitable, in the shape of an inexorable continuation of the equity rally.
The writer is head of asset allocation at Barclays Capital
Wednesday, July 29, 2009
High-frequency trading under scrutiny
By Michael Mackenzie in New York
Published: July 28 2009 18:44 Last updated: July 28 2009 18:44
The lightning fast world of high-frequency equity trading is being scrutinised by the Securities and Exchange Commission, amid concerns that this computer-dominated scene is placing less tech-savvy investors at a disadvantage.
Volumes of trading generated by computers placing super-fast orders – where speed of execution is measured in microseconds – to generate business has rocketed in recent years.
The Tabb Group, a consultancy, recently estimated that high-frequency trading accounts for as much as 73 per cent of US daily equity volume, up from 30 per cent in 2005.
Tabb estimates these players, some of the largest of which are hedge funds such as Citadel, D.E. Shaw & Co. and Renaissance Technologies, represent about 2 per cent of the 20,000 or so trading companies operating in the US markets.
It is a consequence of three trends in equity trading: the introduction of electronic platforms run by exchanges Nasdaq OMX and NYSE Euronext; the growth in “electronic communication networks”, led by Direct Edge and BATS; and the surge in anonymous trading venues, known as “dark pools”, because they trade outside the mainstream market.
Electronic trading has reduced the costs of trading equities for retail and institutional investors.
But with the demise of old-fashioned floor brokers and traditional market makers, new so-called high-frequency equity players, which include proprietary trading desks at investment banks, have become the main providers of liquidity for the overall US equity market.
Even in Europe, ultra-fast electronic trading has gathered momentum in the wake of the Mifid reforms passed by the European Commission two years ago. This has facilitated the arrival of platforms, including Chi-X Europe, Turquoise and a European arm of BATS.
High-frequency trading strategies are generally geared towards extracting fractions of profit from trading small numbers of shares in companies, between different trading platforms at hyper-fast speeds. This pace of trading is known as “latency” and requires constant upgrading of computer systems to stay ahead of the pack.
“High-frequency traders are the de facto market makers now,” says Stephen Ehrlich, chief executive officer at Lightspeed Financial, which provides trading technology and brokerage services for high-frequency traders. “They are using their own capital to provide liquidity for the market.”
But the growing dominance of high-frequency trading has its critics.
This month, Sal Arnuk and Joseph Saluzzi at Themis Trading raised the alarm with their paper: Why Institutional Investors Should Be Concerned About High Frequency Traders.
“We’re not interested in demonising any one asset class, trading strategy, market participant or firm, but rather we want to shine a light on a system and make it fair for all investors,” says Mr Arnuk.
They and other critics argue that high-frequency trading, which is being actively courted by the big US exchanges, results in retail and institutional investors chasing artificial prices and enduring heightened volatility.
Exchanges pay small fees to active traders, usually a quarter of a cent per share in what is termed liquidity rebates. This, says Themis, has inspired trading that merely seeks to capture a rebate from an exchange, no matter whether the actual trade makes money. That churns prices and can force other investors to pay a higher price per share, as liquidity is sucked out of the market.
“The culture of the equity market has been one where providers of liquidity are paid, while takers of liquidity are charged,” said Joe Mecane, chief administrative officer for US equities markets at NYSE Euronext. “It provides an incentive for liquidity providers.”
Doubts about the value of high-frequency firms, however, compelled the London Stock Exchange this month to abandon paying rebates due to concerns that it was alienating its biggest customers, the large banks that channel orders from so-called buy-side asset managers and pension funds.
Beyond rebates, another key concern is the practice of flashing prices, which helps market makers or investors discover where others want to buy or sell stocks. This practice is widely used by high frequency traders and is allowed by BATS, Direct Edge and Nasdaq OMX, while NYSE Euronext has been a vocal critic against the practice.
Charles Schumer, a senior Democrat on the Senate Banking committee, says flashing prices creates a two-tiered market that disadvantages retail and institutional investors and he wants the SEC to ban the practice.
In response, the SEC said it was “specifically examining flash orders to ensure best execution and fair access to information for all investors”.
In a letter to the SEC this week, Bob Greifeld, chief executive of Nasdaq OMX, urged the regulator to examine the practice of flash orders and other aspects of trading.
Larry Tabb, chief executive officer at the Tabb Group, says: “While many of the exchanges don’t even like flash orders, you can look at them as just another way of trading in the dark.”
Both BATS and Direct Edge say any investor can participate in flashing prices or receiving them on their trading venues.
Any move to ban the practice, says Direct Edge, is seen as creating a two-tier market as it is likely to push business away from the main electronic platforms towards “dark pools”.
Still, there are concerns that market makers, such as high-frequency traders, cancel many of their flash orders before other investors can execute a trade. This can enable the market maker to come back and offer shares for sale at a higher price, or place a buy order at a lower level.
“Certain black-box models have cancellation rates as high as 99 per cent on orders,” says Paul Zubulake, senior analyst at Aite Group.
Mr Arnuk believes liquidity rebates and flashing should be stopped in order to level the playing field for all investors.
Mr Tabb argues institutional investors need to raise their game to compete with faster computer systems. “The markets are changing and people need to upgrade both their technology and their people to keep up.”
Published: July 28 2009 18:44 Last updated: July 28 2009 18:44
The lightning fast world of high-frequency equity trading is being scrutinised by the Securities and Exchange Commission, amid concerns that this computer-dominated scene is placing less tech-savvy investors at a disadvantage.
Volumes of trading generated by computers placing super-fast orders – where speed of execution is measured in microseconds – to generate business has rocketed in recent years.
The Tabb Group, a consultancy, recently estimated that high-frequency trading accounts for as much as 73 per cent of US daily equity volume, up from 30 per cent in 2005.
Tabb estimates these players, some of the largest of which are hedge funds such as Citadel, D.E. Shaw & Co. and Renaissance Technologies, represent about 2 per cent of the 20,000 or so trading companies operating in the US markets.
It is a consequence of three trends in equity trading: the introduction of electronic platforms run by exchanges Nasdaq OMX and NYSE Euronext; the growth in “electronic communication networks”, led by Direct Edge and BATS; and the surge in anonymous trading venues, known as “dark pools”, because they trade outside the mainstream market.
Electronic trading has reduced the costs of trading equities for retail and institutional investors.
But with the demise of old-fashioned floor brokers and traditional market makers, new so-called high-frequency equity players, which include proprietary trading desks at investment banks, have become the main providers of liquidity for the overall US equity market.
Even in Europe, ultra-fast electronic trading has gathered momentum in the wake of the Mifid reforms passed by the European Commission two years ago. This has facilitated the arrival of platforms, including Chi-X Europe, Turquoise and a European arm of BATS.
High-frequency trading strategies are generally geared towards extracting fractions of profit from trading small numbers of shares in companies, between different trading platforms at hyper-fast speeds. This pace of trading is known as “latency” and requires constant upgrading of computer systems to stay ahead of the pack.
“High-frequency traders are the de facto market makers now,” says Stephen Ehrlich, chief executive officer at Lightspeed Financial, which provides trading technology and brokerage services for high-frequency traders. “They are using their own capital to provide liquidity for the market.”
But the growing dominance of high-frequency trading has its critics.
This month, Sal Arnuk and Joseph Saluzzi at Themis Trading raised the alarm with their paper: Why Institutional Investors Should Be Concerned About High Frequency Traders.
“We’re not interested in demonising any one asset class, trading strategy, market participant or firm, but rather we want to shine a light on a system and make it fair for all investors,” says Mr Arnuk.
They and other critics argue that high-frequency trading, which is being actively courted by the big US exchanges, results in retail and institutional investors chasing artificial prices and enduring heightened volatility.
Exchanges pay small fees to active traders, usually a quarter of a cent per share in what is termed liquidity rebates. This, says Themis, has inspired trading that merely seeks to capture a rebate from an exchange, no matter whether the actual trade makes money. That churns prices and can force other investors to pay a higher price per share, as liquidity is sucked out of the market.
“The culture of the equity market has been one where providers of liquidity are paid, while takers of liquidity are charged,” said Joe Mecane, chief administrative officer for US equities markets at NYSE Euronext. “It provides an incentive for liquidity providers.”
Doubts about the value of high-frequency firms, however, compelled the London Stock Exchange this month to abandon paying rebates due to concerns that it was alienating its biggest customers, the large banks that channel orders from so-called buy-side asset managers and pension funds.
Beyond rebates, another key concern is the practice of flashing prices, which helps market makers or investors discover where others want to buy or sell stocks. This practice is widely used by high frequency traders and is allowed by BATS, Direct Edge and Nasdaq OMX, while NYSE Euronext has been a vocal critic against the practice.
Charles Schumer, a senior Democrat on the Senate Banking committee, says flashing prices creates a two-tiered market that disadvantages retail and institutional investors and he wants the SEC to ban the practice.
In response, the SEC said it was “specifically examining flash orders to ensure best execution and fair access to information for all investors”.
In a letter to the SEC this week, Bob Greifeld, chief executive of Nasdaq OMX, urged the regulator to examine the practice of flash orders and other aspects of trading.
Larry Tabb, chief executive officer at the Tabb Group, says: “While many of the exchanges don’t even like flash orders, you can look at them as just another way of trading in the dark.”
Both BATS and Direct Edge say any investor can participate in flashing prices or receiving them on their trading venues.
Any move to ban the practice, says Direct Edge, is seen as creating a two-tier market as it is likely to push business away from the main electronic platforms towards “dark pools”.
Still, there are concerns that market makers, such as high-frequency traders, cancel many of their flash orders before other investors can execute a trade. This can enable the market maker to come back and offer shares for sale at a higher price, or place a buy order at a lower level.
“Certain black-box models have cancellation rates as high as 99 per cent on orders,” says Paul Zubulake, senior analyst at Aite Group.
Mr Arnuk believes liquidity rebates and flashing should be stopped in order to level the playing field for all investors.
Mr Tabb argues institutional investors need to raise their game to compete with faster computer systems. “The markets are changing and people need to upgrade both their technology and their people to keep up.”
温家宝严重警告 中国财政已经大跳水
路透社 2009-07-29 14:16:42
表面上看，中国的财政策略和美国截然不同，即便是为应对金融危机需要加大支出，中共政府还是将债务维持在很低的水平.但隐形债务或意味着中国的情况比乍看之下要严重的多.
中国经济连续数年快速增长，政府收入以更快速度递增，去年底国家负债占国内生产总值的比重(debt-to-GDP ratio)为17.7%，比其他任何主要经济体都要低.
问题是上述负债不包括地方政府借款、目前受政府支持的银行天量放贷以及银行系统中已被清除的但仍在流动的不良资产.
若将上述各项都计算在内的话，分析师预计中国负债占GDP比重接近60%，和美国属于同等水平，去年底美国在推出大规模财政刺激方案前该比重为70%可以肯定的是，美国政府大举借债的做法是中国将来很大程度上要避免的，华府今年财政赤字预算占GDP的12.9%，而中共政府目标仅为2.9%.但中国财政状况的恶化程度远快于政府预期，助长了显性和隐性债务的增势，留给政府的馀地正在缩小.
渣打银行中国研究部主管王志浩说，"这很严重，其一是隐性债务太多;其次是地方政府债务翻番，这些都计入财政赤字内的话，就限制了进一步进行财政刺激的空间."
这可能是目前备受争议的一点.随着中国经济重新回到增长轨道以及民营资本的介入，很少有人认为政府需要在目前的4万亿元财政刺激计划上加大支出.但中国决策者仍对可供选择的措施范围缩窄感到不安.中国国务院总理温家宝上周表示，"财政工作面临的形式仍然十分严峻."
财政状况不乐观
今年上半年中共政府收入同比减少了2.4%，远低于官方原先增长8%的目标.政府开支则大幅超出预期，且下半年料进一步剧增，因需支持基础设施项目建设.
税收收入与经济活动密切相关，因此中国经济的复苏将使政府收入增加，然6月份税收收入的改善主要来自土地出售，这种一次性收入掩盖了未来所面临的困难.
法国巴黎银行经济学家孟原表示，"即便我们已经考虑到经济复苏带来的相对乐观的收入增长，未来三年的赤字仍将维持在每年5%左右."但真正的忧虑来自日益增大的非直接债务泥潭.中国财政部官员今年初曾预计，地方政府债务已达4万亿元，或GDP的16.5%，远高于原先的估计.除此之外，还有各银行手里的 4，000亿元坏账，以及被分配到各资产管理公司的至少1万亿元的帐外不良贷款.所有这些最终都将由中共政府埋单.
今年以来，人民币新增贷款达到创纪录规模，意味着银行债务总量也将急剧膨胀.银行大举为基础设施项目提供贷款，因後者料有政府的强力担保.王志浩表示，根据他的"保守"估计，中共政府单今年为担保这些贷款(而发行)的票据就达到1.75万亿，这足以将其2009年度赤字推高到GDP的10%.
“债务炸弹”
最令人担忧的当属各级地方政府出现"债务炸弹"的可能，因他们涉足了既不透明且杠杆率很高的金融操作.
法规明令禁止中资银行向地方政府提供後者为进一步获得贷款所需的投资项目股本，但地方政府和银行现在却正利用一个巨大漏洞--信托公司进行这样的操作.办法十分简单.信托公司推出特别设计的"财富产品"，银行将这些产品售予客户後，将资金交给这些信托公司，後者又将这些资金转移给地方政府，作为(地方政府投资项目的)股本.
简而言之，地方政府正利用债务进行借款.官方媒体最近报导称，中国银行业监管当局已开始警告信托公司和银行防范这种逐渐增大的风险.
就在不久之前，中国银行系统的坏账还对经济构成巨大债务威胁.过去十年最核心的解决办法是:经济保持两位数增长，令国家负债与GDP比率的分母增大，并增加税收减小分子数值.
中共政府已在寻找合适时机提高一些税赋--如提高烟草税，但经济回归强劲增长仍是其减少债务的主要手段.同时，中共政府需要资金弥补不断攀升的赤字.但无论如何，中共政府仍能十分自信，即使其今年的发债规模不得不超过原先计划的9，500亿元，未来数年甚至会更多.
瑞银中国经济学家汪涛说，"中国有庞大的储蓄存款和充沛的流动性，所以在应对赤字上肯定不会有问题."
表面上看，中国的财政策略和美国截然不同，即便是为应对金融危机需要加大支出，中共政府还是将债务维持在很低的水平.但隐形债务或意味着中国的情况比乍看之下要严重的多.
中国经济连续数年快速增长，政府收入以更快速度递增，去年底国家负债占国内生产总值的比重(debt-to-GDP ratio)为17.7%，比其他任何主要经济体都要低.
问题是上述负债不包括地方政府借款、目前受政府支持的银行天量放贷以及银行系统中已被清除的但仍在流动的不良资产.
若将上述各项都计算在内的话，分析师预计中国负债占GDP比重接近60%，和美国属于同等水平，去年底美国在推出大规模财政刺激方案前该比重为70%可以肯定的是，美国政府大举借债的做法是中国将来很大程度上要避免的，华府今年财政赤字预算占GDP的12.9%，而中共政府目标仅为2.9%.但中国财政状况的恶化程度远快于政府预期，助长了显性和隐性债务的增势，留给政府的馀地正在缩小.
渣打银行中国研究部主管王志浩说，"这很严重，其一是隐性债务太多;其次是地方政府债务翻番，这些都计入财政赤字内的话，就限制了进一步进行财政刺激的空间."
这可能是目前备受争议的一点.随着中国经济重新回到增长轨道以及民营资本的介入，很少有人认为政府需要在目前的4万亿元财政刺激计划上加大支出.但中国决策者仍对可供选择的措施范围缩窄感到不安.中国国务院总理温家宝上周表示，"财政工作面临的形式仍然十分严峻."
财政状况不乐观
今年上半年中共政府收入同比减少了2.4%，远低于官方原先增长8%的目标.政府开支则大幅超出预期，且下半年料进一步剧增，因需支持基础设施项目建设.
税收收入与经济活动密切相关，因此中国经济的复苏将使政府收入增加，然6月份税收收入的改善主要来自土地出售，这种一次性收入掩盖了未来所面临的困难.
法国巴黎银行经济学家孟原表示，"即便我们已经考虑到经济复苏带来的相对乐观的收入增长，未来三年的赤字仍将维持在每年5%左右."但真正的忧虑来自日益增大的非直接债务泥潭.中国财政部官员今年初曾预计，地方政府债务已达4万亿元，或GDP的16.5%，远高于原先的估计.除此之外，还有各银行手里的 4，000亿元坏账，以及被分配到各资产管理公司的至少1万亿元的帐外不良贷款.所有这些最终都将由中共政府埋单.
今年以来，人民币新增贷款达到创纪录规模，意味着银行债务总量也将急剧膨胀.银行大举为基础设施项目提供贷款，因後者料有政府的强力担保.王志浩表示，根据他的"保守"估计，中共政府单今年为担保这些贷款(而发行)的票据就达到1.75万亿，这足以将其2009年度赤字推高到GDP的10%.
“债务炸弹”
最令人担忧的当属各级地方政府出现"债务炸弹"的可能，因他们涉足了既不透明且杠杆率很高的金融操作.
法规明令禁止中资银行向地方政府提供後者为进一步获得贷款所需的投资项目股本，但地方政府和银行现在却正利用一个巨大漏洞--信托公司进行这样的操作.办法十分简单.信托公司推出特别设计的"财富产品"，银行将这些产品售予客户後，将资金交给这些信托公司，後者又将这些资金转移给地方政府，作为(地方政府投资项目的)股本.
简而言之，地方政府正利用债务进行借款.官方媒体最近报导称，中国银行业监管当局已开始警告信托公司和银行防范这种逐渐增大的风险.
就在不久之前，中国银行系统的坏账还对经济构成巨大债务威胁.过去十年最核心的解决办法是:经济保持两位数增长，令国家负债与GDP比率的分母增大，并增加税收减小分子数值.
中共政府已在寻找合适时机提高一些税赋--如提高烟草税，但经济回归强劲增长仍是其减少债务的主要手段.同时，中共政府需要资金弥补不断攀升的赤字.但无论如何，中共政府仍能十分自信，即使其今年的发债规模不得不超过原先计划的9，500亿元，未来数年甚至会更多.
瑞银中国经济学家汪涛说，"中国有庞大的储蓄存款和充沛的流动性，所以在应对赤字上肯定不会有问题."
I've been an optimist on China. But I'm starting to worry
--A macro strategy that exacerbate imbalance, in which the excession portion of stimulus went to fixed assetment investment and excessive bank loans was funnelled not to real economy but to inflat asset bubbles, is a receipe for doom
--72% of stimulus went to fixed asset investment. bank lending in the first half is three times the pace of last year. Loan qualith suffered from the rash of disbursement in the first half.
By Stephen Roach
On the surface, China appears to be leading the world from recession to recovery. After coming to a virtual standstill in late 2008, at least as measured quarter-to-quarter, economic growth accelerated sharply in spring 2009.
A back-of-the envelope calculation suggests China may have accounted for as much as 2 percentage points of annualised growth in inflation-adjusted world output in the second quarter of 2009. With contractions moderating elsewhere, China's rebound may have been enough in and of itself to allow global gross domestic product to eke out a small positive gain for the first time since last summer.
That's the good news. The bad news is that China's recent growth spurt comes at a steep price. Fearful that its recent economic short- fall would deepen, Chinese policymakers have opted for quantity over quality in setting macro-strategy, the centrepiece of which is an enormous surge in infrastructure spending funded by a burst of bank lending.
Sure, developing nations always need more infrastructure. But China has taken this to extremes. Infrastructure expenditure (including Sichuan earthquake reconstruction) accounts for fully 72 per cent of China's recently enacted Rmb4,000bn ($585bn) stimulus. The government urged the banks to step up and fund the package. And they did. In the first six months of 2009, bank loans totalled Rmb7,400bn - three times the pace in the first half of 2008 and the strongest six-month lending surge on record.
This outsized bank-directed investment stimulus leaves little doubt as to how bad it was in China in late 2008 and early 2009. An unprecedented external demand shock, stemming from rare synchronous recessions in the developed world, devastated the export-led Chinese growth machine. That triggered sackings of more than 20m migrant workers in export-intensive Guangdong province. Long fixated on social stability, Beijing moved to arrest this deterioration. The government was determined to do whatever it took to restore rapid growth.
Yet there can be no avoiding the destabilizing consequences of these actions. Surging investment accounted for an unprecedented 88 per cent of Chinese GDP growth in the first half of 2009 - double the average contribution of 43 per cent over the past decade. At the same time, the quality of Chinese bank lending most assuredly suffered from the rash of credit disbursements in the first half of this year - a trend that could sow the seeds for a new wave of non-performing bank loans. Just this week, Chinese regulators told banks that new loans must be used to bolster the real economy and not for speculation in equities and real estate.
A little over two years ago, premier Wen Jiabao warned of a Chinese economy that was becoming increasingly "unstable, unbalanced, uncoordinated and ultimately unsustainable". Prescient words. Yet rather than act on those concerns by implementing a pro-consumption rebalancing, growth-hungry China was seduced by the boom in global trade and upped the ante on its most unbalanced sectors. By 2007, investment and exports accounted for about 80 per cent of Chinese GDP. And now, in the face of a severe global recession, China has compounded the very problems the premier warned of: aiming a massive liquidity-driven stimulus at its most unbalanced sector.
This is not a sustainable outcome for any economy - or sustainable support for the world economy. China must redirect economic growth towards internal private consumption. This may require a compromise on the quantity dimension of its growth outcome. But to the extent that leads to improved quality in the Chinese economy, a short-term growth sacrifice is well worth the effort.
Unlike most, I have been a steadfast optimist on China. Yet I am starting to worry. A macro strategy that exacerbates worrying imbalances is ultimately a recipe for failure. In many respects, that's what the global crisis and recession of 2008-09 are all about. China will not get special dispensation from the most critical lesson of this post-crisis era.
--72% of stimulus went to fixed asset investment. bank lending in the first half is three times the pace of last year. Loan qualith suffered from the rash of disbursement in the first half.
By Stephen Roach
On the surface, China appears to be leading the world from recession to recovery. After coming to a virtual standstill in late 2008, at least as measured quarter-to-quarter, economic growth accelerated sharply in spring 2009.
A back-of-the envelope calculation suggests China may have accounted for as much as 2 percentage points of annualised growth in inflation-adjusted world output in the second quarter of 2009. With contractions moderating elsewhere, China's rebound may have been enough in and of itself to allow global gross domestic product to eke out a small positive gain for the first time since last summer.
That's the good news. The bad news is that China's recent growth spurt comes at a steep price. Fearful that its recent economic short- fall would deepen, Chinese policymakers have opted for quantity over quality in setting macro-strategy, the centrepiece of which is an enormous surge in infrastructure spending funded by a burst of bank lending.
Sure, developing nations always need more infrastructure. But China has taken this to extremes. Infrastructure expenditure (including Sichuan earthquake reconstruction) accounts for fully 72 per cent of China's recently enacted Rmb4,000bn ($585bn) stimulus. The government urged the banks to step up and fund the package. And they did. In the first six months of 2009, bank loans totalled Rmb7,400bn - three times the pace in the first half of 2008 and the strongest six-month lending surge on record.
This outsized bank-directed investment stimulus leaves little doubt as to how bad it was in China in late 2008 and early 2009. An unprecedented external demand shock, stemming from rare synchronous recessions in the developed world, devastated the export-led Chinese growth machine. That triggered sackings of more than 20m migrant workers in export-intensive Guangdong province. Long fixated on social stability, Beijing moved to arrest this deterioration. The government was determined to do whatever it took to restore rapid growth.
Yet there can be no avoiding the destabilizing consequences of these actions. Surging investment accounted for an unprecedented 88 per cent of Chinese GDP growth in the first half of 2009 - double the average contribution of 43 per cent over the past decade. At the same time, the quality of Chinese bank lending most assuredly suffered from the rash of credit disbursements in the first half of this year - a trend that could sow the seeds for a new wave of non-performing bank loans. Just this week, Chinese regulators told banks that new loans must be used to bolster the real economy and not for speculation in equities and real estate.
A little over two years ago, premier Wen Jiabao warned of a Chinese economy that was becoming increasingly "unstable, unbalanced, uncoordinated and ultimately unsustainable". Prescient words. Yet rather than act on those concerns by implementing a pro-consumption rebalancing, growth-hungry China was seduced by the boom in global trade and upped the ante on its most unbalanced sectors. By 2007, investment and exports accounted for about 80 per cent of Chinese GDP. And now, in the face of a severe global recession, China has compounded the very problems the premier warned of: aiming a massive liquidity-driven stimulus at its most unbalanced sector.
This is not a sustainable outcome for any economy - or sustainable support for the world economy. China must redirect economic growth towards internal private consumption. This may require a compromise on the quantity dimension of its growth outcome. But to the extent that leads to improved quality in the Chinese economy, a short-term growth sacrifice is well worth the effort.
Unlike most, I have been a steadfast optimist on China. Yet I am starting to worry. A macro strategy that exacerbates worrying imbalances is ultimately a recipe for failure. In many respects, that's what the global crisis and recession of 2008-09 are all about. China will not get special dispensation from the most critical lesson of this post-crisis era.
foreign vs euro vs global bonds
A foreign bond
(called Yankee bond in the US, Samurai bond in Japan, Bulldog bond in the UK) is a bond issued in a country's national bond market by an issuer not domiciled in that country where those bonds are subsequently traded.
Regulatory authorities in the country where the bond is issued impose rules governing the issuance of foreign bonds.
Issuers of foreign bonds include national governments and their subdivisions, corporations, and supranationals (an entity that is formed by two or more central governments through international treaties).
They can be denominated in any currency.
They can be publicly issued or privately placed.
Eurobonds
have the following features:
underwritten by an international syndicate.
offered simultaneously to investors in a number of countries at issuance.
issued outside the jurisdiction of any single country. Therefore, they are not registered through a regulatory agency.
in practice they are typically registered on a national stock exchange. Why? Some institutional investors are prohibited from purchasing securities that are not registered on an exchange. The registration is mainly intended to overcome such restrictions. However, most of the Eurobond trading occurs in the over-the-counter market.
Make coupon payments annually.
Types of Eurobonds:
There are a large variety of Eurobonds with different features. For example, deferred-coupon bonds, step-up bonds, dual currency bonds, etc.
If an Eurobond is denominated in US dollars, it is called Eurodollar bond. Example: A US$ bond issued by Ford and sold in Japan.
"Plain vanilla", fixed rate coupon bonds are called Euro straights, which are unsecured bonds.
A global bond
is a debt obligation that is issued and traded in both the USYankee bond market and the Eurobond market. Issuers of global bonds typically have high credit quality, and have large fund needs on a regular basis. The first global bond was issued by the World Bank. Example: A US$ bond issued bythe Canadian government, and sold in the US and Japan.
(called Yankee bond in the US, Samurai bond in Japan, Bulldog bond in the UK) is a bond issued in a country's national bond market by an issuer not domiciled in that country where those bonds are subsequently traded.
Regulatory authorities in the country where the bond is issued impose rules governing the issuance of foreign bonds.
Issuers of foreign bonds include national governments and their subdivisions, corporations, and supranationals (an entity that is formed by two or more central governments through international treaties).
They can be denominated in any currency.
They can be publicly issued or privately placed.
Eurobonds
have the following features:
underwritten by an international syndicate.
offered simultaneously to investors in a number of countries at issuance.
issued outside the jurisdiction of any single country. Therefore, they are not registered through a regulatory agency.
in practice they are typically registered on a national stock exchange. Why? Some institutional investors are prohibited from purchasing securities that are not registered on an exchange. The registration is mainly intended to overcome such restrictions. However, most of the Eurobond trading occurs in the over-the-counter market.
Make coupon payments annually.
Types of Eurobonds:
There are a large variety of Eurobonds with different features. For example, deferred-coupon bonds, step-up bonds, dual currency bonds, etc.
If an Eurobond is denominated in US dollars, it is called Eurodollar bond. Example: A US$ bond issued by Ford and sold in Japan.
"Plain vanilla", fixed rate coupon bonds are called Euro straights, which are unsecured bonds.
A global bond
is a debt obligation that is issued and traded in both the USYankee bond market and the Eurobond market. Issuers of global bonds typically have high credit quality, and have large fund needs on a regular basis. The first global bond was issued by the World Bank. Example: A US$ bond issued bythe Canadian government, and sold in the US and Japan.
Tuesday, July 28, 2009
Real Estate Developers, Strapped for Cash, Resort to "Irregular" Tactics
By CSC staff, Shanghai,Published:July 28,2009
While the real estate market appears to be is in the midst of a boom, defaults among developers are also beginning to rise. Small and medium developers are resorting to faking sales to get bank loans to relieve their funding pressure.
Statistics show that from May 1 to July 24, which seemed to be good days for Shanghai's real estate market, many housing projects were seeing over 30% cancellations, and the cancellation rate of some projects was as high as 125%. Behind the "boom" of the housing market are irregular behaviors such as getting bank loans by cheating and making fake housing purchasing contracts.
Among the top ten housing projects with the highest cancellation rates, 60% are developments by small and medium real estate companies. "In fact, it is still difficult for small and medium developer to get credit support from banks," said a sales manager of a medium real estate company.
Now it is common for developers to sell an apartment to an employee as a "reward" and then secure a loan from a bank with the housing purchasing contract signed by the employee. "There's a window between the sale and the issuance of housing ownership certificate, during which employees can decide whether to keep or cancel the contract," the sales manager added.
In 2008, when credit was tight, many small and medium developers sought to gather money in this way. "Every developer is doing this. The only differences are scale and method," said the sales manager.
The high housing contract cancellation rate has also occurred in Nanjing. July statistics show, in one housing project alone, 29 deals being cancelled. In Beijing, the cancellation rate in some housing projects has reached 40% or higher.
According to figures from Centaline China Property Research, between January and June new residential housing sales in six key cities totaled 55 million square meters, up 88% over the second half of 2008. However, since May, trends for residential sales in the six cities began to diversify. In June, housing sales in Guangzhou, Shenzhen, and Tianjin all saw a decline, but Beijng and Shanghai were still seeing month-on-month growth. Housing sales in Shanghai in June reached 2.84 million square meters, up 6%, month on month, the highest among all the six cities.
Yin Bocheng, director of the Real Estate Research Center of Fudan University, thinks the boom is a mirage. "This is only fake prosperity." This ploy has been used before to simulate growth in the real estate market. Developers getting bank loans with fake deals will add to credit risk in a long run.
While the real estate market appears to be is in the midst of a boom, defaults among developers are also beginning to rise. Small and medium developers are resorting to faking sales to get bank loans to relieve their funding pressure.
Statistics show that from May 1 to July 24, which seemed to be good days for Shanghai's real estate market, many housing projects were seeing over 30% cancellations, and the cancellation rate of some projects was as high as 125%. Behind the "boom" of the housing market are irregular behaviors such as getting bank loans by cheating and making fake housing purchasing contracts.
Among the top ten housing projects with the highest cancellation rates, 60% are developments by small and medium real estate companies. "In fact, it is still difficult for small and medium developer to get credit support from banks," said a sales manager of a medium real estate company.
Now it is common for developers to sell an apartment to an employee as a "reward" and then secure a loan from a bank with the housing purchasing contract signed by the employee. "There's a window between the sale and the issuance of housing ownership certificate, during which employees can decide whether to keep or cancel the contract," the sales manager added.
In 2008, when credit was tight, many small and medium developers sought to gather money in this way. "Every developer is doing this. The only differences are scale and method," said the sales manager.
The high housing contract cancellation rate has also occurred in Nanjing. July statistics show, in one housing project alone, 29 deals being cancelled. In Beijing, the cancellation rate in some housing projects has reached 40% or higher.
According to figures from Centaline China Property Research, between January and June new residential housing sales in six key cities totaled 55 million square meters, up 88% over the second half of 2008. However, since May, trends for residential sales in the six cities began to diversify. In June, housing sales in Guangzhou, Shenzhen, and Tianjin all saw a decline, but Beijng and Shanghai were still seeing month-on-month growth. Housing sales in Shanghai in June reached 2.84 million square meters, up 6%, month on month, the highest among all the six cities.
Yin Bocheng, director of the Real Estate Research Center of Fudan University, thinks the boom is a mirage. "This is only fake prosperity." This ploy has been used before to simulate growth in the real estate market. Developers getting bank loans with fake deals will add to credit risk in a long run.
Home Prices Rise Across U.S.
Bargain Hunting, Low Rates Drive First Gain in 3 Years; Double Dip Still Possible
By NICK TIMIRAOS and KELLY EVANS
Home prices in major U.S. cities registered the first monthly gain in nearly three years, according to a new report that provided fresh evidence that the severe U.S. housing downturn could be easing.
Standard & Poor's Case-Shiller index, which tracks home prices in 20 metropolitan areas, rose 0.5% for the three-month period ending in May, compared with the three months ending in April. It marked the index's first increase after 34 straight months of decline, and came after a variety of housing indicators has shown glimmers of hope for the past several months.
Home prices remained down about 17% from a year earlier, according to the index. According to S&P/Case-Schiller's seasonally adjusted numbers, which it began reporting only earlier this year, prices in May posted a 0.2% decline.
But most Wall Street economists who discussed the survey focused on the April-to-May rise, saying it represents a significant change in direction. Home prices in 15 of the 20 areas in the survey rose or remained stable.
The results were also consistent with other recent housing data, these economists said. Sales of new and existing homes rose for three consecutive months through June. Housing starts were up in June, and an index of builder sentiment rose in July, though both remained at low levels.
May's uptick came in part as home prices in some areas fell enough for investors and first-time buyers to begin competing for bargains, helping to ease the backlog of unsold homes.
Other likely sales spurs included mortgage rates that fell to 50-year lows, an $8,000 federal tax credit for first-time homebuyers and the ability of buyers to secure mortgages from the Federal Housing Administration with as little as 3.5% down.
The latest readings don't necessarily herald a full-blown recovery for the housing market or broader economy. Consumer confidence remains near historical lows. The U.S. unemployment rate, at 9.5% in June, is expected to hit double digits before year end, making swift growth and an expanding labor force unlikely anytime soon.
The home-sale numbers surprised Robert Shiller, the Yale University economist who helped create the Case-Shiller indexes. "The change in momentum here is very significant," he said. Last month, Mr. Shiller forecast sustained home-price declines into the next few years, which he said now looks less plausible. He said he expects home prices to remain near current levels for the next five years.
Not All U.S. Regions Are Equal Effort to Modify Mortgages Falters House Prices in England, Wales Edge Higher Discuss: Is it the right time to buy a home? U.S. home prices have fallen by about one-third since their peak in the second quarter of 2006, according to S&P, and are roughly back at 2003 levels.
Some analysts warn that the home-price uptick could reverse as rising unemployment causes more Americans to fall behind on their mortgage payments and end up in foreclosure.
One factor that apparently drove the March-through-May uptick was a falling share of homes sold at distressed prices, through foreclosure and so-called short sales. Distressed sales accounted for 33% of existing home sales in May and 31% in June, down from a high of nearly 50% earlier this year, according to the National Association of Realtors.
The drop in foreclosure sales was likely the product of U.S. banks' moratorium on home foreclosures, which they undertook as the government launched a round of programs to modify and refinance loans for at-risk borrowers. Most banks ended their foreclosure moratoria in March.
Interest rates also hovered at or below 5% for most of the March-May period, before rising in June.
"Were it not for those rate reductions and the moratorium, you'd see prices down right now," says Ronald Temple, co-Director of Research at Lazard Asset Management. He expects the index to stabilize or increase in the short-term, but forecasts another 12-15% decline in prices thereafter.
Regardless, a combination of still-low interest rates and eager sellers continues to fuel competition for heavily discounted properties. Some buyers are finding that investors with all-cash offers are consistently beating them in bidding wars.
Stacy Watson, a 39-year-old human-resources manager in the Riverside, Calif., area, says she has made losing bids on at least eight homes since mid-June. On Tuesday, she says, she decided to increase her offer for a five-bedroom home in Perris, Calif., to $198,000, nearly $20,000 more than the asking price.
Ms. Watson and her real-estate agent say the bank-owned home has drawn more than 10 offers in less than a week on the market. "Everyone says it's such a great housing market for buyers," she says. "No. This is hard."
Would-be homeowners have benefited from government programs, including one that allows buyers of properties owned by Fannie Mae to receive mortgages from the government-controlled mortgage-finance company with down payments as low as 3%.
When Nelly Whiteman and her husband recently bought a house out of foreclosure from Fannie Mae, she figures they competed against at least two other buyers. The 27-year-old administrative assistant says they snagged their three-bedroom home in Orangevale, Calif., for $176,000, or about $5,000 more than the asking price. They now pay about $1,080 a month in mortgage payments, insurance and taxes.
"It's an extra bedroom for around what we were paying for rent," she says.
The budding housing recovery isn't being felt across the country. Prices increased in 13 of 20 surveyed markets, with the strongest gains coming in Cleveland, up 4.1% from April; Dallas, up 1.9%; and Boston, up 1.6%.
Home prices were flat in the New York and Tampa, Fla., areas. The survey doesn't track condominium or cooperative apartment sales, so it doesn't take into account the majority of housing stock in New York City.
Prices continue to fall in some markets, particularly overbuilt Sunbelt cities. Prices in Las Vegas declined 2.6% in May from April and were down 32% from a year ago, according to S&P/Case-Shiller. Phoenix prices declined 0.9% from April and were down 34% from May 2008. San Francisco, Miami and Detroit also continued to see year-on-year declines of about 25%.
"Is this just a spring bounce that was partly related to the drop in distressed sales?" asks Thomas Lawler, an independent housing economist based in Leesburg, Va. One key question, he says, is whether another wave of foreclosures could come along to offset the home-inventory decline that has boosted many markets.
In many of the hardest-hit cities, banks appear to be slow to put foreclosed homes on the market. In Las Vegas, for example, banks had taken title to 13,200 homes as of June. That surpassed the total number of homes listed for sale in Las Vegas last month, according to SalesTraq, which monitors inventory in Las Vegas. "Are the banks are intentionally holding back inventory? That's a question a lot of us have," says Larry Murphy, president of SalesTraq.
Some housing analysts say they expect falling prices on mid-to high-end homes to weigh on the Case-Shiller index. The supply of these homes has swelled in recent months as borrowers struggle to obtain financing.
Borrowers of "jumbo" mortgages, which are too big for government backing, face higher rates. Banks are also requiring bigger down-payments at a time when traditional "trade-up" buyers are finding that the equity in their homes has fallen.
"We think [the sales index] will look like a 'W,' where prices go up until the foreclosures at the higher end translate into another leg lower," says Ivy Zelman, chief executive of Zelman & Associates, a housing-research firm.
The improvement in housing likely gave a small boost to U.S. gross domestic product in the second quarter, economists said. After data showed construction of new homes was stronger than expected in June and was revised higher in April and May, Macroeconomic Advisers, a St. Louis-based forecasting group, ratcheted up its estimate of second-quarter economic growth. It now sees output shrinking at just a 0.5% annual rate in the second quarter, compared with declines of 6.3% and 5.5% in the previous two quarters.
The government will report its official estimate of second-quarter growth on Friday.
Write to Nick Timiraos at nick.timiraos@wsj.com and Kelly Evans at kelly.evans@wsj.com
By NICK TIMIRAOS and KELLY EVANS
Home prices in major U.S. cities registered the first monthly gain in nearly three years, according to a new report that provided fresh evidence that the severe U.S. housing downturn could be easing.
Standard & Poor's Case-Shiller index, which tracks home prices in 20 metropolitan areas, rose 0.5% for the three-month period ending in May, compared with the three months ending in April. It marked the index's first increase after 34 straight months of decline, and came after a variety of housing indicators has shown glimmers of hope for the past several months.
Home prices remained down about 17% from a year earlier, according to the index. According to S&P/Case-Schiller's seasonally adjusted numbers, which it began reporting only earlier this year, prices in May posted a 0.2% decline.
But most Wall Street economists who discussed the survey focused on the April-to-May rise, saying it represents a significant change in direction. Home prices in 15 of the 20 areas in the survey rose or remained stable.
The results were also consistent with other recent housing data, these economists said. Sales of new and existing homes rose for three consecutive months through June. Housing starts were up in June, and an index of builder sentiment rose in July, though both remained at low levels.
May's uptick came in part as home prices in some areas fell enough for investors and first-time buyers to begin competing for bargains, helping to ease the backlog of unsold homes.
Other likely sales spurs included mortgage rates that fell to 50-year lows, an $8,000 federal tax credit for first-time homebuyers and the ability of buyers to secure mortgages from the Federal Housing Administration with as little as 3.5% down.
The latest readings don't necessarily herald a full-blown recovery for the housing market or broader economy. Consumer confidence remains near historical lows. The U.S. unemployment rate, at 9.5% in June, is expected to hit double digits before year end, making swift growth and an expanding labor force unlikely anytime soon.
The home-sale numbers surprised Robert Shiller, the Yale University economist who helped create the Case-Shiller indexes. "The change in momentum here is very significant," he said. Last month, Mr. Shiller forecast sustained home-price declines into the next few years, which he said now looks less plausible. He said he expects home prices to remain near current levels for the next five years.
Not All U.S. Regions Are Equal Effort to Modify Mortgages Falters House Prices in England, Wales Edge Higher Discuss: Is it the right time to buy a home? U.S. home prices have fallen by about one-third since their peak in the second quarter of 2006, according to S&P, and are roughly back at 2003 levels.
Some analysts warn that the home-price uptick could reverse as rising unemployment causes more Americans to fall behind on their mortgage payments and end up in foreclosure.
One factor that apparently drove the March-through-May uptick was a falling share of homes sold at distressed prices, through foreclosure and so-called short sales. Distressed sales accounted for 33% of existing home sales in May and 31% in June, down from a high of nearly 50% earlier this year, according to the National Association of Realtors.
The drop in foreclosure sales was likely the product of U.S. banks' moratorium on home foreclosures, which they undertook as the government launched a round of programs to modify and refinance loans for at-risk borrowers. Most banks ended their foreclosure moratoria in March.
Interest rates also hovered at or below 5% for most of the March-May period, before rising in June.
"Were it not for those rate reductions and the moratorium, you'd see prices down right now," says Ronald Temple, co-Director of Research at Lazard Asset Management. He expects the index to stabilize or increase in the short-term, but forecasts another 12-15% decline in prices thereafter.
Regardless, a combination of still-low interest rates and eager sellers continues to fuel competition for heavily discounted properties. Some buyers are finding that investors with all-cash offers are consistently beating them in bidding wars.
Stacy Watson, a 39-year-old human-resources manager in the Riverside, Calif., area, says she has made losing bids on at least eight homes since mid-June. On Tuesday, she says, she decided to increase her offer for a five-bedroom home in Perris, Calif., to $198,000, nearly $20,000 more than the asking price.
Ms. Watson and her real-estate agent say the bank-owned home has drawn more than 10 offers in less than a week on the market. "Everyone says it's such a great housing market for buyers," she says. "No. This is hard."
Would-be homeowners have benefited from government programs, including one that allows buyers of properties owned by Fannie Mae to receive mortgages from the government-controlled mortgage-finance company with down payments as low as 3%.
When Nelly Whiteman and her husband recently bought a house out of foreclosure from Fannie Mae, she figures they competed against at least two other buyers. The 27-year-old administrative assistant says they snagged their three-bedroom home in Orangevale, Calif., for $176,000, or about $5,000 more than the asking price. They now pay about $1,080 a month in mortgage payments, insurance and taxes.
"It's an extra bedroom for around what we were paying for rent," she says.
The budding housing recovery isn't being felt across the country. Prices increased in 13 of 20 surveyed markets, with the strongest gains coming in Cleveland, up 4.1% from April; Dallas, up 1.9%; and Boston, up 1.6%.
Home prices were flat in the New York and Tampa, Fla., areas. The survey doesn't track condominium or cooperative apartment sales, so it doesn't take into account the majority of housing stock in New York City.
Prices continue to fall in some markets, particularly overbuilt Sunbelt cities. Prices in Las Vegas declined 2.6% in May from April and were down 32% from a year ago, according to S&P/Case-Shiller. Phoenix prices declined 0.9% from April and were down 34% from May 2008. San Francisco, Miami and Detroit also continued to see year-on-year declines of about 25%.
"Is this just a spring bounce that was partly related to the drop in distressed sales?" asks Thomas Lawler, an independent housing economist based in Leesburg, Va. One key question, he says, is whether another wave of foreclosures could come along to offset the home-inventory decline that has boosted many markets.
In many of the hardest-hit cities, banks appear to be slow to put foreclosed homes on the market. In Las Vegas, for example, banks had taken title to 13,200 homes as of June. That surpassed the total number of homes listed for sale in Las Vegas last month, according to SalesTraq, which monitors inventory in Las Vegas. "Are the banks are intentionally holding back inventory? That's a question a lot of us have," says Larry Murphy, president of SalesTraq.
Some housing analysts say they expect falling prices on mid-to high-end homes to weigh on the Case-Shiller index. The supply of these homes has swelled in recent months as borrowers struggle to obtain financing.
Borrowers of "jumbo" mortgages, which are too big for government backing, face higher rates. Banks are also requiring bigger down-payments at a time when traditional "trade-up" buyers are finding that the equity in their homes has fallen.
"We think [the sales index] will look like a 'W,' where prices go up until the foreclosures at the higher end translate into another leg lower," says Ivy Zelman, chief executive of Zelman & Associates, a housing-research firm.
The improvement in housing likely gave a small boost to U.S. gross domestic product in the second quarter, economists said. After data showed construction of new homes was stronger than expected in June and was revised higher in April and May, Macroeconomic Advisers, a St. Louis-based forecasting group, ratcheted up its estimate of second-quarter economic growth. It now sees output shrinking at just a 0.5% annual rate in the second quarter, compared with declines of 6.3% and 5.5% in the previous two quarters.
The government will report its official estimate of second-quarter growth on Friday.
Write to Nick Timiraos at nick.timiraos@wsj.com and Kelly Evans at kelly.evans@wsj.com
An Incoherent Truth
PAUL KRUGMAN
Published: July 26, 2009
Right now the fate of health care reform seems to rest in the hands of relatively conservative Democrats — mainly members of the Blue Dog Coalition, created in 1995. And you might be tempted to say that President Obama needs to give those Democrats what they want.
But he can’t — because the Blue Dogs aren’t making sense.
To grasp the problem, you need to understand the outline of the proposed reform (all of the Democratic plans on the table agree on the essentials.)
Reform, if it happens, will rest on four main pillars: regulation, mandates, subsidies and competition.
By regulation I mean the nationwide imposition of rules that would prevent insurance companies from denying coverage based on your medical history, or dropping your coverage when you get sick. This would stop insurers from gaming the system by covering only healthy people.
On the other side, individuals would also be prevented from gaming the system: Americans would be required to buy insurance even if they’re currently healthy, rather than signing up only when they need care. And all but the smallest businesses would be required either to provide their employees with insurance, or to pay fees that help cover the cost of subsidies — subsidies that would make insurance affordable for lower-income American families.
Finally, there would be a public option: a government-run insurance plan competing with private insurers, which would help hold down costs.
The subsidy portion of health reform would cost around a trillion dollars over the next decade. In all the plans currently on the table, this expense would be offset with a combination of cost savings elsewhere and additional taxes, so that there would be no overall effect on the federal deficit.
So what are the objections of the Blue Dogs?
Well, they talk a lot about fiscal responsibility, which basically boils down to worrying about the cost of those subsidies. And it’s tempting to stop right there, and cry foul. After all, where were those concerns about fiscal responsibility back in 2001, when most conservative Democrats voted enthusiastically for that year’s big Bush tax cut — a tax cut that added $1.35 trillion to the deficit?
But it’s actually much worse than that — because even as they complain about the plan’s cost, the Blue Dogs are making demands that would greatly increase that cost.
There has been a lot of publicity about Blue Dog opposition to the public option, and rightly so: a plan without a public option to hold down insurance premiums would cost taxpayers more than a plan with such an option.
But Blue Dogs have also been complaining about the employer mandate, which is even more at odds with their supposed concern about spending. The Congressional Budget Office has already weighed in on this issue: without an employer mandate, health care reform would be undermined as many companies dropped their existing insurance plans, forcing workers to seek federal aid — and causing the cost of subsidies to balloon. It makes no sense at all to complain about the cost of subsidies and at the same time oppose an employer mandate.
So what do the Blue Dogs want?
Maybe they’re just being complete hypocrites. It’s worth remembering the history of one of the Blue Dog Coalition’s founders: former Representative Billy Tauzin of Louisiana. Mr. Tauzin switched to the Republicans soon after the group’s creation; eight years later he pushed through the 2003 Medicare Modernization Act, a deeply irresponsible bill that included huge giveaways to drug and insurance companies. And then he left Congress to become, yes, the lavishly paid president of PhRMA, the pharmaceutical industry lobby.
One interpretation, then, is that the Blue Dogs are basically following in Mr. Tauzin’s footsteps: if their position is incoherent, it’s because they’re nothing but corporate tools, defending special interests. And as the Center for Responsive Politics pointed out in a recent report, drug and insurance companies have lately been pouring money into Blue Dog coffers.
But I guess I’m not quite that cynical. After all, today’s Blue Dogs are politicians who didn’t go the Tauzin route — they didn’t switch parties even when the G.O.P. seemed to hold all the cards and pundits were declaring the Republican majority permanent. So these are Democrats who, despite their relative conservatism, have shown some commitment to their party and its values.
Now, however, they face their moment of truth. For they can’t extract major concessions on the shape of health care reform without dooming the whole project: knock away any of the four main pillars of reform, and the whole thing will collapse — and probably take the Obama presidency down with it.
Is that what the Blue Dogs really want to see happen? We’ll soon find out.
Published: July 26, 2009
Right now the fate of health care reform seems to rest in the hands of relatively conservative Democrats — mainly members of the Blue Dog Coalition, created in 1995. And you might be tempted to say that President Obama needs to give those Democrats what they want.
But he can’t — because the Blue Dogs aren’t making sense.
To grasp the problem, you need to understand the outline of the proposed reform (all of the Democratic plans on the table agree on the essentials.)
Reform, if it happens, will rest on four main pillars: regulation, mandates, subsidies and competition.
By regulation I mean the nationwide imposition of rules that would prevent insurance companies from denying coverage based on your medical history, or dropping your coverage when you get sick. This would stop insurers from gaming the system by covering only healthy people.
On the other side, individuals would also be prevented from gaming the system: Americans would be required to buy insurance even if they’re currently healthy, rather than signing up only when they need care. And all but the smallest businesses would be required either to provide their employees with insurance, or to pay fees that help cover the cost of subsidies — subsidies that would make insurance affordable for lower-income American families.
Finally, there would be a public option: a government-run insurance plan competing with private insurers, which would help hold down costs.
The subsidy portion of health reform would cost around a trillion dollars over the next decade. In all the plans currently on the table, this expense would be offset with a combination of cost savings elsewhere and additional taxes, so that there would be no overall effect on the federal deficit.
So what are the objections of the Blue Dogs?
Well, they talk a lot about fiscal responsibility, which basically boils down to worrying about the cost of those subsidies. And it’s tempting to stop right there, and cry foul. After all, where were those concerns about fiscal responsibility back in 2001, when most conservative Democrats voted enthusiastically for that year’s big Bush tax cut — a tax cut that added $1.35 trillion to the deficit?
But it’s actually much worse than that — because even as they complain about the plan’s cost, the Blue Dogs are making demands that would greatly increase that cost.
There has been a lot of publicity about Blue Dog opposition to the public option, and rightly so: a plan without a public option to hold down insurance premiums would cost taxpayers more than a plan with such an option.
But Blue Dogs have also been complaining about the employer mandate, which is even more at odds with their supposed concern about spending. The Congressional Budget Office has already weighed in on this issue: without an employer mandate, health care reform would be undermined as many companies dropped their existing insurance plans, forcing workers to seek federal aid — and causing the cost of subsidies to balloon. It makes no sense at all to complain about the cost of subsidies and at the same time oppose an employer mandate.
So what do the Blue Dogs want?
Maybe they’re just being complete hypocrites. It’s worth remembering the history of one of the Blue Dog Coalition’s founders: former Representative Billy Tauzin of Louisiana. Mr. Tauzin switched to the Republicans soon after the group’s creation; eight years later he pushed through the 2003 Medicare Modernization Act, a deeply irresponsible bill that included huge giveaways to drug and insurance companies. And then he left Congress to become, yes, the lavishly paid president of PhRMA, the pharmaceutical industry lobby.
One interpretation, then, is that the Blue Dogs are basically following in Mr. Tauzin’s footsteps: if their position is incoherent, it’s because they’re nothing but corporate tools, defending special interests. And as the Center for Responsive Politics pointed out in a recent report, drug and insurance companies have lately been pouring money into Blue Dog coffers.
But I guess I’m not quite that cynical. After all, today’s Blue Dogs are politicians who didn’t go the Tauzin route — they didn’t switch parties even when the G.O.P. seemed to hold all the cards and pundits were declaring the Republican majority permanent. So these are Democrats who, despite their relative conservatism, have shown some commitment to their party and its values.
Now, however, they face their moment of truth. For they can’t extract major concessions on the shape of health care reform without dooming the whole project: knock away any of the four main pillars of reform, and the whole thing will collapse — and probably take the Obama presidency down with it.
Is that what the Blue Dogs really want to see happen? We’ll soon find out.
Threat of Unemployment - WSJ
Are markets taking too rosy a view of unemployment? Unemployment is usually seen as a lagging rather than leading economic indicator: In the last two U.S. downturns, firms continued shedding jobs for months after the recession was officially over. Typically, companies only start hiring in earnest once a recovery is clearly under way. But this time, unemployment may play a bigger role in determining the timing and shape of recovery.
True, the markets are currently betting the old orthodoxy still holds sway. Unemployment has climbed quickly. The U.S. rate hit 9.5% in June, higher than any point since 1983, and up from 5.6% a year earlier, one of the steepest annual rises on record. In the euro zone, May's 9.5% unemployment rate was the highest in 10 years. The Organization for Economic Cooperation and Development forecasts rates of 10% in the U.S. and more than 12% in the euro zone in 2010. But that has not stopped equity markets from rallying strongly, amid growing hopes of a recovery this year.
That's partly because job losses and other cost cuts have provided a cushion for corporate profits: 82% of the S&P 500 companies to report so far have beaten second-quarter earnings expectations. The snag is that only 50% have beaten sales targets, as Deutsche Bank points out. For the moment, earnings are only being held up by costs shrinking faster than revenue. For a true recovery, sales need to start growing too. Rising unemployment may make that harder to achieve.
First, the flipside of improved corporate profits is real financial and consumer pain. U.S. credit card bad debt, for example, is rising faster than unemployment. Annualized write-offs of securitized credit card debt hit a record 10.8% in June, according to Moody's. The agency expects that to rise to 12% to 13% in mid-2010. In Europe, Fitch's U.K. credit card charge-off index hit a record high of 9% in April. Historically, investors have assumed that a one percentage point increase in unemployment will lead to a one percentage point increase in bad credit card debt. But the pace of job losses and levels of debt means nobody is confident previous correlations will hold. Similarly, rising unemployment could also hit house prices again, causing further turmoil for mortgage-backed securities.
Meanwhile, high unemployment is also likely to weigh on consumer sentiment. Nearly 60% of U.S. consumers expect high unemployment to persist over the next several years, the University of Michigan reported Friday. That could shape behavior: Federal Reserve Chairman Ben Bernanke warned last week that unemployment could weigh on consumer spending. Continued pressure on sales could be a further impetus for companies to cut costs and jobs, leading to more losses on consumer debt.
True, the markets are currently betting the old orthodoxy still holds sway. Unemployment has climbed quickly. The U.S. rate hit 9.5% in June, higher than any point since 1983, and up from 5.6% a year earlier, one of the steepest annual rises on record. In the euro zone, May's 9.5% unemployment rate was the highest in 10 years. The Organization for Economic Cooperation and Development forecasts rates of 10% in the U.S. and more than 12% in the euro zone in 2010. But that has not stopped equity markets from rallying strongly, amid growing hopes of a recovery this year.
That's partly because job losses and other cost cuts have provided a cushion for corporate profits: 82% of the S&P 500 companies to report so far have beaten second-quarter earnings expectations. The snag is that only 50% have beaten sales targets, as Deutsche Bank points out. For the moment, earnings are only being held up by costs shrinking faster than revenue. For a true recovery, sales need to start growing too. Rising unemployment may make that harder to achieve.
First, the flipside of improved corporate profits is real financial and consumer pain. U.S. credit card bad debt, for example, is rising faster than unemployment. Annualized write-offs of securitized credit card debt hit a record 10.8% in June, according to Moody's. The agency expects that to rise to 12% to 13% in mid-2010. In Europe, Fitch's U.K. credit card charge-off index hit a record high of 9% in April. Historically, investors have assumed that a one percentage point increase in unemployment will lead to a one percentage point increase in bad credit card debt. But the pace of job losses and levels of debt means nobody is confident previous correlations will hold. Similarly, rising unemployment could also hit house prices again, causing further turmoil for mortgage-backed securities.
Meanwhile, high unemployment is also likely to weigh on consumer sentiment. Nearly 60% of U.S. consumers expect high unemployment to persist over the next several years, the University of Michigan reported Friday. That could shape behavior: Federal Reserve Chairman Ben Bernanke warned last week that unemployment could weigh on consumer spending. Continued pressure on sales could be a further impetus for companies to cut costs and jobs, leading to more losses on consumer debt.
Group says accounting did not cause credit crisis
By STEPHEN BERNARD
The Associated Press
Tuesday, July 28, 2009; 1:40 PM
NEW YORK -- An international financial advisory group said Tuesday that accounting rules were not the cause of the recent credit crisis.
The Financial Crisis Advisory Group also voiced concern about recent regulatory pressure that led to the easing of guidelines about how banks value risky assets that were at the center of the crisis.
In a report released Tuesday, the group said "accounting standards were not a root cause of the financial crisis," but did acknowledge that the weakness in the application of rules reduced credibility in financial reporting.
At the heart of the debate over accounting standards is a rule determining how banks can value assets such as mortgage-backed securities. In a split vote in early April, the U.S. Financial Accounting Standards Board approved a change to the rule, allowing financial firms to value assets at what they would go for in an "orderly" sale, as opposed to a forced or distressed sale.
The two dissenting voters on the five-member board said at that time that FASB was pressured by Congress to make the change.
The advisory group said in the report Tuesday that regulators should not be able to dictate specific rules that are established by two main accounting boards that oversee standards, FASB in the U.S. and the International Accounting Standards Board overseas.
"While it is appropriate for public authorities to voice their concerns and give input to standard setters, in doing so they should not seek to prescribe specific standard-setting outcomes," the group wrote in the report.
Critics had contended the rule made the current financial crisis worse by forcing banks to heavily slash the value of assets such as mortgage-backed securities that were severely depressed by market conditions - conditions where the sale of those assets would only be completed at distressed prices because the market was not functioning properly.
While acknowledging that market turmoil was readily apparent through the valuing of certain assets, the advisory group said the rules governing how to value those assets - known as mark-to-market, or fair value, accounting - did not intensify the credit crisis.
"Proponents of fair value accounting do not deny that indeed mark-to-market accounting shows the fluctuations of the market, but they maintain that these cycles are a fact of life and that the use of fair value accounting does not exacerbate these cycles," the report said.
The value of mortgage-backed securities, which are bonds backed by home loans, and other risky investment products fell sharply beginning in 2007 as the housing market deteriorated and the economy faltered. Banks were required, because of the accounting rules, to record hundreds of billions of dollars in non-cash charges to reflect the waning value of those investments sitting on their balance sheets.
As their value fell, banks became more reluctant to sell the assets at a loss, only further weakening their prices and leading to more write-downs. Only recently have write-downs began to slow. An estimated $2 trillion in soured assets is sitting on banks' books.
Easing or even eliminating that rule, as some industry groups and politicians have proposed, could remove transparency for investors, warned the advisory group that is co-chaired by Harvey Goldschmid, a former commissioner of the U.S. Securities and Exchange Commission and Hans Hoogervorst, chairman of the Netherlands Authority for the Financial Markets.
The Associated Press
Tuesday, July 28, 2009; 1:40 PM
NEW YORK -- An international financial advisory group said Tuesday that accounting rules were not the cause of the recent credit crisis.
The Financial Crisis Advisory Group also voiced concern about recent regulatory pressure that led to the easing of guidelines about how banks value risky assets that were at the center of the crisis.
In a report released Tuesday, the group said "accounting standards were not a root cause of the financial crisis," but did acknowledge that the weakness in the application of rules reduced credibility in financial reporting.
At the heart of the debate over accounting standards is a rule determining how banks can value assets such as mortgage-backed securities. In a split vote in early April, the U.S. Financial Accounting Standards Board approved a change to the rule, allowing financial firms to value assets at what they would go for in an "orderly" sale, as opposed to a forced or distressed sale.
The two dissenting voters on the five-member board said at that time that FASB was pressured by Congress to make the change.
The advisory group said in the report Tuesday that regulators should not be able to dictate specific rules that are established by two main accounting boards that oversee standards, FASB in the U.S. and the International Accounting Standards Board overseas.
"While it is appropriate for public authorities to voice their concerns and give input to standard setters, in doing so they should not seek to prescribe specific standard-setting outcomes," the group wrote in the report.
Critics had contended the rule made the current financial crisis worse by forcing banks to heavily slash the value of assets such as mortgage-backed securities that were severely depressed by market conditions - conditions where the sale of those assets would only be completed at distressed prices because the market was not functioning properly.
While acknowledging that market turmoil was readily apparent through the valuing of certain assets, the advisory group said the rules governing how to value those assets - known as mark-to-market, or fair value, accounting - did not intensify the credit crisis.
"Proponents of fair value accounting do not deny that indeed mark-to-market accounting shows the fluctuations of the market, but they maintain that these cycles are a fact of life and that the use of fair value accounting does not exacerbate these cycles," the report said.
The value of mortgage-backed securities, which are bonds backed by home loans, and other risky investment products fell sharply beginning in 2007 as the housing market deteriorated and the economy faltered. Banks were required, because of the accounting rules, to record hundreds of billions of dollars in non-cash charges to reflect the waning value of those investments sitting on their balance sheets.
As their value fell, banks became more reluctant to sell the assets at a loss, only further weakening their prices and leading to more write-downs. Only recently have write-downs began to slow. An estimated $2 trillion in soured assets is sitting on banks' books.
Easing or even eliminating that rule, as some industry groups and politicians have proposed, could remove transparency for investors, warned the advisory group that is co-chaired by Harvey Goldschmid, a former commissioner of the U.S. Securities and Exchange Commission and Hans Hoogervorst, chairman of the Netherlands Authority for the Financial Markets.
Traders Blamed for Oil Spike
CFTC Will Pin '08 Price Surge on Speculators, in a Reversal From Bush Findings
By IANTHE JEANNE DUGAN and ALISTAIR MACDONALD
The Commodity Futures Trading Commission plans to issue a report next month suggesting speculators played a significant role in driving wild swings in oil prices -- a reversal of an earlier CFTC position that augurs intensifying scrutiny on investors.
In a contentious report last year, the main U.S. futures-market regulator pinned oil-price swings primarily on supply and demand. But that analysis was based on "deeply flawed data," Bart Chilton, one of four CFTC commissioners, said in an interview Monday.
The CFTC's new review, due to be released in August, adds fuel to a growing debate over financial investors who bet on the direction of commodities prices by buying contracts tied to indexes. These speculators have invested hundreds of billions of dollars in contracts that were once dominated by producers and consumers who sought to hedge against oil-market volatility.
The review also reflects shifting political winds. Under Chairman Gary Gensler, appointed by President Barack Obama, the CFTC is departing from the more hands-off approach it took under its previous head, a George W. Bush appointee. The agency is widely expected to adopt new rules to limit the amount of investments in commodities by big institutions betting on their direction purely for financial gain.
The agency didn't make available preliminary figures from the report and declined to discuss the previous data.
Speculators have been a lightning rod of criticism from politicians world-wide, who worry that rising oil prices could damp the recovery potential of their recession-hit economies. Many lawmakers and regulators say they want to ensure that speculators don't make it more costly for consumers to access heating oil, food and other essentials.
These decision makers don't present a united front. The U.K.'s Financial Services Authority has found no evidence that speculators are behind big oil-price swings, people familiar with the matter said Friday. This view, made by the overseer of one of the world's biggest financial markets, contrasts with an opinion piece published in The Wall Street Journal two weeks ago, by French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown, who said governments need to act to curb "dangerously volatile" oil prices.
In the U.S., the CFTC begins public hearings Tuesday to determine whether to limit speculative investments in commodities. Congress also is weighing whether to give the CFTC the authority, under a broader proposal to revamp financial regulation, to regulate commodities investments that occur off traditional exchanges. Byron Dorgan, a North Dakota Democrat, has called on the CFTC to curb "oil speculators looking for a quick buck at the expense of American consumers."
The debate over speculators underscores the shifting nature of commodities trading in recent years. Before the mid-1990s, these markets were dominated by entities that had physical dealings with the underlying commodity, and "speculators" who often took the opposite position, providing liquidity to markets.
But a new group of investors has emerged in recent years. Those who want to bet on commodities prices have increasingly put their money in indexes that track the value of futures contracts, in which investors promise to pay a certain amount in the future for oil and other commodities. As of July 2008, financial investors had about $300 billion riding on these indexes, roughly four times the level in January 2006, according to the International Energy Agency, a Paris-based watchdog.
Separately, these investors may buy derivatives, not directly traded on futures exchanges, that let them make contrary bets to offset their risks.
Crude-oil prices surged in July 2008 to a record $145 a barrel, then dropped to about $33 in December. Oil now trades at around $68 a barrel.
Proponents of index speculation say these parties have added liquidity to markets. They blame price gyrations on supply and demand and say attempts to regulate speculation are foolhardy and could drive investors to less-regulated venues.
CME Group, the world's largest commodities exchange, said in a statement that it hasn't seen "any empirical evidence that index funds and speculators distort prices, as has been widely alleged."
The exchange's chief executive, Craig Donohue, said: "We are deeply concerned that inappropriate regulation of these markets will cause market participants to move to dark pools and other unregulated markets, causing irrevocable harm to the entire U.S. economy." Dark pools are private markets where large orders are transacted.
Last year, CFTC Chief Economist Jeffrey Harris told a House Agriculture subcommittee: "The economic data shows that overall commodity price levels, including agriculture commodity and energy futures prices, are being driven by powerful fundamental economic forces and the laws of supply and demand." Mr. Harris didn't return a call to comment.
The acting CFTC chairman at the time, Bush-appointee Walter Lukken, told the House Agriculture committee that CFTC's economists "did not find direct evidence that speculation was driving up prices." Mr. Lukken, now an executive at the New York Stock Exchange, declined to comment.
In preparing its 2008 report, the CFTC sought information from swaps dealers about their off-exchange derivatives transactions. CFTC commissioner Mr. Chilton -- who was appointed by Mr. Bush and now awaits confirmation of his reappointment under Mr. Obama -- said the data the agency gathered was incomplete, with some players providing partial or no information.
Mr. Chilton dissented from the 2008 CFTC report, saying the agency's conclusions didn't go far enough. He expressed doubt about the amount and type of data received, which he called limited and unreliable. "We didn't have all the information we should have," he said. "And we gave it to Congress anyway, and we spun it."
The agency began shifting under Mr. Gensler, its new chairman. During his confirmation process earlier this year, Mr. Gensler said he believed speculation was partly behind the surge in commodity prices.
Mr. Chilton said the new report will contain a more-thorough analysis of the investors in contracts tied to oil and other commodities, and reveal cases in which single traders hold massive market positions. "We now have multiple sources, and confidence from different sources," he says. He said he believes the data on trading outside exchanges is also more reliable.
Meantime, the U.K.'s FSA has been examining whether speculation has driven big oil price swings in recent months. The FSA is leaning toward the conclusion that the moves have more to do with uncertainty over the direction of economic growth than speculation, according to the people familiar with the matter.
The FSA has no jurisdiction over U.S. markets. But it oversees ICE Futures Europe, one of the largest global energy exchanges, which is based in London.
The FSA doesn't believe that limiting the size of trading positions would be "beneficial" for the market. Still, it concedes it doesn't have a "full explanation" as to why it the market has moved as it has.
—Carolyn Cui and Kara Scannell contributed to this article.
Write to Ianthe Jeanne Dugan at ianthe.dugan@wsj.com and Alistair MacDonald at alistair.macdonald@wsj.com
By IANTHE JEANNE DUGAN and ALISTAIR MACDONALD
The Commodity Futures Trading Commission plans to issue a report next month suggesting speculators played a significant role in driving wild swings in oil prices -- a reversal of an earlier CFTC position that augurs intensifying scrutiny on investors.
In a contentious report last year, the main U.S. futures-market regulator pinned oil-price swings primarily on supply and demand. But that analysis was based on "deeply flawed data," Bart Chilton, one of four CFTC commissioners, said in an interview Monday.
The CFTC's new review, due to be released in August, adds fuel to a growing debate over financial investors who bet on the direction of commodities prices by buying contracts tied to indexes. These speculators have invested hundreds of billions of dollars in contracts that were once dominated by producers and consumers who sought to hedge against oil-market volatility.
The review also reflects shifting political winds. Under Chairman Gary Gensler, appointed by President Barack Obama, the CFTC is departing from the more hands-off approach it took under its previous head, a George W. Bush appointee. The agency is widely expected to adopt new rules to limit the amount of investments in commodities by big institutions betting on their direction purely for financial gain.
The agency didn't make available preliminary figures from the report and declined to discuss the previous data.
Speculators have been a lightning rod of criticism from politicians world-wide, who worry that rising oil prices could damp the recovery potential of their recession-hit economies. Many lawmakers and regulators say they want to ensure that speculators don't make it more costly for consumers to access heating oil, food and other essentials.
These decision makers don't present a united front. The U.K.'s Financial Services Authority has found no evidence that speculators are behind big oil-price swings, people familiar with the matter said Friday. This view, made by the overseer of one of the world's biggest financial markets, contrasts with an opinion piece published in The Wall Street Journal two weeks ago, by French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown, who said governments need to act to curb "dangerously volatile" oil prices.
In the U.S., the CFTC begins public hearings Tuesday to determine whether to limit speculative investments in commodities. Congress also is weighing whether to give the CFTC the authority, under a broader proposal to revamp financial regulation, to regulate commodities investments that occur off traditional exchanges. Byron Dorgan, a North Dakota Democrat, has called on the CFTC to curb "oil speculators looking for a quick buck at the expense of American consumers."
The debate over speculators underscores the shifting nature of commodities trading in recent years. Before the mid-1990s, these markets were dominated by entities that had physical dealings with the underlying commodity, and "speculators" who often took the opposite position, providing liquidity to markets.
But a new group of investors has emerged in recent years. Those who want to bet on commodities prices have increasingly put their money in indexes that track the value of futures contracts, in which investors promise to pay a certain amount in the future for oil and other commodities. As of July 2008, financial investors had about $300 billion riding on these indexes, roughly four times the level in January 2006, according to the International Energy Agency, a Paris-based watchdog.
Separately, these investors may buy derivatives, not directly traded on futures exchanges, that let them make contrary bets to offset their risks.
Crude-oil prices surged in July 2008 to a record $145 a barrel, then dropped to about $33 in December. Oil now trades at around $68 a barrel.
Proponents of index speculation say these parties have added liquidity to markets. They blame price gyrations on supply and demand and say attempts to regulate speculation are foolhardy and could drive investors to less-regulated venues.
CME Group, the world's largest commodities exchange, said in a statement that it hasn't seen "any empirical evidence that index funds and speculators distort prices, as has been widely alleged."
The exchange's chief executive, Craig Donohue, said: "We are deeply concerned that inappropriate regulation of these markets will cause market participants to move to dark pools and other unregulated markets, causing irrevocable harm to the entire U.S. economy." Dark pools are private markets where large orders are transacted.
Last year, CFTC Chief Economist Jeffrey Harris told a House Agriculture subcommittee: "The economic data shows that overall commodity price levels, including agriculture commodity and energy futures prices, are being driven by powerful fundamental economic forces and the laws of supply and demand." Mr. Harris didn't return a call to comment.
The acting CFTC chairman at the time, Bush-appointee Walter Lukken, told the House Agriculture committee that CFTC's economists "did not find direct evidence that speculation was driving up prices." Mr. Lukken, now an executive at the New York Stock Exchange, declined to comment.
In preparing its 2008 report, the CFTC sought information from swaps dealers about their off-exchange derivatives transactions. CFTC commissioner Mr. Chilton -- who was appointed by Mr. Bush and now awaits confirmation of his reappointment under Mr. Obama -- said the data the agency gathered was incomplete, with some players providing partial or no information.
Mr. Chilton dissented from the 2008 CFTC report, saying the agency's conclusions didn't go far enough. He expressed doubt about the amount and type of data received, which he called limited and unreliable. "We didn't have all the information we should have," he said. "And we gave it to Congress anyway, and we spun it."
The agency began shifting under Mr. Gensler, its new chairman. During his confirmation process earlier this year, Mr. Gensler said he believed speculation was partly behind the surge in commodity prices.
Mr. Chilton said the new report will contain a more-thorough analysis of the investors in contracts tied to oil and other commodities, and reveal cases in which single traders hold massive market positions. "We now have multiple sources, and confidence from different sources," he says. He said he believes the data on trading outside exchanges is also more reliable.
Meantime, the U.K.'s FSA has been examining whether speculation has driven big oil price swings in recent months. The FSA is leaning toward the conclusion that the moves have more to do with uncertainty over the direction of economic growth than speculation, according to the people familiar with the matter.
The FSA has no jurisdiction over U.S. markets. But it oversees ICE Futures Europe, one of the largest global energy exchanges, which is based in London.
The FSA doesn't believe that limiting the size of trading positions would be "beneficial" for the market. Still, it concedes it doesn't have a "full explanation" as to why it the market has moved as it has.
—Carolyn Cui and Kara Scannell contributed to this article.
Write to Ianthe Jeanne Dugan at ianthe.dugan@wsj.com and Alistair MacDonald at alistair.macdonald@wsj.com
Developing nations shine amid the crisis gloom
By David Oakley and Patti Waldmeir
Published: July 28 2009 03:00 Last updated: July 28 2009 03:00
It has been a good year for emerging markets.
That may seem an odd statement, given the severity of the global recession and the uncertainty - in spite of recent rallies - that still hangs over the financial markets as the second anniversary of the credit crisis approaches.
But many emerging markets have had a good crisis, or at least a better one than their industrialised peers.
Nowhere is this more true than in China.
Its equity markets have boomed, with the Shanghai Composite index up more than 88 per cent since January 1 - making China the best performing large stock market this year. This compares with the S&P 500, the world's leading benchmark, which has risen a modest 8 per cent.
China's economy is expected to grow by at least 7 per cent this year, new lending has risen sharply and there are signs from leading indicators, such as purchasing managers' surveys, that the momentum can be maintained.
Risk appetite among investors also remains strong, in spite of very high price earnings multiples of more than 30 on the Shanghai Composite.
Robert Buckland, global head of equity strategy at Citigroup, says: "China has shown that if you have a strong fiscal position, you can weather the storms. If it is still growing strongly by the end of the year, then it will be in a good position as the economies of the industrialised world should start to pick up by then."
The turning point for China, and indeed the rest of the emerging markets, appears to have been the launch of the country's vast Rmb4,000bn ($586bn) fiscal stimulus package in November.
This paved the way for a recovery in emerging market stocks across the globe, a good four months before the industrialised markets saw a turnround.
India has also had a relatively good credit crisis. Like China, its equity market is one of the best performing this year - the Sensex is up 55 per cent - and its economy has had a relatively shallow downturn. Most forecasters expect the Indian economy to grow by about 5 per cent this year.
Elsewhere, however, the picture is more mixed.
The stock markets of the small, exporting Asian nations have continued to attract investors, helped by surging Chinese equities.
South Korea's Kospi index, Singapore's FTSE Straits Times index and Malaysia's FTSE Bursa KLCI index are all up more than 30 per cent this year.
But the news is not so positive for their open economies, which have been hit hard by falling exports. South Korean exports, for example, continue to plunge more than 20 per cent year-on-year.
The outlook is also not as clear cut in Latin America.
Brazil's economy is expected to see a mild contraction of just 1 per cent this year.
It has been helped by China's continuing appetite for its commodities, particularly iron ore, its prudent fiscal policies and its relatively closed economy. In contrast, Mexico has suffered because of its links to the US, which buys 80 per cent of its exports.
Meanwhile, Argentina and Venezuela remain no-go areas for most investors because of perceived economic mismanagement.
The Middle East and Gulf states have also suffered. But the stabilising oil price has boosted stocks. Saudi Arabia's Tadawul All Share index has rebounded close to 40 per cent since its lows in March.
However, the clear laggards in the emerging market world have been in central and eastern Europe.
Russia, the regional behemoth, remains in deep trouble. Many analysts expect the economy to contract by 10 per cent this year. However, its stock markets have recovered from their recent sell-off. The RTS index has risen more than 20 per cent since July 10 and is up 60 per cent since the start of the year.
Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, says: "Overall, the emerging markets have done relatively well in this crisis, particularly when compared with the developed markets."
Mr Buckland adds: "In a sense, the financial crisis has been the making of the emerging markets in that they are no longer some kind of super-cyclical play.
"It is no longer the case that if you downgrade US GDP by 1 per cent, then emerging market GDP will be downgraded by 2 or 3 per cent. The balance sheet management of the emerging markets has been better in this crisis than the developed world."
However, there are still risks, even in China, the catalyst for the stock market revival.
Fraser Howie, stock market analyst and author of Privatising China: Inside China's Stock Markets , says the Chinese economy is still relatively immature compared with the industrialised west.
"The banking system has been on steroids at the behest of the government," he says. "What's driving this market is a liquidity bubble of unseen proportions from the banking sector. China has a lot of work to do economically."
Xu Xiaonian, Professor of Economics and Finance at China Europe International Business School (CEIBS) also warns that the continually rising market poses high risks.
"Not much money went into the real economy in the first half, but to the stock markets instead, which will increase risks if inflation occurs."
Mr Rendell says: "China has been a big support for the emerging world, but it is not a haven. It is a good economy to back when compared with other markets, but China is not out of the woods yet - and neither is the rest of the emerging world."
Additional reporting by Shirley Chen
Published: July 28 2009 03:00 Last updated: July 28 2009 03:00
It has been a good year for emerging markets.
That may seem an odd statement, given the severity of the global recession and the uncertainty - in spite of recent rallies - that still hangs over the financial markets as the second anniversary of the credit crisis approaches.
But many emerging markets have had a good crisis, or at least a better one than their industrialised peers.
Nowhere is this more true than in China.
Its equity markets have boomed, with the Shanghai Composite index up more than 88 per cent since January 1 - making China the best performing large stock market this year. This compares with the S&P 500, the world's leading benchmark, which has risen a modest 8 per cent.
China's economy is expected to grow by at least 7 per cent this year, new lending has risen sharply and there are signs from leading indicators, such as purchasing managers' surveys, that the momentum can be maintained.
Risk appetite among investors also remains strong, in spite of very high price earnings multiples of more than 30 on the Shanghai Composite.
Robert Buckland, global head of equity strategy at Citigroup, says: "China has shown that if you have a strong fiscal position, you can weather the storms. If it is still growing strongly by the end of the year, then it will be in a good position as the economies of the industrialised world should start to pick up by then."
The turning point for China, and indeed the rest of the emerging markets, appears to have been the launch of the country's vast Rmb4,000bn ($586bn) fiscal stimulus package in November.
This paved the way for a recovery in emerging market stocks across the globe, a good four months before the industrialised markets saw a turnround.
India has also had a relatively good credit crisis. Like China, its equity market is one of the best performing this year - the Sensex is up 55 per cent - and its economy has had a relatively shallow downturn. Most forecasters expect the Indian economy to grow by about 5 per cent this year.
Elsewhere, however, the picture is more mixed.
The stock markets of the small, exporting Asian nations have continued to attract investors, helped by surging Chinese equities.
South Korea's Kospi index, Singapore's FTSE Straits Times index and Malaysia's FTSE Bursa KLCI index are all up more than 30 per cent this year.
But the news is not so positive for their open economies, which have been hit hard by falling exports. South Korean exports, for example, continue to plunge more than 20 per cent year-on-year.
The outlook is also not as clear cut in Latin America.
Brazil's economy is expected to see a mild contraction of just 1 per cent this year.
It has been helped by China's continuing appetite for its commodities, particularly iron ore, its prudent fiscal policies and its relatively closed economy. In contrast, Mexico has suffered because of its links to the US, which buys 80 per cent of its exports.
Meanwhile, Argentina and Venezuela remain no-go areas for most investors because of perceived economic mismanagement.
The Middle East and Gulf states have also suffered. But the stabilising oil price has boosted stocks. Saudi Arabia's Tadawul All Share index has rebounded close to 40 per cent since its lows in March.
However, the clear laggards in the emerging market world have been in central and eastern Europe.
Russia, the regional behemoth, remains in deep trouble. Many analysts expect the economy to contract by 10 per cent this year. However, its stock markets have recovered from their recent sell-off. The RTS index has risen more than 20 per cent since July 10 and is up 60 per cent since the start of the year.
Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, says: "Overall, the emerging markets have done relatively well in this crisis, particularly when compared with the developed markets."
Mr Buckland adds: "In a sense, the financial crisis has been the making of the emerging markets in that they are no longer some kind of super-cyclical play.
"It is no longer the case that if you downgrade US GDP by 1 per cent, then emerging market GDP will be downgraded by 2 or 3 per cent. The balance sheet management of the emerging markets has been better in this crisis than the developed world."
However, there are still risks, even in China, the catalyst for the stock market revival.
Fraser Howie, stock market analyst and author of Privatising China: Inside China's Stock Markets , says the Chinese economy is still relatively immature compared with the industrialised west.
"The banking system has been on steroids at the behest of the government," he says. "What's driving this market is a liquidity bubble of unseen proportions from the banking sector. China has a lot of work to do economically."
Xu Xiaonian, Professor of Economics and Finance at China Europe International Business School (CEIBS) also warns that the continually rising market poses high risks.
"Not much money went into the real economy in the first half, but to the stock markets instead, which will increase risks if inflation occurs."
Mr Rendell says: "China has been a big support for the emerging world, but it is not a haven. It is a good economy to back when compared with other markets, but China is not out of the woods yet - and neither is the rest of the emerging world."
Additional reporting by Shirley Chen
Monday, July 27, 2009
U.S. Issues New Rules on Short-Selling
By KARA SCANNELL
The Securities and Exchange Commission issued new rules to govern short-selling, promising investors fresh information about the volume and velocity of negative bets placed against companies.
But it dropped a requirement that hedge funds disclose details of short positions to regulators.
Short-selling came under political attack after the market selloff last year, with the practice banned for financial stocks during 14 trading days. A number of studies showed the ban had a limited effect on the market, and regulators have struggled to determine the best way to regulate short-selling without crimping market activity.
The SEC will offer more information on short-selling, but won't ban naked short-selling. Here, Chairman Mary Schapiro in Washington last week.
The SEC's new rules are a middle ground. They finalize temporary rules requiring traders to complete a short sale within four days. They create more disclosure, but still delay the information by a month. They also aggregate short-position data for individual stocks but keep individual money manager positions confidential.
Hedge funds fought such disclosures, saying it would be tantamount to revealing trading secrets.
The SEC said self-regulatory organizations, such as the Financial Industry Regulatory Authority, will begin posting on their Web sites "in the next few weeks" more information about short sales, including something akin to a " ticker tape" that will show, on a one-month delay, the exact time at which a trader places a short-sale and the size of the position. The anonymous data would enable investors and others to determine, forensically, if traders were in some way piling on a company in an improper, coordinated way.
Financial companies and several lawmakers have argued that short sellers' attacks on a company's shares can undermine its stability, citing alleged "bear raids" of financial firms that rely on broad market confidence to stay in business. Short sellers have said their trades reflect a legitimate belief that a stock is overvalued.
The self-regulatory organizations, such as Finra, will also publish daily aggregate volume information of short-selling in each exchange-traded stock. The SEC also would speed up disclosure of failed short trades, when a trader never completes the trade by replacing the borrowed stock, across all companies from once a quarter to twice a month. Failed trades are an indication, but not evidence, that a stock has been manipulated.
The SEC, however, is backing away from its earlier move to require hedge funds and other money managers to disclose weekly their short positions once they reach a certain concentration.
The disclosure requirement for hedge-fund managers was a measure adopted on a temporary basis as markets were seizing up last fall. The SEC didn't offer any explanation for its decision to let the rule expire, but one reason may have been that money managers weren't providing material information on their positions anyway.
The SEC is pushing to gain more regulatory oversight of hedge funds as part of a broader financial regulation overhaul proposed by the Obama Administration.
SEC Chairman Mary Schapiro said Monday's moves showed the agency's "determination to address short-selling abuses" while increasing public disclosure of short-selling activities.
"We look forward to working with the SEC as they and the self-regulatory organizations develop a public database online to better understand the role that short selling plays in our capital markets," said a spokesman for the Coalition of Private Investment Companies, a hedge-fund lobbying group.
Lawmakers are concerned the SEC isn't doing enough to rein in potentially abusive short-selling, known as a naked short sale. In a naked short sale, the trader never actually borrows the stock. Some executives have argued naked short selling allows market manipulators to drive down shares artificially.
Under a rule that was finalized Monday, short-sellers must complete the trade within four days by replacing the borrowed stock, or they have failed to deliver and are subject to penalties.
Last week, seven senators urged the SEC to reduce the potential for abusive naked short-selling by instituting a so-called "hard locate" or preborrow requirement, essentially locking up stock so it can't be lent out to anyone else.
Sen. Ted Kaufman (D.-Del.), who has prodded the SEC to take additional steps, said in a statement that he was disappointed it didn't go further to restrict naked short selling. "Instead of proposing action today to deal with the problem, the SEC apparently is content to let potential solutions sit on the shelf for another two months," he said.
Last summer the SEC instituted an emergency measure requiring traders to lock in contracts to borrow stock in a limited number of financial companies before initiating a short sale. Wall Street firms and hedge funds said it amounted to a ban on short selling because it drove up the price to borrow those stocks.
The SEC said on Monday it would hold a roundtable in September to discuss a hard-locate or preborrow requirement, among other issues.
Write to Kara Scannell at kara.scannell@wsj.com
The Securities and Exchange Commission issued new rules to govern short-selling, promising investors fresh information about the volume and velocity of negative bets placed against companies.
But it dropped a requirement that hedge funds disclose details of short positions to regulators.
Short-selling came under political attack after the market selloff last year, with the practice banned for financial stocks during 14 trading days. A number of studies showed the ban had a limited effect on the market, and regulators have struggled to determine the best way to regulate short-selling without crimping market activity.
The SEC will offer more information on short-selling, but won't ban naked short-selling. Here, Chairman Mary Schapiro in Washington last week.
The SEC's new rules are a middle ground. They finalize temporary rules requiring traders to complete a short sale within four days. They create more disclosure, but still delay the information by a month. They also aggregate short-position data for individual stocks but keep individual money manager positions confidential.
Hedge funds fought such disclosures, saying it would be tantamount to revealing trading secrets.
The SEC said self-regulatory organizations, such as the Financial Industry Regulatory Authority, will begin posting on their Web sites "in the next few weeks" more information about short sales, including something akin to a " ticker tape" that will show, on a one-month delay, the exact time at which a trader places a short-sale and the size of the position. The anonymous data would enable investors and others to determine, forensically, if traders were in some way piling on a company in an improper, coordinated way.
Financial companies and several lawmakers have argued that short sellers' attacks on a company's shares can undermine its stability, citing alleged "bear raids" of financial firms that rely on broad market confidence to stay in business. Short sellers have said their trades reflect a legitimate belief that a stock is overvalued.
The self-regulatory organizations, such as Finra, will also publish daily aggregate volume information of short-selling in each exchange-traded stock. The SEC also would speed up disclosure of failed short trades, when a trader never completes the trade by replacing the borrowed stock, across all companies from once a quarter to twice a month. Failed trades are an indication, but not evidence, that a stock has been manipulated.
The SEC, however, is backing away from its earlier move to require hedge funds and other money managers to disclose weekly their short positions once they reach a certain concentration.
The disclosure requirement for hedge-fund managers was a measure adopted on a temporary basis as markets were seizing up last fall. The SEC didn't offer any explanation for its decision to let the rule expire, but one reason may have been that money managers weren't providing material information on their positions anyway.
The SEC is pushing to gain more regulatory oversight of hedge funds as part of a broader financial regulation overhaul proposed by the Obama Administration.
SEC Chairman Mary Schapiro said Monday's moves showed the agency's "determination to address short-selling abuses" while increasing public disclosure of short-selling activities.
"We look forward to working with the SEC as they and the self-regulatory organizations develop a public database online to better understand the role that short selling plays in our capital markets," said a spokesman for the Coalition of Private Investment Companies, a hedge-fund lobbying group.
Lawmakers are concerned the SEC isn't doing enough to rein in potentially abusive short-selling, known as a naked short sale. In a naked short sale, the trader never actually borrows the stock. Some executives have argued naked short selling allows market manipulators to drive down shares artificially.
Under a rule that was finalized Monday, short-sellers must complete the trade within four days by replacing the borrowed stock, or they have failed to deliver and are subject to penalties.
Last week, seven senators urged the SEC to reduce the potential for abusive naked short-selling by instituting a so-called "hard locate" or preborrow requirement, essentially locking up stock so it can't be lent out to anyone else.
Sen. Ted Kaufman (D.-Del.), who has prodded the SEC to take additional steps, said in a statement that he was disappointed it didn't go further to restrict naked short selling. "Instead of proposing action today to deal with the problem, the SEC apparently is content to let potential solutions sit on the shelf for another two months," he said.
Last summer the SEC instituted an emergency measure requiring traders to lock in contracts to borrow stock in a limited number of financial companies before initiating a short sale. Wall Street firms and hedge funds said it amounted to a ban on short selling because it drove up the price to borrow those stocks.
The SEC said on Monday it would hold a roundtable in September to discuss a hard-locate or preborrow requirement, among other issues.
Write to Kara Scannell at kara.scannell@wsj.com
Obama Declares New Era Of Cooperation With China
WASHINGTON — President Obama declared a new era of “cooperation, not confrontation” with China on Monday, even though two days of high-level talks were not expected to resolve differences over the two nations’ yawning trade gap and China’s unease over soaring U.S. budget deficits.
The Obama administration pledged to get control of the deficits once the economic crisis is resolved. It also pressed China to reshape its economy to rely more on domestic demand and less on exports that drive up the U.S. trade deficit.
Both sides sought to underscore the importance of the revamped Strategic and Economic Dialogue with Obama delivering a major policy address to welcome a sizable Chinese delegation of 150 diplomats.
“I believe that we are poised to make steady progress on some of the most important issues of our times,” the president told officials from both countries assembled in the vast atrium of the Ronald Reagan Building.
“The relationship between the United States and China will shape the 21st century, which makes it as important as any bilateral relationship in the world,” Obama said.
The discussions in Washington represent the continuation of talks begun by the Bush administration. While the initial talks focused on economic tensions, Obama expanded the agenda to include foreign policy issues such as America’s drive to get China’s support for more international pressure to curb North Korea’s nuclear ambitions.
Secretary of State Hillary Rodham Clinton and Treasury Secretary Timothy Geithner were leading the U.S. team. The Chinese delegation was led by Chinese State Councilor Dai Bingguo and Vice Premier Wang Qishan.
Geithner and Wang both spoke of hopeful signs that the global economy was beginning to emerge from its worst financial crisis since the Great Depression.
Geithner said the stimulus packages put together by Beijing and Washington had made a substantial contribution to fighting the global downturn and represented a milestone in economic cooperation between the two nations.
The United States, the world’s largest economy, accounts for about 22 percent of global output, and China around 7 percent. The combined impact of the massive stimulus programs should make a difference, economists said, in cushioning a recession that appears to be bottoming out in the United States and some other countries.
“At present, the world economy is at a critical moment of moving out of crisis and toward recovery,” Wang said, speaking through a translator.
Geithner traveled to Beijing last month to assure Chinese officials that federal budget deficits, which have ballooned because of government efforts to deal with the recession and stabilize the financial system, would be reined in once those crises have passed.
He said Americans were already moving to boost their personal savings rates. Economists have long argued that is necessary to controlling U.S. trade deficits because it means Americans are not consuming as much in imports from China and other countries.
“We are committed to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013,” Geithner said at the opening session of the talks.
Geithner did not spell out how the administration planned to accomplish those objectives. Many private economists have said the Chinese are right to worry about a U.S. budget deficit that is projected to hit $1.85 trillion this year, four-times the previous record, and under the administration’s estimates will not dip below $500 billion over the next decade.
The Chinese, who have the largest foreign holdings of U.S. Treasury debt at $801.5 billion, have expressed worries that soaring deficits could spark inflation or a sudden drop in the value of the dollar, thus jeopardizing their investments.
Chinese officials did not mention those concerns publicly during Monday’s opening session. The United States did not publicly raise the issue of China’s currency, the yuan, which American manufacturers contend is being kept at artificially low levels by Beijing to gain trade advantages against the United States.
These omissions were seen as an effort by both sides to emphasize areas of agreement, in part to avoid upsetting global financial markets during a period of stress for the world economy.
“U.S. and Chinese leaders are striving hard to emphasize their common goals and interests while downplaying substantive policy differences. Irritants in the bilateral relationship including human rights issues and China’s currency policy have been shunted aside,” said Eswar Prasad, a senior professor on trade at Cornell University.
Geithner did say that it would be a “huge contribution to more rapid, balanced and sustained global growth” if China shifted toward more domestic-led growth and away from the current extensive reliance on exports.
While Chinese officials have pledged to move in this direction, it was unclear that the changes would be fast enough or substantial enough to satisfy U.S. demands.
In his remarks, Obama said that the United States and China have a shared interest in clean and secure energy sources. The two nations are the world’s largest emitters of the pollution blamed for global warming, but so far China has resisted calls to set specific caps on emissions or to eliminate tariffs on clean energy technology that the United States and other countries would like to sell them.
The administration did praise China for its help in the nuclear standoff with North Korea. Clinton said the administration was grateful for the “close cooperation” it received from China in response to Pyongyang’s recent missile launches.
While the U.S. trade deficit with China has narrowed slightly this year, it is still the largest imbalance with any country. Critics in Congress say unless China does much more in the currency area, they will seek to pass legislation to impose economic sanctions on Beijing, a move that could spark a trade war.
The Obama administration pledged to get control of the deficits once the economic crisis is resolved. It also pressed China to reshape its economy to rely more on domestic demand and less on exports that drive up the U.S. trade deficit.
Both sides sought to underscore the importance of the revamped Strategic and Economic Dialogue with Obama delivering a major policy address to welcome a sizable Chinese delegation of 150 diplomats.
“I believe that we are poised to make steady progress on some of the most important issues of our times,” the president told officials from both countries assembled in the vast atrium of the Ronald Reagan Building.
“The relationship between the United States and China will shape the 21st century, which makes it as important as any bilateral relationship in the world,” Obama said.
The discussions in Washington represent the continuation of talks begun by the Bush administration. While the initial talks focused on economic tensions, Obama expanded the agenda to include foreign policy issues such as America’s drive to get China’s support for more international pressure to curb North Korea’s nuclear ambitions.
Secretary of State Hillary Rodham Clinton and Treasury Secretary Timothy Geithner were leading the U.S. team. The Chinese delegation was led by Chinese State Councilor Dai Bingguo and Vice Premier Wang Qishan.
Geithner and Wang both spoke of hopeful signs that the global economy was beginning to emerge from its worst financial crisis since the Great Depression.
Geithner said the stimulus packages put together by Beijing and Washington had made a substantial contribution to fighting the global downturn and represented a milestone in economic cooperation between the two nations.
The United States, the world’s largest economy, accounts for about 22 percent of global output, and China around 7 percent. The combined impact of the massive stimulus programs should make a difference, economists said, in cushioning a recession that appears to be bottoming out in the United States and some other countries.
“At present, the world economy is at a critical moment of moving out of crisis and toward recovery,” Wang said, speaking through a translator.
Geithner traveled to Beijing last month to assure Chinese officials that federal budget deficits, which have ballooned because of government efforts to deal with the recession and stabilize the financial system, would be reined in once those crises have passed.
He said Americans were already moving to boost their personal savings rates. Economists have long argued that is necessary to controlling U.S. trade deficits because it means Americans are not consuming as much in imports from China and other countries.
“We are committed to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013,” Geithner said at the opening session of the talks.
Geithner did not spell out how the administration planned to accomplish those objectives. Many private economists have said the Chinese are right to worry about a U.S. budget deficit that is projected to hit $1.85 trillion this year, four-times the previous record, and under the administration’s estimates will not dip below $500 billion over the next decade.
The Chinese, who have the largest foreign holdings of U.S. Treasury debt at $801.5 billion, have expressed worries that soaring deficits could spark inflation or a sudden drop in the value of the dollar, thus jeopardizing their investments.
Chinese officials did not mention those concerns publicly during Monday’s opening session. The United States did not publicly raise the issue of China’s currency, the yuan, which American manufacturers contend is being kept at artificially low levels by Beijing to gain trade advantages against the United States.
These omissions were seen as an effort by both sides to emphasize areas of agreement, in part to avoid upsetting global financial markets during a period of stress for the world economy.
“U.S. and Chinese leaders are striving hard to emphasize their common goals and interests while downplaying substantive policy differences. Irritants in the bilateral relationship including human rights issues and China’s currency policy have been shunted aside,” said Eswar Prasad, a senior professor on trade at Cornell University.
Geithner did say that it would be a “huge contribution to more rapid, balanced and sustained global growth” if China shifted toward more domestic-led growth and away from the current extensive reliance on exports.
While Chinese officials have pledged to move in this direction, it was unclear that the changes would be fast enough or substantial enough to satisfy U.S. demands.
In his remarks, Obama said that the United States and China have a shared interest in clean and secure energy sources. The two nations are the world’s largest emitters of the pollution blamed for global warming, but so far China has resisted calls to set specific caps on emissions or to eliminate tariffs on clean energy technology that the United States and other countries would like to sell them.
The administration did praise China for its help in the nuclear standoff with North Korea. Clinton said the administration was grateful for the “close cooperation” it received from China in response to Pyongyang’s recent missile launches.
While the U.S. trade deficit with China has narrowed slightly this year, it is still the largest imbalance with any country. Critics in Congress say unless China does much more in the currency area, they will seek to pass legislation to impose economic sanctions on Beijing, a move that could spark a trade war.
房地产市场：一次夭折的调整
沈明高
我们的观点 由于本轮房地产市场调整中途夭折，难以为政府部门、房地产开发商和投资者提供一个完整的风险指引，未来深幅调整的风险仍然存在。中国经济对房地产投资的依赖，货币和信贷双宽松，以及通胀防御性投资工具的缺乏，阻止了本轮房地产市场健康调整。
进入本世纪以来，中国房地产价格一路上扬。以住房私有化改革的1999年为元年，到今年上半年，就每个季度同比涨幅的简单算术平均值而言，国家统计局公布的房屋价格指数为4.6%，而同期CPI每季上涨1.8%（图一）。按照国家统计局公布的住房销售累计平均价格计算，在2000年-2008年间，平均每年上涨8.2%。需要指出的是，考虑到一些城市房价实际上涨的速度，过去十年房价涨幅远超出上述平均水平。显然，到目前为止，房地产价格上涨跑赢通货膨胀，是中国最好的通胀防御性投资之一。
数据显示，房地产市场在小幅调整之后，开始回暖。房屋价格指数的波动显示，自2000年以来，全国平均房屋价格季度正增长一直保持到去年年底。即使今年一、二季度房屋价格指数同比出现了负增长，幅度也不是很大，分别仅下降1.1%和0.5%。从月度数据来看，今年6月，全国70个大中城市房屋销售价格同比上涨0.2%，结束了从去年12月以来连续6个月的同比负增长；涨幅已经从5月下降0.6%的基础上回升了0.8个百分点，更比今年3月跌幅最大时的1.3%多了1.5个百分点。 由于缺乏可靠的环比资料，并不清楚本轮全国房地产市场最低迷时，离2007年的峰值有多远。现有有限的统计资料显示，住房销售累计平均价格并没有出现明显的周期性调整。2008年初，该价格水平为每平米3938元，到去年年底跌至3655元，下跌7.2%。今年以来，该价格一直在4000元以上，6月更上升到4460元，较去年12月的低谷上升了22%。这一统计数据显然并不能真实反映目前全国住房销售的平均价格水平，但其相对变动趋势或说明，与之前价格的大幅度上升相比，本轮房地产价格的调整较浅。比较而言，今年一季度，美国住房销售价格较2007年峰值时下跌了17%。
美国等国家的经验表明，房地产市场有明显的周期性。美国耶鲁大学教授席勒在他的专著中指出，正是房地产市场几乎可预测的周期性趋势，助长了市场的乐观情绪和投机行为，也为房地产价格泡沫的破灭埋下了伏笔。这也是为什么，从上个世纪七十年代以来，美国出现了三次规模较大的房地产价格泡沫和泡沫破灭之后的大调整。
为什么中国房地产市场的调整短而浅呢？首先，房地产的支柱产业地位，特别是现有投资拉动的增长模式对房地产投资的依赖，决定了房地产市场调整幅度不可能太深。其次，过度宽松的货币政策也刺激了房地产市场快速回暖。最后，中国居民缺少有效的投资工具，在通胀预期之下，房地产依旧是最主要的通胀防御性投资的对象。
房地产行业具有三大属性。第一，投资属性。过去一年中，中国房地产价格波动较为温和的原因有很多，有开发商对价格下调的本能抗拒，也有一些地方政府对开发商的变相保护（如通过退地或缓缴税费的方式减轻开发商的流动性压力）。但是价格粘性的必然结果是，加剧了房地产销售数量的大幅下滑。进入2008年，商品房累计销售面积出现了全年负增长，并一直持续到今年2月（图二）。 商品房销售面积的跳水，拖累了房地产投资，其累计投资的同比增速从去年7月以前的30%以上，迅速暴跌至今年初的接近零增长。房地产投资占城镇固定资产投资的比重一直稳定在20%以上，其快速下滑，再加上其较长的产业链的乘数效应，无疑直接拖累了固定资产投资增长，中国政府“扩内需”能否成功部分在于能否及时拉动房地产投资的复苏。
第二，政府收入属性。房地产投资的下降，减少了地方政府土地出让收入。房地产开发商累计购置土地面积从去年9月出现同比负增长，今年上半年同比负增长接近30%，为2000年以来的最低增速（图三）。
第三，抵押品属性。无论是房地产开发商还是购房者，均以房地产作为最有效的抵押物。房地产价格的持续下降，最终将导致银行不良贷款的上升。 总体来看，影响房地产投资的主要因素就是流动性。实际上，如果房地产价格在2007年的水平上下调幅度有限，开发商的盈利空间仍然是有保障的。但是，为什么今年年初房地产投资出现了骤停呢？从图三可以看出，近来房地产开发商累计开发土地占累计购置土地的比重虽有所提高，但仍然没有超过60%，这说明土地供给不是房地产投资下降的一个主要原因。除了开发商担心房价继续下跌而采取观望态度之外，更重要的可能还是出于对流动性管理的考虑。在价格调整有限，商品房成交量大幅下滑的情况下，减少投资显然是开发商降低流动性风险的一个主要手段。
房地产行业的三大属性，决定了中国经济复苏难以与房地产脱钩，除非中国政府能否容忍更大的经济波动。
货币和信贷政策的快速转向，是房地产市场调整幅度较浅的另外一个重要原因。去年最后一个季度以来货币和信贷政策的双宽松，从根本上缓解了房地产开发商的流动性瓶颈。另一方面，央行连续减息、房地产交易税收优惠等措施刺激了部分需求，同时充裕的流动性也阻止了房地产价格进一步下滑，带动了投资性需求。从图四可以看出，以M1增长代表的流动性是房屋价格指数一个很好的领先指数。今年6月，M1增长已经达到24.8%，创有该统计数字以来的新高。数据显示，1月-6月，投入到房地产企业的国内贷款增长32.6%；而投放的个人按揭贷款增长63.1%。如果这一政策保持不变，仍有可能继续强力拉升房地产价格。 宽松的货币政策和商品房成交量的显著回升，使开发商安然度过了流动性危机，一些开发商甚至开始捂盘惜售，加剧了供求矛盾。
目前看来，政策对开发商的捂盘现象和住房空置，还没有一套行之有效的政策措施。一些国家向开发商甚至个人征收“房屋空置税”，或不失为增加住房供应的一个办法。
其基本原理是：空置房屋占用了大量的土地和空间资源，如果不能转化为实实在在的消费，征收房屋空置税是对资源占用的一种合理补偿。
中国过去两年多来宏观调控的经验表明，政策转向是资产市场逆转的最根本原因之一，股市是这样，房市也不例外。政策调整的最大优势是，其对资产价格的影响明显，但如果政策调整力度过大或者过于频繁，却有可能损害了市场自我调整能力，结果导致市场在短期内反复振荡。
最后，投资工具单一，特别是缺乏有效的通胀防御性投资工具，也是房地产市场调整逆转的一个不可忽视的因素。宽松的货币政策对于降低市场的通缩预期功不可没，但不设上限的货币政策也助长了市场对未来通胀的预期。在通胀预期之下，企业和投资者一个自然的选择就是进行通胀防御性投资，而过去的经验表明，房地产则是不二的选择。 自中国商品房市场开放以来的十余年中，本轮调整的幅度是最大的。不过，今年以来房地产市场的迅速回暖表明，这是一次半途夭折的调整。换句话说，这次调整并不能说明，中国的房地产市场已经走过了一个完整的周期。如果泡沫进一步累积，真正重大的调整很可能还在后面。
从根本上来说，中国市场经济的发展，需要经历至少一个完整的房地产市场周期，以及能够消化这样一个调整周期的市场和政策机制。■
我们的观点 由于本轮房地产市场调整中途夭折，难以为政府部门、房地产开发商和投资者提供一个完整的风险指引，未来深幅调整的风险仍然存在。中国经济对房地产投资的依赖，货币和信贷双宽松，以及通胀防御性投资工具的缺乏，阻止了本轮房地产市场健康调整。
进入本世纪以来，中国房地产价格一路上扬。以住房私有化改革的1999年为元年，到今年上半年，就每个季度同比涨幅的简单算术平均值而言，国家统计局公布的房屋价格指数为4.6%，而同期CPI每季上涨1.8%（图一）。按照国家统计局公布的住房销售累计平均价格计算，在2000年-2008年间，平均每年上涨8.2%。需要指出的是，考虑到一些城市房价实际上涨的速度，过去十年房价涨幅远超出上述平均水平。显然，到目前为止，房地产价格上涨跑赢通货膨胀，是中国最好的通胀防御性投资之一。
数据显示，房地产市场在小幅调整之后，开始回暖。房屋价格指数的波动显示，自2000年以来，全国平均房屋价格季度正增长一直保持到去年年底。即使今年一、二季度房屋价格指数同比出现了负增长，幅度也不是很大，分别仅下降1.1%和0.5%。从月度数据来看，今年6月，全国70个大中城市房屋销售价格同比上涨0.2%，结束了从去年12月以来连续6个月的同比负增长；涨幅已经从5月下降0.6%的基础上回升了0.8个百分点，更比今年3月跌幅最大时的1.3%多了1.5个百分点。 由于缺乏可靠的环比资料，并不清楚本轮全国房地产市场最低迷时，离2007年的峰值有多远。现有有限的统计资料显示，住房销售累计平均价格并没有出现明显的周期性调整。2008年初，该价格水平为每平米3938元，到去年年底跌至3655元，下跌7.2%。今年以来，该价格一直在4000元以上，6月更上升到4460元，较去年12月的低谷上升了22%。这一统计数据显然并不能真实反映目前全国住房销售的平均价格水平，但其相对变动趋势或说明，与之前价格的大幅度上升相比，本轮房地产价格的调整较浅。比较而言，今年一季度，美国住房销售价格较2007年峰值时下跌了17%。
美国等国家的经验表明，房地产市场有明显的周期性。美国耶鲁大学教授席勒在他的专著中指出，正是房地产市场几乎可预测的周期性趋势，助长了市场的乐观情绪和投机行为，也为房地产价格泡沫的破灭埋下了伏笔。这也是为什么，从上个世纪七十年代以来，美国出现了三次规模较大的房地产价格泡沫和泡沫破灭之后的大调整。
为什么中国房地产市场的调整短而浅呢？首先，房地产的支柱产业地位，特别是现有投资拉动的增长模式对房地产投资的依赖，决定了房地产市场调整幅度不可能太深。其次，过度宽松的货币政策也刺激了房地产市场快速回暖。最后，中国居民缺少有效的投资工具，在通胀预期之下，房地产依旧是最主要的通胀防御性投资的对象。
房地产行业具有三大属性。第一，投资属性。过去一年中，中国房地产价格波动较为温和的原因有很多，有开发商对价格下调的本能抗拒，也有一些地方政府对开发商的变相保护（如通过退地或缓缴税费的方式减轻开发商的流动性压力）。但是价格粘性的必然结果是，加剧了房地产销售数量的大幅下滑。进入2008年，商品房累计销售面积出现了全年负增长，并一直持续到今年2月（图二）。 商品房销售面积的跳水，拖累了房地产投资，其累计投资的同比增速从去年7月以前的30%以上，迅速暴跌至今年初的接近零增长。房地产投资占城镇固定资产投资的比重一直稳定在20%以上，其快速下滑，再加上其较长的产业链的乘数效应，无疑直接拖累了固定资产投资增长，中国政府“扩内需”能否成功部分在于能否及时拉动房地产投资的复苏。
第二，政府收入属性。房地产投资的下降，减少了地方政府土地出让收入。房地产开发商累计购置土地面积从去年9月出现同比负增长，今年上半年同比负增长接近30%，为2000年以来的最低增速（图三）。
第三，抵押品属性。无论是房地产开发商还是购房者，均以房地产作为最有效的抵押物。房地产价格的持续下降，最终将导致银行不良贷款的上升。 总体来看，影响房地产投资的主要因素就是流动性。实际上，如果房地产价格在2007年的水平上下调幅度有限，开发商的盈利空间仍然是有保障的。但是，为什么今年年初房地产投资出现了骤停呢？从图三可以看出，近来房地产开发商累计开发土地占累计购置土地的比重虽有所提高，但仍然没有超过60%，这说明土地供给不是房地产投资下降的一个主要原因。除了开发商担心房价继续下跌而采取观望态度之外，更重要的可能还是出于对流动性管理的考虑。在价格调整有限，商品房成交量大幅下滑的情况下，减少投资显然是开发商降低流动性风险的一个主要手段。
房地产行业的三大属性，决定了中国经济复苏难以与房地产脱钩，除非中国政府能否容忍更大的经济波动。
货币和信贷政策的快速转向，是房地产市场调整幅度较浅的另外一个重要原因。去年最后一个季度以来货币和信贷政策的双宽松，从根本上缓解了房地产开发商的流动性瓶颈。另一方面，央行连续减息、房地产交易税收优惠等措施刺激了部分需求，同时充裕的流动性也阻止了房地产价格进一步下滑，带动了投资性需求。从图四可以看出，以M1增长代表的流动性是房屋价格指数一个很好的领先指数。今年6月，M1增长已经达到24.8%，创有该统计数字以来的新高。数据显示，1月-6月，投入到房地产企业的国内贷款增长32.6%；而投放的个人按揭贷款增长63.1%。如果这一政策保持不变，仍有可能继续强力拉升房地产价格。 宽松的货币政策和商品房成交量的显著回升，使开发商安然度过了流动性危机，一些开发商甚至开始捂盘惜售，加剧了供求矛盾。
目前看来，政策对开发商的捂盘现象和住房空置，还没有一套行之有效的政策措施。一些国家向开发商甚至个人征收“房屋空置税”，或不失为增加住房供应的一个办法。
其基本原理是：空置房屋占用了大量的土地和空间资源，如果不能转化为实实在在的消费，征收房屋空置税是对资源占用的一种合理补偿。
中国过去两年多来宏观调控的经验表明，政策转向是资产市场逆转的最根本原因之一，股市是这样，房市也不例外。政策调整的最大优势是，其对资产价格的影响明显，但如果政策调整力度过大或者过于频繁，却有可能损害了市场自我调整能力，结果导致市场在短期内反复振荡。
最后，投资工具单一，特别是缺乏有效的通胀防御性投资工具，也是房地产市场调整逆转的一个不可忽视的因素。宽松的货币政策对于降低市场的通缩预期功不可没，但不设上限的货币政策也助长了市场对未来通胀的预期。在通胀预期之下，企业和投资者一个自然的选择就是进行通胀防御性投资，而过去的经验表明，房地产则是不二的选择。 自中国商品房市场开放以来的十余年中，本轮调整的幅度是最大的。不过，今年以来房地产市场的迅速回暖表明，这是一次半途夭折的调整。换句话说，这次调整并不能说明，中国的房地产市场已经走过了一个完整的周期。如果泡沫进一步累积，真正重大的调整很可能还在后面。
从根本上来说，中国市场经济的发展，需要经历至少一个完整的房地产市场周期，以及能够消化这样一个调整周期的市场和政策机制。■
Videogame Makers Can't Dodge Recession
By YUKARI IWATANI KANE
The tentacles of the recession have reached into the videogame industry, a business that was long considered downturn-resistant.
As recently as six months ago, the videogame industry was racking up strong growth even as other businesses reported sharp declines in sales and profits. U.S. videogame sales jumped 10% in January as consumers snapped up $60 to $70 games, which can bring dozens of hours of at-home family entertainment.
But last month, videogame sales plunged by a record 29% year over year, according to market-research firm NPD Group. Meanwhile, sales of consoles such as Microsoft Corp.'s Xbox 360 and Nintendo Co.'s Wii plummeted 38%. The steep drops came on top of a gradual sales decline that began in March.
View Full Image
Associated Press
Last month, videogame sales fell 29% from a year earlier, according to NPD. Sales of consoles sank 38%.
The turnabout is rippling out to companies such as online retailer Amazon.com Inc. Last week, Amazon blamed weak quarterly results from its media business on a decline in videogame sales. "You're seeing an industry slowdown in games and consoles," said Amazon finance chief Tom Szkutak in a conference call.
The reversal of fortune is likely to show up further in coming weeks. When Nintendo reports earnings Thursday, some analysts expect to see weaker revenue on a decline in Wii sales and slower-than-expected software sales. Videogame retailer GameStop Corp., which reports earnings next month, is also projected to post less-robust results. Game publishers Electronic Arts Inc. and Activision Blizzard Inc. are expected to post lackluster results when they report in early August, though EA has the advantage of a stronger roster of new games like "Tiger Woods PGA Tour 10."
"Initial orders for our products are tending to be lower," said Strauss Zelnick, chairman of Take-Two Interactive Software Inc., best known for its "Grand Theft Auto" action-game series. "It's not just us, but the industry as a whole." The New York company cut its annual earnings forecast earlier this month, in part because it postponed the launch of its BioShock 2 shooter game.
While the videogame industry had hopes of posting double-digit revenue growth this year, analysts now predict flat to 5% growth from $11 billion in 2008. Jesse Divnich, an analyst for Carlsbad, Calif., research firm Electronic Entertainment Design and Research, said he will "be happy if the industry grows."
The weakness stems from more consumers sitting on the sidelines and tightening their purse strings, especially as they wait for Nintendo, Microsoft and Sony Corp., the maker of the PlayStation 3, to cut the prices of their consoles. Many console and PC game sales are also being cannibalized by digitally downloaded games and alternative entertainment sources like Apple Inc.'s iPhone, which offers thousands of games that can cost only 99 cents or even nothing at all.
The videogame industry also faces tough comparisons to last year's second quarter, which was particularly strong given the release of blockbuster games like Take-Two's "Grand Theft Auto IV" and Nintendo's "Wii Fit" and "Mario Kart Wii."
But the recession has clearly exacerbated the falloff. "It's highlighting the weak months because if people don't really have a reason to go out to the store, they're not," said John Taylor, a financial analyst for Arcadia Investment Corp. in Portland, Ore., alluding to the industry's tendency to see the biggest sales during the year-end holiday season.
Many videogame executives say they remain positive about the industry, pointing to coming releases of big titles. Nintendo is launching "Wii Sports Resort," a collection of resort sports games, this week. Meanwhile, MTV Games is releasing its "The Beatles: Rockband" music game in September and Activision will start selling shooter game "Call of Duty: Modern Warfare 2" in November.
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Associated Press
Paul McCartney appeared at the unveiling of 'The Beatles: Rockband' Xbox game June 1 in Los Angeles.
Analysts expect Sony to cut the price on its PS3 by about $100 this year, leading to price cuts by Microsoft on some of its Xbox 360 models. The PS3 starts at about $400, compared with the equivalent Xbox 360, which costs about $300. Though Nintendo has said it won't cut prices on its $250 Wii this year, it is expected to do so indirectly by bundling games with the console.
Representatives for Sony and Nintendo say there are no plans for a price cut at this time. Microsoft declined comment. But Tony Bartel, GameStop's merchandising and marketing chief, said the company has factored in "a price cut in at least one of the platforms" and is "anticipating a very strong third and fourth quarter."
Still, videogame makers and retailers are likely to run into choosier consumers like Vaughn Forman. Mr. Forman, a 24-year-old gamer in Delray Beach, Fla., owns the latest consoles from Microsoft, Nintendo and Sony but said he is buying fewer games because he is still looking for work after graduating from college. While he wants to buy "The Beatles: Rockband" game, which will go for $250 with accessories, he said he "can't afford to buy it until I get a job."
Evan Wilson, an analyst with Pacific Crest, said many people are continuing to play games they already own, particularly since many of the games can now be refreshed with updates and new features online. "Games provide so much value that you don't necessarily need to buy other stuff," he said.
Write to Yukari Iwatani Kane at yukari.iwatani@wsj.com
The tentacles of the recession have reached into the videogame industry, a business that was long considered downturn-resistant.
As recently as six months ago, the videogame industry was racking up strong growth even as other businesses reported sharp declines in sales and profits. U.S. videogame sales jumped 10% in January as consumers snapped up $60 to $70 games, which can bring dozens of hours of at-home family entertainment.
But last month, videogame sales plunged by a record 29% year over year, according to market-research firm NPD Group. Meanwhile, sales of consoles such as Microsoft Corp.'s Xbox 360 and Nintendo Co.'s Wii plummeted 38%. The steep drops came on top of a gradual sales decline that began in March.
View Full Image
Associated Press
Last month, videogame sales fell 29% from a year earlier, according to NPD. Sales of consoles sank 38%.
The turnabout is rippling out to companies such as online retailer Amazon.com Inc. Last week, Amazon blamed weak quarterly results from its media business on a decline in videogame sales. "You're seeing an industry slowdown in games and consoles," said Amazon finance chief Tom Szkutak in a conference call.
The reversal of fortune is likely to show up further in coming weeks. When Nintendo reports earnings Thursday, some analysts expect to see weaker revenue on a decline in Wii sales and slower-than-expected software sales. Videogame retailer GameStop Corp., which reports earnings next month, is also projected to post less-robust results. Game publishers Electronic Arts Inc. and Activision Blizzard Inc. are expected to post lackluster results when they report in early August, though EA has the advantage of a stronger roster of new games like "Tiger Woods PGA Tour 10."
"Initial orders for our products are tending to be lower," said Strauss Zelnick, chairman of Take-Two Interactive Software Inc., best known for its "Grand Theft Auto" action-game series. "It's not just us, but the industry as a whole." The New York company cut its annual earnings forecast earlier this month, in part because it postponed the launch of its BioShock 2 shooter game.
While the videogame industry had hopes of posting double-digit revenue growth this year, analysts now predict flat to 5% growth from $11 billion in 2008. Jesse Divnich, an analyst for Carlsbad, Calif., research firm Electronic Entertainment Design and Research, said he will "be happy if the industry grows."
The weakness stems from more consumers sitting on the sidelines and tightening their purse strings, especially as they wait for Nintendo, Microsoft and Sony Corp., the maker of the PlayStation 3, to cut the prices of their consoles. Many console and PC game sales are also being cannibalized by digitally downloaded games and alternative entertainment sources like Apple Inc.'s iPhone, which offers thousands of games that can cost only 99 cents or even nothing at all.
The videogame industry also faces tough comparisons to last year's second quarter, which was particularly strong given the release of blockbuster games like Take-Two's "Grand Theft Auto IV" and Nintendo's "Wii Fit" and "Mario Kart Wii."
But the recession has clearly exacerbated the falloff. "It's highlighting the weak months because if people don't really have a reason to go out to the store, they're not," said John Taylor, a financial analyst for Arcadia Investment Corp. in Portland, Ore., alluding to the industry's tendency to see the biggest sales during the year-end holiday season.
Many videogame executives say they remain positive about the industry, pointing to coming releases of big titles. Nintendo is launching "Wii Sports Resort," a collection of resort sports games, this week. Meanwhile, MTV Games is releasing its "The Beatles: Rockband" music game in September and Activision will start selling shooter game "Call of Duty: Modern Warfare 2" in November.
View Full Image
Associated Press
Paul McCartney appeared at the unveiling of 'The Beatles: Rockband' Xbox game June 1 in Los Angeles.
Analysts expect Sony to cut the price on its PS3 by about $100 this year, leading to price cuts by Microsoft on some of its Xbox 360 models. The PS3 starts at about $400, compared with the equivalent Xbox 360, which costs about $300. Though Nintendo has said it won't cut prices on its $250 Wii this year, it is expected to do so indirectly by bundling games with the console.
Representatives for Sony and Nintendo say there are no plans for a price cut at this time. Microsoft declined comment. But Tony Bartel, GameStop's merchandising and marketing chief, said the company has factored in "a price cut in at least one of the platforms" and is "anticipating a very strong third and fourth quarter."
Still, videogame makers and retailers are likely to run into choosier consumers like Vaughn Forman. Mr. Forman, a 24-year-old gamer in Delray Beach, Fla., owns the latest consoles from Microsoft, Nintendo and Sony but said he is buying fewer games because he is still looking for work after graduating from college. While he wants to buy "The Beatles: Rockband" game, which will go for $250 with accessories, he said he "can't afford to buy it until I get a job."
Evan Wilson, an analyst with Pacific Crest, said many people are continuing to play games they already own, particularly since many of the games can now be refreshed with updates and new features online. "Games provide so much value that you don't necessarily need to buy other stuff," he said.
Write to Yukari Iwatani Kane at yukari.iwatani@wsj.com
About Turn Awaits China's Developers
By ANDREW PEAPLE
There may be no bubble in China's property market -- yet. But property developer stocks are outpacing even the Shanghai market's precipitate rise this year.
Not everyone is sharing the euphoria.
Some policymakers are voicing concern about a market recovery that's been fueled by the sharp rise in China's bank lending this year.
That should give investors still bullish about property stocks pause -- there's precedent for Beijing officials to deflate bubbles.
For now, the party's still in full swing.
Share prices of most leading property companies have at least doubled this year, against an 89% rise in A-shares.
The optimism does reflect a better picture for the property market. Transactions in major cities have boomed, up 53% on year in the first half. Property prices rose on the month for the fourth consecutive month in June.
It's a moot point how far this is rooted in fundamentals.
The Ministry of Finance late last week said it believed much of the extra lending to Chinese companies this year has found its way into the stock and property markets. Figures are hard to come by, but Moody's analysts reckon up to a quarter of the new lending has been so channeled. New loans made in China in the first half of 2009 totaled around $1.1 trillion, triple the amount a year ago.
Also last week the Chinese central bank said it would strengthen its supervision of the real estate sector. And the banking regulator has warned banks to enforce rules on mortgages for second homes more strictly.
The lending taps already seem set to dry up, with ICBC the latest bank to signal a sharp slowing of loan growth in the second half of 2009.
If further tightening is around the corner, that won't be good for property companies which are only now in the process of rebuilding balance sheets hit by the last property sector downturn.
In contrast with more optimistic equity analysts, Moody's has a negative outlook for 10 of the 13 Chinese property developers it covers, many of which face heavy refinancing requirements in the coming year.
For sure, some property companies have been raising new equity this year, though that's often gone into new land purchases. Without a true improvement in their cash positions, the property market's resurgence may soon prove to have been too short-lived for many developers.
Write to Andrew Peaple at andrew.peaple@dowjones.com
There may be no bubble in China's property market -- yet. But property developer stocks are outpacing even the Shanghai market's precipitate rise this year.
Not everyone is sharing the euphoria.
Some policymakers are voicing concern about a market recovery that's been fueled by the sharp rise in China's bank lending this year.
That should give investors still bullish about property stocks pause -- there's precedent for Beijing officials to deflate bubbles.
For now, the party's still in full swing.
Share prices of most leading property companies have at least doubled this year, against an 89% rise in A-shares.
The optimism does reflect a better picture for the property market. Transactions in major cities have boomed, up 53% on year in the first half. Property prices rose on the month for the fourth consecutive month in June.
It's a moot point how far this is rooted in fundamentals.
The Ministry of Finance late last week said it believed much of the extra lending to Chinese companies this year has found its way into the stock and property markets. Figures are hard to come by, but Moody's analysts reckon up to a quarter of the new lending has been so channeled. New loans made in China in the first half of 2009 totaled around $1.1 trillion, triple the amount a year ago.
Also last week the Chinese central bank said it would strengthen its supervision of the real estate sector. And the banking regulator has warned banks to enforce rules on mortgages for second homes more strictly.
The lending taps already seem set to dry up, with ICBC the latest bank to signal a sharp slowing of loan growth in the second half of 2009.
If further tightening is around the corner, that won't be good for property companies which are only now in the process of rebuilding balance sheets hit by the last property sector downturn.
In contrast with more optimistic equity analysts, Moody's has a negative outlook for 10 of the 13 Chinese property developers it covers, many of which face heavy refinancing requirements in the coming year.
For sure, some property companies have been raising new equity this year, though that's often gone into new land purchases. Without a true improvement in their cash positions, the property market's resurgence may soon prove to have been too short-lived for many developers.
Write to Andrew Peaple at andrew.peaple@dowjones.com
Loans Shrink as Fear Lingers
By DAVID ENRICH and DAN FITZPATRICK
Lending continues to slow as bankers and borrowers refrain from taking risks, in a bearish sign for the economy.
The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter, and more than half of the loan volume in April and May came from refinancing mortgages and renewing credit to businesses, not new loans, an analysis by The Wall Street Journal shows.
The numbers underscore two related trends weighing on the economy. Financial institutions are clamping down on lending to conserve capital as a cushion against mounting loan losses. And loan demand is falling as companies shelve expansion plans and consumers trim spending to ride out the recession.
That combination is making it harder for the U.S. economy to rebound, and some analysts predict that loan portfolios won't start growing until the second half of 2010.
"I think it is good for banks if we continue to be prudent as an industry and not reach to get loan growth by reducing our underwriting," Richard Davis, chief executive of U.S. Bancorp, said last week. The Minneapolis regional bank's overall loan portfolio declined 1.2% to $182 billion from March to June, despite issuing $16 billion of mortgages. Most of the mortgages came from refinancing existing loans.
The loan figures reviewed by the Journal include giants such as J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc., as well as regional banks such as Fifth Third Bancorp, based in Cincinnati, and Regions Financial Corp., of Birmingham, Ala. The 15 banks hold 47% of federally insured deposits and got $182.5 billion in taxpayer-funded capital infusions through the Troubled Asset Relief Program. As of June 30, the banks had $4.2 trillion of loans on their balance sheets, down from $4.3 trillion as of March 31.
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Banks Profit From U.S. Guarantee U.K. to Call on Banks to Improve Lending Loan portfolios shrank at 13 of the big banks, with the steepest decline at Comerica Inc., Dallas, where the loan total was down 4.3% to $46.6 billion in the latest quarter. Just $1.6 billion of the $10.2 billion in credit extended by Comerica in the second quarter came from new commitments. A bank spokesman said many borrowers "are being cautious."
Bank of America, Charlotte, N.C., reported its loan portfolio slipped 3.6% to $942.2 billion in the second quarter. A spokesman for the largest U.S. bank by assets said the decrease reflects higher loan losses and lower loan demand as borrowers pay off outstanding debts. "There were fewer opportunities to make high-quality loans because of the recession," he added.
Some borrowers complain banks aren't trying hard enough to expand credit. Ernie Cambo, a principal with Miami real-estate developer CPF Investment Group, had to halt work earlier this year on a 2.5-million-square-foot project called Ace Aviation and Commerce Center because he couldn't line up financing beyond the initial phases.
Now he isn't certain he will be able to find bank financing for a planned $4 million building for a South Florida auto auctioneer, despite having a signed lease. "You will find no more frustrated borrower than me right now," said Mr. Cambo, 39 years old. "I am growing in this downturn, and I can't get any incremental debt."
The slow pace of lending has created political heat for the Obama administration. On Friday, Rep. Spencer Bachus (R., Ala.) pressed Treasury Secretary Timothy Geithner to "tell me why we didn't really see that multiplier effect" from banks funneling their TARP money into lots of loans.
"I think you did," Mr. Geithner responded. Each dollar of taxpayer-funded capital gave banks $8 to $12 of lending capacity, and the initial $200 billion infusion by the Bush administration prevented a decline of more than $1 trillion in the overall loan supply, the Treasury secretary said.
Supporters of the bank bailout concede that lending has dipped, but note that the program wasn't meant to expand loan volume, but rather to prevent a collapse -- and has succeeded on that score.
Richard Neiman, a member of the committee formed by Congress to assess the effectiveness of TARP, said in an interview that "you need to be cautious in reading too much into these numbers." Congress intended to "stabilize the financial markets," he added, and there "is no specific reference to increasing lending" in the rescue-program legislation that was signed into law last year.
The 15 banks reported about $803 billion in loan volume in the second quarter, up 12.7% from the first quarter. But nearly 60% of the increase in April and May came from refinancing mortgages and renewing business loans, according to data Treasury collected from the banks. In contrast, new home purchases accounted for just 23% of all mortgage loans. May is the latest month for which the government's figures are available.
At BB&T Corp., of Winston-Salem, N.C., a surge in mortgage refinancing fueled the regional bank's increase of 0.1% in the size of its overall loan portfolio, which hit $100.3 billion as of June 30. Mortgage lending "is really booming," CEO Kelly King said, but loan growth slowed in May and June, "especially in the commercial area."
Banking analysts said the fact that less than half of loan volume is coming from new loans shows how far the economy still has to go to dig out of the recession. "You are looking for net new loans in the marketplace to be a signal of true change, and we have not seen that yet," said Christopher Marinac, research director at FIG Partners in Atlanta.
"You've got to have fewer people paying down loans...and you've got to get banks to loosen underwriting standards," said RBC Capital Markets analyst Gerard Cassidy. "That is when you will see loan balances in the U.S. banking system expand from where they are today. When that happens, you will see the economy really start to blossom."
On a year-over-year basis, total loans held by the 15 big banks rose 17% from $3.6 trillion in 2008's second quarter. The increase was skewed by the impact of acquisitions that included J.P. Morgan's takeover of the banking operations of Washington Mutual Inc. and Wachovia Corp.'s purchase by Wells Fargo & Co. Excluding purchases, loan portfolios shrank by about 10% as of June 30 from a year earlier.
The figures are a strong but imperfect indicator of loan activity. For example, loans sold to other institutions aren't counted on a bank's balance sheet at the end of the quarter. Since the financial crisis erupted, though, sales of loans have withered.
Write to David Enrich at david.enrich@wsj.com and Dan Fitzpatrick at dan.fitzpatrick@wsj.com
Lending continues to slow as bankers and borrowers refrain from taking risks, in a bearish sign for the economy.
The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter, and more than half of the loan volume in April and May came from refinancing mortgages and renewing credit to businesses, not new loans, an analysis by The Wall Street Journal shows.
The numbers underscore two related trends weighing on the economy. Financial institutions are clamping down on lending to conserve capital as a cushion against mounting loan losses. And loan demand is falling as companies shelve expansion plans and consumers trim spending to ride out the recession.
That combination is making it harder for the U.S. economy to rebound, and some analysts predict that loan portfolios won't start growing until the second half of 2010.
"I think it is good for banks if we continue to be prudent as an industry and not reach to get loan growth by reducing our underwriting," Richard Davis, chief executive of U.S. Bancorp, said last week. The Minneapolis regional bank's overall loan portfolio declined 1.2% to $182 billion from March to June, despite issuing $16 billion of mortgages. Most of the mortgages came from refinancing existing loans.
The loan figures reviewed by the Journal include giants such as J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc., as well as regional banks such as Fifth Third Bancorp, based in Cincinnati, and Regions Financial Corp., of Birmingham, Ala. The 15 banks hold 47% of federally insured deposits and got $182.5 billion in taxpayer-funded capital infusions through the Troubled Asset Relief Program. As of June 30, the banks had $4.2 trillion of loans on their balance sheets, down from $4.3 trillion as of March 31.
More
Banks Profit From U.S. Guarantee U.K. to Call on Banks to Improve Lending Loan portfolios shrank at 13 of the big banks, with the steepest decline at Comerica Inc., Dallas, where the loan total was down 4.3% to $46.6 billion in the latest quarter. Just $1.6 billion of the $10.2 billion in credit extended by Comerica in the second quarter came from new commitments. A bank spokesman said many borrowers "are being cautious."
Bank of America, Charlotte, N.C., reported its loan portfolio slipped 3.6% to $942.2 billion in the second quarter. A spokesman for the largest U.S. bank by assets said the decrease reflects higher loan losses and lower loan demand as borrowers pay off outstanding debts. "There were fewer opportunities to make high-quality loans because of the recession," he added.
Some borrowers complain banks aren't trying hard enough to expand credit. Ernie Cambo, a principal with Miami real-estate developer CPF Investment Group, had to halt work earlier this year on a 2.5-million-square-foot project called Ace Aviation and Commerce Center because he couldn't line up financing beyond the initial phases.
Now he isn't certain he will be able to find bank financing for a planned $4 million building for a South Florida auto auctioneer, despite having a signed lease. "You will find no more frustrated borrower than me right now," said Mr. Cambo, 39 years old. "I am growing in this downturn, and I can't get any incremental debt."
The slow pace of lending has created political heat for the Obama administration. On Friday, Rep. Spencer Bachus (R., Ala.) pressed Treasury Secretary Timothy Geithner to "tell me why we didn't really see that multiplier effect" from banks funneling their TARP money into lots of loans.
"I think you did," Mr. Geithner responded. Each dollar of taxpayer-funded capital gave banks $8 to $12 of lending capacity, and the initial $200 billion infusion by the Bush administration prevented a decline of more than $1 trillion in the overall loan supply, the Treasury secretary said.
Supporters of the bank bailout concede that lending has dipped, but note that the program wasn't meant to expand loan volume, but rather to prevent a collapse -- and has succeeded on that score.
Richard Neiman, a member of the committee formed by Congress to assess the effectiveness of TARP, said in an interview that "you need to be cautious in reading too much into these numbers." Congress intended to "stabilize the financial markets," he added, and there "is no specific reference to increasing lending" in the rescue-program legislation that was signed into law last year.
The 15 banks reported about $803 billion in loan volume in the second quarter, up 12.7% from the first quarter. But nearly 60% of the increase in April and May came from refinancing mortgages and renewing business loans, according to data Treasury collected from the banks. In contrast, new home purchases accounted for just 23% of all mortgage loans. May is the latest month for which the government's figures are available.
At BB&T Corp., of Winston-Salem, N.C., a surge in mortgage refinancing fueled the regional bank's increase of 0.1% in the size of its overall loan portfolio, which hit $100.3 billion as of June 30. Mortgage lending "is really booming," CEO Kelly King said, but loan growth slowed in May and June, "especially in the commercial area."
Banking analysts said the fact that less than half of loan volume is coming from new loans shows how far the economy still has to go to dig out of the recession. "You are looking for net new loans in the marketplace to be a signal of true change, and we have not seen that yet," said Christopher Marinac, research director at FIG Partners in Atlanta.
"You've got to have fewer people paying down loans...and you've got to get banks to loosen underwriting standards," said RBC Capital Markets analyst Gerard Cassidy. "That is when you will see loan balances in the U.S. banking system expand from where they are today. When that happens, you will see the economy really start to blossom."
On a year-over-year basis, total loans held by the 15 big banks rose 17% from $3.6 trillion in 2008's second quarter. The increase was skewed by the impact of acquisitions that included J.P. Morgan's takeover of the banking operations of Washington Mutual Inc. and Wachovia Corp.'s purchase by Wells Fargo & Co. Excluding purchases, loan portfolios shrank by about 10% as of June 30 from a year earlier.
The figures are a strong but imperfect indicator of loan activity. For example, loans sold to other institutions aren't counted on a bank's balance sheet at the end of the quarter. Since the financial crisis erupted, though, sales of loans have withered.
Write to David Enrich at david.enrich@wsj.com and Dan Fitzpatrick at dan.fitzpatrick@wsj.com
Corporate Bonds in Favor
By ANNELENA LOBB and ROB COPELAND
While the stock-market rally is hogging the headlines, corporate bonds are staging their own remarkable surge.
The average junk-rated company is now no longer "distressed," meaning yields have fallen to less than 10 percentage points above the benchmark Treasury bond. Yields on higher-quality companies also are dramatically lower as investors feel less leery about corporate debt. As yields fall, bond prices rise.
Stocks and corporate bonds are benefiting from the same generally upbeat mood this earnings season on signs in quarterly reports the economy is winding toward the end of the recession.
Still, it is hard to blame investors for not plowing all their cash into stocks.
Some investors are choosing to hedge their bets, preferring corporate bonds over stocks. They say even risky bonds are a smart cushion against uncertainty about the stock-market rally's staying power.
"If you believe in a V-shaped recovery, then you buy stocks. If you believe we're going to bump along, then you have to go with credit," says Kent Wosepka, chief investment officer of active fixed income at the Standish Mellon Asset Management Co. unit of Bank of New York Mellon Corp. "If I told you that you could get 10%-plus in equities, you would jump at it."
Even if the default rate on high-yield corporate bonds hits the 14% rate by the end of 2009 projected by analysts at Citigroup, returns from the junk that survives would more than offset the default-related losses, says Mr. Wosepka, who oversees $186 billion in assets.
In addition, bondholders typically get some money back following a default.
Stock investors usually are wiped out when a company files for bankruptcy protection.
Since early March, the Standard & Poor's 500-stock index has rocketed 45% higher, while the Dow Jones Industrial Average is up 39%.
The Dow rose 4% last week, and the S&P 500 gained 4.1%.
Meanwhile, the spread between investment-grade bond yields and Treasurys has been halved to about three percentage points, according to Merrill Lynch. High-yield spreads are down sharply from their all-time high of 21.8 percentage points in December. Total yields on junk bonds average about 12.3%, above their 10-year average of 10.7%, Merrill calculates.
Returns on high-yield bonds could reach the midteens over the next year, as long as the recession doesn't deepen, the recovery is sluggish and Treasury bond yields don't change much, says Martin Fridson, chief executive of Fridson Investment Advisors.
Other investors still think stocks will outperform bonds as layoffs and other cost-cutting moves position companies for an earnings rebound.
Last week, Goldman Sachs analysts predicted the S&P 500 would hit 1060 by year end, up 8.2% from Friday's close.
Some bears are steering clear of corporate bonds and stocks for now.
"People buying into the stock market are buying into hope," says Thomas Mangan, a portfolio manager at the James Balanced: Golden Rainbow Fund. Mr. Mangan recently bought Treasurys, since he believes the U.S. economy may fall into a deeper recession.
Corporates "are not a place to go as a safe haven," adds Mr. Mangan.
His fund manages about $540 million.
But Michael Kaminsky, a portfolio manager at Neuberger Berman LLC, says economic uncertainty makes bonds from low-rated companies with strong balance sheets and cash flows look more attractive than their stocks over the next three years.
"You can still make 8% to 12% in noninvestment-grade credits today," he says.
He bought investment-grade bonds when they notched similarly high returns late last year, though now favors dividend-paying large-company stocks.
Among below-investment-grade companies, Mr. Kaminsky holds the stock and debt of cellular-tower company American Tower and energy companies Enterprise Product Partners and Regency Energy Partners. He also owns Terex bonds, but not the industrial company's stock.
Those holdings are in one of the two investment strategies Mr. Kaminsky co-manages for Neuberger, worth about $4 billion.
It now holds about 45% stocks, 40% bonds and 15% cash, compared with 80% stocks and 20% cash a year ago.
Junk-bond issuers must pay higher rates to investors, because ratings agencies consider them more likely to miss payments or default than investment-grade bond issuers.
"I'm looking for stock-market-like returns without all the risk of stocks," says Keith Springer, president of Capital Financial Advisory Services.
The Sacramento, Calif., firm manages about $80 million, about half of which is in corporate bonds, 30% in dividend-paying stocks and 20% in cash.
He recently bought triple-C-rated GMAC bonds that offer about 12% a year for three years, and one-year Sallie Mae bonds with a 9.25% yield to maturity.
"Maybe the companies don't make money, but I don't care. You just need a company to stay in business to pay the bonds, even if the stocks don't rally," he says.
Write to Annelena Lobb at annelena.lobb@wsj.com
While the stock-market rally is hogging the headlines, corporate bonds are staging their own remarkable surge.
The average junk-rated company is now no longer "distressed," meaning yields have fallen to less than 10 percentage points above the benchmark Treasury bond. Yields on higher-quality companies also are dramatically lower as investors feel less leery about corporate debt. As yields fall, bond prices rise.
Stocks and corporate bonds are benefiting from the same generally upbeat mood this earnings season on signs in quarterly reports the economy is winding toward the end of the recession.
Still, it is hard to blame investors for not plowing all their cash into stocks.
Some investors are choosing to hedge their bets, preferring corporate bonds over stocks. They say even risky bonds are a smart cushion against uncertainty about the stock-market rally's staying power.
"If you believe in a V-shaped recovery, then you buy stocks. If you believe we're going to bump along, then you have to go with credit," says Kent Wosepka, chief investment officer of active fixed income at the Standish Mellon Asset Management Co. unit of Bank of New York Mellon Corp. "If I told you that you could get 10%-plus in equities, you would jump at it."
Even if the default rate on high-yield corporate bonds hits the 14% rate by the end of 2009 projected by analysts at Citigroup, returns from the junk that survives would more than offset the default-related losses, says Mr. Wosepka, who oversees $186 billion in assets.
In addition, bondholders typically get some money back following a default.
Stock investors usually are wiped out when a company files for bankruptcy protection.
Since early March, the Standard & Poor's 500-stock index has rocketed 45% higher, while the Dow Jones Industrial Average is up 39%.
The Dow rose 4% last week, and the S&P 500 gained 4.1%.
Meanwhile, the spread between investment-grade bond yields and Treasurys has been halved to about three percentage points, according to Merrill Lynch. High-yield spreads are down sharply from their all-time high of 21.8 percentage points in December. Total yields on junk bonds average about 12.3%, above their 10-year average of 10.7%, Merrill calculates.
Returns on high-yield bonds could reach the midteens over the next year, as long as the recession doesn't deepen, the recovery is sluggish and Treasury bond yields don't change much, says Martin Fridson, chief executive of Fridson Investment Advisors.
Other investors still think stocks will outperform bonds as layoffs and other cost-cutting moves position companies for an earnings rebound.
Last week, Goldman Sachs analysts predicted the S&P 500 would hit 1060 by year end, up 8.2% from Friday's close.
Some bears are steering clear of corporate bonds and stocks for now.
"People buying into the stock market are buying into hope," says Thomas Mangan, a portfolio manager at the James Balanced: Golden Rainbow Fund. Mr. Mangan recently bought Treasurys, since he believes the U.S. economy may fall into a deeper recession.
Corporates "are not a place to go as a safe haven," adds Mr. Mangan.
His fund manages about $540 million.
But Michael Kaminsky, a portfolio manager at Neuberger Berman LLC, says economic uncertainty makes bonds from low-rated companies with strong balance sheets and cash flows look more attractive than their stocks over the next three years.
"You can still make 8% to 12% in noninvestment-grade credits today," he says.
He bought investment-grade bonds when they notched similarly high returns late last year, though now favors dividend-paying large-company stocks.
Among below-investment-grade companies, Mr. Kaminsky holds the stock and debt of cellular-tower company American Tower and energy companies Enterprise Product Partners and Regency Energy Partners. He also owns Terex bonds, but not the industrial company's stock.
Those holdings are in one of the two investment strategies Mr. Kaminsky co-manages for Neuberger, worth about $4 billion.
It now holds about 45% stocks, 40% bonds and 15% cash, compared with 80% stocks and 20% cash a year ago.
Junk-bond issuers must pay higher rates to investors, because ratings agencies consider them more likely to miss payments or default than investment-grade bond issuers.
"I'm looking for stock-market-like returns without all the risk of stocks," says Keith Springer, president of Capital Financial Advisory Services.
The Sacramento, Calif., firm manages about $80 million, about half of which is in corporate bonds, 30% in dividend-paying stocks and 20% in cash.
He recently bought triple-C-rated GMAC bonds that offer about 12% a year for three years, and one-year Sallie Mae bonds with a 9.25% yield to maturity.
"Maybe the companies don't make money, but I don't care. You just need a company to stay in business to pay the bonds, even if the stocks don't rally," he says.
Write to Annelena Lobb at annelena.lobb@wsj.com
Sunday, July 26, 2009
Prologis Q2 2009
FFO
FFO ex significant non-cash items was $0.19 in Q2 2009. Adding $0.06 non-recurring charge, the adjusted FFO was $0.25. (page 2.3 and first paragragh)
Occupancy rates (Leased percentage)
PLD's occupancy is still sliding. 78.86% of its directed own portoflio (196,828 square feet) was leased by Q2 2009, 3.26% lower than the leased percentage in Q4 2008. (page 3.1)
Rents
Rents continued to decline. In the Q 2009, rent rates in total porfolio decreased 12.48% while rent rates in Q1 2009 decrdeased 4.17%. (page 5.3)
Lease expiration
By the remainder of the year 2009, 6.48% (12,206) of total portfolio's rents will expire. 14.56% (24,595) of rens in 2010 will expire.
Liqudity
a.Credit lines
PLD also has made significant progress on the extension and amendment of the company’s existing $3.64 billion Global Senior Credit Facility, originally scheduled to mature on October 6, 2009. ProLogis has exercised its extension option on the existing credit facility to October 6, 2010 and has secured written commitments of approximately $2.0 billion for its amended credit facility. (page 1.2)
b.Secured vs Unsecured debts
283 million of PLD senior notes will matured by the end of 2009. By 2010, another $190 mill of senior notes will mature.
Hence, PLD major liquidity concern will arrive on October 2010.
FFO ex significant non-cash items was $0.19 in Q2 2009. Adding $0.06 non-recurring charge, the adjusted FFO was $0.25. (page 2.3 and first paragragh)
Occupancy rates (Leased percentage)
PLD's occupancy is still sliding. 78.86% of its directed own portoflio (196,828 square feet) was leased by Q2 2009, 3.26% lower than the leased percentage in Q4 2008. (page 3.1)
Rents
Rents continued to decline. In the Q 2009, rent rates in total porfolio decreased 12.48% while rent rates in Q1 2009 decrdeased 4.17%. (page 5.3)
Lease expiration
By the remainder of the year 2009, 6.48% (12,206) of total portfolio's rents will expire. 14.56% (24,595) of rens in 2010 will expire.
Liqudity
a.Credit lines
PLD also has made significant progress on the extension and amendment of the company’s existing $3.64 billion Global Senior Credit Facility, originally scheduled to mature on October 6, 2009. ProLogis has exercised its extension option on the existing credit facility to October 6, 2010 and has secured written commitments of approximately $2.0 billion for its amended credit facility. (page 1.2)
b.Secured vs Unsecured debts
283 million of PLD senior notes will matured by the end of 2009. By 2010, another $190 mill of senior notes will mature.
Hence, PLD major liquidity concern will arrive on October 2010.
Economical Leading Sectors Scaled back Inventory by Q2 2009
As the second quarter earning season rise to the full swing, US stock markets cheered at the unusual positive earning surprises. Yet, I am cautiously optimistic about the earning numbers.
By July 25th, 183 S&P500 firms have released earning. Nearly 75% beat their expectations. This is probably the highest number since 1994 when Reuters started tracking earning numbers. Leading the pack are GS and Intel. Driven by large risk taking and trading expertise in fixed income market, GS beat the expectation by a large margin. It earned $5.71 per share in second quarter, $2.06 more than the expectation. Intel issued the positive outlook for 2010, calling the bottom the PC market.
Two sectors, consumer durable and seminconductor, usually lead in the economic recovery. Both sectors have fantastic numbers. Yet a closer look at the number won't give us confidence that economy is recovering into high gear.
In consumer durable sector, seven out of eight firms beat the earning expectations. Yet top line growth is grim. Only two of eight firms beat revenue expectations by low margin: one is Black & Deck that tops revenue expectation by 0.16% and the other is Fortune Brands Inc that beat expectation by 1.59%. It implies that most consumer durable companies beat earning expectataions by cutting expense, especialy laying off employees. Yet consumers still tightened their purse strings and balk at large items. As consumers contribute two thirds of GDP, it is hard to imagine a recovery without strong individual consumption.
Numbers from semiconductor sector seem more optimistic. six out of ten firms beat earning expectations. But eight firms beat revenue expectations. Leading by Intel and AMD, most semiconductors beat revenue expectations by a relative large margin, 10.07% for Intel and 4.84% for AMD.
Yet, the two's inventory number tells us that the two companies have not set the stage for a strong economic recovery. Intel's inventory continue to slide in Q2 2009. Its inentory level by Q2 2009 was 2.8 bil, 240 mill lower than Q1 2009 and 940 mil lower than Q4 2008. Admittedly the pace of decline is shrinking. Second derivative is postive yet first derivative is still negative. AMD's inventory in Q2 2009 was $494 mil, $46 mil lower from Q1 2009 and $63 mil lower from Q42008. These two are not expections. Texas Instrument and Linear Technology also lowered their inventory level in Q2 2009.
If these companies received large order from clients or they are confident the economy is poised for a strong recovery, they wiil at least increase their inventory level. Yet their inventoy numbers in the whole sector disappointed me.
After scrutinizing the numbers of the two leading sectors, I have to say that economy is getting better yet I have not seen clear signs of a strong recovery.
By July 25th, 183 S&P500 firms have released earning. Nearly 75% beat their expectations. This is probably the highest number since 1994 when Reuters started tracking earning numbers. Leading the pack are GS and Intel. Driven by large risk taking and trading expertise in fixed income market, GS beat the expectation by a large margin. It earned $5.71 per share in second quarter, $2.06 more than the expectation. Intel issued the positive outlook for 2010, calling the bottom the PC market.
Two sectors, consumer durable and seminconductor, usually lead in the economic recovery. Both sectors have fantastic numbers. Yet a closer look at the number won't give us confidence that economy is recovering into high gear.
In consumer durable sector, seven out of eight firms beat the earning expectations. Yet top line growth is grim. Only two of eight firms beat revenue expectations by low margin: one is Black & Deck that tops revenue expectation by 0.16% and the other is Fortune Brands Inc that beat expectation by 1.59%. It implies that most consumer durable companies beat earning expectataions by cutting expense, especialy laying off employees. Yet consumers still tightened their purse strings and balk at large items. As consumers contribute two thirds of GDP, it is hard to imagine a recovery without strong individual consumption.
Numbers from semiconductor sector seem more optimistic. six out of ten firms beat earning expectations. But eight firms beat revenue expectations. Leading by Intel and AMD, most semiconductors beat revenue expectations by a relative large margin, 10.07% for Intel and 4.84% for AMD.
Yet, the two's inventory number tells us that the two companies have not set the stage for a strong economic recovery. Intel's inventory continue to slide in Q2 2009. Its inentory level by Q2 2009 was 2.8 bil, 240 mill lower than Q1 2009 and 940 mil lower than Q4 2008. Admittedly the pace of decline is shrinking. Second derivative is postive yet first derivative is still negative. AMD's inventory in Q2 2009 was $494 mil, $46 mil lower from Q1 2009 and $63 mil lower from Q42008. These two are not expections. Texas Instrument and Linear Technology also lowered their inventory level in Q2 2009.
If these companies received large order from clients or they are confident the economy is poised for a strong recovery, they wiil at least increase their inventory level. Yet their inventoy numbers in the whole sector disappointed me.
After scrutinizing the numbers of the two leading sectors, I have to say that economy is getting better yet I have not seen clear signs of a strong recovery.
Ericsson Wins Nortel Auction
--Former Canadian network infrastructurer giant was sold.
--Ericsson bought its most profitable piece, CDMA business, for $1.13 billion, expaned large presence in North America
--The auction drew three competitors – Ericsson, Nokia Siemens Networks and distressed-debt investor MatlinPatterson Global Advisers LLC
--Layoff will follow
By SARA SILVER
Telefon AB L.M. Ericsson will pay $1.13 billion to acquire the most profitable piece of bankrupt Nortel Networks Corp. after winning an auction for the assets late Friday.
The assets Ericsson is buying include Nortel's profitable but declining CDMA business, which sells a key wireless technology to major U.S. carriers, and a group of 400 researchers working on a high-end broadband technology. Nortel will ask bankruptcy courts in the U.S. and Canada to approve the sale on July 28.
The auction drew three competitors – Ericsson, Nokia Siemens Networks and distressed-debt investor MatlinPatterson Global Advisers LLC, which is among Nortel's largest bondholders. Nokia Siemens set off the auction process this spring with an unsolicited $650 million bid.
The deal will significantly boost Ericsson's presence in North America. In a release, the company said Nortel's CDMA operations generated about $2 billion in 2008, compared with sales of about $2.7 billion for Ericsson's North American business that year. The combination will leave North America the largest region within Ericsson. Ericsson has agreed to offer jobs to at least 2,500 employees of the Nortel units.
In agreeing to take at least 2,500 people from Nortel, Ericsson is inheriting about 80% of the division's employees, a Nortel spokeswoman said. For the remaining 20%, Nortel will look for opportunities in its other business, but if they can't be placed, there may be layoffs, a Nortel spokesman said.
The deal includes CDMA contracts with North American operators like Verizon Wireless and Sprint Nextel Corp. It also includes a group of engineers working on LTE, or long-term evolution, a wireless broadband technology, and a lifetime license to Nortel's LTE patents, which will be sold separately.
Ericsson is getting the assets debt free and says the purchase will add to its earnings within a year of closing.
In addition to selling the CDMA and LTE wireless operation, Nortel is also seeking buyers for its enterprise unit. The division sells telecom gear to large enterprises and organizations. Nortel has agreed to a stalking-horse bid for $475 million from Avaya Inc. for this business. However, Nortel has yet to release auction details for the operation. As the outcome for the wireless division showed, the stalking-horse bid doesn't necessarily represent the chosen offer.
Nortel also seeks buyers for its division that sells optical gear for city networks and a second that targets phone carriers' voice over Internet protocol networks, the Nortel spokeswoman said.
Magnus Mandersson, head of Ericsson Northern Europe, will be president of Ericsson's CDMA operations, and Richard Lowe of Nortel has been named chief operating officer.
The auction stretched into the night Friday at a New York law firm
BlackBerry maker Research In Motion Ltd. was a wild card in the process. This week, the company complained that Nortel blocked it from bidding. RIM asked the Canadian government to intervene in the bankruptcy process, but the government said it will leave the matter to the courts.
On Friday, Ericsson said its second-quarter profit fell to 831 million Swedish kronor ($111 million) from 1.9 billion kronor due to restructuring charges and losses at Sony Ericsson, and said the economic downturn is now hurting some of its markets.
"The effects of the global economic climate on the mobile infrastructure market are now more notable, especially in markets with currencies under pressure and a tougher credit environment," Chief Executive Carl-Henric Svanberg said.
—Ben Dummett and Gustav Sandstrom contributed to this article.
Write to Sara Silver at sara.silver@wsj.com
--Ericsson bought its most profitable piece, CDMA business, for $1.13 billion, expaned large presence in North America
--The auction drew three competitors – Ericsson, Nokia Siemens Networks and distressed-debt investor MatlinPatterson Global Advisers LLC
--Layoff will follow
By SARA SILVER
Telefon AB L.M. Ericsson will pay $1.13 billion to acquire the most profitable piece of bankrupt Nortel Networks Corp. after winning an auction for the assets late Friday.
The assets Ericsson is buying include Nortel's profitable but declining CDMA business, which sells a key wireless technology to major U.S. carriers, and a group of 400 researchers working on a high-end broadband technology. Nortel will ask bankruptcy courts in the U.S. and Canada to approve the sale on July 28.
The auction drew three competitors – Ericsson, Nokia Siemens Networks and distressed-debt investor MatlinPatterson Global Advisers LLC, which is among Nortel's largest bondholders. Nokia Siemens set off the auction process this spring with an unsolicited $650 million bid.
The deal will significantly boost Ericsson's presence in North America. In a release, the company said Nortel's CDMA operations generated about $2 billion in 2008, compared with sales of about $2.7 billion for Ericsson's North American business that year. The combination will leave North America the largest region within Ericsson. Ericsson has agreed to offer jobs to at least 2,500 employees of the Nortel units.
In agreeing to take at least 2,500 people from Nortel, Ericsson is inheriting about 80% of the division's employees, a Nortel spokeswoman said. For the remaining 20%, Nortel will look for opportunities in its other business, but if they can't be placed, there may be layoffs, a Nortel spokesman said.
The deal includes CDMA contracts with North American operators like Verizon Wireless and Sprint Nextel Corp. It also includes a group of engineers working on LTE, or long-term evolution, a wireless broadband technology, and a lifetime license to Nortel's LTE patents, which will be sold separately.
Ericsson is getting the assets debt free and says the purchase will add to its earnings within a year of closing.
In addition to selling the CDMA and LTE wireless operation, Nortel is also seeking buyers for its enterprise unit. The division sells telecom gear to large enterprises and organizations. Nortel has agreed to a stalking-horse bid for $475 million from Avaya Inc. for this business. However, Nortel has yet to release auction details for the operation. As the outcome for the wireless division showed, the stalking-horse bid doesn't necessarily represent the chosen offer.
Nortel also seeks buyers for its division that sells optical gear for city networks and a second that targets phone carriers' voice over Internet protocol networks, the Nortel spokeswoman said.
Magnus Mandersson, head of Ericsson Northern Europe, will be president of Ericsson's CDMA operations, and Richard Lowe of Nortel has been named chief operating officer.
The auction stretched into the night Friday at a New York law firm
BlackBerry maker Research In Motion Ltd. was a wild card in the process. This week, the company complained that Nortel blocked it from bidding. RIM asked the Canadian government to intervene in the bankruptcy process, but the government said it will leave the matter to the courts.
On Friday, Ericsson said its second-quarter profit fell to 831 million Swedish kronor ($111 million) from 1.9 billion kronor due to restructuring charges and losses at Sony Ericsson, and said the economic downturn is now hurting some of its markets.
"The effects of the global economic climate on the mobile infrastructure market are now more notable, especially in markets with currencies under pressure and a tougher credit environment," Chief Executive Carl-Henric Svanberg said.
—Ben Dummett and Gustav Sandstrom contributed to this article.
Write to Sara Silver at sara.silver@wsj.com
Friday, July 24, 2009
Transcript: Obama’s Statement On Gates Comments
By WBUR NEWS & WIRE SERVICES
WASHINGTON — The following transcript of President Obama’s statement Friday in the White House briefing room was released by the White House Office of Media Affairs:
President Obama: Hey, it’s a cameo appearance. Sit down, sit down. I need to help Gibbs out a little bit here.
Q: Are you the new press secretary?
Obama: If you got to do a job, do it yourself. (Laughter.)
I wanted to address you guys directly because over the last day and a half obviously there’s been all sorts of controversy around the incident that happened in Cambridge with Professor Gates and the police department there.
I actually just had a conversation with Sergeant Jim Crowley, the officer involved. And I have to tell you that as I said yesterday, my impression of him was that he was a outstanding police officer and a good man, and that was confirmed in the phone conversation — and I told him that.
And because this has been ratcheting up — and I obviously helped to contribute ratcheting it up — I want to make clear that in my choice of words I think I unfortunately gave an impression that I was maligning the Cambridge Police Department or Sergeant Crowley specifically — and I could have calibrated those words differently. And I told this to Sergeant Crowley.
I continue to believe, based on what I have heard, that there was an overreaction in pulling Professor Gates out of his home to the station. I also continue to believe, based on what I heard, that Professor Gates probably overreacted as well. My sense is you’ve got two good people in a circumstance in which neither of them were able to resolve the incident in the way that it should have been resolved and the way they would have liked it to be resolved.
The fact that it has garnered so much attention I think is a testimony to the fact that these are issues that are still very sensitive here in America. So to the extent that my choice of words didn’t illuminate, but rather contributed to more media frenzy, I think that was unfortunate.
What I’d like to do then I make sure that everybody steps back for a moment, recognizes that these are two decent people, not extrapolate too much from the facts — but as I said at the press conference, be mindful of the fact that because of our history, because of the difficulties of the past, you know, African Americans are sensitive to these issues. And even when you’ve got a police officer who has a fine track record on racial sensitivity, interactions between police officers and the African American community can sometimes be fraught with misunderstanding.
My hope is, is that as a consequence of this event this ends up being what’s called a “teachable moment,” where all of us instead of pumping up the volume spend a little more time listening to each other and try to focus on how we can generally improve relations between police officers and minority communities, and that instead of flinging accusations we can all be a little more reflective in terms of what we can do to contribute to more unity. Lord knows we need it right now — because over the last two days as we’ve discussed this issue, I don’t know if you’ve noticed, but nobody has been paying much attention to health care. (Laughter.)
I will not use this time to spend more words on health care, although I can’t guarantee that that will be true next week. I just wanted to emphasize that — one last point I guess I would make. There are some who say that as President I shouldn’t have stepped into this at all because it’s a local issue. I have to tell you that that part of it I disagree with. The fact that this has become such a big issue I think is indicative of the fact that race is still a troubling aspect of our society. Whether I were black or white, I think that me commenting on this and hopefully contributing to constructive — as opposed to negative — understandings about the issue, is part of my portfolio.
So at the end of the conversation there was a discussion about — my conversation with Sergeant Crowley, there was discussion about he and I and Professor Gates having a beer here in the White House. We don’t know if that’s scheduled yet — (laughter) — but we may put that together
He also did say he wanted to find out if there was a way of getting the press off his lawn. (Laughter.) I informed him that I can’t get the press off my lawn. (Laughter.) He pointed out that my lawn is bigger than his lawn. (Laughter.) But if anybody has any connections to the Boston press, as well as national press, Sergeant Crowley would be happy for you to stop trampling his grass.
All right. Thank you, guys.
WASHINGTON — The following transcript of President Obama’s statement Friday in the White House briefing room was released by the White House Office of Media Affairs:
President Obama: Hey, it’s a cameo appearance. Sit down, sit down. I need to help Gibbs out a little bit here.
Q: Are you the new press secretary?
Obama: If you got to do a job, do it yourself. (Laughter.)
I wanted to address you guys directly because over the last day and a half obviously there’s been all sorts of controversy around the incident that happened in Cambridge with Professor Gates and the police department there.
I actually just had a conversation with Sergeant Jim Crowley, the officer involved. And I have to tell you that as I said yesterday, my impression of him was that he was a outstanding police officer and a good man, and that was confirmed in the phone conversation — and I told him that.
And because this has been ratcheting up — and I obviously helped to contribute ratcheting it up — I want to make clear that in my choice of words I think I unfortunately gave an impression that I was maligning the Cambridge Police Department or Sergeant Crowley specifically — and I could have calibrated those words differently. And I told this to Sergeant Crowley.
I continue to believe, based on what I have heard, that there was an overreaction in pulling Professor Gates out of his home to the station. I also continue to believe, based on what I heard, that Professor Gates probably overreacted as well. My sense is you’ve got two good people in a circumstance in which neither of them were able to resolve the incident in the way that it should have been resolved and the way they would have liked it to be resolved.
The fact that it has garnered so much attention I think is a testimony to the fact that these are issues that are still very sensitive here in America. So to the extent that my choice of words didn’t illuminate, but rather contributed to more media frenzy, I think that was unfortunate.
What I’d like to do then I make sure that everybody steps back for a moment, recognizes that these are two decent people, not extrapolate too much from the facts — but as I said at the press conference, be mindful of the fact that because of our history, because of the difficulties of the past, you know, African Americans are sensitive to these issues. And even when you’ve got a police officer who has a fine track record on racial sensitivity, interactions between police officers and the African American community can sometimes be fraught with misunderstanding.
My hope is, is that as a consequence of this event this ends up being what’s called a “teachable moment,” where all of us instead of pumping up the volume spend a little more time listening to each other and try to focus on how we can generally improve relations between police officers and minority communities, and that instead of flinging accusations we can all be a little more reflective in terms of what we can do to contribute to more unity. Lord knows we need it right now — because over the last two days as we’ve discussed this issue, I don’t know if you’ve noticed, but nobody has been paying much attention to health care. (Laughter.)
I will not use this time to spend more words on health care, although I can’t guarantee that that will be true next week. I just wanted to emphasize that — one last point I guess I would make. There are some who say that as President I shouldn’t have stepped into this at all because it’s a local issue. I have to tell you that that part of it I disagree with. The fact that this has become such a big issue I think is indicative of the fact that race is still a troubling aspect of our society. Whether I were black or white, I think that me commenting on this and hopefully contributing to constructive — as opposed to negative — understandings about the issue, is part of my portfolio.
So at the end of the conversation there was a discussion about — my conversation with Sergeant Crowley, there was discussion about he and I and Professor Gates having a beer here in the White House. We don’t know if that’s scheduled yet — (laughter) — but we may put that together
He also did say he wanted to find out if there was a way of getting the press off his lawn. (Laughter.) I informed him that I can’t get the press off my lawn. (Laughter.) He pointed out that my lawn is bigger than his lawn. (Laughter.) But if anybody has any connections to the Boston press, as well as national press, Sergeant Crowley would be happy for you to stop trampling his grass.
All right. Thank you, guys.
Global Deflation Pandemic Begins to Brew
--global delfation is still unfolding, in contrast to surge in energy prices.
By SCOTT PATTERSON
In congressional testimony this week, Federal Reserve Chairman Ben Bernanke gave no indication that he planned to turn off the central bank's liquidity spigots anytime soon.
Critics howled that the Fed is risking runaway inflation. More immediately, however, the threat of deflation seems a bigger concern -- not just in the U.S., but also in economies around the world.
Last week, World Bank Chief Economist Justin Lin warned in a speech that a surge in excess capacity world-wide could lead to a global "deflationary downward spiral."
The Bank of Japan and the International Monetary Fund are forecasting two years of price declines in Japan, which suffered a serious bout of deflation in the 1990s because of a blowup in its banking sector and collapse in the real-estate market.
Recent data show that prices still are falling in fast-growing economies such as India and China. In the first half of the year, China's consumer-price index was down 1.1% from a year ago, and its producer-price index fell 5.9%, according to China's National Bureau of Statistics from last week. In India, prices have been slipping into negative territory for more than a month.
Broadly, prices in Europe are tipping into a deflationary dead zone. In the 16-nation euro region, prices fell 0.1% in June from last year, the first such drop on record. Prices have been flat or down in Finland, Portugal, France, Germany, Ireland, Spain and Switzerland, according to Moody's Economy.com.
There are a few caveats. Recent deflation data in part reflect the comparison with sky-high energy prices last year. And oil prices could spike again.
Ironically, that could potentially hurt companies' pricing power by taking spare cash out of struggling consumers' pockets.
But if deflation does take root, it could prove devastating for investors. Deflation can cause stock prices to decline as companies are unable to boost prices; corporate bonds also suffer from rising bankruptcies.
Behind a global deflation virus is a collapse of demand in the U.S. Unless the economic engine in the U.S. can get cranking again, deflation could keep spreading.
Email: tape@wsj.com
By SCOTT PATTERSON
In congressional testimony this week, Federal Reserve Chairman Ben Bernanke gave no indication that he planned to turn off the central bank's liquidity spigots anytime soon.
Critics howled that the Fed is risking runaway inflation. More immediately, however, the threat of deflation seems a bigger concern -- not just in the U.S., but also in economies around the world.
Last week, World Bank Chief Economist Justin Lin warned in a speech that a surge in excess capacity world-wide could lead to a global "deflationary downward spiral."
The Bank of Japan and the International Monetary Fund are forecasting two years of price declines in Japan, which suffered a serious bout of deflation in the 1990s because of a blowup in its banking sector and collapse in the real-estate market.
Recent data show that prices still are falling in fast-growing economies such as India and China. In the first half of the year, China's consumer-price index was down 1.1% from a year ago, and its producer-price index fell 5.9%, according to China's National Bureau of Statistics from last week. In India, prices have been slipping into negative territory for more than a month.
Broadly, prices in Europe are tipping into a deflationary dead zone. In the 16-nation euro region, prices fell 0.1% in June from last year, the first such drop on record. Prices have been flat or down in Finland, Portugal, France, Germany, Ireland, Spain and Switzerland, according to Moody's Economy.com.
There are a few caveats. Recent deflation data in part reflect the comparison with sky-high energy prices last year. And oil prices could spike again.
Ironically, that could potentially hurt companies' pricing power by taking spare cash out of struggling consumers' pockets.
But if deflation does take root, it could prove devastating for investors. Deflation can cause stock prices to decline as companies are unable to boost prices; corporate bonds also suffer from rising bankruptcies.
Behind a global deflation virus is a collapse of demand in the U.S. Unless the economic engine in the U.S. can get cranking again, deflation could keep spreading.
Email: tape@wsj.com
Thursday, July 23, 2009
中国经济：政策推动下的脱钩
王庆
2009 年第二季度中国GDP 同比增幅为7.9%，我们认为这意味着19%的年化环比增长。在我们看来，在政策的推动下，中国与世界其他地区的脱钩正在实现。 我们将2009年GDP增长预测调高至9%，2010年增幅调高至10%。
今年以来所采取的积极政策反应可能会在2009年剩下的这段时间里继续推动投资的快速增长。同时，我们预期房地产投资将在2010年加速增长，这将有助于部分抵消预期中由于2009年的基数较高而出现的基础设施投资速度的放缓。随着消费者信心和就业情况的改善，2010年底之前私人消费有望持续稳定增长。
我们预计，出口在2009年的大幅下滑之后，将于2010年恢复增长，再加上盈利的复苏，这些都将有助于支撑私人投资的增长。我们认为，尽管GDP增长势头强劲，2010年年中之前，通胀压力不太可能出现。就增长趋势而言，我们预计GDP增幅将于2010年第一季度达到最高点，然后开始适度放缓。
我们认为，接下来的6－12个月可能会出现加速增长和低通胀共存的情况，同时政策态势相对稳定，这样的宏观经济环境有利于资产价格。不过，我们认为，由于通胀压力可能会在明年年中开始出现，对潜在紧缩政策的担心可能会对市场情绪产生影响。另一方面，随着自发的有机增长动力逐渐增强，企业盈利可能会在2010年得到改善。
政策推动下的脱钩
尽管第二季度出口继续下降，且降幅超过我们的预期，但这一点已经被积极的增长支持政策所抵消。持续的大规模贷款发放，继续刺激着国内经济活动，首先是基础设施投资。城镇固定资产投资在6 月份继续保持强劲增长，同比增幅达到35.3%（1－5 月为32.9%）。尽管这一增幅略低于5 月份的38.6%，但它也使今年截止目前为止（09年上半年）的增幅达到33.6%。尤其是，房地产开发投资的加速（6 月份同比增长18.1%，5 月份12%，09 年上半年9.9%）依然令人鼓舞（虽然增幅弱于去年同期的20.9%）。无需赘言，政策推动下的资本支出依然是增长动力，这一点可从基础设施投资中得到证实。 西部(上半年42.1%，第一季度46.1%) 和中部 (上半年38.1%，第一季度34.3%) 地区的投资增长继续高于东部 (上半年26.7%，第一季度19.8%)。这同样说明了近期各个项目的政策推动性质。
当如此大规模的全球危机来袭时，最初，每个与全球经济联系紧密的经济体无一例外都会受到强烈的冲击。不过，各国在危机爆发后所采取的政策反应的力度和速度差异很大，从而导致了各自在危机后复苏格局的不同。
中国恰好是一个适当的例子。中国政府积极的政策反应将中国“强健的资产负债表”变成了“漂亮的利润表”，从而使中国有别于那些金融系统瘫痪或由于财政或国际收支不良而无法采取强劲的财政或货币刺激政策的国家。这使中国成为第一个从这场危机中复苏的主要经济体，从而出现了政策推动下，中国与世界其他国家的经济脱钩。
具体而言，几个月以来，持续的超预期信贷增长不断支撑乐观情绪，并使得：(a)一系列公共基础设施项目的加速出台；(b) 在出口疲软的情况下，私人消费和制造业的私人资本支出的反弹；(c) 日益明确的房地产投资复苏。这些积极的态势，再加上资产价格持续的回升，抵消了外部需求长期疲软的影响。
2009 年第二季度的最新数据证实，第一季度的确就是我们所预见的V形反弹的底部，不过反弹曲线甚至比我们的预期更为陡峭。今年以来积极的政策反应─可从银行放贷规模的迅猛增长中得到印证─可能会在2009 年剩下几个月里的刺激投资快速增长。
随着零售和消费者信心的见底，消费已经出现了明显的反弹。看来，政府刺激消费的措施已经见效，抵消了近期消费的下跌。此外，2009 年第一季度以来广泛稳定的就业形势，再加上中国政府对未来几年内进一步加强社会保险体系以及其他社会服务改革的承诺，将在经济大幅下滑的情况下支撑消费者信心，防止预防性储蓄的急剧上升。
虽然政策推动下的资本支出可能最终成为今年重要的增长动力，我们预计，2010 年私人投资将会稳健复苏，从而减少经济增长对公共投资的依赖。
出口四季度开始复苏
过去几个月里，中国出口前所未有的急跌备受关注。我们曾在多个场合承认，这一跌幅之深、持续时间之长，远超我们的预期。与此同时，此前总体GDP 增长以及其他经济指标（出口交付金额和香港公布的贸易数据）也曾显示，出口跌幅不应如此剧烈，这使我们对数据的可靠性有所怀疑。
我们怀疑，2007 年和2008 年（截止2008 年第三季度）强劲的出口增长数据可能隐藏着部分热钱的流入。我们怀疑，2007 年和2008 年（截止2008 年三季度）强劲的出口增长数据可能隐藏着部分热钱的流入。受人民币迅速增值预期的推动，出口商（国内制造商以及外资制造商）可能夸大了出货量，以获得更多的人民币供应。
我们预计，贸易跌幅将于2009 年下半年继续收窄，出口增长将于年底回到零左右，2009 年全年出口增长为-16%，2010 年则反弹到9%。我们预计今年进口将下跌13%（09 年上半年为-25.5%），并在2010 年实现10%的正增长。我们预计今年的贸易顺差将出现2003 年以来的首次缩减，从2008 年的2,970 亿美元降至2,200 亿美元以下。
未来12 个月内不必担心通胀
银行放贷和货币增长（M2）的迅猛扩张令很多人担心通胀风险。然而，我们却认为，至少在未来12 个月之内无需担心此事。在我们看来，当一个经济体系遭遇中国当前面临的如此大规模的外部冲击时，CPI 增长的首要肇因是出口增长，而非货币增长。原因在于：首先，中国以往的经验表明，出口的急剧减速可能对经济产生强大的反通胀/通缩作用。
在过去的12 年间，中国经历了三次通缩： 第一次是在亚洲金融危机期间，第二次是在纳斯达克股票泡沫破灭之后，第三次即是当前的这一次。这三次通缩要么与出口的暴跌同时发生，要么紧随其而来。虽然我们确实预计，出口的跌幅将在今年剩下来的几个月里收窄，并将在2010 年恢复正增长，但我们认为未来12 个月内出口增长的力度尚不足以产生真正的通胀压力（如3.0%以上的通胀）。
其次，在经济下滑时，货币供应和通胀之间的关系通常会变得相当不稳定，其原因在于货币流通速度会急剧下降。这使得简单地根据货币供应增长衡量通胀风险非常不可靠，尤其是当这两者之间从一开始就不存在稳定、有力的因果关系时。
再次，从供给方面来看，国际商品价格泡沫的破裂使中国进口的原材料（如原油、铁矿石、金属等）价格急剧下降，这带来了强大的正面贸易条件的冲击，并通过PPI的急跌得到部分印证。
展望未来，大宗商品价格向上的空间不会太大，同时也意味着PPI 不可能随时出现强劲的反弹。此外，PPI 的低增长可能增加除食品以外的CPI 下行压力。
政策预期
随着经济复苏的加速，对政策可能出现变化，导致复苏偏离轨道的担心也在滋长。但我们认为，在2009 年年内不会出现实质性的政策变化。尤其是通胀风险尚未出现之前，进行重大转变开始实施真正的紧缩政策的可能性几乎为零。
因此，我们预计，今年剩下几个月里将继续维持当前的宽松政策态度。我们预计贷款发放将逐月正常化，但这不应视为政策的收紧。在这一背景下，今年全年新增贷款将达到9 万亿元。我们还预计，2009 年年底之前，基准存贷款利率不会出现调整，同时也不会再出台任何新的大规模财政刺激政策。
此外，我们预计房地产行业也不会有任何重大的政策调整。这一行业强劲的全面复苏，尤其是近期房价的上涨使许多人担心管理层是否会象2007 年底和2008 年上半年一样，再次下重手干预房地产市场。事实上，当时的记忆犹新，许多市场参与者都遭受了重创。但我们认为这一担心没有必要。房地产市场是中国有机增长最重要的源泉，而过去几年的经验教训也清楚地表明：稳定的政策环境对于中国房地产市场的健康、可持续发展至关重要。展望未来，我们预计管理层对房地产市场的政策态度不会改变。事实上，我们应当把2008 年10 月以来的政策调整视为政策的正常化，而非任意的反周期政策宽松化，后者通常是暂时的。
管理层当前的政策重点是双轨运行：1）取消人为限制开发的不适宜政策措施，鼓励市场化商品房开发；2）用公共资金开发低成本、低租金经济适用房项目，解决低收入家庭的住房问题。我们认为，由于在有活力的商品房项目的基础上，预计将会推出可行的经济适用房项目，因此这是一个有效的、可持续政策途径。鉴于房地产行业对于支撑经济复苏和可持续增长的重要作用，任何有关政策变化可能造成对这一行业的潜在伤害的担心都是不必要的。尽管如此，我们认为，政府选择严格执行现有规定，以防过度投机的可能性还是存在的。长期来看，这些措施不会改变房地产行业的总体趋势（正如我们反复强调的，房地产市场的基础依然强健），反而有助于这一行业的健康、可持续发展。
我们认为，接下来的6－12 个月可能会出现加速增长和低通胀共存的情况，同时政策态势相对稳定，这样的宏观经济环境有利于资产价格。不过，我们认为，由于通胀压力可能会在明年年中开始出现，对潜在紧缩政策的担心可能会对市场情绪产生影响。另一方面，随着自发的有机增长动力逐渐增强，企业盈利可能会在2010年得到改善。
2009 年第二季度中国GDP 同比增幅为7.9%，我们认为这意味着19%的年化环比增长。在我们看来，在政策的推动下，中国与世界其他地区的脱钩正在实现。 我们将2009年GDP增长预测调高至9%，2010年增幅调高至10%。
今年以来所采取的积极政策反应可能会在2009年剩下的这段时间里继续推动投资的快速增长。同时，我们预期房地产投资将在2010年加速增长，这将有助于部分抵消预期中由于2009年的基数较高而出现的基础设施投资速度的放缓。随着消费者信心和就业情况的改善，2010年底之前私人消费有望持续稳定增长。
我们预计，出口在2009年的大幅下滑之后，将于2010年恢复增长，再加上盈利的复苏，这些都将有助于支撑私人投资的增长。我们认为，尽管GDP增长势头强劲，2010年年中之前，通胀压力不太可能出现。就增长趋势而言，我们预计GDP增幅将于2010年第一季度达到最高点，然后开始适度放缓。
我们认为，接下来的6－12个月可能会出现加速增长和低通胀共存的情况，同时政策态势相对稳定，这样的宏观经济环境有利于资产价格。不过，我们认为，由于通胀压力可能会在明年年中开始出现，对潜在紧缩政策的担心可能会对市场情绪产生影响。另一方面，随着自发的有机增长动力逐渐增强，企业盈利可能会在2010年得到改善。
政策推动下的脱钩
尽管第二季度出口继续下降，且降幅超过我们的预期，但这一点已经被积极的增长支持政策所抵消。持续的大规模贷款发放，继续刺激着国内经济活动，首先是基础设施投资。城镇固定资产投资在6 月份继续保持强劲增长，同比增幅达到35.3%（1－5 月为32.9%）。尽管这一增幅略低于5 月份的38.6%，但它也使今年截止目前为止（09年上半年）的增幅达到33.6%。尤其是，房地产开发投资的加速（6 月份同比增长18.1%，5 月份12%，09 年上半年9.9%）依然令人鼓舞（虽然增幅弱于去年同期的20.9%）。无需赘言，政策推动下的资本支出依然是增长动力，这一点可从基础设施投资中得到证实。 西部(上半年42.1%，第一季度46.1%) 和中部 (上半年38.1%，第一季度34.3%) 地区的投资增长继续高于东部 (上半年26.7%，第一季度19.8%)。这同样说明了近期各个项目的政策推动性质。
当如此大规模的全球危机来袭时，最初，每个与全球经济联系紧密的经济体无一例外都会受到强烈的冲击。不过，各国在危机爆发后所采取的政策反应的力度和速度差异很大，从而导致了各自在危机后复苏格局的不同。
中国恰好是一个适当的例子。中国政府积极的政策反应将中国“强健的资产负债表”变成了“漂亮的利润表”，从而使中国有别于那些金融系统瘫痪或由于财政或国际收支不良而无法采取强劲的财政或货币刺激政策的国家。这使中国成为第一个从这场危机中复苏的主要经济体，从而出现了政策推动下，中国与世界其他国家的经济脱钩。
具体而言，几个月以来，持续的超预期信贷增长不断支撑乐观情绪，并使得：(a)一系列公共基础设施项目的加速出台；(b) 在出口疲软的情况下，私人消费和制造业的私人资本支出的反弹；(c) 日益明确的房地产投资复苏。这些积极的态势，再加上资产价格持续的回升，抵消了外部需求长期疲软的影响。
2009 年第二季度的最新数据证实，第一季度的确就是我们所预见的V形反弹的底部，不过反弹曲线甚至比我们的预期更为陡峭。今年以来积极的政策反应─可从银行放贷规模的迅猛增长中得到印证─可能会在2009 年剩下几个月里的刺激投资快速增长。
随着零售和消费者信心的见底，消费已经出现了明显的反弹。看来，政府刺激消费的措施已经见效，抵消了近期消费的下跌。此外，2009 年第一季度以来广泛稳定的就业形势，再加上中国政府对未来几年内进一步加强社会保险体系以及其他社会服务改革的承诺，将在经济大幅下滑的情况下支撑消费者信心，防止预防性储蓄的急剧上升。
虽然政策推动下的资本支出可能最终成为今年重要的增长动力，我们预计，2010 年私人投资将会稳健复苏，从而减少经济增长对公共投资的依赖。
出口四季度开始复苏
过去几个月里，中国出口前所未有的急跌备受关注。我们曾在多个场合承认，这一跌幅之深、持续时间之长，远超我们的预期。与此同时，此前总体GDP 增长以及其他经济指标（出口交付金额和香港公布的贸易数据）也曾显示，出口跌幅不应如此剧烈，这使我们对数据的可靠性有所怀疑。
我们怀疑，2007 年和2008 年（截止2008 年第三季度）强劲的出口增长数据可能隐藏着部分热钱的流入。我们怀疑，2007 年和2008 年（截止2008 年三季度）强劲的出口增长数据可能隐藏着部分热钱的流入。受人民币迅速增值预期的推动，出口商（国内制造商以及外资制造商）可能夸大了出货量，以获得更多的人民币供应。
我们预计，贸易跌幅将于2009 年下半年继续收窄，出口增长将于年底回到零左右，2009 年全年出口增长为-16%，2010 年则反弹到9%。我们预计今年进口将下跌13%（09 年上半年为-25.5%），并在2010 年实现10%的正增长。我们预计今年的贸易顺差将出现2003 年以来的首次缩减，从2008 年的2,970 亿美元降至2,200 亿美元以下。
未来12 个月内不必担心通胀
银行放贷和货币增长（M2）的迅猛扩张令很多人担心通胀风险。然而，我们却认为，至少在未来12 个月之内无需担心此事。在我们看来，当一个经济体系遭遇中国当前面临的如此大规模的外部冲击时，CPI 增长的首要肇因是出口增长，而非货币增长。原因在于：首先，中国以往的经验表明，出口的急剧减速可能对经济产生强大的反通胀/通缩作用。
在过去的12 年间，中国经历了三次通缩： 第一次是在亚洲金融危机期间，第二次是在纳斯达克股票泡沫破灭之后，第三次即是当前的这一次。这三次通缩要么与出口的暴跌同时发生，要么紧随其而来。虽然我们确实预计，出口的跌幅将在今年剩下来的几个月里收窄，并将在2010 年恢复正增长，但我们认为未来12 个月内出口增长的力度尚不足以产生真正的通胀压力（如3.0%以上的通胀）。
其次，在经济下滑时，货币供应和通胀之间的关系通常会变得相当不稳定，其原因在于货币流通速度会急剧下降。这使得简单地根据货币供应增长衡量通胀风险非常不可靠，尤其是当这两者之间从一开始就不存在稳定、有力的因果关系时。
再次，从供给方面来看，国际商品价格泡沫的破裂使中国进口的原材料（如原油、铁矿石、金属等）价格急剧下降，这带来了强大的正面贸易条件的冲击，并通过PPI的急跌得到部分印证。
展望未来，大宗商品价格向上的空间不会太大，同时也意味着PPI 不可能随时出现强劲的反弹。此外，PPI 的低增长可能增加除食品以外的CPI 下行压力。
政策预期
随着经济复苏的加速，对政策可能出现变化，导致复苏偏离轨道的担心也在滋长。但我们认为，在2009 年年内不会出现实质性的政策变化。尤其是通胀风险尚未出现之前，进行重大转变开始实施真正的紧缩政策的可能性几乎为零。
因此，我们预计，今年剩下几个月里将继续维持当前的宽松政策态度。我们预计贷款发放将逐月正常化，但这不应视为政策的收紧。在这一背景下，今年全年新增贷款将达到9 万亿元。我们还预计，2009 年年底之前，基准存贷款利率不会出现调整，同时也不会再出台任何新的大规模财政刺激政策。
此外，我们预计房地产行业也不会有任何重大的政策调整。这一行业强劲的全面复苏，尤其是近期房价的上涨使许多人担心管理层是否会象2007 年底和2008 年上半年一样，再次下重手干预房地产市场。事实上，当时的记忆犹新，许多市场参与者都遭受了重创。但我们认为这一担心没有必要。房地产市场是中国有机增长最重要的源泉，而过去几年的经验教训也清楚地表明：稳定的政策环境对于中国房地产市场的健康、可持续发展至关重要。展望未来，我们预计管理层对房地产市场的政策态度不会改变。事实上，我们应当把2008 年10 月以来的政策调整视为政策的正常化，而非任意的反周期政策宽松化，后者通常是暂时的。
管理层当前的政策重点是双轨运行：1）取消人为限制开发的不适宜政策措施，鼓励市场化商品房开发；2）用公共资金开发低成本、低租金经济适用房项目，解决低收入家庭的住房问题。我们认为，由于在有活力的商品房项目的基础上，预计将会推出可行的经济适用房项目，因此这是一个有效的、可持续政策途径。鉴于房地产行业对于支撑经济复苏和可持续增长的重要作用，任何有关政策变化可能造成对这一行业的潜在伤害的担心都是不必要的。尽管如此，我们认为，政府选择严格执行现有规定，以防过度投机的可能性还是存在的。长期来看，这些措施不会改变房地产行业的总体趋势（正如我们反复强调的，房地产市场的基础依然强健），反而有助于这一行业的健康、可持续发展。
我们认为，接下来的6－12 个月可能会出现加速增长和低通胀共存的情况，同时政策态势相对稳定，这样的宏观经济环境有利于资产价格。不过，我们认为，由于通胀压力可能会在明年年中开始出现，对潜在紧缩政策的担心可能会对市场情绪产生影响。另一方面，随着自发的有机增长动力逐渐增强，企业盈利可能会在2010年得到改善。
事非宜，勿轻诺，苟轻诺，进退错
外汇储备 与我无关
正文 评论 更多财经点评的文章 » 投稿 打印 转发 MSN推荐 博客引用 发布到 MySpace.cn 字 体崔宇
中国的官方外汇储备突破了2万亿美元，却是一件令人发愁的事，这也印证了物极必反的道理，少了不行，多了更麻烦。特别是金融危机以来，中国巨额的外汇储备面临着美元贬值带来的缩水压力，不但官方一直在呼吁超主权货币，试图跳出美元陷阱，很多学者和公众的建议也是铺天盖地。
但或许这些都只是单相思。因为外汇储备和财政收入不同，它不是政府的财富，赚了也只是货币管理当局-中央银行自身的收益，赔了则是其自身的损失，和普通公众并无直接关联。
另外，外汇储备的问题其实是货币管理当局自导自演的悲喜剧，主要是强制结售汇制度和不合理的汇率制度造成的。而且，由于涉及所谓国家机密或商业机密，央行其实并不愿外人置喙，既然外汇储备的币种结构和投资方向一直都是“像雾像雨又像风” ，我们又何必殚精竭虑地盲人摸象呢？
外汇储备的概念甚至让许多经济学家混淆。记得年初时，国内某著名经济学家主张要分掉一部分外汇储备以“藏富于民” ，这就是误把外汇储备当成政府自身财富的典型例子。虽然央行资产负债表把外汇储备作为资产，但这只是债务性资产，而不是政府自身拥有的财富。以出口商为例，其结汇时中央银行虽增加了外汇储备，但同时却向其支付了等额人民币作为“对价” ，通俗地讲就是谁也不欠谁的。央行哪还会有动力分外汇储备呢，保值增值还来不及呢，除非央行想制造通货膨胀。
明白了外汇储备不能分的道理之后，就会明白外汇储备其实只是央行管理的一项资产，而且是只能在海外投资的资产，无论其增值还是缩水都只是央行自己的损益，公众也不必过于操心。当然，要操心的是国际收支危机，即外资撤退和汇率暴跌会让外汇储备告罄，这就像亚洲金融危机或者像去年的冰岛和匈牙利等国经历的那样。但中国目前不存在这样的风险，虽然说有热钱在兴风作浪，但去年下半年以来，外汇储备只是在2008年10月， 11月以及2009年1月， 2月有过轻微的负增长，目前中国还是要担心外汇储备太多以及如何保值增值的问题。
但这两个问题恰恰是普通公众无能为力的。外汇储备太多，其实是一个伪命题，确切的说应该是官方外汇储备太多。虽然日本的官方外汇储备少于中国，但日本民间的外汇储备有3万多亿美元，中国的民间外汇储备没有精确统计，有人估计只有1600多亿美元。
中国的官方外汇储备太多可以说是“自作自受” 。许多人都批评强制结售汇制度，认为这导致民间外汇储备萎缩，官方外汇储备膨胀。但这只是问题的一个方面，主要还是汇率制度的问题。 2005年以来，人民币稳定的升值预期下，即使没有强制结售汇制度，企业和居民为了避免汇率损失也会主动结汇。
尽管去年8月， “外汇管理条例”进行了修订，取消了经常项目外汇收入的强制结汇要求，但这不意味着就一定会“藏汇于民” ，如果人民币继续保持升值预期，这其实等于“嫁祸于民” ，因为央行既抛掉了收益率很低的“烫手山芋” ，又减少了发行央票来对冲基础货币投放的成本。
鉴于“引进来”的源头控制不住，最近，外汇管理局又连续下发了涉及企业境外直接投资的三个文件鼓励“走出去” 。 这自然是一招妙棋，会把官方的外汇储备资产变成微观企业的对外投资。但目前看来，以国企为主力军的海外并购缺乏约束，国有企业可以不考虑或较少考虑因投资效率低下而招致的惩罚，于是多数国企为了完成政治任务竞相跻身于海外收购大军之列，这种激进的大收购虽然能为央行排忧解难，但由于国内银行对国企海外并购提供的多是利率很低的政策性贷款，一旦国有企业不计成本地进行海外并购，央行的风险固然小了，但商业银行的风险大了。
对于外汇储备保值增值的问题公众更是“剃头挑子一头儿热” 。外汇储备的变动有很多的因素，比如经常项目差额，资本项目差额，热钱，汇率和投资收益等等，因此很难判断外汇储备增加或减少的具体原因，而且外汇管理部门并没有公布外汇储备的币种结构和投资方向（当然这是出于商业机密的考虑，但是从美国财政部例行公布的国际资本流动报告中，可以大致窥见中国外汇储备美元资产的投资头寸，外管部门的做法至少在结果上有些掩耳盗铃） 。
因此，公众也就不必多管闲事了，不如抱定外汇储备与我无关的念头，落个耳根清净，正如上面所说，反正这是央行自身的损益。
目前，对于外汇储备的关注似乎形成了一个大泡沫。其实，比外汇储备的保值增值问题更重要的是，如何遏制通过低价的劳动力，能源和环境成本形成的巨额贸易顺差，如何形成双向浮动的汇率机制以及如何监控热钱流动等等与老百姓更切身相关的问题。尽管如此，我还不至于妄下断语说“我不再看外汇储备” ，因为这是一种极端的偏见和承诺，而“弟子规”中的告诫是： “事非宜，勿轻诺，苟轻诺，进退错” 。
正文 评论 更多财经点评的文章 » 投稿 打印 转发 MSN推荐 博客引用 发布到 MySpace.cn 字 体崔宇
中国的官方外汇储备突破了2万亿美元，却是一件令人发愁的事，这也印证了物极必反的道理，少了不行，多了更麻烦。特别是金融危机以来，中国巨额的外汇储备面临着美元贬值带来的缩水压力，不但官方一直在呼吁超主权货币，试图跳出美元陷阱，很多学者和公众的建议也是铺天盖地。
但或许这些都只是单相思。因为外汇储备和财政收入不同，它不是政府的财富，赚了也只是货币管理当局-中央银行自身的收益，赔了则是其自身的损失，和普通公众并无直接关联。
另外，外汇储备的问题其实是货币管理当局自导自演的悲喜剧，主要是强制结售汇制度和不合理的汇率制度造成的。而且，由于涉及所谓国家机密或商业机密，央行其实并不愿外人置喙，既然外汇储备的币种结构和投资方向一直都是“像雾像雨又像风” ，我们又何必殚精竭虑地盲人摸象呢？
外汇储备的概念甚至让许多经济学家混淆。记得年初时，国内某著名经济学家主张要分掉一部分外汇储备以“藏富于民” ，这就是误把外汇储备当成政府自身财富的典型例子。虽然央行资产负债表把外汇储备作为资产，但这只是债务性资产，而不是政府自身拥有的财富。以出口商为例，其结汇时中央银行虽增加了外汇储备，但同时却向其支付了等额人民币作为“对价” ，通俗地讲就是谁也不欠谁的。央行哪还会有动力分外汇储备呢，保值增值还来不及呢，除非央行想制造通货膨胀。
明白了外汇储备不能分的道理之后，就会明白外汇储备其实只是央行管理的一项资产，而且是只能在海外投资的资产，无论其增值还是缩水都只是央行自己的损益，公众也不必过于操心。当然，要操心的是国际收支危机，即外资撤退和汇率暴跌会让外汇储备告罄，这就像亚洲金融危机或者像去年的冰岛和匈牙利等国经历的那样。但中国目前不存在这样的风险，虽然说有热钱在兴风作浪，但去年下半年以来，外汇储备只是在2008年10月， 11月以及2009年1月， 2月有过轻微的负增长，目前中国还是要担心外汇储备太多以及如何保值增值的问题。
但这两个问题恰恰是普通公众无能为力的。外汇储备太多，其实是一个伪命题，确切的说应该是官方外汇储备太多。虽然日本的官方外汇储备少于中国，但日本民间的外汇储备有3万多亿美元，中国的民间外汇储备没有精确统计，有人估计只有1600多亿美元。
中国的官方外汇储备太多可以说是“自作自受” 。许多人都批评强制结售汇制度，认为这导致民间外汇储备萎缩，官方外汇储备膨胀。但这只是问题的一个方面，主要还是汇率制度的问题。 2005年以来，人民币稳定的升值预期下，即使没有强制结售汇制度，企业和居民为了避免汇率损失也会主动结汇。
尽管去年8月， “外汇管理条例”进行了修订，取消了经常项目外汇收入的强制结汇要求，但这不意味着就一定会“藏汇于民” ，如果人民币继续保持升值预期，这其实等于“嫁祸于民” ，因为央行既抛掉了收益率很低的“烫手山芋” ，又减少了发行央票来对冲基础货币投放的成本。
鉴于“引进来”的源头控制不住，最近，外汇管理局又连续下发了涉及企业境外直接投资的三个文件鼓励“走出去” 。 这自然是一招妙棋，会把官方的外汇储备资产变成微观企业的对外投资。但目前看来，以国企为主力军的海外并购缺乏约束，国有企业可以不考虑或较少考虑因投资效率低下而招致的惩罚，于是多数国企为了完成政治任务竞相跻身于海外收购大军之列，这种激进的大收购虽然能为央行排忧解难，但由于国内银行对国企海外并购提供的多是利率很低的政策性贷款，一旦国有企业不计成本地进行海外并购，央行的风险固然小了，但商业银行的风险大了。
对于外汇储备保值增值的问题公众更是“剃头挑子一头儿热” 。外汇储备的变动有很多的因素，比如经常项目差额，资本项目差额，热钱，汇率和投资收益等等，因此很难判断外汇储备增加或减少的具体原因，而且外汇管理部门并没有公布外汇储备的币种结构和投资方向（当然这是出于商业机密的考虑，但是从美国财政部例行公布的国际资本流动报告中，可以大致窥见中国外汇储备美元资产的投资头寸，外管部门的做法至少在结果上有些掩耳盗铃） 。
因此，公众也就不必多管闲事了，不如抱定外汇储备与我无关的念头，落个耳根清净，正如上面所说，反正这是央行自身的损益。
目前，对于外汇储备的关注似乎形成了一个大泡沫。其实，比外汇储备的保值增值问题更重要的是，如何遏制通过低价的劳动力，能源和环境成本形成的巨额贸易顺差，如何形成双向浮动的汇率机制以及如何监控热钱流动等等与老百姓更切身相关的问题。尽管如此，我还不至于妄下断语说“我不再看外汇储备” ，因为这是一种极端的偏见和承诺，而“弟子规”中的告诫是： “事非宜，勿轻诺，苟轻诺，进退错” 。
中国经济的“夹生饭式”复苏
崔宇
1.large money supply and lending did not shore up CPI and PPI
2.maintaining 8% GDP take prioripty over the initiative to restructure economic structure, which aimed to reduce over capacity
3.if money flow to stock market and fixed asset market, it will further inflate the bubble. If money flows to upstream industries, it might not lead directly to job increase but more overcapacity.
如果单纯地把经济复苏定义于GDP复苏的话，上半年，中国经济毫无疑问是全球的一枝独秀。国家统计局16日公布的数据显示，上半年中国GDP同比增长7.1%，其中第二季度GDP同比增长7.9%，不仅大大高于第一季度的6.1%，而且也预示着“保八”大有希望。
但背后隐藏的不和谐因素不得不防。虽然固定资产投资高速增长对冲了净出口的下降，但固定资产投资基本都是政府主导的公共投资，民间投资持续萎缩，其可持续性值得怀疑。而且，货币供应量和新增贷款的高速增长并没有缓解CPI和PPI的下行趋势，CPI和PPI同比跌幅还在不断扩大，CPI的环比跌幅也在扩大，显示资金可能从实体经济渗出流入虚拟经济领域，这将带来资产价格泡沫的压力。
经济增长、物价下行、资产泡沫，这种“东边日出西边雨”的“夹生饭式” 复苏，不仅让中国经济暂时陷入了“增缩”的陷阱，而且让宏观调控左右为难。
“增缩”现象之所以形成就是“保增长”压过了“调结构”。 其实，第一季度似乎出现了“调结构”的曙光。因为从对GDP增长的贡献率来看，第一季度6.1%的增长中，最终消费的贡献率高达到70%，资本形成总额（包括固定资产投资和存货投资）的贡献率仅为33%，净出口的贡献率为负3%。
但是，当时主要是因为存货投资的大幅下降对冲了固定资产投资的高增长，消费并没有真正启动。因此，第二季度，中国加大了固定资产投资的步伐，其中5月份城镇固定资产投资甚至同比增长了39%。这取得了一定成效，从上半年的情况来看，在7.1%的GDP增长中，最终消费的贡献率降到了53.4%，资本形成总额的贡献率达到了87.6%，净出口的贡献率高达负41%。
可以看出，对于宏观经济的“三驾马车”来说，在经济衰退、收入预期下降的情况下立即启动消费，长路漫漫，而出口又受到全球经济不景气的影响持续萎缩，因此，不得不重新依赖固定资产投资这种能最快拉动GDP的方式来“保增长”，“调结构”只能退居其次。但是，由于上游企业仍然处在“去库存化”的阶段，而下游企业面临外需不振，这样上下游企业都面临产能过剩，抵消了价格上行的压力，就暂时出现了“增缩”的现象。
另外， 之所以说“增缩”是暂时的，还因为目前天量的货币供应量和新增贷款，它们是悬在中国经济头顶的“堰塞湖”。如果这些资金进入股市和房市，尽管不会带来通货膨胀，但会带来资产价格泡沫；如果他们进入上游的产能过剩行业，那将导致未来产能继续过剩的压力，而且还不会带来太多就业机会。
值得注意的是，目前工业增加值的增长速度已经在加快。尽管第一季度工业增加值增长仅为5.1%，低于一季度GDP 6.1%的增幅；但第二季度，工业增加值增速达到了9.1%，已经高于二季度GDP 7.9%的增幅，特别是6月份工业增加值同比增长了10.7%，重新回到了两位数的增长。
工业增加值的回升也是双刃剑，一方面它表明企业“去库存化”可能已经告一段落，企业开始重新扩大生产，这将给PPI和CPI带来上行的动力；但另一方面也暗藏危机，即固定资产投资是否还会保持现在的高位来吸收这些产能，否则将带来又一轮的产能过剩。
尽管目前CPI和PPI的下行有翘尾因素的影响，由于去年6月CPI增速开始放缓，去年9月PPI增速开始放缓，因此预计下半年CPI和PPI有望正增长。但翘尾因素只是一个外生因素，如果继续保持固定资产投资的高增长，而外需依然下滑，国内消费依然没有启动，居民收入没有持续增长，那么即使放出了太多的货币，短期内也不会产生通货膨胀的压力。
虽然要承认“增缩”只是暂时现象，但至少接下来中国经济不会出现“滞胀”。因为只要有政府主导的银行支持政府主导的投资，GDP增长就不会停滞。当然，目前的通缩也有可能转化为通胀，这个前提是股市和房地产泡沫继续膨胀，吸引了实体经济的资金大量涌入，特别是当中小企业不做实业，把资金投向股市和房市，如同2007年时一样，生产活动的减少自然会导致通货膨胀。
其实，中国经济一直都是“夹生饭式”的增长，GDP和财政收入在高速增长，但居民就业和收入则与之脱节。这次从衰退中复苏只不过是故伎重演，这伎俩就是依靠投资，特别是政府主导的高投资，而不是消费。
1.large money supply and lending did not shore up CPI and PPI
2.maintaining 8% GDP take prioripty over the initiative to restructure economic structure, which aimed to reduce over capacity
3.if money flow to stock market and fixed asset market, it will further inflate the bubble. If money flows to upstream industries, it might not lead directly to job increase but more overcapacity.
如果单纯地把经济复苏定义于GDP复苏的话，上半年，中国经济毫无疑问是全球的一枝独秀。国家统计局16日公布的数据显示，上半年中国GDP同比增长7.1%，其中第二季度GDP同比增长7.9%，不仅大大高于第一季度的6.1%，而且也预示着“保八”大有希望。
但背后隐藏的不和谐因素不得不防。虽然固定资产投资高速增长对冲了净出口的下降，但固定资产投资基本都是政府主导的公共投资，民间投资持续萎缩，其可持续性值得怀疑。而且，货币供应量和新增贷款的高速增长并没有缓解CPI和PPI的下行趋势，CPI和PPI同比跌幅还在不断扩大，CPI的环比跌幅也在扩大，显示资金可能从实体经济渗出流入虚拟经济领域，这将带来资产价格泡沫的压力。
经济增长、物价下行、资产泡沫，这种“东边日出西边雨”的“夹生饭式” 复苏，不仅让中国经济暂时陷入了“增缩”的陷阱，而且让宏观调控左右为难。
“增缩”现象之所以形成就是“保增长”压过了“调结构”。 其实，第一季度似乎出现了“调结构”的曙光。因为从对GDP增长的贡献率来看，第一季度6.1%的增长中，最终消费的贡献率高达到70%，资本形成总额（包括固定资产投资和存货投资）的贡献率仅为33%，净出口的贡献率为负3%。
但是，当时主要是因为存货投资的大幅下降对冲了固定资产投资的高增长，消费并没有真正启动。因此，第二季度，中国加大了固定资产投资的步伐，其中5月份城镇固定资产投资甚至同比增长了39%。这取得了一定成效，从上半年的情况来看，在7.1%的GDP增长中，最终消费的贡献率降到了53.4%，资本形成总额的贡献率达到了87.6%，净出口的贡献率高达负41%。
可以看出，对于宏观经济的“三驾马车”来说，在经济衰退、收入预期下降的情况下立即启动消费，长路漫漫，而出口又受到全球经济不景气的影响持续萎缩，因此，不得不重新依赖固定资产投资这种能最快拉动GDP的方式来“保增长”，“调结构”只能退居其次。但是，由于上游企业仍然处在“去库存化”的阶段，而下游企业面临外需不振，这样上下游企业都面临产能过剩，抵消了价格上行的压力，就暂时出现了“增缩”的现象。
另外， 之所以说“增缩”是暂时的，还因为目前天量的货币供应量和新增贷款，它们是悬在中国经济头顶的“堰塞湖”。如果这些资金进入股市和房市，尽管不会带来通货膨胀，但会带来资产价格泡沫；如果他们进入上游的产能过剩行业，那将导致未来产能继续过剩的压力，而且还不会带来太多就业机会。
值得注意的是，目前工业增加值的增长速度已经在加快。尽管第一季度工业增加值增长仅为5.1%，低于一季度GDP 6.1%的增幅；但第二季度，工业增加值增速达到了9.1%，已经高于二季度GDP 7.9%的增幅，特别是6月份工业增加值同比增长了10.7%，重新回到了两位数的增长。
工业增加值的回升也是双刃剑，一方面它表明企业“去库存化”可能已经告一段落，企业开始重新扩大生产，这将给PPI和CPI带来上行的动力；但另一方面也暗藏危机，即固定资产投资是否还会保持现在的高位来吸收这些产能，否则将带来又一轮的产能过剩。
尽管目前CPI和PPI的下行有翘尾因素的影响，由于去年6月CPI增速开始放缓，去年9月PPI增速开始放缓，因此预计下半年CPI和PPI有望正增长。但翘尾因素只是一个外生因素，如果继续保持固定资产投资的高增长，而外需依然下滑，国内消费依然没有启动，居民收入没有持续增长，那么即使放出了太多的货币，短期内也不会产生通货膨胀的压力。
虽然要承认“增缩”只是暂时现象，但至少接下来中国经济不会出现“滞胀”。因为只要有政府主导的银行支持政府主导的投资，GDP增长就不会停滞。当然，目前的通缩也有可能转化为通胀，这个前提是股市和房地产泡沫继续膨胀，吸引了实体经济的资金大量涌入，特别是当中小企业不做实业，把资金投向股市和房市，如同2007年时一样，生产活动的减少自然会导致通货膨胀。
其实，中国经济一直都是“夹生饭式”的增长，GDP和财政收入在高速增长，但居民就业和收入则与之脱节。这次从衰退中复苏只不过是故伎重演，这伎俩就是依靠投资，特别是政府主导的高投资，而不是消费。
Why yield is the asset class to go after in these times
By James Barty
Published: July 23 2009 03:00 Last updated: July 23 2009 03:00
One of the biggest issues facing investors in the next couple of years is the likely profile for inflation and how it will affect their decisions.
Some have framed the choice as one between deflation and hyper-inflation. Even if we ignore the somewhat ridiculous "hyper" element, the implications for financial assets differ widely.
If we see deflation, then the obvious pick is government bonds, with equities likely to struggle and commodities still more so, while index-linked bonds are likely to be a waste of money.
If we get inflation, you can largely turn the order around, although too high an inflation rate is normally not good for equities either, as interest rates tend to be high and volatile in such an outcome.
Yet is this the real choice we face? The Financial Times has been full of articles arguing that inflation is a necessary outcome of quantitative easing, normally citing a probable surge in "inflationary" lending.
On the other hand, the deflationists seem to think that it is either the 1930s all over again or, if not quite that bad, at least a repeat of the Japan experience with no growth and deflation.
We believe there is a good chance both of these scenarios are wrong.
The Japan experience was one where the authorities did too little, too late, for too long. When the Bank of Japan finally stepped up to the plate and expanded its balance sheet greatly, it managed to do so without triggering any noticeable build-up of inflationary pressures.
That is a lesson for the inflationists: creation of central bank money does not lead to inflation if there is not a transmission mechanism for it.
The faster reaction of the western authorities in undertaking an aggressive easing of policy, both monetary and fiscal, has probably headed off the worst of the deflationists' fears.
The very low level of short rates and direct quantitative easing is providing relief for borrowers, while higher fiscal deficits are filling the hole in aggregate demand created by the slump, just as Keynes argued it should.
It is unlikely, however, to prevent the delevering of balance sheets both in banks and the personal sector. That will constrain bank lending while fiscal consolidation - a course necessary to bring government finances back to stability - is likely to provide a natural offset to the very easy monetary policy stance.
In such an environment, a sub-par recovery is likely. Together with large amounts of spare capacity, this probably means that inflation will remain very subdued, possibly close to zero, although outright deflation - which we would define as permanently falling prices - is also unlikely.
That means monetary policy will probably need to remain loose merely to ensure that any recovery is not derailed, rather than generating excessive credit growth and inflation.
Investors should therefore prepare for a prolonged period of very low short rates.
We believe that means yield is the asset class to go after. Corporate bonds and equities with strong balance sheets and dividend yields would seem to be a sensible combination of assets for a conservative investor in such an environment.
After all, the competition is likely to be cash yielding nothing and government bonds (including index-linked) yielding only modest returns - although in real terms, if we are right on inflation, those returns will be respectable.
The performance of commodities in such an environment is more difficult to forecast, but we suspect it is unlikely to be that good in spite of all the hopes for the Brics.
Our advice to investors is to put the boom or gloom alternatives back in the bin where they belong and think of assets that will perform in a slow grind back to normality.
The writer is head of macro strategy at Arrowgrass Capital Partners LLP, a multi-strategy hedge fund
Published: July 23 2009 03:00 Last updated: July 23 2009 03:00
One of the biggest issues facing investors in the next couple of years is the likely profile for inflation and how it will affect their decisions.
Some have framed the choice as one between deflation and hyper-inflation. Even if we ignore the somewhat ridiculous "hyper" element, the implications for financial assets differ widely.
If we see deflation, then the obvious pick is government bonds, with equities likely to struggle and commodities still more so, while index-linked bonds are likely to be a waste of money.
If we get inflation, you can largely turn the order around, although too high an inflation rate is normally not good for equities either, as interest rates tend to be high and volatile in such an outcome.
Yet is this the real choice we face? The Financial Times has been full of articles arguing that inflation is a necessary outcome of quantitative easing, normally citing a probable surge in "inflationary" lending.
On the other hand, the deflationists seem to think that it is either the 1930s all over again or, if not quite that bad, at least a repeat of the Japan experience with no growth and deflation.
We believe there is a good chance both of these scenarios are wrong.
The Japan experience was one where the authorities did too little, too late, for too long. When the Bank of Japan finally stepped up to the plate and expanded its balance sheet greatly, it managed to do so without triggering any noticeable build-up of inflationary pressures.
That is a lesson for the inflationists: creation of central bank money does not lead to inflation if there is not a transmission mechanism for it.
The faster reaction of the western authorities in undertaking an aggressive easing of policy, both monetary and fiscal, has probably headed off the worst of the deflationists' fears.
The very low level of short rates and direct quantitative easing is providing relief for borrowers, while higher fiscal deficits are filling the hole in aggregate demand created by the slump, just as Keynes argued it should.
It is unlikely, however, to prevent the delevering of balance sheets both in banks and the personal sector. That will constrain bank lending while fiscal consolidation - a course necessary to bring government finances back to stability - is likely to provide a natural offset to the very easy monetary policy stance.
In such an environment, a sub-par recovery is likely. Together with large amounts of spare capacity, this probably means that inflation will remain very subdued, possibly close to zero, although outright deflation - which we would define as permanently falling prices - is also unlikely.
That means monetary policy will probably need to remain loose merely to ensure that any recovery is not derailed, rather than generating excessive credit growth and inflation.
Investors should therefore prepare for a prolonged period of very low short rates.
We believe that means yield is the asset class to go after. Corporate bonds and equities with strong balance sheets and dividend yields would seem to be a sensible combination of assets for a conservative investor in such an environment.
After all, the competition is likely to be cash yielding nothing and government bonds (including index-linked) yielding only modest returns - although in real terms, if we are right on inflation, those returns will be respectable.
The performance of commodities in such an environment is more difficult to forecast, but we suspect it is unlikely to be that good in spite of all the hopes for the Brics.
Our advice to investors is to put the boom or gloom alternatives back in the bin where they belong and think of assets that will perform in a slow grind back to normality.
The writer is head of macro strategy at Arrowgrass Capital Partners LLP, a multi-strategy hedge fund
fair Value Acccounting: IASB v.s FASB - FT
--Standard-setters may offer two at the end of an upcoming two-day London pow-wow.
--FASB wants everything at tfair value on teh balance sheeet. Cahgnes in value of certain instrumetns would be recognized in "other comprehensive income" (OCI) and so would not hit profit.
--IASB wants instruments to be classified according to their fundametneal characteristics. Instruments wtih stable and predictable cash flow can be accounted for at cost and imparied if necessary. Other instruments must be marked to market.
--The diference affect banks regulatory capital. A subordnated bond in a securitzation pool must be amrked to market under IASB proposals, with loss hiting capital. Under FASB probal, tier one capital would be unfacted.
--FASB wants everything at tfair value on teh balance sheeet. Cahgnes in value of certain instrumetns would be recognized in "other comprehensive income" (OCI) and so would not hit profit.
--IASB wants instruments to be classified according to their fundametneal characteristics. Instruments wtih stable and predictable cash flow can be accounted for at cost and imparied if necessary. Other instruments must be marked to market.
--The diference affect banks regulatory capital. A subordnated bond in a securitzation pool must be amrked to market under IASB proposals, with loss hiting capital. Under FASB probal, tier one capital would be unfacted.
Wednesday, July 22, 2009
leading and lag industries in this earning seasons Q2 2009
Associate director of economic analysis Bob Johnson on the current economic signals and which sectors may perk up first.
Jeremy Glaser: I'm Jeremy Glaser with Morningstar.com. With earning season starting to pick up, I'm here to discuss the potential impact that macroeconomic factors will have on these earnings with our associate director of economic analysis, Bob Johnson. Thanks for joining me today, Bob.
Bob Johnson: Good to be here.
Glaser: So, first things first. Let's talk a little bit about the employment situation. We learned this [Thursday morning] that over half a million people applied for unemployment claims for the first time last week. That still seems like a staggering number of people to be losing their jobs.
Johnson: It is a big number and it's unfortunate for those folks. But, the neat thing about that number is that it has been trending down now since March. What I called in many of my pieces a glacial slowdown in that number--it peaked at something like 674,000--and maybe we'd go 620,000 or 615,000 or 610,000. And today we busted under 600,000 jobs lost in a big way.
The loss came in at 565,000. So, better than it's been. It finally broke under that key, psychologically important 600,000 level. Some will claim there's different things with the auto industry and so forth that may distort the number. Maybe the Fourth of July.
But clearly that was built into some people's expectations when they were thinking about what the number would be. And I think the number was better than what most people were thinking. I view the number as a positive. It could easily tip back up next week when it's reported. But we'll take it any way we can get it right now.
Glaser: But even if it was a little bit better than it was before, it's still a tremendous number of people who are still losing their jobs. Still, the unemployment rate is continuing to rise. When you think of consumer spending as being a key driver of the economy, how is that ever going to pick up? How are people going to have the confidence to go out and buy when they see so many of their friends and family losing their jobs?
Johnson: I think a lot of the job losses are concentrated in certain geographic areas, and in certain industries more than others. I think some of the broad-based layoffs that we saw at the beginning of the year are now more strongly focused in construction, and a couple of the manufacturing sectors.
Therefore I think we'll have the opportunity where people are not thinking that everybody that's right next to them is losing their job. One is improved consumer confidence. And the people that have their jobs spend more money. They're a little bit more confident. They've saved up a little bit of money. They didn't buy that house or that car. So now they've got the money to spend somewhere else. So that's another thing that can help.
Glaser: Speaking of consumer spending, June same-store sale numbers also came out this morning. Anything interesting there?
Johnson: Clearly, some of the apparel things are being badly impacted by some absolutely atrocious weather conditions in the upper Midwest and in the Northeast. We've gotten to the point now where, two sunny days in Boston since May. We've just had our coldest day in 124 years in Chicago yesterday for the month of July. Those are all pretty stunning things that have a real effect on things like swimsuits, and towels, and people driving to the beach.
One positive trend in the retail sales number was some of the department stores--they've been doing pretty badly. Again, still didn't do wonderfully, but did better than expectation. So people are maybe starting to build up a little bit from shopping entirely at Wal-Mart and Family Dollar an moving up the chain just a little bit. So that was good to see in the month as well.
Glaser: So taking a step back, when we see second quarter earnings start to roll out, what industry should we be looking at as leading industries that we'd want to see improving before the rest of the economy does, and which are going to be lagging?
Johnson: Almost always, consumer discretionary are the items that improve first. I think we've seen that already in some stock performance. And hopefully we'll see some of that follow through with improved earnings this quarter. Again, people don't anticipate in advance, but we expect that to get better first.
Technology is another area that typically gets a little bit better first. We've talked to our semiconductor analyst on that. We're not claiming a major victory, but it's a little bit of a restocking. People that had drained their pipelines think nobody will ever buy anything again. Now they're saying, "I've got to have a little bit in stock. Just a little."
So, in the semiconductor industry in particular, we've seen a lot of inventory rebuilding this quarter. So that sector I think will actually be, on a relative basis, one of the better looking ones this quarter.
Glaser: What do you think could potentially look pretty bad?
Johnson: Again, some of the manufacturing and materials. Materials in particular and some of the commodities. If you think about it, last year was when all of the commodities were going crazy, they peaked in the July, August, September time frame. And so you've got those type of things in the high numbers last year, and now very low this year. So, the year-over-year comparison will look horrible.
Jeremy Glaser: I'm Jeremy Glaser with Morningstar.com. With earning season starting to pick up, I'm here to discuss the potential impact that macroeconomic factors will have on these earnings with our associate director of economic analysis, Bob Johnson. Thanks for joining me today, Bob.
Bob Johnson: Good to be here.
Glaser: So, first things first. Let's talk a little bit about the employment situation. We learned this [Thursday morning] that over half a million people applied for unemployment claims for the first time last week. That still seems like a staggering number of people to be losing their jobs.
Johnson: It is a big number and it's unfortunate for those folks. But, the neat thing about that number is that it has been trending down now since March. What I called in many of my pieces a glacial slowdown in that number--it peaked at something like 674,000--and maybe we'd go 620,000 or 615,000 or 610,000. And today we busted under 600,000 jobs lost in a big way.
The loss came in at 565,000. So, better than it's been. It finally broke under that key, psychologically important 600,000 level. Some will claim there's different things with the auto industry and so forth that may distort the number. Maybe the Fourth of July.
But clearly that was built into some people's expectations when they were thinking about what the number would be. And I think the number was better than what most people were thinking. I view the number as a positive. It could easily tip back up next week when it's reported. But we'll take it any way we can get it right now.
Glaser: But even if it was a little bit better than it was before, it's still a tremendous number of people who are still losing their jobs. Still, the unemployment rate is continuing to rise. When you think of consumer spending as being a key driver of the economy, how is that ever going to pick up? How are people going to have the confidence to go out and buy when they see so many of their friends and family losing their jobs?
Johnson: I think a lot of the job losses are concentrated in certain geographic areas, and in certain industries more than others. I think some of the broad-based layoffs that we saw at the beginning of the year are now more strongly focused in construction, and a couple of the manufacturing sectors.
Therefore I think we'll have the opportunity where people are not thinking that everybody that's right next to them is losing their job. One is improved consumer confidence. And the people that have their jobs spend more money. They're a little bit more confident. They've saved up a little bit of money. They didn't buy that house or that car. So now they've got the money to spend somewhere else. So that's another thing that can help.
Glaser: Speaking of consumer spending, June same-store sale numbers also came out this morning. Anything interesting there?
Johnson: Clearly, some of the apparel things are being badly impacted by some absolutely atrocious weather conditions in the upper Midwest and in the Northeast. We've gotten to the point now where, two sunny days in Boston since May. We've just had our coldest day in 124 years in Chicago yesterday for the month of July. Those are all pretty stunning things that have a real effect on things like swimsuits, and towels, and people driving to the beach.
One positive trend in the retail sales number was some of the department stores--they've been doing pretty badly. Again, still didn't do wonderfully, but did better than expectation. So people are maybe starting to build up a little bit from shopping entirely at Wal-Mart and Family Dollar an moving up the chain just a little bit. So that was good to see in the month as well.
Glaser: So taking a step back, when we see second quarter earnings start to roll out, what industry should we be looking at as leading industries that we'd want to see improving before the rest of the economy does, and which are going to be lagging?
Johnson: Almost always, consumer discretionary are the items that improve first. I think we've seen that already in some stock performance. And hopefully we'll see some of that follow through with improved earnings this quarter. Again, people don't anticipate in advance, but we expect that to get better first.
Technology is another area that typically gets a little bit better first. We've talked to our semiconductor analyst on that. We're not claiming a major victory, but it's a little bit of a restocking. People that had drained their pipelines think nobody will ever buy anything again. Now they're saying, "I've got to have a little bit in stock. Just a little."
So, in the semiconductor industry in particular, we've seen a lot of inventory rebuilding this quarter. So that sector I think will actually be, on a relative basis, one of the better looking ones this quarter.
Glaser: What do you think could potentially look pretty bad?
Johnson: Again, some of the manufacturing and materials. Materials in particular and some of the commodities. If you think about it, last year was when all of the commodities were going crazy, they peaked in the July, August, September time frame. And so you've got those type of things in the high numbers last year, and now very low this year. So, the year-over-year comparison will look horrible.
For Obama, Health Care Overhaul Is Make-Or-Break
by Liz Halloran
\President Obama is scheduled to take his health care hard sell to the American people Wednesday, during a prime-time news conference that comes in the midst of an increasingly strident free-for-all over the politics and price of his planned overhaul.
On the line is the centerpiece of the president's domestic agenda, now mired in a partisan Washington battle that even his most ardent supporters say the president needs to win.
"In health care, this is his moment of root hog or die," says Don Fowler, a prominent South Carolina Democrat and past national chairman of the Democratic National Committee. He used the old-timey catchphrase to describe the president's imperative to do the work needed to get the health care overhaul passed — or suffer the consequences.
And, Fowler says, the consequences cannot be underestimated.
"In terms of his presidency, more rides on this than just health care," Fowler says. "If he wins this battle, I think it would open doors so he can get most anything he wants. If he loses, it's not only going to be damaging to health care but also to the rest of his agenda."
GOP Smells Opportunity
Obama's increasingly aggressive push for his plan to expand health care coverage includes a national mobilization of the grass-roots network formed during his presidential campaign. The president's stepped-up role comes as he faces stubborn resistance from moderates in his own party who are balking at the plan's $1 trillion price tag over the next decade.
A spate of recent polls has also showed sagging public confidence in his leadership, while unemployment continues to creep up. And the president's goal to have health care legislation before Congress leaves for its August recess is appearing increasingly remote.
"I think there's no question that this is the most difficult of times to try to push for such major reforms," says Democratic strategist Peter Fenn. "I think that there's no question that if the economy had not been in a nose dive, this would have been unbelievably easier."
Republicans, sensing opportunity, have raised the political stakes for the president — and for themselves — by launching a full-out assault on Obama's health care initiative, but without offering up alternatives.
The president this week seized on an assertion by GOP Sen. Jim DeMint of South Carolina, who predicted that Republicans could "break" Obama politically by making the health care issue his "Waterloo."
During an appearance Tuesday in the White House Rose Garden, Obama defended his health care plan and what he characterized as "substantial common ground" that has been reached on the overhaul. And he scolded Republicans for "playing the politics of the moment."
It is, the president said, a "familiar Washington script."
The President's Imperative
What Obama needs to do Wednesday night and in the two weeks leading up to the August congressional recess is to better outline the risks that failure poses, says Darrell West of the liberal Brookings Institution.
"His numbers may be falling, but he still retains a strong reservoir of public support," West says. "He needs to use that to get Congress to move and to send out the central message that the risks of failure are incredibly high, that status quo in the health care system is unacceptable."
The longer it takes to finalize a health care deal, the more difficult it will be for the president to get the legislation he wants.
"We're headed toward a 10 percent unemployment rate and continued economic concerns," West says. "His approval rating is much more likely to be lower in the fall. He'll be in a weaker position to make his case to Congress, and it will all be much riskier for him."
Fighting On
The president on Tuesday laid out his argument for swift and decisive action, and he is expected to repeat those themes tonight.
Consensus has been reached, he said, on a number of issues, from extending health care coverage to an unprecedented number of Americans and "promoting choice" and comparison shopping among insurance plans, to emphasizing prevention and limiting out-of-pocket expenses for those facing catastrophic illnesses.
Americans "don't care who is up and who is down politically in Washington," Obama said. "They care about what's going on in their own lives. They care about whether their families will be crushed by rising premiums."
But Republicans have their own talking points: criticizing the August imperative as too soon for such a complicated and expensive undertaking; pointing to an eye-popping Congressional Budget Office analysis that predicted the current plan would not contain health costs over time; and taking on proposals to tax wealthy Americans to pay for the plan. (Republicans say the tax would hit small businesses, but analysis shows that of all taxpayers who report some business income, only 4.2 percent would be subject to the higher taxes being considered.)
Fowler, the former DNC national chairman, says the GOP has been successful in introducing doubt about the workability of the plans coming out of committees in the Democratic-controlled House and Senate.
But some GOP analysts warn that if party members don't offer up an articulate, constructive alternative along with their criticism, they may end up harming themselves.
Said one strategist: "Republicans need to show that we're for health reform — just not a government takeover. There has not been a lot of consistency on that message."
Historic Opportunity
History has shown that meaningful opportunities for health care reform, because of its difficulty, "come around once every generation," says the Brookings Institution's West.
This is the president's chance, he said, and he's gotten further than most by managing to get congressional committees to vote on health care policy changes.
"But the goal is not a committee victory — it's actually getting legislation through Congress," West says.
Obama's moment of root hog or die has indeed arrived.
"He, as the lone leader, must find a way through these choices," Fowler says, "and induce compromises that meet his standards."
And that, Fowler says, goes well beyond press conferences and speeches.
\President Obama is scheduled to take his health care hard sell to the American people Wednesday, during a prime-time news conference that comes in the midst of an increasingly strident free-for-all over the politics and price of his planned overhaul.
On the line is the centerpiece of the president's domestic agenda, now mired in a partisan Washington battle that even his most ardent supporters say the president needs to win.
"In health care, this is his moment of root hog or die," says Don Fowler, a prominent South Carolina Democrat and past national chairman of the Democratic National Committee. He used the old-timey catchphrase to describe the president's imperative to do the work needed to get the health care overhaul passed — or suffer the consequences.
And, Fowler says, the consequences cannot be underestimated.
"In terms of his presidency, more rides on this than just health care," Fowler says. "If he wins this battle, I think it would open doors so he can get most anything he wants. If he loses, it's not only going to be damaging to health care but also to the rest of his agenda."
GOP Smells Opportunity
Obama's increasingly aggressive push for his plan to expand health care coverage includes a national mobilization of the grass-roots network formed during his presidential campaign. The president's stepped-up role comes as he faces stubborn resistance from moderates in his own party who are balking at the plan's $1 trillion price tag over the next decade.
A spate of recent polls has also showed sagging public confidence in his leadership, while unemployment continues to creep up. And the president's goal to have health care legislation before Congress leaves for its August recess is appearing increasingly remote.
"I think there's no question that this is the most difficult of times to try to push for such major reforms," says Democratic strategist Peter Fenn. "I think that there's no question that if the economy had not been in a nose dive, this would have been unbelievably easier."
Republicans, sensing opportunity, have raised the political stakes for the president — and for themselves — by launching a full-out assault on Obama's health care initiative, but without offering up alternatives.
The president this week seized on an assertion by GOP Sen. Jim DeMint of South Carolina, who predicted that Republicans could "break" Obama politically by making the health care issue his "Waterloo."
During an appearance Tuesday in the White House Rose Garden, Obama defended his health care plan and what he characterized as "substantial common ground" that has been reached on the overhaul. And he scolded Republicans for "playing the politics of the moment."
It is, the president said, a "familiar Washington script."
The President's Imperative
What Obama needs to do Wednesday night and in the two weeks leading up to the August congressional recess is to better outline the risks that failure poses, says Darrell West of the liberal Brookings Institution.
"His numbers may be falling, but he still retains a strong reservoir of public support," West says. "He needs to use that to get Congress to move and to send out the central message that the risks of failure are incredibly high, that status quo in the health care system is unacceptable."
The longer it takes to finalize a health care deal, the more difficult it will be for the president to get the legislation he wants.
"We're headed toward a 10 percent unemployment rate and continued economic concerns," West says. "His approval rating is much more likely to be lower in the fall. He'll be in a weaker position to make his case to Congress, and it will all be much riskier for him."
Fighting On
The president on Tuesday laid out his argument for swift and decisive action, and he is expected to repeat those themes tonight.
Consensus has been reached, he said, on a number of issues, from extending health care coverage to an unprecedented number of Americans and "promoting choice" and comparison shopping among insurance plans, to emphasizing prevention and limiting out-of-pocket expenses for those facing catastrophic illnesses.
Americans "don't care who is up and who is down politically in Washington," Obama said. "They care about what's going on in their own lives. They care about whether their families will be crushed by rising premiums."
But Republicans have their own talking points: criticizing the August imperative as too soon for such a complicated and expensive undertaking; pointing to an eye-popping Congressional Budget Office analysis that predicted the current plan would not contain health costs over time; and taking on proposals to tax wealthy Americans to pay for the plan. (Republicans say the tax would hit small businesses, but analysis shows that of all taxpayers who report some business income, only 4.2 percent would be subject to the higher taxes being considered.)
Fowler, the former DNC national chairman, says the GOP has been successful in introducing doubt about the workability of the plans coming out of committees in the Democratic-controlled House and Senate.
But some GOP analysts warn that if party members don't offer up an articulate, constructive alternative along with their criticism, they may end up harming themselves.
Said one strategist: "Republicans need to show that we're for health reform — just not a government takeover. There has not been a lot of consistency on that message."
Historic Opportunity
History has shown that meaningful opportunities for health care reform, because of its difficulty, "come around once every generation," says the Brookings Institution's West.
This is the president's chance, he said, and he's gotten further than most by managing to get congressional committees to vote on health care policy changes.
"But the goal is not a committee victory — it's actually getting legislation through Congress," West says.
Obama's moment of root hog or die has indeed arrived.
"He, as the lone leader, must find a way through these choices," Fowler says, "and induce compromises that meet his standards."
And that, Fowler says, goes well beyond press conferences and speeches.
Inflation - the real threat to sustained recovery
Alan Greenspan
The rise in global stock prices from early March to mid-June is arguably the primary cause of the surprising positive turn in the economic environment. The $12,000bn of newly created corporate equity value has added significantly to the capital buffer that supports the debt issued by financial and non-financial companies. Corporate debt, as a consequence, has been upgraded and yields have fallen. Previously capital-strapped companies have been able to raise considerable debt and equity in recent months. Market fears of bank insolvency, particularly, have been assuaged.
Is this the beginning of a prolonged economic recovery or a false dawn? There are credible arguments on both sides of the issue. I conjectured over a year ago on these pages that the crisis will end when home prices in the US stabilise. That still appears right. Such prices largely determine the amount of equity in homes – the ultimate collateral for the $11,000bn of US home mortgage debt, a significant share of which is held in the form of asset-backed securities outside the US. Prices are currently being suppressed by a large overhang of vacant houses for sale. Owing to the recent sharp drop in house completions, this overhang is being liquidated in earnest, suggesting prices could start to stabilise in the next several months – although they could drift lower into 2010.
In addition, huge unrecognised losses of US banks still need to be funded. Either a stabilisation of home prices or a further rise in newly created equity value available to US financial intermediaries would address this impediment to recovery.
Global stock markets have rallied so far and so fast this year that it is difficult to imagine they can proceed further at anywhere near their recent pace. But what if, after a correction, they proceeded inexorably higher? That would bolster global balance sheets with large amounts of new equity value and supply banks with the new capital that would allow them to step up lending. Higher share prices would also lead to increased household wealth and spending, and the rising market value of existing corporate assets (proxied by stock prices) relative to their replacement cost would spur new capital investment. Leverage would be materially reduced. A prolonged recovery in global equity prices would thus assist in the lifting of the deflationary forces that still hover over the global economy.
I recognise that I accord a much larger economic role to equity prices than is the conventional wisdom. From my perspective, they are not merely an important leading indicator of global business activity, but a major contributor to that activity, operating primarily through balance sheets. My hypothesis will be tested in the year ahead. If shares fall back to their early spring lows or worse, I would expect the “green shoots” spotted in recent weeks to wither.
Stock prices, to be sure, are affected by the usual economic gyrations. But, as I noted in March, a significant driver of stock prices is the innate human propensity to swing between euphoria and fear, which, while heavily influenced by economic events, has a life of its own. In my experience, such episodes are often not mere forecasts of future business activity, but major causes of it.
For the benevolent scenario above to play out, the short-term dangers of deflation and longer-term dangers of inflation have to be confronted and removed. Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge. If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012; earlier if markets anticipate a prolonged period of elevated money supply. Annual price inflation in the US is significantly correlated (with a 3½-year lag) with annual changes in money supply per unit of capacity.
Inflation is a special concern over the next decade given the pending avalanche of government debt about to be unloaded on world financial markets. The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt.
The Federal Reserve, when it perceives that the unemployment rate is poised to decline, will presumably start to allow its short-term assets to run off, and either sell its newly acquired bonds, notes and asset-backed securities or, if that proves too disruptive to markets, issue (with congressional approval) Fed debt to sterilise, or counter, what is left of its huge expansion of the monetary base. Thus, interest rates would rise well before the restoration of full employment, a policy that, in the past, has not been viewed favourably by Congress. Moreover, unless US government spending commitments are stretched out or cut back, real interest rates will be likely to rise even more, owing to the need to finance the widening deficit.
Government spending commitments over the next decade are staggering. On top of that, the range of error is particularly large owing to the uncertainties in forecasting Medicare costs. Historically, the US, to limit the likelihood of destructive inflation, relied on a large buffer between the level of federal debt and rough measures of total borrowing capacity. Current debt issuance projections, if realised, will surely place America precariously close to that notional borrowing ceiling. Fears of an eventual significant pick-up in inflation may soon begin to be factored into longer-term US government bond yields, or interest rates. Should real long-term interest rates become chronically elevated, share prices, if history is any guide, will remain suppressed.
The US is faced with the choice of either paring back its budget deficits and monetary base as soon as the current risks of deflation dissipate, or setting the stage for a potential upsurge in inflation. Even absent the inflation threat, there is another potential danger inherent in current US fiscal policy: a major increase in the funding of the US economy through public sector debt. Such a course for fiscal policy is a recipe for the political allocation of capital and an undermining of the process of “creative destruction” – the private sector market competition that is essential to rising standards of living. This paradigm’s reputation has been badly tarnished by recent events. Improvements in financial regulation and supervision, especially in areas of capital adequacy, are necessary. However, for the best chance for worldwide economic growth we must continue to rely on private market forces to allocate capital and other resources. The alternative of political allocation of resources has been tried; and it failed.
The writer is former chairman of the US Federal Reserve
The rise in global stock prices from early March to mid-June is arguably the primary cause of the surprising positive turn in the economic environment. The $12,000bn of newly created corporate equity value has added significantly to the capital buffer that supports the debt issued by financial and non-financial companies. Corporate debt, as a consequence, has been upgraded and yields have fallen. Previously capital-strapped companies have been able to raise considerable debt and equity in recent months. Market fears of bank insolvency, particularly, have been assuaged.
Is this the beginning of a prolonged economic recovery or a false dawn? There are credible arguments on both sides of the issue. I conjectured over a year ago on these pages that the crisis will end when home prices in the US stabilise. That still appears right. Such prices largely determine the amount of equity in homes – the ultimate collateral for the $11,000bn of US home mortgage debt, a significant share of which is held in the form of asset-backed securities outside the US. Prices are currently being suppressed by a large overhang of vacant houses for sale. Owing to the recent sharp drop in house completions, this overhang is being liquidated in earnest, suggesting prices could start to stabilise in the next several months – although they could drift lower into 2010.
In addition, huge unrecognised losses of US banks still need to be funded. Either a stabilisation of home prices or a further rise in newly created equity value available to US financial intermediaries would address this impediment to recovery.
Global stock markets have rallied so far and so fast this year that it is difficult to imagine they can proceed further at anywhere near their recent pace. But what if, after a correction, they proceeded inexorably higher? That would bolster global balance sheets with large amounts of new equity value and supply banks with the new capital that would allow them to step up lending. Higher share prices would also lead to increased household wealth and spending, and the rising market value of existing corporate assets (proxied by stock prices) relative to their replacement cost would spur new capital investment. Leverage would be materially reduced. A prolonged recovery in global equity prices would thus assist in the lifting of the deflationary forces that still hover over the global economy.
I recognise that I accord a much larger economic role to equity prices than is the conventional wisdom. From my perspective, they are not merely an important leading indicator of global business activity, but a major contributor to that activity, operating primarily through balance sheets. My hypothesis will be tested in the year ahead. If shares fall back to their early spring lows or worse, I would expect the “green shoots” spotted in recent weeks to wither.
Stock prices, to be sure, are affected by the usual economic gyrations. But, as I noted in March, a significant driver of stock prices is the innate human propensity to swing between euphoria and fear, which, while heavily influenced by economic events, has a life of its own. In my experience, such episodes are often not mere forecasts of future business activity, but major causes of it.
For the benevolent scenario above to play out, the short-term dangers of deflation and longer-term dangers of inflation have to be confronted and removed. Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge. If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012; earlier if markets anticipate a prolonged period of elevated money supply. Annual price inflation in the US is significantly correlated (with a 3½-year lag) with annual changes in money supply per unit of capacity.
Inflation is a special concern over the next decade given the pending avalanche of government debt about to be unloaded on world financial markets. The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt.
The Federal Reserve, when it perceives that the unemployment rate is poised to decline, will presumably start to allow its short-term assets to run off, and either sell its newly acquired bonds, notes and asset-backed securities or, if that proves too disruptive to markets, issue (with congressional approval) Fed debt to sterilise, or counter, what is left of its huge expansion of the monetary base. Thus, interest rates would rise well before the restoration of full employment, a policy that, in the past, has not been viewed favourably by Congress. Moreover, unless US government spending commitments are stretched out or cut back, real interest rates will be likely to rise even more, owing to the need to finance the widening deficit.
Government spending commitments over the next decade are staggering. On top of that, the range of error is particularly large owing to the uncertainties in forecasting Medicare costs. Historically, the US, to limit the likelihood of destructive inflation, relied on a large buffer between the level of federal debt and rough measures of total borrowing capacity. Current debt issuance projections, if realised, will surely place America precariously close to that notional borrowing ceiling. Fears of an eventual significant pick-up in inflation may soon begin to be factored into longer-term US government bond yields, or interest rates. Should real long-term interest rates become chronically elevated, share prices, if history is any guide, will remain suppressed.
The US is faced with the choice of either paring back its budget deficits and monetary base as soon as the current risks of deflation dissipate, or setting the stage for a potential upsurge in inflation. Even absent the inflation threat, there is another potential danger inherent in current US fiscal policy: a major increase in the funding of the US economy through public sector debt. Such a course for fiscal policy is a recipe for the political allocation of capital and an undermining of the process of “creative destruction” – the private sector market competition that is essential to rising standards of living. This paradigm’s reputation has been badly tarnished by recent events. Improvements in financial regulation and supervision, especially in areas of capital adequacy, are necessary. However, for the best chance for worldwide economic growth we must continue to rely on private market forces to allocate capital and other resources. The alternative of political allocation of resources has been tried; and it failed.
The writer is former chairman of the US Federal Reserve
Money struggles to pass through banking pipe
--Money pumped by ECB to Commercial banks ended up in ECB's balance sheet, banks deposits
--Some money funneled to government bonds, corporate bonds, to financial system. It might distort the market without benefiting real economy where it needs money most
--The blockage of banking pipe is not unique to Europe. Japan QE in the lost decade encountered the same issue.
By David Oakley, Ralph Atkins and Gillian Tett
Published: July 21 2009 18:55 Last updated: July 21 2009 20:46
Central banks have pumped a vast amount of money into the financial system this year – but so far there is little evidence that this liquidity has found its way into the broader economy.
What is happening could be likened to the pattern that develops when a household drain is partly blocked as the central banks frantically pour money into the financial system, with the commercial banks supposedly acting as a pipe, in an effort to stabilise the economies.
But many commercial banks are reluctant to pass this liquidity on to their customers, in the form of loans, because they are scrambling to repair their own balance sheets and are afraid to lend because of fears of potential losses. The banking pipe is, thus, partly blocked.
So where is this money, or liquidity, ending up?
At the moment, a large amount is being parked at the central banks themselves.
In Europe, commercial bank overnight deposits at the European Central Bank have soared since the ECB pumped €442bn in one-year loans into the system on June 24.
Although the amount of money deposited overnight is very volatile, it rarely went above €50bn before the ECB injection. On Monday night, it stood at €188bn, and it has surged above €300bn on some days this month.
Jean-Claude Trichet, the ECB president, has warned that “it may take some time ... for the extra liquidity to be transformed into credit” – without specifying how long.
He has also acknowledged that much of the €442bn financial injection is being parked at the ECB’s overnight deposit facility.
“Banks will have to gain experience in using the longer-term credit that they obtain from their central banks to expand their longer-term assets rather than increase the availability of short-term liquidity,” Mr Trichet says.
In the nearest the French ECB president comes to a headmasterly telling off, he adds: “We remind banks of their responsibility to continue to lend to firms and households at appropriate rates and in suitable volumes.”
Deposits have also risen sharply at the US Federal Reserve and the Bank of England.
As well as depositing money at the central banks, the commercial banks are also buying government bonds, high-quality corporate bonds and, of late, equities – in effect recycling the liquidity around the financial system.
While this “backflow” of liquidity is not dangerous yet, some economists fear it could end up distorting the markets in the coming months – undermining the rationale behind the extreme monetary measures.
Some hints of this “backflow” emerged when Deutsche Postbank received €9.2bn of offers for its debut public sector covered bond on July 3 in the space of just 10 minutes. In the end, it sold €1bn to investors, of which about €300m was sold to banks.
This buying of bank bonds by the banks themselves appears to fly in the face of what the monetary authorities are trying to achieve, although investors say using spare cash to buy financial debt is safer than making loans since the banks are tacitly guaranteed by the government.
Mike Amey, head of UK bond portfolios at Pimco, says: “It makes sense for investors to buy senior bonds issued by the major UK banks because they are relatively safe, with high levels of government support, and offer significant extra yield over government bonds. For example, you can buy five-year RBS bonds for a yield of 5.7 per cent compared with 2.9 per cent on a five-year gilt.”
This blockage in the banking pipe – or “broken transmission mechanism” to use the monetary jargon – is not unique to Europe.
It was a crucial issue that bedevilled the Japanese in the late 1990s and early part of this decade when the Bank of Japan engaged in quantitative easing at the time.
In particular, when the BoJ flooded the markets with liquidity, the banks tended to hang on to that cash, rather than turn it into loans, even when the government pleaded with them to pass the monetary aid on.
That, in turn, distorted the Japanese money markets and left some Japanese officials quietly concluding that QE had not been very successful.
In the UK, the Bank of England has tried to circumvent that problem – and learn from Japan – by purchasing gilts, rather than giving money directly to banks. The theory is that asset managers might use the cash they receive to purchase corporate bonds, driving down their yields.
In essence, the British are using a tactic akin to trying to shove liquidity through multiple pipes, in the hope that some of it gets to the economy – even if one or two pipes are blocked.
The key question is whether the extraordinary central bank policies are working.
In the case of the eurozone, bank lending to non-financial corporations – one of the most important barometers to the success of the ECB’s actions – has slowed dramatically this year to an annual growth rate of 4.4 per cent in May from a rate of 9 per cent in January. Eurozone lending for house purchases contracted by 0.5 per cent in May. No wonder central bankers are watching the situation closely.
As long as some of the liquidity is still passing through the system, irrespective of the blockages, then the extra liquidity can have a stabilising effect. However, the risk of “backflow” is prompting unease and may be one reason why central banks end their current policies sooner than some expect.
--Some money funneled to government bonds, corporate bonds, to financial system. It might distort the market without benefiting real economy where it needs money most
--The blockage of banking pipe is not unique to Europe. Japan QE in the lost decade encountered the same issue.
By David Oakley, Ralph Atkins and Gillian Tett
Published: July 21 2009 18:55 Last updated: July 21 2009 20:46
Central banks have pumped a vast amount of money into the financial system this year – but so far there is little evidence that this liquidity has found its way into the broader economy.
What is happening could be likened to the pattern that develops when a household drain is partly blocked as the central banks frantically pour money into the financial system, with the commercial banks supposedly acting as a pipe, in an effort to stabilise the economies.
But many commercial banks are reluctant to pass this liquidity on to their customers, in the form of loans, because they are scrambling to repair their own balance sheets and are afraid to lend because of fears of potential losses. The banking pipe is, thus, partly blocked.
So where is this money, or liquidity, ending up?
At the moment, a large amount is being parked at the central banks themselves.
In Europe, commercial bank overnight deposits at the European Central Bank have soared since the ECB pumped €442bn in one-year loans into the system on June 24.
Although the amount of money deposited overnight is very volatile, it rarely went above €50bn before the ECB injection. On Monday night, it stood at €188bn, and it has surged above €300bn on some days this month.
Jean-Claude Trichet, the ECB president, has warned that “it may take some time ... for the extra liquidity to be transformed into credit” – without specifying how long.
He has also acknowledged that much of the €442bn financial injection is being parked at the ECB’s overnight deposit facility.
“Banks will have to gain experience in using the longer-term credit that they obtain from their central banks to expand their longer-term assets rather than increase the availability of short-term liquidity,” Mr Trichet says.
In the nearest the French ECB president comes to a headmasterly telling off, he adds: “We remind banks of their responsibility to continue to lend to firms and households at appropriate rates and in suitable volumes.”
Deposits have also risen sharply at the US Federal Reserve and the Bank of England.
As well as depositing money at the central banks, the commercial banks are also buying government bonds, high-quality corporate bonds and, of late, equities – in effect recycling the liquidity around the financial system.
While this “backflow” of liquidity is not dangerous yet, some economists fear it could end up distorting the markets in the coming months – undermining the rationale behind the extreme monetary measures.
Some hints of this “backflow” emerged when Deutsche Postbank received €9.2bn of offers for its debut public sector covered bond on July 3 in the space of just 10 minutes. In the end, it sold €1bn to investors, of which about €300m was sold to banks.
This buying of bank bonds by the banks themselves appears to fly in the face of what the monetary authorities are trying to achieve, although investors say using spare cash to buy financial debt is safer than making loans since the banks are tacitly guaranteed by the government.
Mike Amey, head of UK bond portfolios at Pimco, says: “It makes sense for investors to buy senior bonds issued by the major UK banks because they are relatively safe, with high levels of government support, and offer significant extra yield over government bonds. For example, you can buy five-year RBS bonds for a yield of 5.7 per cent compared with 2.9 per cent on a five-year gilt.”
This blockage in the banking pipe – or “broken transmission mechanism” to use the monetary jargon – is not unique to Europe.
It was a crucial issue that bedevilled the Japanese in the late 1990s and early part of this decade when the Bank of Japan engaged in quantitative easing at the time.
In particular, when the BoJ flooded the markets with liquidity, the banks tended to hang on to that cash, rather than turn it into loans, even when the government pleaded with them to pass the monetary aid on.
That, in turn, distorted the Japanese money markets and left some Japanese officials quietly concluding that QE had not been very successful.
In the UK, the Bank of England has tried to circumvent that problem – and learn from Japan – by purchasing gilts, rather than giving money directly to banks. The theory is that asset managers might use the cash they receive to purchase corporate bonds, driving down their yields.
In essence, the British are using a tactic akin to trying to shove liquidity through multiple pipes, in the hope that some of it gets to the economy – even if one or two pipes are blocked.
The key question is whether the extraordinary central bank policies are working.
In the case of the eurozone, bank lending to non-financial corporations – one of the most important barometers to the success of the ECB’s actions – has slowed dramatically this year to an annual growth rate of 4.4 per cent in May from a rate of 9 per cent in January. Eurozone lending for house purchases contracted by 0.5 per cent in May. No wonder central bankers are watching the situation closely.
As long as some of the liquidity is still passing through the system, irrespective of the blockages, then the extra liquidity can have a stabilising effect. However, the risk of “backflow” is prompting unease and may be one reason why central banks end their current policies sooner than some expect.
Tuesday, July 21, 2009
Mall Owner Prepares TALF Deals
--Shopping center giant Developers Divresified Realty Corp is trying to raise $600 mil through two bonds sales
--It will be backed by two assets pool, each worth of $800 mil, loan to value 40%, consisting 60 shopping centers across the country
Developers Diversified's Bond Sales Set to Be First CMBS to Use Program
By LINGLING WEI
Shopping center giant Developers Diversified Realty Corp. is working on raising $600 million through two bond sales that promise to be a litmus test for one of the government's key economic rescue programs.
Those deals are on track to be the first major offerings of commercial-mortgage-backed securities that will take advantage of the Term Asset-Backed Securities Loan Facility, or TALF, program. TALF is designed to jump-start lending by increasing investor demand for securities tied to all kinds of assets, including consumer and commercial loans. As long as banks can move loans off their books by repackaging and selling them as bonds, they will be able to make more loans.
CMBS is one of the key tests for the TALF program, introduced by the Federal Reserve in March with the hopes of reviving the securitization markets. Since then the program has been considered a moderate success, helping borrowers including Harley-Davidson Inc. and others raise $65 billion in sales of bonds backed by everything from credit cards to car loans. The Fed has so far made $35 billion in TALF loans to investors buying these securities, which has sparked a market rally, reducing the cost of borrowing for issuers.
Federal Reserve Chairman Ben Bernanke told Congress Tuesday that TALF has "been effective," in restarting some consumer-lending markets and suggested the Fed is considering expanding TALF to "some alternative assets."
The Fed extended TALF to include newly issued CMBS in June. There have been no deals so far, but a dozen or so new CMBS deals are hoping to take advantage of TALF, according to bankers and investors. Developers Diversified is hoping to close its deals, which have very conservative structures, in the fall.
But not everyone is going to benefit from the TALF program. Tight restrictions will bar thousands of small developers and commercial-property owners with heavy debt loads from participating. Among loans that won't qualify: floating-rate mortgages, construction loans or loans secured by properties that are being "repositioned" and don't have a stabilized cash flow.
The success of TALF is considered critical for averting what could be a serious upheaval in commercial real estate, further hamstringing the economy. Banks, developers and investors are facing billions of dollars of losses because of frozen credit markets, which drive down property values and drive up loan defaults.
Over the past 15 years, owners of office buildings, shopping centers, hotels and other commercial property have become enormously dependent on mortgages that were packaged into securities, sliced up to appeal to buyers with different risk tolerances. Wall Street firms powered that business into a $700 billion market, as big as the markets for securitized auto loans, credit cards and student loans combined.
But the credit crunch froze the CMBS market. There have been no new issues for about a year. By contrast, in 2007, there was a record $230 billion of CMBS bonds sold.
The deals Developers Diversified has in the works reflect the high bars the Fed, mindful of protecting taxpayers' interest, sets for the type of loan it will accept as eligible for TALF financing. The two pools of assets, valued at $800 million each, consist of some 60 shopping centers across the country. These properties feature stable cash flow because they are occupied by discount retailers that tend to attract more business in a recession from price-minded shoppers.
"The assets serve as good collateral for risk-averse lenders," said David Oakes, chief investment officer at Developers Diversified, in an interview Tuesday.
The Beachwood, Ohio-based company, which owns more than 700 shopping centers world-wide, hopes to borrow more than $600 million against these asset pools, meaning a loan-to-value ratio of roughly 40%. During the frothy years before the recession, banks were willing to lend as much as 70% of a property's value because the debt could be easily sold as CMBS.
With such a large cushion, the two deals likely will be made up of only triple-A-rated bonds, the ones eligible for TALF funding. A conventional CMBS deal, by contrast, was diced up into different flavors of bonds with some rated below investment grade.
Developers Diversified hopes to use the proceeds to refinance maturing mortgages and generate new capital through the deals led by Goldman Sachs Group Inc. and Citigroup Inc.
The TALF program, Mr. Oakes said, is "helpful for us and very important to help restart one of the important means of financing."
Other CMBS deals in the TALF pipeline include those by mall owners Westfield Group and Macerich Co. and office-building owner Vornado Realty Trust, according to people familiar with the matter. These potential deals also are collateralized by multiple properties owned, possibly, by one owner. This reflects the Fed's intention to have a diversified pool of properties and also banks' reluctance to take on "warehouse" risks associated with having to pool together loans from many borrowers. Representatives at Westfield, Macerich and Vornado declined to comment.
Most of the TALF deals done this year have been met with strong demand from investors buying the securities both with and without the Fed's loans. Since March the cost of funds for these lenders has fallen by several percentage points in some cases.
For investors, the TALF loans have lured new buyers of asset-backed securities to the market with leveraged returns that could be as high as 48%, which was the estimated return under certain conditions for a Sallie Mae offering backed by private student loans in May.
Meanwhile, real-estate industry groups are lobbying for the Fed to extend the TALF program beyond its current Dec. 31 sunset date, through the end of next year. "Approving and securitizing a TALF-eligible commercial real-estate loan takes at least three months," says Jeffrey DeBoer, president of the Real Estate Roundtable, the chief lobbying group for the industry. "Unless the government acts soon this potentially positive program will effectively end in mid-September."
—Liz Rappaport contributed to this article.
Write to Lingling Wei at lingling.wei@dowjones.com
--It will be backed by two assets pool, each worth of $800 mil, loan to value 40%, consisting 60 shopping centers across the country
Developers Diversified's Bond Sales Set to Be First CMBS to Use Program
By LINGLING WEI
Shopping center giant Developers Diversified Realty Corp. is working on raising $600 million through two bond sales that promise to be a litmus test for one of the government's key economic rescue programs.
Those deals are on track to be the first major offerings of commercial-mortgage-backed securities that will take advantage of the Term Asset-Backed Securities Loan Facility, or TALF, program. TALF is designed to jump-start lending by increasing investor demand for securities tied to all kinds of assets, including consumer and commercial loans. As long as banks can move loans off their books by repackaging and selling them as bonds, they will be able to make more loans.
CMBS is one of the key tests for the TALF program, introduced by the Federal Reserve in March with the hopes of reviving the securitization markets. Since then the program has been considered a moderate success, helping borrowers including Harley-Davidson Inc. and others raise $65 billion in sales of bonds backed by everything from credit cards to car loans. The Fed has so far made $35 billion in TALF loans to investors buying these securities, which has sparked a market rally, reducing the cost of borrowing for issuers.
Federal Reserve Chairman Ben Bernanke told Congress Tuesday that TALF has "been effective," in restarting some consumer-lending markets and suggested the Fed is considering expanding TALF to "some alternative assets."
The Fed extended TALF to include newly issued CMBS in June. There have been no deals so far, but a dozen or so new CMBS deals are hoping to take advantage of TALF, according to bankers and investors. Developers Diversified is hoping to close its deals, which have very conservative structures, in the fall.
But not everyone is going to benefit from the TALF program. Tight restrictions will bar thousands of small developers and commercial-property owners with heavy debt loads from participating. Among loans that won't qualify: floating-rate mortgages, construction loans or loans secured by properties that are being "repositioned" and don't have a stabilized cash flow.
The success of TALF is considered critical for averting what could be a serious upheaval in commercial real estate, further hamstringing the economy. Banks, developers and investors are facing billions of dollars of losses because of frozen credit markets, which drive down property values and drive up loan defaults.
Over the past 15 years, owners of office buildings, shopping centers, hotels and other commercial property have become enormously dependent on mortgages that were packaged into securities, sliced up to appeal to buyers with different risk tolerances. Wall Street firms powered that business into a $700 billion market, as big as the markets for securitized auto loans, credit cards and student loans combined.
But the credit crunch froze the CMBS market. There have been no new issues for about a year. By contrast, in 2007, there was a record $230 billion of CMBS bonds sold.
The deals Developers Diversified has in the works reflect the high bars the Fed, mindful of protecting taxpayers' interest, sets for the type of loan it will accept as eligible for TALF financing. The two pools of assets, valued at $800 million each, consist of some 60 shopping centers across the country. These properties feature stable cash flow because they are occupied by discount retailers that tend to attract more business in a recession from price-minded shoppers.
"The assets serve as good collateral for risk-averse lenders," said David Oakes, chief investment officer at Developers Diversified, in an interview Tuesday.
The Beachwood, Ohio-based company, which owns more than 700 shopping centers world-wide, hopes to borrow more than $600 million against these asset pools, meaning a loan-to-value ratio of roughly 40%. During the frothy years before the recession, banks were willing to lend as much as 70% of a property's value because the debt could be easily sold as CMBS.
With such a large cushion, the two deals likely will be made up of only triple-A-rated bonds, the ones eligible for TALF funding. A conventional CMBS deal, by contrast, was diced up into different flavors of bonds with some rated below investment grade.
Developers Diversified hopes to use the proceeds to refinance maturing mortgages and generate new capital through the deals led by Goldman Sachs Group Inc. and Citigroup Inc.
The TALF program, Mr. Oakes said, is "helpful for us and very important to help restart one of the important means of financing."
Other CMBS deals in the TALF pipeline include those by mall owners Westfield Group and Macerich Co. and office-building owner Vornado Realty Trust, according to people familiar with the matter. These potential deals also are collateralized by multiple properties owned, possibly, by one owner. This reflects the Fed's intention to have a diversified pool of properties and also banks' reluctance to take on "warehouse" risks associated with having to pool together loans from many borrowers. Representatives at Westfield, Macerich and Vornado declined to comment.
Most of the TALF deals done this year have been met with strong demand from investors buying the securities both with and without the Fed's loans. Since March the cost of funds for these lenders has fallen by several percentage points in some cases.
For investors, the TALF loans have lured new buyers of asset-backed securities to the market with leveraged returns that could be as high as 48%, which was the estimated return under certain conditions for a Sallie Mae offering backed by private student loans in May.
Meanwhile, real-estate industry groups are lobbying for the Fed to extend the TALF program beyond its current Dec. 31 sunset date, through the end of next year. "Approving and securitizing a TALF-eligible commercial real-estate loan takes at least three months," says Jeffrey DeBoer, president of the Real Estate Roundtable, the chief lobbying group for the industry. "Unless the government acts soon this potentially positive program will effectively end in mid-September."
—Liz Rappaport contributed to this article.
Write to Lingling Wei at lingling.wei@dowjones.com
Obama: Overtreatment Drives Health-Care Costs
--change the fee-for-service moedel to models with less incentive for uncessary servcies
--learn from Mayo clinic case, which costs 28% below natoinal average
by Scott Horsley
“Our proposal would change incentives so that providers will give patients the best care, not just the most expensive care, which will mean big savings over time.”
President Obama
All Things Considered, July 21, 2009 · President Obama has promised to overhaul the nation's health-care system in a way that controls costs and expands insurance coverage. But critics say the legislation that's appeared so far would achieve only one of those goals.
"We don't see anything in there of any real substance with regard to paying for value," said Denis Cortese, president of the Mayo Clinic. "To us, that's real health-care reform — paying for value."
The Mayo Clinic is famous for providing world-class quality. It is also one of the health-care industry's great bargains, with costs 28 percent below the national average, according to researchers at Dartmouth College.
Cortese says the United States should aim for both high quality and cost savings — a combination he calls "higher value care."
"By higher value, we mean better outcomes, better results, better safety, better service — at lower cost over time," Cortese said. He complained that lawmakers have so far missed that target, offering good suggestions for expanding insurance coverage, but largely neglecting cost and quality concerns.
The lack of cost controls also spooks some of the moderate Democrats on the House Energy and Commerce Committee, who met with the president Tuesday; these lawmakers worry that spiraling health-care bills will bleed the government dry.
Council Of Independent Experts
In response to these concerns, the Obama administration stepped forward late last week with an 11th-hour tourniquet. The president called for an independent council of medical experts to oversee Medicare payments and recommend cost-saving changes.
"Our proposal would change incentives so that providers will give patients the best care — not just the most expensive car — which will mean big savings over time," Obama said.
The government already has a Medicare Advisory Commission, but its advice on cost-cutting is often ignored by lawmakers. The president's plan would give teeth to the recommendations by requiring Congress to approve or disapprove them as a package, much as it did with the military-base-closing commission.
"What we want to do is force Congress to make sure they're acting on these recommendations to bend the cost curve each and every year," the president said.
Removing Incentives For Overtreatment
The administration suggests one way to bend the cost curve down is to change the way doctors and hospitals are paid.
The health-care industry's current "fee-for-service" model allows doctors and other providers to receive a fee for each service — every office visit, test and procedure. The administration's idea is to discourage unnecessary tests and procedures that often go along with the existing fee-for-service model.
Massachusetts, for example, is one state looking for alternatives to the fee-for-service model; the state is now exploring a system that would set fixed prices for treating patients of a given age with a given illness.
"The fee-for-service model is like asking a butcher how much steak you should eat," said Jon Gruber, a health economist at the Massachusetts Institute of Technology. "Basically, the fee-for-service model just rewards doctors the more that they do. This would be the opposite. In this model, doctors would get a fixed amount no matter how much they did."
The Mayo Clinic Model
This payment model would represent a pretty radical overhaul, but there are examples of this approach already in place, including the Mayo Clinic.
Doctors at the clinic are on salary, so they have no financial incentive to order extra procedures. Mayo's Cortese strongly supports the idea of using an expert panel to recommend such changes. By adjusting Medicare payments, he said, the government could send ripple effects throughout the health-care system.
"It will change the delivery system over time, and it will end up getting the country where we've all been saying we'd like to be," said Cortese, "and that is getting our money's worth."
The White House argues that using an expert panel to recommend changes every year would provide flexibility to adjust to changing needs. It also allows the administration to promise health-care savings in the future, without having to detail just how those savings would be achieved.
--learn from Mayo clinic case, which costs 28% below natoinal average
by Scott Horsley
“Our proposal would change incentives so that providers will give patients the best care, not just the most expensive care, which will mean big savings over time.”
President Obama
All Things Considered, July 21, 2009 · President Obama has promised to overhaul the nation's health-care system in a way that controls costs and expands insurance coverage. But critics say the legislation that's appeared so far would achieve only one of those goals.
"We don't see anything in there of any real substance with regard to paying for value," said Denis Cortese, president of the Mayo Clinic. "To us, that's real health-care reform — paying for value."
The Mayo Clinic is famous for providing world-class quality. It is also one of the health-care industry's great bargains, with costs 28 percent below the national average, according to researchers at Dartmouth College.
Cortese says the United States should aim for both high quality and cost savings — a combination he calls "higher value care."
"By higher value, we mean better outcomes, better results, better safety, better service — at lower cost over time," Cortese said. He complained that lawmakers have so far missed that target, offering good suggestions for expanding insurance coverage, but largely neglecting cost and quality concerns.
The lack of cost controls also spooks some of the moderate Democrats on the House Energy and Commerce Committee, who met with the president Tuesday; these lawmakers worry that spiraling health-care bills will bleed the government dry.
Council Of Independent Experts
In response to these concerns, the Obama administration stepped forward late last week with an 11th-hour tourniquet. The president called for an independent council of medical experts to oversee Medicare payments and recommend cost-saving changes.
"Our proposal would change incentives so that providers will give patients the best care — not just the most expensive car — which will mean big savings over time," Obama said.
The government already has a Medicare Advisory Commission, but its advice on cost-cutting is often ignored by lawmakers. The president's plan would give teeth to the recommendations by requiring Congress to approve or disapprove them as a package, much as it did with the military-base-closing commission.
"What we want to do is force Congress to make sure they're acting on these recommendations to bend the cost curve each and every year," the president said.
Removing Incentives For Overtreatment
The administration suggests one way to bend the cost curve down is to change the way doctors and hospitals are paid.
The health-care industry's current "fee-for-service" model allows doctors and other providers to receive a fee for each service — every office visit, test and procedure. The administration's idea is to discourage unnecessary tests and procedures that often go along with the existing fee-for-service model.
Massachusetts, for example, is one state looking for alternatives to the fee-for-service model; the state is now exploring a system that would set fixed prices for treating patients of a given age with a given illness.
"The fee-for-service model is like asking a butcher how much steak you should eat," said Jon Gruber, a health economist at the Massachusetts Institute of Technology. "Basically, the fee-for-service model just rewards doctors the more that they do. This would be the opposite. In this model, doctors would get a fixed amount no matter how much they did."
The Mayo Clinic Model
This payment model would represent a pretty radical overhaul, but there are examples of this approach already in place, including the Mayo Clinic.
Doctors at the clinic are on salary, so they have no financial incentive to order extra procedures. Mayo's Cortese strongly supports the idea of using an expert panel to recommend such changes. By adjusting Medicare payments, he said, the government could send ripple effects throughout the health-care system.
"It will change the delivery system over time, and it will end up getting the country where we've all been saying we'd like to be," said Cortese, "and that is getting our money's worth."
The White House argues that using an expert panel to recommend changes every year would provide flexibility to adjust to changing needs. It also allows the administration to promise health-care savings in the future, without having to detail just how those savings would be achieved.
China's Bubbling Consensus
By MOHAMMED HADI
Bubbles are forming in China. The consensus among market strategists, though, is that worrying about their risks is so much less rewarding for investors than trying to profit from them.
As long as cash from China's $1 trillion bank-lending spree keeps finding its way into the markets, prices are destined to rise. Beijing isn't going to interfere while the lending, and spending, keeps generating results like the 7.9% second-quarter economic growth rate reported Thursday.
With stocks up this year, valuations already are high. Ten of 13 sectors in the MSCI China Index are above their long-term price-to-earnings averages, said Morgan Stanley. But as was clear during the last Chinese stock-market bubble in 2007, Chinese companies have proved themselves willing to invest excess cash into stock and real-estate markets. Evidence points to this happening again. The winners of some recent land auctions have been cash-rich companies with no real-estate business, J.P. Morgan said.
Individual investors, too, are piling in. In the mainland, more than 1.6 million stock-trading accounts were opened in June, 68% more than the year before.
For now, economists expect little in the way of tightening until next year. Investors ought to consider that the bubble's certainty is now the consensus. Surprises then will be of the unpleasant variety.
Write to Mohammed Hadi at mohammed.hadi@dowjones.com
Bubbles are forming in China. The consensus among market strategists, though, is that worrying about their risks is so much less rewarding for investors than trying to profit from them.
As long as cash from China's $1 trillion bank-lending spree keeps finding its way into the markets, prices are destined to rise. Beijing isn't going to interfere while the lending, and spending, keeps generating results like the 7.9% second-quarter economic growth rate reported Thursday.
With stocks up this year, valuations already are high. Ten of 13 sectors in the MSCI China Index are above their long-term price-to-earnings averages, said Morgan Stanley. But as was clear during the last Chinese stock-market bubble in 2007, Chinese companies have proved themselves willing to invest excess cash into stock and real-estate markets. Evidence points to this happening again. The winners of some recent land auctions have been cash-rich companies with no real-estate business, J.P. Morgan said.
Individual investors, too, are piling in. In the mainland, more than 1.6 million stock-trading accounts were opened in June, 68% more than the year before.
For now, economists expect little in the way of tightening until next year. Investors ought to consider that the bubble's certainty is now the consensus. Surprises then will be of the unpleasant variety.
Write to Mohammed Hadi at mohammed.hadi@dowjones.com
The Fed’s Exit Strategy
tools used to fight inflation
--pay interests to deposits
--reverse repurchase agreements with banks and other agencies
--sell long term securitis to open maket
--Treasury sold bills and notes to banks and agencies to mop liquidity
By BEN BERNANKE
The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero. We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit.
These actions have softened the economic impact of the financial crisis. They have also improved the functioning of key credit markets, including the markets for interbank lending, commercial paper, consumer and small-business credit, and residential mortgages.
My colleagues and I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner.
The exit strategy is closely tied to the management of the Federal Reserve balance sheet. When the Fed makes loans or acquires securities, the funds enter the banking system and ultimately appear in the reserve accounts held at the Fed by banks and other depository institutions. These reserve balances now total about $800 billion, much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed.
But as the economy recovers, banks should find more opportunities to lend out their reserves. That would produce faster growth in broad money (for example, M1 or M2) and easier credit conditions, which could ultimately result in inflationary pressures—unless we adopt countervailing policy measures. When the time comes to tighten monetary policy, we must either eliminate these large reserve balances or, if they remain, neutralize any potential undesired effects on the economy.
To some extent, reserves held by banks at the Fed will contract automatically, as improving financial conditions lead to reduced use of our short-term lending facilities, and ultimately to their wind down. Indeed, short-term credit extended by the Fed to financial institutions and other market participants has already fallen to less than $600 billion as of mid-July from about $1.5 trillion at the end of 2008. In addition, reserves could be reduced by about $100 billion to $200 billion each year over the next few years as securities held by the Fed mature or are prepaid. However, reserves likely would remain quite high for several years unless additional policies are undertaken.
Even if our balance sheet stays large for a while, we have two broad means of tightening monetary policy at the appropriate time: paying interest on reserve balances and taking various actions that reduce the stock of reserves. We could use either of these approaches alone; however, to ensure effectiveness, we likely would use both in combination.
Congress granted us authority last fall to pay interest on balances held by banks at the Fed. Currently, we pay banks an interest rate of 0.25%. When the time comes to tighten policy, we can raise the rate paid on reserve balances as we increase our target for the federal funds rate.
Banks generally will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve. Moreover, they should compete to borrow any funds that are offered in private markets at rates below the interest rate on reserve balances because, by so doing, they can earn a spread without risk.
Thus the interest rate that the Fed pays should tend to put a floor under short-term market rates, including our policy target, the federal-funds rate. Raising the rate paid on reserve balances also discourages excessive growth in money or credit, because banks will not want to lend out their reserves at rates below what they can earn at the Fed.
Considerable international experience suggests that paying interest on reserves effectively manages short-term market rates. For example, the European Central Bank allows banks to place excess reserves in an interest-paying deposit facility. Even as that central bank’s liquidity-operations substantially increased its balance sheet, the overnight interbank rate remained at or above its deposit rate. In addition, the Bank of Japan and the Bank of Canada have also used their ability to pay interest on reserves to maintain a floor under short-term market rates.
Despite this logic and experience, the federal-funds rate has dipped somewhat below the rate paid by the Fed, especially in October and November 2008, when the Fed first began to pay interest on reserves. This pattern partly reflected temporary factors, such as banks’ inexperience with the new system.
However, this pattern appears also to have resulted from the fact that some large lenders in the federal-funds market, notably government-sponsored enterprises such as Fannie Mae and Freddie Mac, are ineligible to receive interest on balances held at the Fed, and thus they have an incentive to lend in that market at rates below what the Fed pays banks.
Under more normal financial conditions, the willingness of banks to engage in the simple arbitrage noted above will tend to limit the gap between the federal-funds rate and the rate the Fed pays on reserves. If that gap persists, the problem can be addressed by supplementing payment of interest on reserves with steps to reduce reserves and drain excess liquidity from markets—the second means of tightening monetary policy. Here are four options for doing this.
First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements with financial market participants, including banks, government-sponsored enterprises and other institutions. Reverse repurchase agreements involve the sale by the Fed of securities from its portfolio with an agreement to buy the securities back at a slightly higher price at a later date.
Second, the Treasury could sell bills and deposit the proceeds with the Federal Reserve. When purchasers pay for the securities, the Treasury’s account at the Federal Reserve rises and reserve balances decline.
The Treasury has been conducting such operations since last fall under its Supplementary Financing Program. Although the Treasury’s operations are helpful, to protect the independence of monetary policy, we must take care to ensure that we can achieve our policy objectives without reliance on the Treasury.
Third, using the authority Congress gave us to pay interest on banks’ balances at the Fed, we can offer term deposits to banks—analogous to the certificates of deposit that banks offer their customers. Bank funds held in term deposits at the Fed would not be available for the federal funds market.
Fourth, if necessary, the Fed could reduce reserves by selling a portion of its holdings of long-term securities into the open market.
Each of these policies would help to raise short-term interest rates and limit the growth of broad measures of money and credit, thereby tightening monetary policy.
Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period. We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.
—Mr. Bernanke is chairman of the Federal Reserve.
--pay interests to deposits
--reverse repurchase agreements with banks and other agencies
--sell long term securitis to open maket
--Treasury sold bills and notes to banks and agencies to mop liquidity
By BEN BERNANKE
The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero. We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit.
These actions have softened the economic impact of the financial crisis. They have also improved the functioning of key credit markets, including the markets for interbank lending, commercial paper, consumer and small-business credit, and residential mortgages.
My colleagues and I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner.
The exit strategy is closely tied to the management of the Federal Reserve balance sheet. When the Fed makes loans or acquires securities, the funds enter the banking system and ultimately appear in the reserve accounts held at the Fed by banks and other depository institutions. These reserve balances now total about $800 billion, much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed.
But as the economy recovers, banks should find more opportunities to lend out their reserves. That would produce faster growth in broad money (for example, M1 or M2) and easier credit conditions, which could ultimately result in inflationary pressures—unless we adopt countervailing policy measures. When the time comes to tighten monetary policy, we must either eliminate these large reserve balances or, if they remain, neutralize any potential undesired effects on the economy.
To some extent, reserves held by banks at the Fed will contract automatically, as improving financial conditions lead to reduced use of our short-term lending facilities, and ultimately to their wind down. Indeed, short-term credit extended by the Fed to financial institutions and other market participants has already fallen to less than $600 billion as of mid-July from about $1.5 trillion at the end of 2008. In addition, reserves could be reduced by about $100 billion to $200 billion each year over the next few years as securities held by the Fed mature or are prepaid. However, reserves likely would remain quite high for several years unless additional policies are undertaken.
Even if our balance sheet stays large for a while, we have two broad means of tightening monetary policy at the appropriate time: paying interest on reserve balances and taking various actions that reduce the stock of reserves. We could use either of these approaches alone; however, to ensure effectiveness, we likely would use both in combination.
Congress granted us authority last fall to pay interest on balances held by banks at the Fed. Currently, we pay banks an interest rate of 0.25%. When the time comes to tighten policy, we can raise the rate paid on reserve balances as we increase our target for the federal funds rate.
Banks generally will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve. Moreover, they should compete to borrow any funds that are offered in private markets at rates below the interest rate on reserve balances because, by so doing, they can earn a spread without risk.
Thus the interest rate that the Fed pays should tend to put a floor under short-term market rates, including our policy target, the federal-funds rate. Raising the rate paid on reserve balances also discourages excessive growth in money or credit, because banks will not want to lend out their reserves at rates below what they can earn at the Fed.
Considerable international experience suggests that paying interest on reserves effectively manages short-term market rates. For example, the European Central Bank allows banks to place excess reserves in an interest-paying deposit facility. Even as that central bank’s liquidity-operations substantially increased its balance sheet, the overnight interbank rate remained at or above its deposit rate. In addition, the Bank of Japan and the Bank of Canada have also used their ability to pay interest on reserves to maintain a floor under short-term market rates.
Despite this logic and experience, the federal-funds rate has dipped somewhat below the rate paid by the Fed, especially in October and November 2008, when the Fed first began to pay interest on reserves. This pattern partly reflected temporary factors, such as banks’ inexperience with the new system.
However, this pattern appears also to have resulted from the fact that some large lenders in the federal-funds market, notably government-sponsored enterprises such as Fannie Mae and Freddie Mac, are ineligible to receive interest on balances held at the Fed, and thus they have an incentive to lend in that market at rates below what the Fed pays banks.
Under more normal financial conditions, the willingness of banks to engage in the simple arbitrage noted above will tend to limit the gap between the federal-funds rate and the rate the Fed pays on reserves. If that gap persists, the problem can be addressed by supplementing payment of interest on reserves with steps to reduce reserves and drain excess liquidity from markets—the second means of tightening monetary policy. Here are four options for doing this.
First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements with financial market participants, including banks, government-sponsored enterprises and other institutions. Reverse repurchase agreements involve the sale by the Fed of securities from its portfolio with an agreement to buy the securities back at a slightly higher price at a later date.
Second, the Treasury could sell bills and deposit the proceeds with the Federal Reserve. When purchasers pay for the securities, the Treasury’s account at the Federal Reserve rises and reserve balances decline.
The Treasury has been conducting such operations since last fall under its Supplementary Financing Program. Although the Treasury’s operations are helpful, to protect the independence of monetary policy, we must take care to ensure that we can achieve our policy objectives without reliance on the Treasury.
Third, using the authority Congress gave us to pay interest on banks’ balances at the Fed, we can offer term deposits to banks—analogous to the certificates of deposit that banks offer their customers. Bank funds held in term deposits at the Fed would not be available for the federal funds market.
Fourth, if necessary, the Fed could reduce reserves by selling a portion of its holdings of long-term securities into the open market.
Each of these policies would help to raise short-term interest rates and limit the growth of broad measures of money and credit, thereby tightening monetary policy.
Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period. We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.
—Mr. Bernanke is chairman of the Federal Reserve.
Monday, July 20, 2009
Policy-Driven Decoupling: Upgrading Our 2009-10 Outlook
July 17, 2009
By Qing Wang, Denise Yam, CFA & Steven Zhang Hong Kong
Another Stronger-than-Expected GDP Report for 2Q09
The Chinese economy staged a stronger-than-expected rebound in 2Q09, with real growth reaching 7.9%Y, up from the trough of 6.1% in 1Q09. On a seasonally adjusted basis, we estimate that the economy grew by a strong 4.5%Q (+19% annualized), accelerating from 1.5% in 1Q09 and the trough of 0.4% in 4Q08. We attribute the better-than-expected economic performance to the maintenance of the growth-boosting policy stance, which made possible a much-accelerated realization of the real stimulative effect from the multi-trillion renminbi fiscal package and expansionary monetary and credit policy, which we originally expected to materialize only in 2H09. In particular, policy-driven monetary and credit expansion, which has been consistently surprising on the upside, has enabled the significant pick-up in domestic investment. The Rmb1.53 trillion new loans made in June sent money and loan growth to new record-highs of 28.5%Y (M2) and 34.4%Y, respectively. Credit creation in 1H09 totaled Rmb7.37 trillion, three times the amount in the year-ago period, and exceeding the 2008 total (Rmb4.91 trillion) by 50%, helping to finance the 35.7%Y growth in fixed asset investment (nationwide) in 2Q09, up from 28.8% in 1Q (33.5% in 1H).
Taking stock of the achievements already realized in 1H09, and standing by our view that the Chinese economy will continue to stage a gradual and steady recovery in the remainder of the year, we are yet again raising our growth forecasts. Our latest upgrade is underpinned by the following four main arguments:
• Much stronger-than-expected policy responses have successfully prevented a potentially sharper slowdown triggered by external shock and helped an early recovery in investment;
• The strong recovery in the property sector bodes well for further recovery in real estate investment in the remainder of this year and 2010;
• Domestic consumption remains resilient as confidence holds up well;
• Policy stance will remain broadly supportive through 2010.
We raise our real GDP growth forecasts to 9% from 7% for 2009 and to 10% from 8% for 2010.
Domestic Strength Offsets External Weakness
Although the decline in exports continued into 2Q09 and turned out to be worse than our earlier expectation (see China Data Release: Trade Recovery Still Short of Expectations, July 10, 2009), this had been adequately offset by the aggressive growth-supporting policies. Continued large-scale credit creation (see China Data Release: Acceleration of Monetary Expansion; Meaningful Tightening Unlikely, July 15, 2009) continued to fuel domestic economic activity, starting from infrastructure investment.
Urban fixed-asset investment growth remained strong in June, rising 35.3%Y (+32.9% in Jan-May), bringing year-to-date (1H09) growth to 33.6%, although this was a tad slower than the 38.6% jump in May alone. In particular, the pick-up in real estate development investment (+18.1%Y in June versus +12% in May, +9.9% in 1H09) remained encouraging (although still weaker than the 20.9% expansion last year). Needless to say, policy-driven capex, as evidenced in infrastructure investment, remained the driver. Investment in the Western (+42.1%Y in 1H versus +46.1% in 1Q) and Central (+38.1% versus +34.3%) regions continued to outpace that in the Eastern region (+26.7% versus +19.8%), also suggesting the policy-driven nature of the latest projects.
Domestic consumer demand growth, as evidenced by retail sales, also remained strong. June sales totaled Rmb994 billion, up 15%Y (versus our forecast of +15.2% and market forecasts of +15.3%). In real terms (deflated by retail price inflation, -2.3%Y in June), sales growth powered ahead further, to 17.7%Y in June, from 17.4% in May.
The pick-up in domestic demand and restocking in the manufacturing sector have led value-added industrial output on a firmer recovery track. Output growth reached 10.7%Y in June, beating our and market (both +9.5%) forecasts by a wide margin, up from 8.9% in May (+6.3% in Jan-May). Electricity generation also, finally, returned to positive growth in June, up 3.6%Y, after remaining negative since October 2008 (except in February 2009 because of the Lunar New Year effect), suggesting a recovery in production in the power-intensive sectors, such as steel and other metals, which suffered relatively a more severe contraction and destocking earlier on following speculative production and overstocking during the up-cycle. We attribute much of the strength in industrial production to domestic demand and would like to highlight the apparent decoupling from the weakness in exports.
Consumer prices (CPI) remained in deflationary territory in June, falling 1.7%Y, slightly more negative than our and market forecasts (both at -1.3%), resulting in average consumer deflation of 1.1%Y in 1H09. We believe that the downside surprise mainly stems from the fall in food prices (-0.3% in 1H, which implies more than a 1%Y drop in June). Indeed, we observe that CPI is still being dragged down on a sequential basis by food prices (-1.4%M in June by our estimate), although the non-food component is likely rebounding on the retail fuel price hikes.
In the upstream, producer prices (PPI) fell 7.8%Y in June (-7.2% in May), while raw materials purchasing prices (RMPPI) fell 11.2% (-10.4% in May). The declines for both indices exceeded our (PPI: -7.5%, RMPPI: -11%) and market (PPI: -7.4%) expectations. Nevertheless, we are confident that prices, both upstream and downstream, are riding out the bottom, in line with the pick-up in sentiment and activity. Sequential price drops are certainly alleviating, although year-on-year declines could persist - because of base effects - until late this year.
A Policy-Driven Decoupling
When turmoil of such a global scale hit, the initial negative effect of the shock was felt indiscriminately strongly by every economy that is deeply integrated into the global economy. The strength and speed of policy responses in the immediate aftermath of the crisis were, however, quite uneven among the countries, resulting in different patterns of post-crisis recovery.
China is a case in point. The aggressive policy response by the Chinese authorities helped translate China's ‘strong balance sheet' into a ‘decent-looking income statement', which distinguishes China from those countries that either suffer from a paralyzed financial system or are unable to launch strong pro-growth fiscal or monetary policy responses because of weak fiscal and/or external balance-of-payments positions. This makes China the first major economy to recover from the turmoil with strong momentum, effecting a policy-induced economic decoupling between China and the rest of the world.
In our previous research, we highlighted a potential ‘goldilocks recovery scenario', wherein the government's growth-supporting policies enable asset reflation, which underpins consumer and investor confidence and prevents the harsh adjustment in domestic consumption and private investment in 1H09 (see "Mapping the Recovery in 2009-10", China Strategy and Economics: 2009 GDP Recovery Unlikely to Boost Profits or Equities, February 23, 2009). The shallower trough in the economic cycle is then followed by recovery in activity, initially spearheaded by fiscal stimulus (3Q09), and then by a tepid recovery in external demand (4Q09 and 2010). Although the timing of these series of events is not exactly as we had envisaged, this ideal scenario appears to be playing out.
Specifically, sustained and stronger-than-expected credit growth in recent months has continued to buoy sentiment and helped to deliver: a) an accelerated rollout of public infrastructure projects; b) more resilience in private consumption and private manufacturing sector capex despite weak exports; and c) an increasingly convincing recovery in property investment. These positive developments, together with the steady asset price reflation, are serving to compensate for the prolonged weakness in external demand.
Growth Outlook Upgrade for 2009-10
We upgrade our forecasts for GDP growth to 9% for 2009 and 10% for 2010. The latest 2Q09 data confirmed that 1Q09 was the trough of the V-shaped trajectory we had envisioned, but the recovery track is proving to be even steeper than we had earlier expected.
The aggressive policy responses - as reflected in the rapid expansion of bank lending - so far this year will likely continue to fuel rapid investment growth in the remainder of 2009. Moreover, we expect property investment to accelerate significantly in 2010, partly offsetting the slowdown in infrastructure investment expected to materialize because of the high base in 2009. Private consumption will likely continue to improve steadily through 2010, as consumer confidence and employment improve. We expect export expansion to resume in 2010 following a sharp contraction in 2009, which, together with a recovery in profits, should help to underpin non-property-related private investment. Despite strong headline GDP growth, inflation pressures are unlikely to emerge until mid-2010, in our view. In terms of trajectory, we expect GDP growth to peak in 1Q10 before starting to moderate thereafter.
Specifically, in our updated forecasts, we have revised consumption growth (in real terms) to 8.5% for 2009 and 9.8% for 2010, stronger than that in 2008 (+8.3%), though weaker in nominal terms because of lower inflation. Consumption has certainly demonstrated its resilience in 1Q09 with a bottoming-out of retail sales and consumer confidence. Consumption-boosting measures introduced by the government appear to have worked well to make up for the shortfall in the near term. Moreover, broadly stable employment since 1Q09, together with the Chinese authorities' pledge to further strengthen the social security system and other social service reform in the coming years, will likely underpin consumer confidence, preventing a sharp rise in precautionary savings despite a substantial economic downturn. Of particular note, housing-related consumption (e.g., furniture, decoration materials) will likely grow remarkably amid a strong recovery in the property sector.
On the investment front, our last upgrade was primarily driven by an upward revision in real estate investment. This time round, it is the resilience in manufacturing sector investment despite weak exports, as well as real estate investment, that has prompted our revisions. We now expect 9% growth in manufacturing investment in 2009, versus 0% previously, and a further acceleration to 12% growth in 2010, as we expect profit growth to recover backed by improving exports (as discussed below).
In line with our expectation, real estate investment has shown increasingly convincing signs of recovery, as reflected in the remarkable rebound in property sales in recent months (see China Economics: Property Sector Recovery Is for Real, May 15, 2009). We believe that this trend is sustainable, pointing to considerable upside to real estate investment in the remainder of this year and next. We therefore are again lifting our forecast for real estate investment to 10% in 2009 and 15% in 2010. On the other hand, we expect infrastructure investment to see explosive 50% growth this year but pass on its role as the key growth driver in 2010. We now expect overall fixed investment to grow 15.1% in 2009 and 12.2% in 2010 in real terms. While policy-driven capex will likely prove to be the key growth driver this year, we expect a steady revival in private investment to reduce the reliance on public investment for growth in 2010.
Export Recovery Expected by 4Q09
Much attention has focused on the unprecedentedly sharp contraction in China's exports in the past several months. We had admitted, on several occasions, that the declines have far exceeded and sustained for longer than our expectations. Meanwhile, overall GDP growth and other economic indicators (output value for export delivery and trade data reported by Hong Kong) have shown far milder downturns than consistent with this export plunge, raising our skepticism yet again towards the reliability of the data.
We suspect that strong exports data in 2007 and 2008 (up to 3Q08) could have encompassed some hidden hot money inflows. Driven by expectations of rapid renminbi appreciation, exporters (domestic as well as foreign-invested producers) may have overstated their shipments to obtain more renminbi. With the stalling of the renminbi appreciation since 2H08 and intensified de-risking amid the financial turmoil, the cutback or discontinuation of this over-invoicing practice could have contributed to the exaggerated sharp declines in the export data. The year-on-year export numbers may be somewhat misleading - as they are being distorted downwards by the reduction in hot money inflows - and help solve the anomaly of the milder-than-expected effect of the export decline on the real economy in 1H09. It follows that we should not expect exports to return to pre-crisis levels any time soon, given the structural reduction in hot money inflows, and that weak year-on-year export numbers would sustain for up to one year. Nevertheless, it also means that as this one-off normalization wears out, exports can promptly resume positive growth.
Moreover, we believe that the current exchange rate policy, i.e., a quasi-hard peg to the USD (see China Economics: An Exit Strategy for the Renminbi? June 9, 2009), combined with recent and expected USD weakness, helps Chinese exports reclaim external competitiveness, and strengthens our optimism towards export recovery. In fact, while the year-on-year export decline averaged 21.8% in 1H09, shipments have been showing sequential improvement in the past few months. We continue to forecast narrowing trade declines in 2H09, and expect export growth to return to close to zero by year-end, and average -16% in 2009, followed by a 9% rebound in 2010. We expect imports to contract by 13% this year (-25.4% in 1H09) and increase by 10% in 2010. We expect the trade surplus to contract this year, for the first time since 2003, to just under US$220 billion, down from US$297 billion in 2008.
Quarterly Growth Profile
We have also updated the quarterly growth trajectory. The 2Q09 rebound (+4.5%Q) represents a strong bounce from the cyclical trough, so we do not expect this sequential growth rate to continue in the upcoming quarters, but return to a more sustainable 2.0-2.5% in the quarters ahead. Nevertheless, the year-on-year growth rate is set to accelerate further in the next few quarters, surging to double-digit rates by 4Q09 and peaking in 1Q10, before tapering off - on the base effect - toward a more sustainable high-single-digit level. The deceleration in growth rate over the course of 2010 would reflect acceleration in private consumption and investment (e.g., property investment) and recovery in exports being partly offset by a smaller dose of policy stimulus.
The Risks: Bull and Bear Cases
The key risk to this outlook lies in external demand. While strong policy responses could help to achieve a meaningful decoupling between China and the rest of the world for several years, there is no absolute decoupling as long as China remains deeply integrated into the global economy, in our view.
There is considerable uncertainty about the outlook for 2010 for the global economy. As it stands now, our global economics team expects that both the US and Eurozone will start to show positive sequential growth by 4Q09 before embarking on a sustained, albeit tepid, recovery through 2010 (see Global Forecast Snapshots: The Global Economy in One Place, June 18, 2009). However, at the current juncture, it is still uncertain whether the G3 economies can successfully maintain such a strong recovery through 2010. Our US economists, Richard Berner and David Greenlaw, expect US GDP growth to be around 2.2% in 2010, but think it could swing between 1.2% under a bear case and 3.8% under a bull case. Similarly, our European economist, Elga Bartsch, expects Eurozone GDP growth to be around 0.5% in 2010, but thinks it could swing between -0.9% under a bear case and 2.2% under a bull case.
In this context, we also revise our two alternative scenarios - bear and bull cases - to highlight both downside and upside risks to the 2010 outlook under our new baseline scenario. We believe that the key risk to our new forecasts stems from the external demand outlook and its attendant effect on private investment in the manufacturing sector. The GDP growth rates under the bull and bear scenarios are 12% and 8%, respectively. We assign 70%, 20% and 10% subjective probabilities to the base, bear and bull cases, respectively.
Under the bull scenario, a faster and stronger recovery in the US and Eurozone economies implies that China's export growth turns positive sooner than expected and private investment in the manufacturing sector registers higher growth. Under the bear scenario, the economy will likely register a sharp double-dip after 1Q10. Persistently weak exports will offset the effect of policy stimulus and hurt sentiment again such that neither private investment in the manufacturing sector nor private consumption will pick up significantly.
Inflation Not a Concern in the Next 12 Months
The rapid expansion of bank lending and money supply (M2) growth have caused considerable concern about the risk of inflation. However, we argue that these concerns are unwarranted at least in the next 12 months. When the economic system is subject to as large a negative external shock as the one China is experiencing now, the dominant contributing factor to headline CPI inflation is export growth instead of money growth, in our view. Here is why:
First, China's past experiences suggest that a sharp decline in export growth should have a strong disinflationary/deflationary effect on the economy. Export growth in this context can be treated as a proxy of the output gap in China: the lower the export growth rate, the larger the potential negative output gap and thus disinflationary/deflationary pressures. Note, however, that it is very difficult to estimate the output gap for China, an economy of which the structure evolves rapidly. China has suffered three episodes of deflation in the past 12 years: the first during the Asian Financial Crisis, the second in the aftermath of the NASDAQ stock bubble burst, and the third being the current one. All three episodes of deflation either coincided with, or occurred in the immediate aftermath of, a collapse in export growth. Although we do expect the decline in export growth to narrow substantially in the remainder of the year and exports to resume positive growth in 2010, we do not expect the recovery in export growth to be sufficiently vigorous as to generate meaningful inflationary pressures (e.g., 3.0+% inflation) in the next 12 months.
Second, the relationship between money and inflation tends to become quite unstable amid a serious economic downturn because the velocity of money declines markedly. This makes gauging inflation risk simply based on money supply growth particularly tricky, especially when there is no robust and stable causal relationship between the two in the first place.
Third, from the supply side, the bursting of the international commodity price bubble caused prices of raw materials (e.g., crude oil, iron ore, metals) imported by China to decline sharply, representing a powerful positive terms-of-trade shock, as in part reflected in the sharp decline in PPI inflation.
Looking ahead, our global commodity research team believes that "ultimately, commodities should perform strongly through this cycle", although in the near term, "fundamentals remain mixed with agriculture balances arguably most constructive, with energy and metals less so..." (see The Commodity Call: Commodities Rally on Greenback & Green Shoots, June 4, 2009). This implies that the upside to commodity prices is unlikely to be large in the next few months, suggesting that PPI inflation is unlikely to rebound strongly any time soon from its recent low of -7.2%Y in June. Furthermore, the low PPI inflation will likely put downward pressures on ex-food CPI inflation.
In this context, the inflation outlook through 2010 will likely again be largely shaped by changes in food prices, in our view. The relevant inflationary pressures could stem from two sources: i) the government's decision to hike the minimum purchase prices of grains by 15%, which would bring about grain price increases in 2010; and ii) the classical ‘hog cycle' that will likely lead to an increase in pork and other meat prices in 2010. In particular, regarding the latter, pork prices have been sliding sharply from the peak since 1Q08 and have fallen below the break-even level (i.e., 6-to-1 pork-to-grain price ratio) recently. Discouraged by poor profit prospects, hog farmers have reportedly started to cut back breeding scale by slaughtering sows. According to our agricultural research team, the destocking of live hogs should extend to 4Q09 to complete the supply adjustment, which could cause substantial pork price increases (e.g., mid-teens) over 2010.
We forecast CPI inflation at -0.6% in 2009 and 2.5% in 2010. We expect the headline CPI inflation to remain negative through October 2009 and creep into positive territory from November 2009. Food price inflation will likely turn positive three months earlier than headline inflation, while we expect ex-food CPI inflation to remain in negative territory through 2009. Entering into 2010, while CPI inflation will likely stay on a steady uptrend with food prices starting to edge up in part due to the base effect, we expect overall headline CPI inflation to remain relatively low through 1H10 (i.e., below 2.5%Y). We expect CPI inflation to climb slightly faster in 2H, as the recovery in export growth gains momentum, reaching 3%Y in 4Q10. We forecast average food price and ex-food price inflation at 4.2% and 1.6%, respectively.
End of Profitless Growth
Latest data (through May) indicate that the decline in industrial profit growth narrowed substantially from about -30%Y in Jan-Feb to -16%Y in Mar-May. The improvement is particularly strong for downstream manufacturing sectors (from -40%Y to -3.5%Y) (see China Economics: Green Shoots in Profits, June 29, 2009).
The strong recovery and acceleration in headline GDP growth in the remainder of the year and through 2010 will likely bring an end to the profitless growth in 2010. In particular, the favorable mix of potential growth drivers in 2010 bodes well for an eventual recovery in profit growth, in our view. Industrial profits are a function of genuine strength of the economy instead of policy stimulus, as the latter may help to produce decent top-line figures but not necessarily be able to deliver bottom-line earnings performance, in our view. In 2H09 and over the course of 2010, we expect the headline GDP growth to be increasingly driven by such autonomous demand as private consumption, property investment and exports instead of public spending carried out under the stimulus plan.
In addition to better overall economic conditions, the low cost pressures stemming from the still relatively low raw material prices will likely contribute to improved profits.
First, despite the sharp improvement in their terms of trade in late 2008 and 1H09, producers were unable to realize the potential gains back then because activities such as production and sales dropped to very low levels at the height of the financial turmoil.
Second, as activity starts to pick up, the low cost benefits should show accordingly, especially for the producers who have seized the opportunity of very low international commodity prices to build up their inventory of raw materials.
Third, the recent developments in international commodity price markets have largely reflected normalization of the relative prices between commodities and manufactured goods - the structure of which had been compressed to unsustainable levels at the height of the turmoil - instead of inflationary pressures due to broad-based recovery in global demand, in our view. Commodity price increases due to relative price normalization are consistent with the competitiveness of China's manufacturing sector and are thus unlikely to have much negative implications for corporate profitability, in our view.
Fourth, the Morgan Stanley Commodity Research team does not believe that the rise in demand due to an early economic recovery in China alone will be able to substantially drive up international commodity prices. This makes China a potential beneficiary from relatively low commodities prices for a considerable period of time until the economies of its competitors for the same fixed amount of supply of commodities recover.
Policy Calls
As economic recovery gains traction, concerns about potential policy change that could derail the recovery are also on the rise. However, we do not expect any meaningful policy change through 2009. Since the strong recovery has been largely policy stimulus-driven, it makes little sense to us for the authorities to make a major policy shift towards outright tightening in the absence of robust autonomous organic growth, especially when inflation does not pose a risk. Any meaningful policy tightening will be endogenous, i.e., contingent on sufficient evidence of sustainable, autonomous demand, in our view.
We therefore expect the status quo of the current accommodative policy stance to be maintained for the remainder of the year. We continue to expect further normalization in loan creation each month, but this should not be interpreted as policy tightening. In this context, total new loans could reach over Rmb9 trillion this year. We also expect the base lending and deposit rates to remain unchanged through 2009. Meanwhile, we do not expect additional fiscal policy stimulus of any meaningful size in the remainder of the year. We believe that the current exchange rate arrangement - featuring a quasi-hard peg of the renminbi to the US dollar - will remain unchanged through 2009 and most probably through the next 12 months and even beyond.
If the outlook that we envisage for 2009 materializes, normalization of the policy stance becomes a distinct possibility for 2010, in our view. The Central Economic Work Conference that traditionally takes place in late November and early December and sets the broad policy parameters for the coming year should be an occasion for such a policy shift. While some normalization of the policy stance in 2010 is entirely possible, we caution against interpreting these potential changes as outright tightening. By the end of 2009, export growth - despite perhaps having rebounded substantially from the lows - will likely remain slightly negative and headline inflation will likely barely creep into positive territory. In this context, the Chinese authorities are unlikely to consider the Chinese economy to be completely out of the woods, and a major policy shift cannot be justified, despite potential double-digit GDP growth by 4Q09, in our view.
However, a more meaningful policy shift by mid-2010 is quite possible. By mid-2010, we expect year-on-year export growth to have reached close to the high single-digit level and the headline CPI inflation to have reached 2.5%Y. The developments of these two key variables on the back of a peak GDP growth rate potentially at about 12%Y in 1Q10 (as per our forecast) will make the authorities feel sufficiently comfortable with turning on the tightening bias in the policy stance for the remainder of the year, in our view.
Specifically, we expect the following: a) new bank lending to moderate considerably from the extraordinarily high levels so far this year such that the overall size of the loan book may increase by 15-17% in 2010, down from nearly 30% in 2009; b) more proactive open market operations by the PBoC in 1H10 likely to be aided by RRR hikes in 2H10 to help achieve the loan growth target; c) hikes of the base interest rates by 25-50bp in 2H10, signaling the beginning of a rate hike cycle that is broadly in sync with that of the US. Incidentally, our US economists, Richard Berner and David Greenlaw, expect that "a hike in the (US Fed) target rate will not occur until mid-2010" (see US Economics: US Economic and Interest Rate Forecast: Does the Economy Need More Stimulus? July 7, 2009); and d) the implementation of the second half of the Rmb4 trillion spending package will be unaffected.
We do not expect any major policy change vis-à-vis the property sector either. The strong recovery in this sector in general and recent property prices increase in particular have made many worry whether the Chinese authorities will intervene in the property market heavy handedly again, as they did in late 2007 and 1H08. Indeed, the memory is still fresh, and many market participants have been traumatized. However, we dismiss this concern. The property sector is the most important source of organic growth in China, and lessons from the past few years have made it clear that a stable policy environment is critical for healthy, sustainable development of the property sector in China. Looking ahead, we expect the authorities' current policy stance vis-à-vis the property sector to remain unchanged. In fact, we should view the policy change since October 2008 as policy normalization, rather than discretionary, counter-cyclical policy easing, which tends to be temporary.
The authorities' current policy approach features two tracks: 1) encouraging market-based commercial housing by removing unduly austere policy measures that artificially depress its development; and 2) addressing the housing issue for low-income households by developing the low-cost, low-rent, affordable housing program financed by public funds. This is an effective and sustainable policy approach, as a viable affordable housing program is predicated on a buoyant commercial housing program, in our view. In view of the property sector's importance in supporting an economic recovery and sustainable growth, any concern that the policy shift might potentially hurt this sector is unwarranted, in our view.
That said, we think it justified if the government chooses to strictly enforce existing rules to prevent abuse by speculators. These moves will not change the broad trend of the property sector - the fundamentals of which, as we have consistently argued, remain sound - and will instead contribute to a sustainable, healthy development in the long run, in our view (see again China Economics: Property Sector Recovery Is For Real, May 15, 2009 and China Economics: Can the Property Sector Be Counted on as the Engine of Growth? September 2, 2008).
Investment Implications
The next 6-12 months will likely feature a mix of growth acceleration and low inflation against the backdrop of a relatively stable policy stance, a macroeconomic environment that is conducive to asset price reflation, in our view. However, we think that as inflation pressures start to emerge by mid-year, concern about potential policy tightening will likely weigh on market sentiment. On the other hand, bottom-line corporate earnings will likely improve in 2010, as autonomous organic growth gains traction over time.
For further details, please see Policy-Driven Decoupling: Upgrade 2009-10 Outlook, July 16, 2009.
By Qing Wang, Denise Yam, CFA & Steven Zhang Hong Kong
Another Stronger-than-Expected GDP Report for 2Q09
The Chinese economy staged a stronger-than-expected rebound in 2Q09, with real growth reaching 7.9%Y, up from the trough of 6.1% in 1Q09. On a seasonally adjusted basis, we estimate that the economy grew by a strong 4.5%Q (+19% annualized), accelerating from 1.5% in 1Q09 and the trough of 0.4% in 4Q08. We attribute the better-than-expected economic performance to the maintenance of the growth-boosting policy stance, which made possible a much-accelerated realization of the real stimulative effect from the multi-trillion renminbi fiscal package and expansionary monetary and credit policy, which we originally expected to materialize only in 2H09. In particular, policy-driven monetary and credit expansion, which has been consistently surprising on the upside, has enabled the significant pick-up in domestic investment. The Rmb1.53 trillion new loans made in June sent money and loan growth to new record-highs of 28.5%Y (M2) and 34.4%Y, respectively. Credit creation in 1H09 totaled Rmb7.37 trillion, three times the amount in the year-ago period, and exceeding the 2008 total (Rmb4.91 trillion) by 50%, helping to finance the 35.7%Y growth in fixed asset investment (nationwide) in 2Q09, up from 28.8% in 1Q (33.5% in 1H).
Taking stock of the achievements already realized in 1H09, and standing by our view that the Chinese economy will continue to stage a gradual and steady recovery in the remainder of the year, we are yet again raising our growth forecasts. Our latest upgrade is underpinned by the following four main arguments:
• Much stronger-than-expected policy responses have successfully prevented a potentially sharper slowdown triggered by external shock and helped an early recovery in investment;
• The strong recovery in the property sector bodes well for further recovery in real estate investment in the remainder of this year and 2010;
• Domestic consumption remains resilient as confidence holds up well;
• Policy stance will remain broadly supportive through 2010.
We raise our real GDP growth forecasts to 9% from 7% for 2009 and to 10% from 8% for 2010.
Domestic Strength Offsets External Weakness
Although the decline in exports continued into 2Q09 and turned out to be worse than our earlier expectation (see China Data Release: Trade Recovery Still Short of Expectations, July 10, 2009), this had been adequately offset by the aggressive growth-supporting policies. Continued large-scale credit creation (see China Data Release: Acceleration of Monetary Expansion; Meaningful Tightening Unlikely, July 15, 2009) continued to fuel domestic economic activity, starting from infrastructure investment.
Urban fixed-asset investment growth remained strong in June, rising 35.3%Y (+32.9% in Jan-May), bringing year-to-date (1H09) growth to 33.6%, although this was a tad slower than the 38.6% jump in May alone. In particular, the pick-up in real estate development investment (+18.1%Y in June versus +12% in May, +9.9% in 1H09) remained encouraging (although still weaker than the 20.9% expansion last year). Needless to say, policy-driven capex, as evidenced in infrastructure investment, remained the driver. Investment in the Western (+42.1%Y in 1H versus +46.1% in 1Q) and Central (+38.1% versus +34.3%) regions continued to outpace that in the Eastern region (+26.7% versus +19.8%), also suggesting the policy-driven nature of the latest projects.
Domestic consumer demand growth, as evidenced by retail sales, also remained strong. June sales totaled Rmb994 billion, up 15%Y (versus our forecast of +15.2% and market forecasts of +15.3%). In real terms (deflated by retail price inflation, -2.3%Y in June), sales growth powered ahead further, to 17.7%Y in June, from 17.4% in May.
The pick-up in domestic demand and restocking in the manufacturing sector have led value-added industrial output on a firmer recovery track. Output growth reached 10.7%Y in June, beating our and market (both +9.5%) forecasts by a wide margin, up from 8.9% in May (+6.3% in Jan-May). Electricity generation also, finally, returned to positive growth in June, up 3.6%Y, after remaining negative since October 2008 (except in February 2009 because of the Lunar New Year effect), suggesting a recovery in production in the power-intensive sectors, such as steel and other metals, which suffered relatively a more severe contraction and destocking earlier on following speculative production and overstocking during the up-cycle. We attribute much of the strength in industrial production to domestic demand and would like to highlight the apparent decoupling from the weakness in exports.
Consumer prices (CPI) remained in deflationary territory in June, falling 1.7%Y, slightly more negative than our and market forecasts (both at -1.3%), resulting in average consumer deflation of 1.1%Y in 1H09. We believe that the downside surprise mainly stems from the fall in food prices (-0.3% in 1H, which implies more than a 1%Y drop in June). Indeed, we observe that CPI is still being dragged down on a sequential basis by food prices (-1.4%M in June by our estimate), although the non-food component is likely rebounding on the retail fuel price hikes.
In the upstream, producer prices (PPI) fell 7.8%Y in June (-7.2% in May), while raw materials purchasing prices (RMPPI) fell 11.2% (-10.4% in May). The declines for both indices exceeded our (PPI: -7.5%, RMPPI: -11%) and market (PPI: -7.4%) expectations. Nevertheless, we are confident that prices, both upstream and downstream, are riding out the bottom, in line with the pick-up in sentiment and activity. Sequential price drops are certainly alleviating, although year-on-year declines could persist - because of base effects - until late this year.
A Policy-Driven Decoupling
When turmoil of such a global scale hit, the initial negative effect of the shock was felt indiscriminately strongly by every economy that is deeply integrated into the global economy. The strength and speed of policy responses in the immediate aftermath of the crisis were, however, quite uneven among the countries, resulting in different patterns of post-crisis recovery.
China is a case in point. The aggressive policy response by the Chinese authorities helped translate China's ‘strong balance sheet' into a ‘decent-looking income statement', which distinguishes China from those countries that either suffer from a paralyzed financial system or are unable to launch strong pro-growth fiscal or monetary policy responses because of weak fiscal and/or external balance-of-payments positions. This makes China the first major economy to recover from the turmoil with strong momentum, effecting a policy-induced economic decoupling between China and the rest of the world.
In our previous research, we highlighted a potential ‘goldilocks recovery scenario', wherein the government's growth-supporting policies enable asset reflation, which underpins consumer and investor confidence and prevents the harsh adjustment in domestic consumption and private investment in 1H09 (see "Mapping the Recovery in 2009-10", China Strategy and Economics: 2009 GDP Recovery Unlikely to Boost Profits or Equities, February 23, 2009). The shallower trough in the economic cycle is then followed by recovery in activity, initially spearheaded by fiscal stimulus (3Q09), and then by a tepid recovery in external demand (4Q09 and 2010). Although the timing of these series of events is not exactly as we had envisaged, this ideal scenario appears to be playing out.
Specifically, sustained and stronger-than-expected credit growth in recent months has continued to buoy sentiment and helped to deliver: a) an accelerated rollout of public infrastructure projects; b) more resilience in private consumption and private manufacturing sector capex despite weak exports; and c) an increasingly convincing recovery in property investment. These positive developments, together with the steady asset price reflation, are serving to compensate for the prolonged weakness in external demand.
Growth Outlook Upgrade for 2009-10
We upgrade our forecasts for GDP growth to 9% for 2009 and 10% for 2010. The latest 2Q09 data confirmed that 1Q09 was the trough of the V-shaped trajectory we had envisioned, but the recovery track is proving to be even steeper than we had earlier expected.
The aggressive policy responses - as reflected in the rapid expansion of bank lending - so far this year will likely continue to fuel rapid investment growth in the remainder of 2009. Moreover, we expect property investment to accelerate significantly in 2010, partly offsetting the slowdown in infrastructure investment expected to materialize because of the high base in 2009. Private consumption will likely continue to improve steadily through 2010, as consumer confidence and employment improve. We expect export expansion to resume in 2010 following a sharp contraction in 2009, which, together with a recovery in profits, should help to underpin non-property-related private investment. Despite strong headline GDP growth, inflation pressures are unlikely to emerge until mid-2010, in our view. In terms of trajectory, we expect GDP growth to peak in 1Q10 before starting to moderate thereafter.
Specifically, in our updated forecasts, we have revised consumption growth (in real terms) to 8.5% for 2009 and 9.8% for 2010, stronger than that in 2008 (+8.3%), though weaker in nominal terms because of lower inflation. Consumption has certainly demonstrated its resilience in 1Q09 with a bottoming-out of retail sales and consumer confidence. Consumption-boosting measures introduced by the government appear to have worked well to make up for the shortfall in the near term. Moreover, broadly stable employment since 1Q09, together with the Chinese authorities' pledge to further strengthen the social security system and other social service reform in the coming years, will likely underpin consumer confidence, preventing a sharp rise in precautionary savings despite a substantial economic downturn. Of particular note, housing-related consumption (e.g., furniture, decoration materials) will likely grow remarkably amid a strong recovery in the property sector.
On the investment front, our last upgrade was primarily driven by an upward revision in real estate investment. This time round, it is the resilience in manufacturing sector investment despite weak exports, as well as real estate investment, that has prompted our revisions. We now expect 9% growth in manufacturing investment in 2009, versus 0% previously, and a further acceleration to 12% growth in 2010, as we expect profit growth to recover backed by improving exports (as discussed below).
In line with our expectation, real estate investment has shown increasingly convincing signs of recovery, as reflected in the remarkable rebound in property sales in recent months (see China Economics: Property Sector Recovery Is for Real, May 15, 2009). We believe that this trend is sustainable, pointing to considerable upside to real estate investment in the remainder of this year and next. We therefore are again lifting our forecast for real estate investment to 10% in 2009 and 15% in 2010. On the other hand, we expect infrastructure investment to see explosive 50% growth this year but pass on its role as the key growth driver in 2010. We now expect overall fixed investment to grow 15.1% in 2009 and 12.2% in 2010 in real terms. While policy-driven capex will likely prove to be the key growth driver this year, we expect a steady revival in private investment to reduce the reliance on public investment for growth in 2010.
Export Recovery Expected by 4Q09
Much attention has focused on the unprecedentedly sharp contraction in China's exports in the past several months. We had admitted, on several occasions, that the declines have far exceeded and sustained for longer than our expectations. Meanwhile, overall GDP growth and other economic indicators (output value for export delivery and trade data reported by Hong Kong) have shown far milder downturns than consistent with this export plunge, raising our skepticism yet again towards the reliability of the data.
We suspect that strong exports data in 2007 and 2008 (up to 3Q08) could have encompassed some hidden hot money inflows. Driven by expectations of rapid renminbi appreciation, exporters (domestic as well as foreign-invested producers) may have overstated their shipments to obtain more renminbi. With the stalling of the renminbi appreciation since 2H08 and intensified de-risking amid the financial turmoil, the cutback or discontinuation of this over-invoicing practice could have contributed to the exaggerated sharp declines in the export data. The year-on-year export numbers may be somewhat misleading - as they are being distorted downwards by the reduction in hot money inflows - and help solve the anomaly of the milder-than-expected effect of the export decline on the real economy in 1H09. It follows that we should not expect exports to return to pre-crisis levels any time soon, given the structural reduction in hot money inflows, and that weak year-on-year export numbers would sustain for up to one year. Nevertheless, it also means that as this one-off normalization wears out, exports can promptly resume positive growth.
Moreover, we believe that the current exchange rate policy, i.e., a quasi-hard peg to the USD (see China Economics: An Exit Strategy for the Renminbi? June 9, 2009), combined with recent and expected USD weakness, helps Chinese exports reclaim external competitiveness, and strengthens our optimism towards export recovery. In fact, while the year-on-year export decline averaged 21.8% in 1H09, shipments have been showing sequential improvement in the past few months. We continue to forecast narrowing trade declines in 2H09, and expect export growth to return to close to zero by year-end, and average -16% in 2009, followed by a 9% rebound in 2010. We expect imports to contract by 13% this year (-25.4% in 1H09) and increase by 10% in 2010. We expect the trade surplus to contract this year, for the first time since 2003, to just under US$220 billion, down from US$297 billion in 2008.
Quarterly Growth Profile
We have also updated the quarterly growth trajectory. The 2Q09 rebound (+4.5%Q) represents a strong bounce from the cyclical trough, so we do not expect this sequential growth rate to continue in the upcoming quarters, but return to a more sustainable 2.0-2.5% in the quarters ahead. Nevertheless, the year-on-year growth rate is set to accelerate further in the next few quarters, surging to double-digit rates by 4Q09 and peaking in 1Q10, before tapering off - on the base effect - toward a more sustainable high-single-digit level. The deceleration in growth rate over the course of 2010 would reflect acceleration in private consumption and investment (e.g., property investment) and recovery in exports being partly offset by a smaller dose of policy stimulus.
The Risks: Bull and Bear Cases
The key risk to this outlook lies in external demand. While strong policy responses could help to achieve a meaningful decoupling between China and the rest of the world for several years, there is no absolute decoupling as long as China remains deeply integrated into the global economy, in our view.
There is considerable uncertainty about the outlook for 2010 for the global economy. As it stands now, our global economics team expects that both the US and Eurozone will start to show positive sequential growth by 4Q09 before embarking on a sustained, albeit tepid, recovery through 2010 (see Global Forecast Snapshots: The Global Economy in One Place, June 18, 2009). However, at the current juncture, it is still uncertain whether the G3 economies can successfully maintain such a strong recovery through 2010. Our US economists, Richard Berner and David Greenlaw, expect US GDP growth to be around 2.2% in 2010, but think it could swing between 1.2% under a bear case and 3.8% under a bull case. Similarly, our European economist, Elga Bartsch, expects Eurozone GDP growth to be around 0.5% in 2010, but thinks it could swing between -0.9% under a bear case and 2.2% under a bull case.
In this context, we also revise our two alternative scenarios - bear and bull cases - to highlight both downside and upside risks to the 2010 outlook under our new baseline scenario. We believe that the key risk to our new forecasts stems from the external demand outlook and its attendant effect on private investment in the manufacturing sector. The GDP growth rates under the bull and bear scenarios are 12% and 8%, respectively. We assign 70%, 20% and 10% subjective probabilities to the base, bear and bull cases, respectively.
Under the bull scenario, a faster and stronger recovery in the US and Eurozone economies implies that China's export growth turns positive sooner than expected and private investment in the manufacturing sector registers higher growth. Under the bear scenario, the economy will likely register a sharp double-dip after 1Q10. Persistently weak exports will offset the effect of policy stimulus and hurt sentiment again such that neither private investment in the manufacturing sector nor private consumption will pick up significantly.
Inflation Not a Concern in the Next 12 Months
The rapid expansion of bank lending and money supply (M2) growth have caused considerable concern about the risk of inflation. However, we argue that these concerns are unwarranted at least in the next 12 months. When the economic system is subject to as large a negative external shock as the one China is experiencing now, the dominant contributing factor to headline CPI inflation is export growth instead of money growth, in our view. Here is why:
First, China's past experiences suggest that a sharp decline in export growth should have a strong disinflationary/deflationary effect on the economy. Export growth in this context can be treated as a proxy of the output gap in China: the lower the export growth rate, the larger the potential negative output gap and thus disinflationary/deflationary pressures. Note, however, that it is very difficult to estimate the output gap for China, an economy of which the structure evolves rapidly. China has suffered three episodes of deflation in the past 12 years: the first during the Asian Financial Crisis, the second in the aftermath of the NASDAQ stock bubble burst, and the third being the current one. All three episodes of deflation either coincided with, or occurred in the immediate aftermath of, a collapse in export growth. Although we do expect the decline in export growth to narrow substantially in the remainder of the year and exports to resume positive growth in 2010, we do not expect the recovery in export growth to be sufficiently vigorous as to generate meaningful inflationary pressures (e.g., 3.0+% inflation) in the next 12 months.
Second, the relationship between money and inflation tends to become quite unstable amid a serious economic downturn because the velocity of money declines markedly. This makes gauging inflation risk simply based on money supply growth particularly tricky, especially when there is no robust and stable causal relationship between the two in the first place.
Third, from the supply side, the bursting of the international commodity price bubble caused prices of raw materials (e.g., crude oil, iron ore, metals) imported by China to decline sharply, representing a powerful positive terms-of-trade shock, as in part reflected in the sharp decline in PPI inflation.
Looking ahead, our global commodity research team believes that "ultimately, commodities should perform strongly through this cycle", although in the near term, "fundamentals remain mixed with agriculture balances arguably most constructive, with energy and metals less so..." (see The Commodity Call: Commodities Rally on Greenback & Green Shoots, June 4, 2009). This implies that the upside to commodity prices is unlikely to be large in the next few months, suggesting that PPI inflation is unlikely to rebound strongly any time soon from its recent low of -7.2%Y in June. Furthermore, the low PPI inflation will likely put downward pressures on ex-food CPI inflation.
In this context, the inflation outlook through 2010 will likely again be largely shaped by changes in food prices, in our view. The relevant inflationary pressures could stem from two sources: i) the government's decision to hike the minimum purchase prices of grains by 15%, which would bring about grain price increases in 2010; and ii) the classical ‘hog cycle' that will likely lead to an increase in pork and other meat prices in 2010. In particular, regarding the latter, pork prices have been sliding sharply from the peak since 1Q08 and have fallen below the break-even level (i.e., 6-to-1 pork-to-grain price ratio) recently. Discouraged by poor profit prospects, hog farmers have reportedly started to cut back breeding scale by slaughtering sows. According to our agricultural research team, the destocking of live hogs should extend to 4Q09 to complete the supply adjustment, which could cause substantial pork price increases (e.g., mid-teens) over 2010.
We forecast CPI inflation at -0.6% in 2009 and 2.5% in 2010. We expect the headline CPI inflation to remain negative through October 2009 and creep into positive territory from November 2009. Food price inflation will likely turn positive three months earlier than headline inflation, while we expect ex-food CPI inflation to remain in negative territory through 2009. Entering into 2010, while CPI inflation will likely stay on a steady uptrend with food prices starting to edge up in part due to the base effect, we expect overall headline CPI inflation to remain relatively low through 1H10 (i.e., below 2.5%Y). We expect CPI inflation to climb slightly faster in 2H, as the recovery in export growth gains momentum, reaching 3%Y in 4Q10. We forecast average food price and ex-food price inflation at 4.2% and 1.6%, respectively.
End of Profitless Growth
Latest data (through May) indicate that the decline in industrial profit growth narrowed substantially from about -30%Y in Jan-Feb to -16%Y in Mar-May. The improvement is particularly strong for downstream manufacturing sectors (from -40%Y to -3.5%Y) (see China Economics: Green Shoots in Profits, June 29, 2009).
The strong recovery and acceleration in headline GDP growth in the remainder of the year and through 2010 will likely bring an end to the profitless growth in 2010. In particular, the favorable mix of potential growth drivers in 2010 bodes well for an eventual recovery in profit growth, in our view. Industrial profits are a function of genuine strength of the economy instead of policy stimulus, as the latter may help to produce decent top-line figures but not necessarily be able to deliver bottom-line earnings performance, in our view. In 2H09 and over the course of 2010, we expect the headline GDP growth to be increasingly driven by such autonomous demand as private consumption, property investment and exports instead of public spending carried out under the stimulus plan.
In addition to better overall economic conditions, the low cost pressures stemming from the still relatively low raw material prices will likely contribute to improved profits.
First, despite the sharp improvement in their terms of trade in late 2008 and 1H09, producers were unable to realize the potential gains back then because activities such as production and sales dropped to very low levels at the height of the financial turmoil.
Second, as activity starts to pick up, the low cost benefits should show accordingly, especially for the producers who have seized the opportunity of very low international commodity prices to build up their inventory of raw materials.
Third, the recent developments in international commodity price markets have largely reflected normalization of the relative prices between commodities and manufactured goods - the structure of which had been compressed to unsustainable levels at the height of the turmoil - instead of inflationary pressures due to broad-based recovery in global demand, in our view. Commodity price increases due to relative price normalization are consistent with the competitiveness of China's manufacturing sector and are thus unlikely to have much negative implications for corporate profitability, in our view.
Fourth, the Morgan Stanley Commodity Research team does not believe that the rise in demand due to an early economic recovery in China alone will be able to substantially drive up international commodity prices. This makes China a potential beneficiary from relatively low commodities prices for a considerable period of time until the economies of its competitors for the same fixed amount of supply of commodities recover.
Policy Calls
As economic recovery gains traction, concerns about potential policy change that could derail the recovery are also on the rise. However, we do not expect any meaningful policy change through 2009. Since the strong recovery has been largely policy stimulus-driven, it makes little sense to us for the authorities to make a major policy shift towards outright tightening in the absence of robust autonomous organic growth, especially when inflation does not pose a risk. Any meaningful policy tightening will be endogenous, i.e., contingent on sufficient evidence of sustainable, autonomous demand, in our view.
We therefore expect the status quo of the current accommodative policy stance to be maintained for the remainder of the year. We continue to expect further normalization in loan creation each month, but this should not be interpreted as policy tightening. In this context, total new loans could reach over Rmb9 trillion this year. We also expect the base lending and deposit rates to remain unchanged through 2009. Meanwhile, we do not expect additional fiscal policy stimulus of any meaningful size in the remainder of the year. We believe that the current exchange rate arrangement - featuring a quasi-hard peg of the renminbi to the US dollar - will remain unchanged through 2009 and most probably through the next 12 months and even beyond.
If the outlook that we envisage for 2009 materializes, normalization of the policy stance becomes a distinct possibility for 2010, in our view. The Central Economic Work Conference that traditionally takes place in late November and early December and sets the broad policy parameters for the coming year should be an occasion for such a policy shift. While some normalization of the policy stance in 2010 is entirely possible, we caution against interpreting these potential changes as outright tightening. By the end of 2009, export growth - despite perhaps having rebounded substantially from the lows - will likely remain slightly negative and headline inflation will likely barely creep into positive territory. In this context, the Chinese authorities are unlikely to consider the Chinese economy to be completely out of the woods, and a major policy shift cannot be justified, despite potential double-digit GDP growth by 4Q09, in our view.
However, a more meaningful policy shift by mid-2010 is quite possible. By mid-2010, we expect year-on-year export growth to have reached close to the high single-digit level and the headline CPI inflation to have reached 2.5%Y. The developments of these two key variables on the back of a peak GDP growth rate potentially at about 12%Y in 1Q10 (as per our forecast) will make the authorities feel sufficiently comfortable with turning on the tightening bias in the policy stance for the remainder of the year, in our view.
Specifically, we expect the following: a) new bank lending to moderate considerably from the extraordinarily high levels so far this year such that the overall size of the loan book may increase by 15-17% in 2010, down from nearly 30% in 2009; b) more proactive open market operations by the PBoC in 1H10 likely to be aided by RRR hikes in 2H10 to help achieve the loan growth target; c) hikes of the base interest rates by 25-50bp in 2H10, signaling the beginning of a rate hike cycle that is broadly in sync with that of the US. Incidentally, our US economists, Richard Berner and David Greenlaw, expect that "a hike in the (US Fed) target rate will not occur until mid-2010" (see US Economics: US Economic and Interest Rate Forecast: Does the Economy Need More Stimulus? July 7, 2009); and d) the implementation of the second half of the Rmb4 trillion spending package will be unaffected.
We do not expect any major policy change vis-à-vis the property sector either. The strong recovery in this sector in general and recent property prices increase in particular have made many worry whether the Chinese authorities will intervene in the property market heavy handedly again, as they did in late 2007 and 1H08. Indeed, the memory is still fresh, and many market participants have been traumatized. However, we dismiss this concern. The property sector is the most important source of organic growth in China, and lessons from the past few years have made it clear that a stable policy environment is critical for healthy, sustainable development of the property sector in China. Looking ahead, we expect the authorities' current policy stance vis-à-vis the property sector to remain unchanged. In fact, we should view the policy change since October 2008 as policy normalization, rather than discretionary, counter-cyclical policy easing, which tends to be temporary.
The authorities' current policy approach features two tracks: 1) encouraging market-based commercial housing by removing unduly austere policy measures that artificially depress its development; and 2) addressing the housing issue for low-income households by developing the low-cost, low-rent, affordable housing program financed by public funds. This is an effective and sustainable policy approach, as a viable affordable housing program is predicated on a buoyant commercial housing program, in our view. In view of the property sector's importance in supporting an economic recovery and sustainable growth, any concern that the policy shift might potentially hurt this sector is unwarranted, in our view.
That said, we think it justified if the government chooses to strictly enforce existing rules to prevent abuse by speculators. These moves will not change the broad trend of the property sector - the fundamentals of which, as we have consistently argued, remain sound - and will instead contribute to a sustainable, healthy development in the long run, in our view (see again China Economics: Property Sector Recovery Is For Real, May 15, 2009 and China Economics: Can the Property Sector Be Counted on as the Engine of Growth? September 2, 2008).
Investment Implications
The next 6-12 months will likely feature a mix of growth acceleration and low inflation against the backdrop of a relatively stable policy stance, a macroeconomic environment that is conducive to asset price reflation, in our view. However, we think that as inflation pressures start to emerge by mid-year, concern about potential policy tightening will likely weigh on market sentiment. On the other hand, bottom-line corporate earnings will likely improve in 2010, as autonomous organic growth gains traction over time.
For further details, please see Policy-Driven Decoupling: Upgrade 2009-10 Outlook, July 16, 2009.
Commercial Mortgage Loans Failing at Rapid Pace
By LINGLING WEI and MAURICE TAMMAN
U.S. banks have been charging off soured commercial mortgages at the fastest pace in nearly 20 years, according to an analysis by The Wall Street Journal. At that rate, losses on loans used to finance offices, shopping malls, hotels, apartments and other commercial property could reach about $30 billion by the end of 2009.
The losses by regional banks on their commercial real-estate loans will be among the most watched details as thousands of banks report second-quarter results over the next two weeks. Many of the most troubled banks have heavy exposure to commercial real estate. So far, 57 banks have failed this year.
The $30 billion estimate is based on financial reports filed by more than 8,000 banks for the first quarter. The trend continued as a handful of major banks reported second-quarter results, including Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Bank of America Corp. Regional banks tend to have higher exposure to commercial real estate than these big financial institutions.
The commercial real-estate market, valued at about $6.7 trillion, represents 13% of the U.S.'s gross domestic product. But the recession and scarce credit are pushing more commercial developers and investors into default. Meanwhile, property values continue to decline, and banks are required to record a loss on any troubled real-estate loans where the appraised value falls below the amount owed.
Delinquencies on commercial mortgages held by banks more than doubled to about 4.3% in the second quarter from a year earlier, Foresight Analytics estimates. Rep. Carolyn Maloney (D., N.Y.), who heads the House's Joint Economic Committee, said she is working with Treasury Department officials on a plan to try to head off rising defaults on commercial mortgages before they cascade into a crisis.
In contrast to home loans, the majority of which were made by about 10 lenders, thousands of U.S. banks, especially regional and community banks, loaded up on commercial-property debt.
Ironically, small banks appear to be much less aggressive in recognizing losses than their bigger brethren. According to the Journal analysis, the largest banks, with assets of more than $100 billion, saw charge-offs roughly quadruple last year, while losses at many medium-size banks grew at a much smaller rate of 120%.
One monument to both the excessive froth of the real-estate boom and the morning-after headache setting in for lenders is the landmark Equitable Building, rising 33 stories above downtown Atlanta.
In 2007, San Diego real-estate firm Equastone LLC paid $57 million for the office tower and took out a $51.9 million mortgage from Capmark Bank, a Utah-based unit of Capmark Financial Group Inc. in Horsham, Pa. Equastone planned to expand the tower and attract a tenant with pockets deep enough to rename the building.
Shortly after the purchase, the economic slump pushed vacancies higher and rents down. In April, Capmark Bank foreclosed on the building after Equastone defaulted on the debt.
In June, the Equitable Building was sold in a foreclosure auction for $29.5 million, 43% less than the original loan amount. And the buyer? It was 100 Peachtree Street Atlanta, a company formed by Capmark Bank for the purpose of acquiring the building. There were no other bidders.
Steven Nielsen, Capmark Bank's chief executive, said the mortgage was written off to the "estimated value" of the building. He wouldn't specify the size of the related charge-off on Capmark's books. Property-tax records show the building was valued at about $44.8 million at foreclosure, which would equal a $7.1 million loss for the bank.
Some bankers say they feel growing pressures from regulators to take losses on commercial real-estate exposure as a way of reducing the possibility of a catastrophic hit later.
"We recognize losses as quickly as any bank, partly because bank regulators dictate that," said Ed Garding, chief credit officer at First Interstate Bank, of Billings, Mont. More than 40% of the bank's loans are in commercial real estate, but according to the Journal analysis, annualized charge-offs in 2009 would be just 3% of its nonperforming commercial mortgages as of the end of 2008. That compares with an average of 34% for all U.S. banks.
Mr. Garding said the commercial real-estate market has held up relatively well in First Interstate's markets in Montana and Wyoming. Meanwhile, "we're strongly collateralized so the loan doesn't result in a loss," he added.
Among other banks with notably low charge-offs: Based on the Journal study, annualized write-offs this year would be only 9% of all nonperforming commercial mortgages at a Wachovia Corp. unit in Charlotte, N.C. A spokeswoman at Wachovia declined to comment.
At New York Community Bank, a New York State-charted savings bank, that ratio would be a meager 2% in the first quarter. Ilene Angarola, director of investor relations at New York Community Bancorp., the bank holding company, credited the bank's strong underwriting standards. "Even though we have seen a decline in property values, our loan-to-value ratio is conservative enough that we haven't experienced anywhere near the degree of the charge-offs our peers have experienced," Ms. Angarola said.
Some analysts, meanwhile, worry that banks aren't sufficiently recognizing losses on their commercial real-estate loans, thereby exposing themselves to bigger losses later. According to Deutsche Bank AG, since the beginning of last year, the amount of charged-off commercial mortgages as a percentage of such debt outstanding has ranged from a high of 3.2% to as low as 0.3%.
"Net charge-offs to date have been highly inadequate," said Richard Parkus, head of commercial mortgage-backed securities research at Deutsche Bank. "This is clearly a problem that is being pushed out into the future."
How aggressively regulators respond could help determine how long the commercial-property market remains mired in turmoil. "If banks are allowed to bury problem loans away in their portfolios for years via massive term extensions, this is likely to be a very long process," Mr. Parkus said.
Write to Lingling Wei at lingling.wei@dowjones.com and Maurice Tamman at maurice.tamman@wsj.com
U.S. banks have been charging off soured commercial mortgages at the fastest pace in nearly 20 years, according to an analysis by The Wall Street Journal. At that rate, losses on loans used to finance offices, shopping malls, hotels, apartments and other commercial property could reach about $30 billion by the end of 2009.
The losses by regional banks on their commercial real-estate loans will be among the most watched details as thousands of banks report second-quarter results over the next two weeks. Many of the most troubled banks have heavy exposure to commercial real estate. So far, 57 banks have failed this year.
The $30 billion estimate is based on financial reports filed by more than 8,000 banks for the first quarter. The trend continued as a handful of major banks reported second-quarter results, including Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Bank of America Corp. Regional banks tend to have higher exposure to commercial real estate than these big financial institutions.
The commercial real-estate market, valued at about $6.7 trillion, represents 13% of the U.S.'s gross domestic product. But the recession and scarce credit are pushing more commercial developers and investors into default. Meanwhile, property values continue to decline, and banks are required to record a loss on any troubled real-estate loans where the appraised value falls below the amount owed.
Delinquencies on commercial mortgages held by banks more than doubled to about 4.3% in the second quarter from a year earlier, Foresight Analytics estimates. Rep. Carolyn Maloney (D., N.Y.), who heads the House's Joint Economic Committee, said she is working with Treasury Department officials on a plan to try to head off rising defaults on commercial mortgages before they cascade into a crisis.
In contrast to home loans, the majority of which were made by about 10 lenders, thousands of U.S. banks, especially regional and community banks, loaded up on commercial-property debt.
Ironically, small banks appear to be much less aggressive in recognizing losses than their bigger brethren. According to the Journal analysis, the largest banks, with assets of more than $100 billion, saw charge-offs roughly quadruple last year, while losses at many medium-size banks grew at a much smaller rate of 120%.
One monument to both the excessive froth of the real-estate boom and the morning-after headache setting in for lenders is the landmark Equitable Building, rising 33 stories above downtown Atlanta.
In 2007, San Diego real-estate firm Equastone LLC paid $57 million for the office tower and took out a $51.9 million mortgage from Capmark Bank, a Utah-based unit of Capmark Financial Group Inc. in Horsham, Pa. Equastone planned to expand the tower and attract a tenant with pockets deep enough to rename the building.
Shortly after the purchase, the economic slump pushed vacancies higher and rents down. In April, Capmark Bank foreclosed on the building after Equastone defaulted on the debt.
In June, the Equitable Building was sold in a foreclosure auction for $29.5 million, 43% less than the original loan amount. And the buyer? It was 100 Peachtree Street Atlanta, a company formed by Capmark Bank for the purpose of acquiring the building. There were no other bidders.
Steven Nielsen, Capmark Bank's chief executive, said the mortgage was written off to the "estimated value" of the building. He wouldn't specify the size of the related charge-off on Capmark's books. Property-tax records show the building was valued at about $44.8 million at foreclosure, which would equal a $7.1 million loss for the bank.
Some bankers say they feel growing pressures from regulators to take losses on commercial real-estate exposure as a way of reducing the possibility of a catastrophic hit later.
"We recognize losses as quickly as any bank, partly because bank regulators dictate that," said Ed Garding, chief credit officer at First Interstate Bank, of Billings, Mont. More than 40% of the bank's loans are in commercial real estate, but according to the Journal analysis, annualized charge-offs in 2009 would be just 3% of its nonperforming commercial mortgages as of the end of 2008. That compares with an average of 34% for all U.S. banks.
Mr. Garding said the commercial real-estate market has held up relatively well in First Interstate's markets in Montana and Wyoming. Meanwhile, "we're strongly collateralized so the loan doesn't result in a loss," he added.
Among other banks with notably low charge-offs: Based on the Journal study, annualized write-offs this year would be only 9% of all nonperforming commercial mortgages at a Wachovia Corp. unit in Charlotte, N.C. A spokeswoman at Wachovia declined to comment.
At New York Community Bank, a New York State-charted savings bank, that ratio would be a meager 2% in the first quarter. Ilene Angarola, director of investor relations at New York Community Bancorp., the bank holding company, credited the bank's strong underwriting standards. "Even though we have seen a decline in property values, our loan-to-value ratio is conservative enough that we haven't experienced anywhere near the degree of the charge-offs our peers have experienced," Ms. Angarola said.
Some analysts, meanwhile, worry that banks aren't sufficiently recognizing losses on their commercial real-estate loans, thereby exposing themselves to bigger losses later. According to Deutsche Bank AG, since the beginning of last year, the amount of charged-off commercial mortgages as a percentage of such debt outstanding has ranged from a high of 3.2% to as low as 0.3%.
"Net charge-offs to date have been highly inadequate," said Richard Parkus, head of commercial mortgage-backed securities research at Deutsche Bank. "This is clearly a problem that is being pushed out into the future."
How aggressively regulators respond could help determine how long the commercial-property market remains mired in turmoil. "If banks are allowed to bury problem loans away in their portfolios for years via massive term extensions, this is likely to be a very long process," Mr. Parkus said.
Write to Lingling Wei at lingling.wei@dowjones.com and Maurice Tamman at maurice.tamman@wsj.com
Drug Makers Criticized for Co-Pay Subsidies
--Americans spend 2.5 trillion annually, 20% GDP, on healthcare cost
--Generally 10% of the healthcare cost goes to drugs. For patients with private plans, share increased to 20%
By JONATHAN D. ROCKOFF
Even as U.S. lawmakers seek new ways to rein in health-care spending, drug companies are quietly circumventing a proven tool for controlling prescription-drug costs: insurance co-payments.
Drug makers are increasingly subsidizing these "co-pays" -- the share of prescription costs that insured patients must pay out of their own pocket. Insurers require co-pays to give patients an incentive to be price-sensitive and pick generic drugs over pricier name brands.
In the past year, drug manufacturers have broadly expanded their subsidy programs, according to a Wall Street Journal examination of their practices, potentially undermining the cost-cutting incentive. Drugs with co-pays subsidized by their makers include Pfizer Inc.'s cholesterol fighter Lipitor, the world's top-selling drug, as well as more expensive therapies such as Enbrel, a drug for rheumatoid arthritis and psoriasis co-marketed by Wyeth and Amgen Inc. that costs up to $24,000 a year.
Drug makers say the subsidies help cash-strapped customers afford their medicines. But health insurers complain that the practice undercuts a proven method for encouraging use of cost-effective generics. Insurers say it's forcing them to pay for costly therapies, and raise premiums to cover the expense.
The tension over co-pays lays bare the often conflicting interests of drug makers and insurers amid the legislative effort to overhaul the U.S. health-care system. One of the central goals of the overhaul is to contain the $2.5 trillion Americans spend annually on health care.
There is little comprehensive data on the extent of the subsidies or their potential effect on health-care costs. A 2008 study by one New York state insurer indicated that 48 drugs now have co-pay subsidies, but its list didn't include several major pharmaceuticals that Journal research also showed to have subsidies.
Spending on drugs is about 10% of overall health-care spending. However, for working-age adults covered by private health plans, drug spending is typically double that or more, according to an analysis by Rand Corp., the nonprofit research organization.
Studies show that co-pays -- introduced by insurers and employers in the 1980s -- are an effective way to reduce spending. Every 10% increase in a co-pay reduces drug spending by as much as 6%, according to a 2007 survey of research published in the Journal of the American Medical Association. Prescription-drug sales in the U.S. last year reached $291 billion, according to IMS Health.
"The patient, I will tell you, is economically very, very sensitive to co-pays, and a $5, $10, $20, $25 co-pay matters," Abbott Laboratories Chief Executive Miles White told analysts in April, after Abbott expanded its subsidy program for Humira, a rheumatoid arthritis therapy, so customers wouldn't have to pay more than $60 a year out of pocket, down from a maximum of $300. The total cost of a year's prescription for Humira can reach $19,000.
In April, Amgen increased its subsidies for Enbrel, a Humira rival, offering to pay for patients' first six months of co-pays and cap their out-of-pocket costs at $10 for each of the next six months.
British drug maker AstraZeneca PLC's program for Nexium (the No. 2-selling drug in the U.S., behind Lipitor) is typical of the new co-pay subsidies. Under the program, the company will pay a patient's out-of-pocket costs for the heartburn drug beyond $25 and up to $75 a month. To get the discount, patients simply hand to their pharmacist a rebate card, which they can obtain through their doctor, or by calling the company or -- starting this month -- simply by printing one from the drug's Web site.
Ann Runfola, a 63-year-old secretary from Buffalo, N.Y., says she cannot afford Nexium without AstraZeneca's assistance because her $40 co-pay is too much. "I could use that $40 a month to buy groceries," she says.
Ms. Runfola switched to a less expensive generic drug, Prilosec OTC, in April after her Nexium discount card expired. But she says Nexium works better, and she intends to switch back because AstraZeneca recently sent her a new discount card. "These people are godsends," she says.
Health-insurance executives see it differently. "This is a marketing effort so they don't lose market share," said Eileen Wood, vice president of pharmacy and health-quality programs at CDPHP, an insurer in New York State. "They're just waiving the co-pay so people won't pay attention to cost."
There are cases when co-pays work too well: Studies show they deter some chronic-disease sufferers from taking necessary medicines. As a result, some insurers and employers have reduced or even eliminated co-pays for heart and diabetes drugs, for example.
Pfizer started providing co-pay rebates for Lipitor two years ago. Lipitor was facing competition from three generic rivals in the same class of cholesterol-reducing drugs known as statins.
Initially, Pfizer gave patients as much as $15 off their co-pay each time they filled a prescription if they used a rebate card obtained through their doctor. This year, Pfizer started offering the cards directly to patients.
According to Drugstore.com, the overall cost of a common dose of Lipitor is more than $1,400 a year, four to eight times more than its generic competitors.
"Initially, we did it quite honestly because we were facing a generic presence in the marketplace," said Jim Sage, who oversees marketing for Pfizer's heart drugs. "We also did it because prescribing decisions were being based not just on clinical factors, but also cost."
Many drug makers say the rising co-pays imposed by health plans are making drugs unaffordable for patients. The average co-pay for preferred brand-name drugs like Lipitor jumped 44%, to $26 per prescription, between 2002 and 2008, according to a Kaiser Family Foundation survey.
But the rise in co-pays has merely mirrored the rise in the overall cost of brand-name drugs. The overall cost of the most widely used brand-name drugs between 2002 and 2008 jumped by 64%, or more than three times the rate of inflation, according to AARP, an advocacy group for older Americans.
Edmund Pezalla, national medical director at Aetna Pharmacy Management (which administers drug benefits on behalf of employers), said that if pharmaceutical companies are serious about making drugs more affordable, they should reduce their prices and eliminate tactics like co-pay rebates.
"It's cost-shifting," said Sean Karbowicz, clinical pharmacy manager for Regence BlueCross BlueShield, a major insurer in the Northwest. "The dollars aren't coming out of the members' pockets -- they're coming out of the plan. That results in raised premiums for everyone to pay."
A Pfizer spokeswoman said the company "stands firmly behind the value" of its medicines and works with doctors, hospitals and patient-assistance programs to make the company's drugs affordable and to reduce hospital costs.
Massachusetts is the only state barring such rebates, under the False Health Care Claims law designed to prevent payments to encourage use of a particular drug, said Nonnie Burnes, the state's insurance commissioner.
Drug companies don't offer the help to Medicare Part D beneficiaries out of concern that the discounts could violate the federal anti-kickback law, which also aims to limit use of costly drugs.
Write to Jonathan D. Rockoff at jonathan.rockoff@wsj.com
--Generally 10% of the healthcare cost goes to drugs. For patients with private plans, share increased to 20%
By JONATHAN D. ROCKOFF
Even as U.S. lawmakers seek new ways to rein in health-care spending, drug companies are quietly circumventing a proven tool for controlling prescription-drug costs: insurance co-payments.
Drug makers are increasingly subsidizing these "co-pays" -- the share of prescription costs that insured patients must pay out of their own pocket. Insurers require co-pays to give patients an incentive to be price-sensitive and pick generic drugs over pricier name brands.
In the past year, drug manufacturers have broadly expanded their subsidy programs, according to a Wall Street Journal examination of their practices, potentially undermining the cost-cutting incentive. Drugs with co-pays subsidized by their makers include Pfizer Inc.'s cholesterol fighter Lipitor, the world's top-selling drug, as well as more expensive therapies such as Enbrel, a drug for rheumatoid arthritis and psoriasis co-marketed by Wyeth and Amgen Inc. that costs up to $24,000 a year.
Drug makers say the subsidies help cash-strapped customers afford their medicines. But health insurers complain that the practice undercuts a proven method for encouraging use of cost-effective generics. Insurers say it's forcing them to pay for costly therapies, and raise premiums to cover the expense.
The tension over co-pays lays bare the often conflicting interests of drug makers and insurers amid the legislative effort to overhaul the U.S. health-care system. One of the central goals of the overhaul is to contain the $2.5 trillion Americans spend annually on health care.
There is little comprehensive data on the extent of the subsidies or their potential effect on health-care costs. A 2008 study by one New York state insurer indicated that 48 drugs now have co-pay subsidies, but its list didn't include several major pharmaceuticals that Journal research also showed to have subsidies.
Spending on drugs is about 10% of overall health-care spending. However, for working-age adults covered by private health plans, drug spending is typically double that or more, according to an analysis by Rand Corp., the nonprofit research organization.
Studies show that co-pays -- introduced by insurers and employers in the 1980s -- are an effective way to reduce spending. Every 10% increase in a co-pay reduces drug spending by as much as 6%, according to a 2007 survey of research published in the Journal of the American Medical Association. Prescription-drug sales in the U.S. last year reached $291 billion, according to IMS Health.
"The patient, I will tell you, is economically very, very sensitive to co-pays, and a $5, $10, $20, $25 co-pay matters," Abbott Laboratories Chief Executive Miles White told analysts in April, after Abbott expanded its subsidy program for Humira, a rheumatoid arthritis therapy, so customers wouldn't have to pay more than $60 a year out of pocket, down from a maximum of $300. The total cost of a year's prescription for Humira can reach $19,000.
In April, Amgen increased its subsidies for Enbrel, a Humira rival, offering to pay for patients' first six months of co-pays and cap their out-of-pocket costs at $10 for each of the next six months.
British drug maker AstraZeneca PLC's program for Nexium (the No. 2-selling drug in the U.S., behind Lipitor) is typical of the new co-pay subsidies. Under the program, the company will pay a patient's out-of-pocket costs for the heartburn drug beyond $25 and up to $75 a month. To get the discount, patients simply hand to their pharmacist a rebate card, which they can obtain through their doctor, or by calling the company or -- starting this month -- simply by printing one from the drug's Web site.
Ann Runfola, a 63-year-old secretary from Buffalo, N.Y., says she cannot afford Nexium without AstraZeneca's assistance because her $40 co-pay is too much. "I could use that $40 a month to buy groceries," she says.
Ms. Runfola switched to a less expensive generic drug, Prilosec OTC, in April after her Nexium discount card expired. But she says Nexium works better, and she intends to switch back because AstraZeneca recently sent her a new discount card. "These people are godsends," she says.
Health-insurance executives see it differently. "This is a marketing effort so they don't lose market share," said Eileen Wood, vice president of pharmacy and health-quality programs at CDPHP, an insurer in New York State. "They're just waiving the co-pay so people won't pay attention to cost."
There are cases when co-pays work too well: Studies show they deter some chronic-disease sufferers from taking necessary medicines. As a result, some insurers and employers have reduced or even eliminated co-pays for heart and diabetes drugs, for example.
Pfizer started providing co-pay rebates for Lipitor two years ago. Lipitor was facing competition from three generic rivals in the same class of cholesterol-reducing drugs known as statins.
Initially, Pfizer gave patients as much as $15 off their co-pay each time they filled a prescription if they used a rebate card obtained through their doctor. This year, Pfizer started offering the cards directly to patients.
According to Drugstore.com, the overall cost of a common dose of Lipitor is more than $1,400 a year, four to eight times more than its generic competitors.
"Initially, we did it quite honestly because we were facing a generic presence in the marketplace," said Jim Sage, who oversees marketing for Pfizer's heart drugs. "We also did it because prescribing decisions were being based not just on clinical factors, but also cost."
Many drug makers say the rising co-pays imposed by health plans are making drugs unaffordable for patients. The average co-pay for preferred brand-name drugs like Lipitor jumped 44%, to $26 per prescription, between 2002 and 2008, according to a Kaiser Family Foundation survey.
But the rise in co-pays has merely mirrored the rise in the overall cost of brand-name drugs. The overall cost of the most widely used brand-name drugs between 2002 and 2008 jumped by 64%, or more than three times the rate of inflation, according to AARP, an advocacy group for older Americans.
Edmund Pezalla, national medical director at Aetna Pharmacy Management (which administers drug benefits on behalf of employers), said that if pharmaceutical companies are serious about making drugs more affordable, they should reduce their prices and eliminate tactics like co-pay rebates.
"It's cost-shifting," said Sean Karbowicz, clinical pharmacy manager for Regence BlueCross BlueShield, a major insurer in the Northwest. "The dollars aren't coming out of the members' pockets -- they're coming out of the plan. That results in raised premiums for everyone to pay."
A Pfizer spokeswoman said the company "stands firmly behind the value" of its medicines and works with doctors, hospitals and patient-assistance programs to make the company's drugs affordable and to reduce hospital costs.
Massachusetts is the only state barring such rebates, under the False Health Care Claims law designed to prevent payments to encourage use of a particular drug, said Nonnie Burnes, the state's insurance commissioner.
Drug companies don't offer the help to Medicare Part D beneficiaries out of concern that the discounts could violate the federal anti-kickback law, which also aims to limit use of costly drugs.
Write to Jonathan D. Rockoff at jonathan.rockoff@wsj.com
Doctors' Payments Snag Health Bill
By JANET ADAMY
WASHINGTON -- A plan to end a program that would cut government payments to doctors is emerging as the flash point in the debate over whether President Barack Obama's effort to overhaul the health system would increase the federal budget deficit.
The proposal was crucial to winning support from the politically powerful American Medical Association -- but it has also made it tougher to argue that the health overhaul would pay for itself.
President Obama this week plans to continue his bid to drum up support for his goal to expand health insurance to the nation's 46 million uninsured Americans, after suffering some setbacks last week. On Capitol Hill this week, House members hope to pass their health bill through a third and final committee, and senators are expected to resume talks to hammer out an agreement on the only bipartisan health bill taking shape in Congress.
Administration officials on Sunday expressed confidence that lawmakers could pass legislation before Congress's August recess. "The chances are high" that Congress can meet the deadline, White House budget director Peter Orszag told "Fox News Sunday," but he added that lawmakers should amend the legislation to help contain costs.
Health and Human Services Secretary Kathleen Sebelius, appearing on NBC's "Meet the Press," said costs associated with the legislation could be reduced significantly if lawmakers included the administration's recommendation to bolster the power of the Medicare Payment Advisory Commission, or MedPAC, to set Medicare payment policies.
Some of the nation's governors, meeting at the summer convention of the National Governors Association in Biloxi, Miss., over the weekend, expressed concern that federal health-care legislation could push billions of dollars in new expenses onto their state budgets, according to Associated Press. "If we're asked to pick up on state increased costs in health care, it's going to take away from...environment, transportation, education, public safety, all the other things that we as states do," said Georgia Gov. Sonny Perdue, a Republican.
New Mexico Gov. Bill Richardson said he liked President Obama's plan to use public and private options for health care, but he worried that Congress would dilute the plan and pass billions of dollars in new expenses on to states. "We can't afford that, and that's not acceptable," he said, according to the AP.
One of the president's challenges will be convincing the public that the effort to overhaul health care wouldn't add to the national debt. In its first comprehensive cost estimate of the planned health overhaul, the Congressional Budget Office said in a report Friday that the House health bill would increase the deficit by $239 billion by 2019. The CBO is a nonpartisan body that calculates the cost of legislation, and its findings help shape policy.
The White House, which has insisted the health overhaul wouldn't raise the deficit, said the $239 billion figure doesn't tell the whole story. One of the biggest costs of the House bill is a provision that would override a cost-savings measure imposed earlier this decade that calls for the government to cut the payments doctors receive for treating Medicare patients by 21% next year. The House proposal would instead give doctors a slight payment increase, at a total cost of $245 billion over 10 years, compared with cutting payments by 21%.
Democrats note that lawmakers have postponed implementing the cuts each year since they were first sought, and that the government wasn't likely to have followed through with this year's reduction. For that reason, they argue, that cost should be viewed as a separate item, and that, when taken out, their plan wouldn't increase the deficit.
"It so happens that they attached that to health-care reform," Mr. Orszag said in an interview Sunday. By factoring that cost out of the health overhaul, "we think we're being more real world and realistic."
The Congressional Budget Office must stick to a stricter interpretation of the spending provisions in the bill. "This legislation says we're going to raise doctors' payments, and we score that with the cost it's going to have," CBO Director Douglas Elmendorf said in an interview.
The possibility of increased payments to doctors is likely to pressure them to swallow some type of cuts to help reduce the cost of the bill.
Cecil Wilson, president-elect of the American Medical Association, said in an email that "reforming the flawed Medicare physician-payment system is very important to the final health-reform package, as are covering the uninsured, medical liability reform and many other elements of the bill. AMA's support for a final package will depend on all its components."
Other interest groups are speaking up in an effort to shape the bills as they move into a critical stage. America's Health Insurance Plans, the main lobby for the insurance industry, on Monday plans to begin a national advertising campaign voicing support for a bipartisan health plan.
—Stephen Power contributed to this article.
Write to Janet Adamy at janet.adamy@wsj.com
WASHINGTON -- A plan to end a program that would cut government payments to doctors is emerging as the flash point in the debate over whether President Barack Obama's effort to overhaul the health system would increase the federal budget deficit.
The proposal was crucial to winning support from the politically powerful American Medical Association -- but it has also made it tougher to argue that the health overhaul would pay for itself.
President Obama this week plans to continue his bid to drum up support for his goal to expand health insurance to the nation's 46 million uninsured Americans, after suffering some setbacks last week. On Capitol Hill this week, House members hope to pass their health bill through a third and final committee, and senators are expected to resume talks to hammer out an agreement on the only bipartisan health bill taking shape in Congress.
Administration officials on Sunday expressed confidence that lawmakers could pass legislation before Congress's August recess. "The chances are high" that Congress can meet the deadline, White House budget director Peter Orszag told "Fox News Sunday," but he added that lawmakers should amend the legislation to help contain costs.
Health and Human Services Secretary Kathleen Sebelius, appearing on NBC's "Meet the Press," said costs associated with the legislation could be reduced significantly if lawmakers included the administration's recommendation to bolster the power of the Medicare Payment Advisory Commission, or MedPAC, to set Medicare payment policies.
Some of the nation's governors, meeting at the summer convention of the National Governors Association in Biloxi, Miss., over the weekend, expressed concern that federal health-care legislation could push billions of dollars in new expenses onto their state budgets, according to Associated Press. "If we're asked to pick up on state increased costs in health care, it's going to take away from...environment, transportation, education, public safety, all the other things that we as states do," said Georgia Gov. Sonny Perdue, a Republican.
New Mexico Gov. Bill Richardson said he liked President Obama's plan to use public and private options for health care, but he worried that Congress would dilute the plan and pass billions of dollars in new expenses on to states. "We can't afford that, and that's not acceptable," he said, according to the AP.
One of the president's challenges will be convincing the public that the effort to overhaul health care wouldn't add to the national debt. In its first comprehensive cost estimate of the planned health overhaul, the Congressional Budget Office said in a report Friday that the House health bill would increase the deficit by $239 billion by 2019. The CBO is a nonpartisan body that calculates the cost of legislation, and its findings help shape policy.
The White House, which has insisted the health overhaul wouldn't raise the deficit, said the $239 billion figure doesn't tell the whole story. One of the biggest costs of the House bill is a provision that would override a cost-savings measure imposed earlier this decade that calls for the government to cut the payments doctors receive for treating Medicare patients by 21% next year. The House proposal would instead give doctors a slight payment increase, at a total cost of $245 billion over 10 years, compared with cutting payments by 21%.
Democrats note that lawmakers have postponed implementing the cuts each year since they were first sought, and that the government wasn't likely to have followed through with this year's reduction. For that reason, they argue, that cost should be viewed as a separate item, and that, when taken out, their plan wouldn't increase the deficit.
"It so happens that they attached that to health-care reform," Mr. Orszag said in an interview Sunday. By factoring that cost out of the health overhaul, "we think we're being more real world and realistic."
The Congressional Budget Office must stick to a stricter interpretation of the spending provisions in the bill. "This legislation says we're going to raise doctors' payments, and we score that with the cost it's going to have," CBO Director Douglas Elmendorf said in an interview.
The possibility of increased payments to doctors is likely to pressure them to swallow some type of cuts to help reduce the cost of the bill.
Cecil Wilson, president-elect of the American Medical Association, said in an email that "reforming the flawed Medicare physician-payment system is very important to the final health-reform package, as are covering the uninsured, medical liability reform and many other elements of the bill. AMA's support for a final package will depend on all its components."
Other interest groups are speaking up in an effort to shape the bills as they move into a critical stage. America's Health Insurance Plans, the main lobby for the insurance industry, on Monday plans to begin a national advertising campaign voicing support for a bipartisan health plan.
—Stephen Power contributed to this article.
Write to Janet Adamy at janet.adamy@wsj.com
Sunday, July 19, 2009
China is Building Bubble
Jiawen (Kevin) Zhou
本周央行计划向部分银行发行总额为1000亿人民币的一年期定向央票。时隔两年，央行重启具有惩罚意图的定向票据，调整流动性的意图已非常明显。央行曾在06-07年的通胀周期下频繁发行定向票据，最近一次发行是07年9月份（也就是市场在顶部的时候）。此次央行计划发行的定向票据利率为1.5%，将于9月份缴款。发行对象未确定，可能主要面向股份制商业银行，意在警示商业银行切勿再突击放贷。6月份新增贷款高达1.53万亿，上半年累计7.37万亿，超过全年的贷款目标下限5万亿元。此次发行定向票据出乎市场意料。政府面临着收紧银根会让经济二次探底的风险和延续宽松货币基调则加剧资产泡沫的风险。目前货币政策从之前的极度宽松向适度宽松转变。
与此同时，大小非减持也在加速。6月份大小非减持量连续第五个月超过10亿股，以12.4亿股的减持量再度创出历史新高，占6月份大小非解禁总股数126.7亿股的9.8%。前六月大小非累计减持346.9亿股，而A股截止6月底已解禁的大小非为2254.8亿股，减持的比例为15.4%，尚有86.6%的解禁股随时会套现。如果央行适度紧缩开始影响股市，那么大小非减持的速度会加快。
房地产板块近期已显疲态，与部分城市收紧二套房政策有关。上述因素为不利因素，但一些指数基金的推出则对大盘股有支撑作用。另外中小盘股则有蓄势待发的迹象。总的看来，A股在往下反转之前，依然有上升空间。而一旦股市反转泡沫破灭，则中国可能面临着比08年更严峻的局面，因为政府的货币与财政政策无法像08年底-09上半年那样宽松，而且私人资本在第二次泡沫破灭中财富被消灭的更多。
在08-09的经济衰退中，需求剧降，而产能又过剩，投资机会非常少，所以私人资本不愿意贷款来投入生产（投入更多，亏损越多）。那么私人资本前些年积累的财富往哪儿放？去上海北京买房，去买股票。或者用银行贷款来维持生产，而用自己的钱投入房市股市（所以银行在查信贷走向时很难查到信贷资金真正的去向）。国企贷款则有三个流向：基础设施建设，以更高利率转贷给私人资本，以及投入房市与股市（北京最近的新地王就是政府国企背景的公司）。
茅于轼说中国的房地产价格高是因为人民太有钱了，其实他说的是对的，只不过是少数人太有钱了，推高了一线城市的房价，而一般的白领，如果非要坚持“没有买房子就不结婚”的落后观念的话，就来为此心甘情愿的付出代价。
本周央行计划向部分银行发行总额为1000亿人民币的一年期定向央票。时隔两年，央行重启具有惩罚意图的定向票据，调整流动性的意图已非常明显。央行曾在06-07年的通胀周期下频繁发行定向票据，最近一次发行是07年9月份（也就是市场在顶部的时候）。此次央行计划发行的定向票据利率为1.5%，将于9月份缴款。发行对象未确定，可能主要面向股份制商业银行，意在警示商业银行切勿再突击放贷。6月份新增贷款高达1.53万亿，上半年累计7.37万亿，超过全年的贷款目标下限5万亿元。此次发行定向票据出乎市场意料。政府面临着收紧银根会让经济二次探底的风险和延续宽松货币基调则加剧资产泡沫的风险。目前货币政策从之前的极度宽松向适度宽松转变。
与此同时，大小非减持也在加速。6月份大小非减持量连续第五个月超过10亿股，以12.4亿股的减持量再度创出历史新高，占6月份大小非解禁总股数126.7亿股的9.8%。前六月大小非累计减持346.9亿股，而A股截止6月底已解禁的大小非为2254.8亿股，减持的比例为15.4%，尚有86.6%的解禁股随时会套现。如果央行适度紧缩开始影响股市，那么大小非减持的速度会加快。
房地产板块近期已显疲态，与部分城市收紧二套房政策有关。上述因素为不利因素，但一些指数基金的推出则对大盘股有支撑作用。另外中小盘股则有蓄势待发的迹象。总的看来，A股在往下反转之前，依然有上升空间。而一旦股市反转泡沫破灭，则中国可能面临着比08年更严峻的局面，因为政府的货币与财政政策无法像08年底-09上半年那样宽松，而且私人资本在第二次泡沫破灭中财富被消灭的更多。
在08-09的经济衰退中，需求剧降，而产能又过剩，投资机会非常少，所以私人资本不愿意贷款来投入生产（投入更多，亏损越多）。那么私人资本前些年积累的财富往哪儿放？去上海北京买房，去买股票。或者用银行贷款来维持生产，而用自己的钱投入房市股市（所以银行在查信贷走向时很难查到信贷资金真正的去向）。国企贷款则有三个流向：基础设施建设，以更高利率转贷给私人资本，以及投入房市与股市（北京最近的新地王就是政府国企背景的公司）。
茅于轼说中国的房地产价格高是因为人民太有钱了，其实他说的是对的，只不过是少数人太有钱了，推高了一线城市的房价，而一般的白领，如果非要坚持“没有买房子就不结婚”的落后观念的话，就来为此心甘情愿的付出代价。
Earnings Uptick Lifts Confidence
Stock Market Soars for the Week as Early Corporate Reports Handily Beat Estimates
By E.S. BROWNING
The first wave of quarterly corporate earnings reports arrived stronger than expected, soothing investor fears of another economic crisis and helping push the Dow Jones Industrial Average to its strongest weekly gain since March.
The Dow ended the week up 7.3% at 8743.94, taking just five days to recover almost all the 7.4% decline of the previous four weeks, as investors took heart from blowout earnings by Goldman Sachs Group Inc. and positive comments from J.P. Morgan Chase & Co. and Intel Corp.
Even less-than-stellar reports from Bank of America Corp., Citigroup Inc. and General Electric Co. failed to halt the Dow's advance.
Only about 11% of major companies have reported second-quarter results so far. Plenty of surprises may await as more than half make their announcements in the coming two weeks.
But up to now, 71% of those reporting have beaten analysts' expectations. While forecasts were quite low, that is notably stronger than the 61% that typically surpass estimates, according to Thomson Reuters. And several big companies, including International Business Machines, J.P. Morgan and Intel, have made relatively upbeat comments about the future.
The Dow, which is made up of 30 blue-chip stocks including Bank of America, Intel, IBM, J.P. Morgan and GE, closed Friday up 32.12 at 8743.94. It remains down 38% from its 2007 record close.
Although the profit news has been better than expected, it still isn't especially good, and investors aren't exactly celebrating. Analysts still forecast that all 10 of the major industry groups represented in the Standard & Poor's 500-stock index, from finance to technology to energy, will post second-quarter declines in profit compared to one year ago. They continue to forecast a profit decline for the S&P 500 companies overall for all of 2009.
Investors agree that the road ahead will be rocky, and many still hold more cash than normal. The most bearish warn that investor confidence isn't strong enough to push stocks significantly higher, and that another severe stock slump could come in September or October, which historically have been dicey months for financial markets.
For now, the presence of cash on the sidelines is considered good for the market, because it gives investors what analysts call "dry powder" that they can move into stocks as their confidence gradually improves.
"The government has saved the banks, and therefore the Armageddon calamity is just not likely," said Henry Herrmann, chief executive of money-management group Waddell & Reed. "On the other hand, we haven't necessarily fixed the banks, which was manifest in the Citigroup and Bank of America earnings reports."
In its commentary on its earnings, Citigroup suggested that growth in bad consumer loans may be moderating. But that means loans are continuing to go bad, just at a slower pace. Bank of America warned that "profitability will be much tougher in the second half of the year than it was in the first half" and that credit losses are likely to rise.
Mr. Herrmann's firm has gone to 7% cash today from 22% in the first quarter. That is still above the 2% or 3% that would be normal for his firm, which manages about $57 billion.
Companies such as IBM still are reporting declining sales from a year ago, so that their profit gains are based more on cost-cutting than on a real improvement in the market. Even Google Inc. reported slowing sales increases.
GE, which reported a 49% second-quarter net income decline Friday, was hurt by softness in its industrial-order backlog, on which analysts had been counting to offset weakness in its financial-services side.
The stock market is recovering not so much on signs of real economic progress, but on relief that disaster may have been averted. To become really bullish, money managers say they would want to see sales improve.
A report just out from Goldman Sachs warns that it could take years for economic demand to get back to normal.
"We find that under reasonable parameters of supply and demand growth, it will take at least two years, and probably more like three to five years, to eliminate spare capacity in the manufacturing sector," said the report from Goldman economist Andrew Tilton. "In the labor market, the unemployment rate is likely to remain above the current concept of 'normal' for an even longer period."
That would be bad news in an economy more than two-thirds dependent on consumer demand.
While Intel said it saw signs of better days ahead, executives at both Intel and Dell warned this week that businesses were delaying tech purchases and wringing more use out of older desktops and laptops. Intel said it isn't counting on significant new demand this year.
Such worries could limit stock gains in the second half. For now, investor expectations were so low that any signs of improvement at all were grounds for bidding stocks higher. Even news that the government was refusing to rescue small-business lender CIT Group Inc. wasn't enough to send stocks down. Investors appeared to agree with the government that CIT wasn't too big to fail.
At Harris Private Bank in Chicago, Chief Investment Officer Jack Ablin says he is preparing to move about 5% of the $60 billion his firm manages into stocks from bonds. Today his portfolio is made up of 60% stocks and 40% bonds, and Mr. Ablin plans to make the shift toward stocks in a bet on a gradual economic recovery.
Key Private Bank in Cleveland is mulling a similar shift. "We think the rally will continue through the end of the year," said Bruce McCain, who helps oversee about $20 billion as head of the investment strategy team there.
Mr. McCain is concerned that trading volume has been lighter than would be normal in a true stock rally, reflecting the continuing doubts of many investors.
"What we have found the most encouraging is the way so many companies reporting have tended to surprise on the positive side," Mr. McCain said. While the good news is coming more from cost-cutting than from real demand growth, "we would expect as the economy begins to stir, that the reports more broadly would be on the positive side in future quarters," he says.
He still worries that the economic recovery could be tepid. But that is something to worry about later, Mr. McCain adds. For now, he is moving money out of cash and into stocks, in a bet that the market will slowly move higher.
Write to E.S. Browning at jim.browning@wsj.com
By E.S. BROWNING
The first wave of quarterly corporate earnings reports arrived stronger than expected, soothing investor fears of another economic crisis and helping push the Dow Jones Industrial Average to its strongest weekly gain since March.
The Dow ended the week up 7.3% at 8743.94, taking just five days to recover almost all the 7.4% decline of the previous four weeks, as investors took heart from blowout earnings by Goldman Sachs Group Inc. and positive comments from J.P. Morgan Chase & Co. and Intel Corp.
Even less-than-stellar reports from Bank of America Corp., Citigroup Inc. and General Electric Co. failed to halt the Dow's advance.
Only about 11% of major companies have reported second-quarter results so far. Plenty of surprises may await as more than half make their announcements in the coming two weeks.
But up to now, 71% of those reporting have beaten analysts' expectations. While forecasts were quite low, that is notably stronger than the 61% that typically surpass estimates, according to Thomson Reuters. And several big companies, including International Business Machines, J.P. Morgan and Intel, have made relatively upbeat comments about the future.
The Dow, which is made up of 30 blue-chip stocks including Bank of America, Intel, IBM, J.P. Morgan and GE, closed Friday up 32.12 at 8743.94. It remains down 38% from its 2007 record close.
Although the profit news has been better than expected, it still isn't especially good, and investors aren't exactly celebrating. Analysts still forecast that all 10 of the major industry groups represented in the Standard & Poor's 500-stock index, from finance to technology to energy, will post second-quarter declines in profit compared to one year ago. They continue to forecast a profit decline for the S&P 500 companies overall for all of 2009.
Investors agree that the road ahead will be rocky, and many still hold more cash than normal. The most bearish warn that investor confidence isn't strong enough to push stocks significantly higher, and that another severe stock slump could come in September or October, which historically have been dicey months for financial markets.
For now, the presence of cash on the sidelines is considered good for the market, because it gives investors what analysts call "dry powder" that they can move into stocks as their confidence gradually improves.
"The government has saved the banks, and therefore the Armageddon calamity is just not likely," said Henry Herrmann, chief executive of money-management group Waddell & Reed. "On the other hand, we haven't necessarily fixed the banks, which was manifest in the Citigroup and Bank of America earnings reports."
In its commentary on its earnings, Citigroup suggested that growth in bad consumer loans may be moderating. But that means loans are continuing to go bad, just at a slower pace. Bank of America warned that "profitability will be much tougher in the second half of the year than it was in the first half" and that credit losses are likely to rise.
Mr. Herrmann's firm has gone to 7% cash today from 22% in the first quarter. That is still above the 2% or 3% that would be normal for his firm, which manages about $57 billion.
Companies such as IBM still are reporting declining sales from a year ago, so that their profit gains are based more on cost-cutting than on a real improvement in the market. Even Google Inc. reported slowing sales increases.
GE, which reported a 49% second-quarter net income decline Friday, was hurt by softness in its industrial-order backlog, on which analysts had been counting to offset weakness in its financial-services side.
The stock market is recovering not so much on signs of real economic progress, but on relief that disaster may have been averted. To become really bullish, money managers say they would want to see sales improve.
A report just out from Goldman Sachs warns that it could take years for economic demand to get back to normal.
"We find that under reasonable parameters of supply and demand growth, it will take at least two years, and probably more like three to five years, to eliminate spare capacity in the manufacturing sector," said the report from Goldman economist Andrew Tilton. "In the labor market, the unemployment rate is likely to remain above the current concept of 'normal' for an even longer period."
That would be bad news in an economy more than two-thirds dependent on consumer demand.
While Intel said it saw signs of better days ahead, executives at both Intel and Dell warned this week that businesses were delaying tech purchases and wringing more use out of older desktops and laptops. Intel said it isn't counting on significant new demand this year.
Such worries could limit stock gains in the second half. For now, investor expectations were so low that any signs of improvement at all were grounds for bidding stocks higher. Even news that the government was refusing to rescue small-business lender CIT Group Inc. wasn't enough to send stocks down. Investors appeared to agree with the government that CIT wasn't too big to fail.
At Harris Private Bank in Chicago, Chief Investment Officer Jack Ablin says he is preparing to move about 5% of the $60 billion his firm manages into stocks from bonds. Today his portfolio is made up of 60% stocks and 40% bonds, and Mr. Ablin plans to make the shift toward stocks in a bet on a gradual economic recovery.
Key Private Bank in Cleveland is mulling a similar shift. "We think the rally will continue through the end of the year," said Bruce McCain, who helps oversee about $20 billion as head of the investment strategy team there.
Mr. McCain is concerned that trading volume has been lighter than would be normal in a true stock rally, reflecting the continuing doubts of many investors.
"What we have found the most encouraging is the way so many companies reporting have tended to surprise on the positive side," Mr. McCain said. While the good news is coming more from cost-cutting than from real demand growth, "we would expect as the economy begins to stir, that the reports more broadly would be on the positive side in future quarters," he says.
He still worries that the economic recovery could be tepid. But that is something to worry about later, Mr. McCain adds. For now, he is moving money out of cash and into stocks, in a bet that the market will slowly move higher.
Write to E.S. Browning at jim.browning@wsj.com
Economist Predicts Recession Will Soon Be Over
While we're still in a recession, economists say there will likely be a turnaround this summer.
Don't feel bad if you're a bit confused about the financial news that came out this past week: Goldman Sachs and JP Morgan both reported huge quarterly profits, while CIT, one of the nation's largest commercial lenders, is on the verge of collapse. The Fed says unemployment will top 10 percent, and manufacturing and exports are stagnant. But consumer spending is up, and so is the stock market.
What's going on? Well, apparently, the recession is drawing to a close and will be over sometime this summer. At least that's what the folks at the Economic Cycles Research Institute say, and they've been pretty dead on so far.
"The reason we're so convinced — and we are quite convinced — that the recession is drawing to a close is because of leading indicators," Lakshman Achuthan, managing director at the institute, tells NPR's Guy Raz.
Unemployment Rate Versus Productivity
The ECRI categorizes indicators, like unemployment rates and productivity, as leading, lagging or coinciding with the business cycle. A lagging indicator would be the unemployment rate. Leading indicators include "drivers of the economy," such as housing activity, productivity, money growth and credit.
Different sequences of indicators point to different types of events. Achuthan says the ECRI sees a robust sequence of events that happen at the beginning and end of recessions, and indicators are showing it is likely that there will be a recovery soon.
"The key is that there is no one piece that we're hanging our hat on. It is a pervasive upturn in these leading indicators, and that is the hallmark of something that is going to persist for a few quarters, a year at least," Achuthan says. "And it is going to be pronounced."
Achuthan says that when you add up all the indicators without bias into a leading index, the picture becomes clear: These indexes are shooting up. And that says a lot. In the time that these indicators have been in existence, they have not made a mistake on a recession or a recovery poll, he says.
Still In A Recession, But Emerging
"First thing that's happening is that everything is getting less bad," Achuthan says. "They're still growing negative, so I think the recession — as far as I know at this second — is still on. But it's less negative than it was a few months ago." The pace of the recession has already begun to ease.
But "the end of the recession does not mean an immediate turn to prosperity," he says. "It means that the economy has stopped shrinking and has begun to grow."
He added, "We've lost 7 million jobs. It's going to take years to get those jobs back."
Don't feel bad if you're a bit confused about the financial news that came out this past week: Goldman Sachs and JP Morgan both reported huge quarterly profits, while CIT, one of the nation's largest commercial lenders, is on the verge of collapse. The Fed says unemployment will top 10 percent, and manufacturing and exports are stagnant. But consumer spending is up, and so is the stock market.
What's going on? Well, apparently, the recession is drawing to a close and will be over sometime this summer. At least that's what the folks at the Economic Cycles Research Institute say, and they've been pretty dead on so far.
"The reason we're so convinced — and we are quite convinced — that the recession is drawing to a close is because of leading indicators," Lakshman Achuthan, managing director at the institute, tells NPR's Guy Raz.
Unemployment Rate Versus Productivity
The ECRI categorizes indicators, like unemployment rates and productivity, as leading, lagging or coinciding with the business cycle. A lagging indicator would be the unemployment rate. Leading indicators include "drivers of the economy," such as housing activity, productivity, money growth and credit.
Different sequences of indicators point to different types of events. Achuthan says the ECRI sees a robust sequence of events that happen at the beginning and end of recessions, and indicators are showing it is likely that there will be a recovery soon.
"The key is that there is no one piece that we're hanging our hat on. It is a pervasive upturn in these leading indicators, and that is the hallmark of something that is going to persist for a few quarters, a year at least," Achuthan says. "And it is going to be pronounced."
Achuthan says that when you add up all the indicators without bias into a leading index, the picture becomes clear: These indexes are shooting up. And that says a lot. In the time that these indicators have been in existence, they have not made a mistake on a recession or a recovery poll, he says.
Still In A Recession, But Emerging
"First thing that's happening is that everything is getting less bad," Achuthan says. "They're still growing negative, so I think the recession — as far as I know at this second — is still on. But it's less negative than it was a few months ago." The pace of the recession has already begun to ease.
But "the end of the recession does not mean an immediate turn to prosperity," he says. "It means that the economy has stopped shrinking and has begun to grow."
He added, "We've lost 7 million jobs. It's going to take years to get those jobs back."
Friday, July 17, 2009
The Joy of Sachs
Sign in to Recommend
By PAUL KRUGMAN
Published: July 16, 2009
The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?
First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.
Second, it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away.
Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.
Let’s start by talking about how Goldman makes money.
Over the past generation — ever since the banking deregulation of the Reagan years — the U.S. economy has been “financialized.” The business of moving money around, of slicing, dicing and repackaging financial claims, has soared in importance compared with the actual production of useful stuff. The sector officially labeled “securities, commodity contracts and investments” has grown especially fast, from only 0.3 percent of G.D.P. in the late 1970s to 1.7 percent of G.D.P. in 2007.
Such growth would be fine if financialization really delivered on its promises — if financial firms made money by directing capital to its most productive uses, by developing innovative ways to spread and reduce risk. But can anyone, at this point, make those claims with a straight face? Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls. They increased risk rather than reducing it, and concentrated risk rather than spreading it. In effect, the industry was selling dangerous patent medicine to gullible consumers.
Goldman’s role in the financialization of America was similar to that of other players, except for one thing: Goldman didn’t believe its own hype. Other banks invested heavily in the same toxic waste they were selling to the public at large. Goldman, famously, made a lot of money selling securities backed by subprime mortgages — then made a lot more money by selling mortgage-backed securities short, just before their value crashed. All of this was perfectly legal, but the net effect was that Goldman made profits by playing the rest of us for suckers.
And Wall Streeters have every incentive to keep playing that kind of game.
The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win, tails other people lose. If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand.
And the events of the past year have skewed those incentives even more, by putting taxpayers as well as investors on the hook if things go wrong.
I won’t try to parse the competing claims about how much direct benefit Goldman received from recent financial bailouts, especially the government’s assumption of A.I.G.’s liabilities. What’s clear is that Wall Street in general, Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong.
You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.
Now the last time there was a comparable expansion of the financial safety net, the creation of federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure that banks didn’t abuse their privileges. This time, new regulations are still in the drawing-board stage — and the finance lobby is already fighting against even the most basic protections for consumers.
If these lobbying efforts succeed, we’ll have set the stage for an even bigger financial disaster a few years down the road. The next crisis could look something like the savings-and-loan mess of the 1980s, in which deregulated banks gambled with, or in some cases stole, taxpayers’ money — except that it would involve the financial industry as a whole.
The bottom line is that Goldman’s blowout quarter is good news for Goldman and the people who work there. It’s good news for financial superstars in general, whose paychecks are rapidly climbing back to precrisis levels. But it’s bad news for almost everyone else.
By PAUL KRUGMAN
Published: July 16, 2009
The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?
First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.
Second, it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away.
Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.
Let’s start by talking about how Goldman makes money.
Over the past generation — ever since the banking deregulation of the Reagan years — the U.S. economy has been “financialized.” The business of moving money around, of slicing, dicing and repackaging financial claims, has soared in importance compared with the actual production of useful stuff. The sector officially labeled “securities, commodity contracts and investments” has grown especially fast, from only 0.3 percent of G.D.P. in the late 1970s to 1.7 percent of G.D.P. in 2007.
Such growth would be fine if financialization really delivered on its promises — if financial firms made money by directing capital to its most productive uses, by developing innovative ways to spread and reduce risk. But can anyone, at this point, make those claims with a straight face? Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls. They increased risk rather than reducing it, and concentrated risk rather than spreading it. In effect, the industry was selling dangerous patent medicine to gullible consumers.
Goldman’s role in the financialization of America was similar to that of other players, except for one thing: Goldman didn’t believe its own hype. Other banks invested heavily in the same toxic waste they were selling to the public at large. Goldman, famously, made a lot of money selling securities backed by subprime mortgages — then made a lot more money by selling mortgage-backed securities short, just before their value crashed. All of this was perfectly legal, but the net effect was that Goldman made profits by playing the rest of us for suckers.
And Wall Streeters have every incentive to keep playing that kind of game.
The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win, tails other people lose. If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand.
And the events of the past year have skewed those incentives even more, by putting taxpayers as well as investors on the hook if things go wrong.
I won’t try to parse the competing claims about how much direct benefit Goldman received from recent financial bailouts, especially the government’s assumption of A.I.G.’s liabilities. What’s clear is that Wall Street in general, Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong.
You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.
Now the last time there was a comparable expansion of the financial safety net, the creation of federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure that banks didn’t abuse their privileges. This time, new regulations are still in the drawing-board stage — and the finance lobby is already fighting against even the most basic protections for consumers.
If these lobbying efforts succeed, we’ll have set the stage for an even bigger financial disaster a few years down the road. The next crisis could look something like the savings-and-loan mess of the 1980s, in which deregulated banks gambled with, or in some cases stole, taxpayers’ money — except that it would involve the financial industry as a whole.
The bottom line is that Goldman’s blowout quarter is good news for Goldman and the people who work there. It’s good news for financial superstars in general, whose paychecks are rapidly climbing back to precrisis levels. But it’s bad news for almost everyone else.
China Adds to Treasury Pile, With Bias to Short End
By MIN ZENG
China lifted its Treasury holdings by $38 billion in May to a total $801.5 billion, cementing its stronghold as the U.S.'s biggest creditor and increasing its importance for U.S. policy makers.
Still, improved risk appetite in May prompted foreign investors to sell long-dated U.S. Treasurys, which investors often turn to as a haven investment in times of uncertainty.
Overall, because of their buying of U.S. stocks, foreign investors bought $7.9 billion in long-term U.S. securities. U.S. investors bought $27.7 billion in foreign securities, for a net capital outflow from the U.S. of $19.8 billion in the long-term securities market, after net inflows of $11.5 billion in April, according to the monthly Treasury International Capital report released Thursday.
Foreign investors, who account for more than half of the Treasury market, sold $22.55 billion in Treasury notes and bonds in May, compared with net purchases of $41.89 billion the month before. U.S. corporate bonds, stocks and agency debt issued by the housing-finance giants Fannie Mae and Freddie Mac benefited from a move out of low-risk government debt.
Some central banks joined the move out of U.S. debt, with Japan and Russia cutting Treasury holdings in May. But China ramped up its purchases, posting the biggest one-month increase since last October. China now holds more than 20% of total Treasury holdings among foreign central banks and nearly matches the total amount Japan and Russia hold together.
Still, of the $38 billion increase in China's Treasury holdings in May, $34 billion went to short-term Treasury bills, noted Kathy Lien, director of currency research at Global Forex Trading in New York.
That change took place as the dollar lost 7.2% against the euro in May amid rising fears the U.S. government's aggressive fiscal and monetary policies could lead to a significant devaluation of the greenback, which would hurt the value of China's Treasury holdings.
"Although their reliance on the U.S. prevents them from aggressively selling dollars outright, their switch from long to short-dated securities is a precautionary measure in case they need to move money around," Ms. Lien said.
But the overall increase in holdings is good news for the U.S., which has to sell a record amount of government debt to cover its surging budget shortfalls. China's Treasury purchases also may help calm fears in the Treasury market of a sudden drop in demand.
It also underlines China's status as a major world power. "The more Treasurys China buys, the more it becomes a stakeholder," said Stephen Jen, managing director of macroeconomics and currencies at BlueGold Capital Management LLP in London. "They are like a shareholder in the U.S. and their voices have to be heard."
Tony Crescenzi, portfolio manager at Pacific Investment Management Co. in Newport Beach, Calif., said the increase in China's purchase of Treasurys "almost certainly relates to its increase in foreign reserves," as these flows tend to be recycled back to dollar assets.
China's reserves have increased sharply as the economy rebounded strongly in the second quarter, standing at a record $2.13 trillion in June. The rebound, however, has been driven by the government's stimulus package, while the export sector continues to suffer from weak global demand. To support the export industry, Chinese policy makers would like to see a relatively weak yuan, hence the need to recycle foreign reserves into Treasurys.
The yuan has been relatively steady against the dollar, after appreciating more than 6% a year in 2007 and 2008.
China lifted its Treasury holdings by $38 billion in May to a total $801.5 billion, cementing its stronghold as the U.S.'s biggest creditor and increasing its importance for U.S. policy makers.
Still, improved risk appetite in May prompted foreign investors to sell long-dated U.S. Treasurys, which investors often turn to as a haven investment in times of uncertainty.
Overall, because of their buying of U.S. stocks, foreign investors bought $7.9 billion in long-term U.S. securities. U.S. investors bought $27.7 billion in foreign securities, for a net capital outflow from the U.S. of $19.8 billion in the long-term securities market, after net inflows of $11.5 billion in April, according to the monthly Treasury International Capital report released Thursday.
Foreign investors, who account for more than half of the Treasury market, sold $22.55 billion in Treasury notes and bonds in May, compared with net purchases of $41.89 billion the month before. U.S. corporate bonds, stocks and agency debt issued by the housing-finance giants Fannie Mae and Freddie Mac benefited from a move out of low-risk government debt.
Some central banks joined the move out of U.S. debt, with Japan and Russia cutting Treasury holdings in May. But China ramped up its purchases, posting the biggest one-month increase since last October. China now holds more than 20% of total Treasury holdings among foreign central banks and nearly matches the total amount Japan and Russia hold together.
Still, of the $38 billion increase in China's Treasury holdings in May, $34 billion went to short-term Treasury bills, noted Kathy Lien, director of currency research at Global Forex Trading in New York.
That change took place as the dollar lost 7.2% against the euro in May amid rising fears the U.S. government's aggressive fiscal and monetary policies could lead to a significant devaluation of the greenback, which would hurt the value of China's Treasury holdings.
"Although their reliance on the U.S. prevents them from aggressively selling dollars outright, their switch from long to short-dated securities is a precautionary measure in case they need to move money around," Ms. Lien said.
But the overall increase in holdings is good news for the U.S., which has to sell a record amount of government debt to cover its surging budget shortfalls. China's Treasury purchases also may help calm fears in the Treasury market of a sudden drop in demand.
It also underlines China's status as a major world power. "The more Treasurys China buys, the more it becomes a stakeholder," said Stephen Jen, managing director of macroeconomics and currencies at BlueGold Capital Management LLP in London. "They are like a shareholder in the U.S. and their voices have to be heard."
Tony Crescenzi, portfolio manager at Pacific Investment Management Co. in Newport Beach, Calif., said the increase in China's purchase of Treasurys "almost certainly relates to its increase in foreign reserves," as these flows tend to be recycled back to dollar assets.
China's reserves have increased sharply as the economy rebounded strongly in the second quarter, standing at a record $2.13 trillion in June. The rebound, however, has been driven by the government's stimulus package, while the export sector continues to suffer from weak global demand. To support the export industry, Chinese policy makers would like to see a relatively weak yuan, hence the need to recycle foreign reserves into Treasurys.
The yuan has been relatively steady against the dollar, after appreciating more than 6% a year in 2007 and 2008.
Corporate bond boom forecast to taper off
By Jennifer Hughes
Published: July 16 2009 19:19 Last updated: July 16 2009 19:19
The boom in European corporate bond issuance will fade as the year goes on, according to analysts at JPMorgan in a note that could help deflate talk of a permanent shift towards more bond deals.
Tight bank lending and investor appetite for bonds’ relatively high yields sparked a borrowing boom this year that has taken the total issuance by European corporates past any previous full-year record. Euro-denominated issuance is also poised to beat its previous €200bn ($282.4bn) full-year record in the coming days.
But JPMorgan’s credit team predicted new investment-grade paper in the second half would total €95bn – half the €189bn in the first six months of the year, according to data from Dealogic.
The analysts said the first half had been boosted by financing for a handful of giant mergers and by a rush to refinance debt due in 2010 – most of which had been done.
“All this leaves us with the overriding impression that second-half issuance will be driven either by second-tier borrowers or, more opportunistically, by the top tier as they continue to reconfigure their liabilities from loans to bonds,” said Stephen Dulake of JPMorgan.
The slowdown in new paper could also damp the belief of some market participants that the issuance boom signalled a longer-term trend of companies switching financing from banks to the markets.
European companies have traditionally relied more heavily on banks than their US counterparts, so bond markets have been smaller and less liquid than their American cousins.
But this year the banks’ own struggles have pushed European companies towards the public markets. For the first time since 2002, issuance by non-financial companies outweighed issuance by the financial sector in the year to June.
This in turn triggered speculation that corporate treasurers, scarred by the experiences of the crisis, would become more comfortable using bonds to spread the risks of being reliant on banks with their shorter-term lending.
Published: July 16 2009 19:19 Last updated: July 16 2009 19:19
The boom in European corporate bond issuance will fade as the year goes on, according to analysts at JPMorgan in a note that could help deflate talk of a permanent shift towards more bond deals.
Tight bank lending and investor appetite for bonds’ relatively high yields sparked a borrowing boom this year that has taken the total issuance by European corporates past any previous full-year record. Euro-denominated issuance is also poised to beat its previous €200bn ($282.4bn) full-year record in the coming days.
But JPMorgan’s credit team predicted new investment-grade paper in the second half would total €95bn – half the €189bn in the first six months of the year, according to data from Dealogic.
The analysts said the first half had been boosted by financing for a handful of giant mergers and by a rush to refinance debt due in 2010 – most of which had been done.
“All this leaves us with the overriding impression that second-half issuance will be driven either by second-tier borrowers or, more opportunistically, by the top tier as they continue to reconfigure their liabilities from loans to bonds,” said Stephen Dulake of JPMorgan.
The slowdown in new paper could also damp the belief of some market participants that the issuance boom signalled a longer-term trend of companies switching financing from banks to the markets.
European companies have traditionally relied more heavily on banks than their US counterparts, so bond markets have been smaller and less liquid than their American cousins.
But this year the banks’ own struggles have pushed European companies towards the public markets. For the first time since 2002, issuance by non-financial companies outweighed issuance by the financial sector in the year to June.
This in turn triggered speculation that corporate treasurers, scarred by the experiences of the crisis, would become more comfortable using bonds to spread the risks of being reliant on banks with their shorter-term lending.
Thursday, July 16, 2009
The start of something big?
Jul 8th 2009
From The Economist print edition
Solar electricity may be about to attract real money
IT IS an old idea. Build solar power stations in the Sahara desert and transport the electricity produced to Europe using high-voltage, direct-current (HVDC) cables. It is simple in theory, but hard in practice—and very, very costly. But it is a carbon-dioxide-free way of making a lot of electricity, and a collecting area the size of Austria could supply the world.
A meeting on July 13th might get the ball rolling. Munich Re, the world’s largest reinsurance company, has invited 20 large companies (including Siemens, Germany’s engineering giant; power suppliers RWE and E.ON; and Deutsche Bank, Germany’s biggest) to join it in forming a consortium called Desertec. If all goes well, this will eventually build a legion of solar power stations in Africa and Arabia, and connect them to Europe.
The power stations in question will be “solar thermal”, rather than the better known sort relying on photovoltaic solar cells. In other words, instead of converting the sun’s rays directly into electricity using expensive semiconductor-grade silicon, they will use cheap metal mirrors to focus those rays either onto boilers that make steam to drive turbines, or onto containers of special low-melting-point salts that will store heat overnight, so that it is available to drive turbines during the hours of darkness.
Munich Re’s interest in the matter is to reduce the effects of global warming. “Climate change affects our core business of weather-related natural catastrophes,” says Peter Höppe, the head of the firm’s “geo risks research” department. Munich Re hopes that introducing solar power on a large scale will at least slow the process down a bit.
Large-scale investment would also provide economies of scale and stimulate innovation, thus reducing the cost of solar electricity. At the moment, no form of solar power is as cheap as coal-generated electricity, but solar-thermal is reckoned by many to be a better bet to get there than photovoltaics—a task that is also made easier by the extra cost of the permits to emit carbon-dioxide that the European Union now requires the operators of coal-fired power stations to hold.
If the scheme were implemented in full, it would involve spending €400 billion ($560 billion) at today’s prices, over the next 40 years, building enough solar power stations to satisfy 15% of European demand in 2050—together with most of North Africa’s and Arabia’s—and about 20 trans-Mediterranean HVDC cables which, unlike conventional AC power lines, can transmit power over long distances and through water without significant losses. A bold proposal, then. But not a completely outrageous one. As the old Chinese proverb has it, even a journey of 1,000 miles begins with a single step.
From The Economist print edition
Solar electricity may be about to attract real money
IT IS an old idea. Build solar power stations in the Sahara desert and transport the electricity produced to Europe using high-voltage, direct-current (HVDC) cables. It is simple in theory, but hard in practice—and very, very costly. But it is a carbon-dioxide-free way of making a lot of electricity, and a collecting area the size of Austria could supply the world.
A meeting on July 13th might get the ball rolling. Munich Re, the world’s largest reinsurance company, has invited 20 large companies (including Siemens, Germany’s engineering giant; power suppliers RWE and E.ON; and Deutsche Bank, Germany’s biggest) to join it in forming a consortium called Desertec. If all goes well, this will eventually build a legion of solar power stations in Africa and Arabia, and connect them to Europe.
The power stations in question will be “solar thermal”, rather than the better known sort relying on photovoltaic solar cells. In other words, instead of converting the sun’s rays directly into electricity using expensive semiconductor-grade silicon, they will use cheap metal mirrors to focus those rays either onto boilers that make steam to drive turbines, or onto containers of special low-melting-point salts that will store heat overnight, so that it is available to drive turbines during the hours of darkness.
Munich Re’s interest in the matter is to reduce the effects of global warming. “Climate change affects our core business of weather-related natural catastrophes,” says Peter Höppe, the head of the firm’s “geo risks research” department. Munich Re hopes that introducing solar power on a large scale will at least slow the process down a bit.
Large-scale investment would also provide economies of scale and stimulate innovation, thus reducing the cost of solar electricity. At the moment, no form of solar power is as cheap as coal-generated electricity, but solar-thermal is reckoned by many to be a better bet to get there than photovoltaics—a task that is also made easier by the extra cost of the permits to emit carbon-dioxide that the European Union now requires the operators of coal-fired power stations to hold.
If the scheme were implemented in full, it would involve spending €400 billion ($560 billion) at today’s prices, over the next 40 years, building enough solar power stations to satisfy 15% of European demand in 2050—together with most of North Africa’s and Arabia’s—and about 20 trans-Mediterranean HVDC cables which, unlike conventional AC power lines, can transmit power over long distances and through water without significant losses. A bold proposal, then. But not a completely outrageous one. As the old Chinese proverb has it, even a journey of 1,000 miles begins with a single step.
Google Q2 2009
--Rev 5.52 bil, up 3% from Q2 2008, flat from Q1 2009
--Paid Clicks increased approximately 15% over the second quarter of 2008 and decreased approximately 2% over the first quarter of 2009. This might be red flag.
--Cost per click decreased approximately 13% over the second quarter of 2008 and increased approximately 5% over the first quarter of 2009.
--Paid Clicks increased approximately 15% over the second quarter of 2008 and decreased approximately 2% over the first quarter of 2009. This might be red flag.
--Cost per click decreased approximately 13% over the second quarter of 2008 and increased approximately 5% over the first quarter of 2009.
IBM Q2 2009
--Revenue: 23.3 bil, down 13% or 7% adjusting for currency, up against 21.7 in Q1 2009
--gross prfoit margin 45.5%, up 2.3%
--Net Income: 3.1 bil, up 12%
--inventory 2,691 mil, down from 2,759 mil in Q1 2009
--gross prfoit margin 45.5%, up 2.3%
--Net Income: 3.1 bil, up 12%
--inventory 2,691 mil, down from 2,759 mil in Q1 2009
Credit Card Holders Delinquency Rate Improved In June
NEW YORK (AP) — Two major credit card providers reported
more improvements in delinquency rates in June on Wednesday, an
encouraging sign that borrowers are not in as bad shape as many
had feared.
American Express Co. said in a regulatory filing that
accounts at least 30 days past due shrunk to 4.4 percent of
total loans during the month ended June 30, after falling to 4.7
percent in May and 4.9 percent in April.
Capital One Financial Corp., a major credit card issuer
based in McLean, Va., said its delinquency rate among U.S. cards
improved for a fourth straight month, falling to 4.77 percent
from 4.9 percent in May.
Investors cheered the improving delinquency data, sending
shares of both companies sharply higher. American Express rose
$2.76, or 11.3 percent, to close at $27.22, while Capital One
rose $2.73, or 11.8 percent, to $25.84.
Despite the improvement in delinquency rates, both
companies reported mixed results on another measure — the
percentage of loans they have given up on as unrecoverable, or
charge-offs.
more improvements in delinquency rates in June on Wednesday, an
encouraging sign that borrowers are not in as bad shape as many
had feared.
American Express Co. said in a regulatory filing that
accounts at least 30 days past due shrunk to 4.4 percent of
total loans during the month ended June 30, after falling to 4.7
percent in May and 4.9 percent in April.
Capital One Financial Corp., a major credit card issuer
based in McLean, Va., said its delinquency rate among U.S. cards
improved for a fourth straight month, falling to 4.77 percent
from 4.9 percent in May.
Investors cheered the improving delinquency data, sending
shares of both companies sharply higher. American Express rose
$2.76, or 11.3 percent, to close at $27.22, while Capital One
rose $2.73, or 11.8 percent, to $25.84.
Despite the improvement in delinquency rates, both
companies reported mixed results on another measure — the
percentage of loans they have given up on as unrecoverable, or
charge-offs.
Wednesday, July 15, 2009
Shanghai Yuyuan to Sell Bonds as China Lifts Ban
China ended a 10-month moratorium on the issuance of exchange-traded corporate bonds Tuesday by giving Shanghai Yuyuan Tourist Mart Co. permission to sell 500 million yuan ($73.2 million) worth of the bonds.
The five-year bonds will be sold on the Shanghai Stock Exchange on Friday.
Exchange-traded bonds are one of three categories of bonds in China's complex corporate-bond market. Such bonds are typically sold by listed companies and supervised by the China Securities Regulatory Commission.
The relaxation of restrictions in this particular section of the corporate-debt market comes on the heels of the CSRC's decision last month to resume initial public offerings after a nine-month hiatus. It also reflects Beijing's growing ease with the domestic capital markets' capacity and appetite for supply as the economic recovery gains traction.
'China may want to test the water by initially opening the door to small-sized bond issues,' said Dong Chengjiang, a bond analyst at Shenyin Wanguo Securities. 'The regulator is likely to allow bigger offerings if the market gives a positive response, repeating the pattern of the IPO resumption.'
Mr. Dong said he expects local companies to issue between 120 billion yuan and 180 billion yuan worth of exchange-traded bonds this year.
Shanghai Yuyuan said it will use the proceeds from the bond issue to repay bank loans and to supplement its working capital.
Haitong Securities Co. will be the main underwriter of the deal, it said.
The National Development and Reform Commission, China's top economic-planning agency, regulates bonds issued by mostly state-owned enterprises and government agencies for long-term funding needs. The Chinese central bank operates a separate medium-term note program and approves sales of short-term bills.
The CSRC imposed its moratorium on stock-exchange corporate-bond issues and IPOs in September as part of its efforts to boost China's equities market.
The last exchange-traded bond was a 5.9 billion yuan issue by China Vanke Co., the country's biggest property developer, in September.
Before the bond moratorium, nearly 40 companies had gained preliminary regulatory approval for bond issues, with a combined issuance size of about 140 billion yuan.
Among them, PetroChina Co., China's largest listed oil and gas producer by capacity, proposed selling 30 billion yuan worth of debt, and China Petroleum & Chemical Corp. planned to issue 20 billion yuan worth of bonds.
Wang Ming
The five-year bonds will be sold on the Shanghai Stock Exchange on Friday.
Exchange-traded bonds are one of three categories of bonds in China's complex corporate-bond market. Such bonds are typically sold by listed companies and supervised by the China Securities Regulatory Commission.
The relaxation of restrictions in this particular section of the corporate-debt market comes on the heels of the CSRC's decision last month to resume initial public offerings after a nine-month hiatus. It also reflects Beijing's growing ease with the domestic capital markets' capacity and appetite for supply as the economic recovery gains traction.
'China may want to test the water by initially opening the door to small-sized bond issues,' said Dong Chengjiang, a bond analyst at Shenyin Wanguo Securities. 'The regulator is likely to allow bigger offerings if the market gives a positive response, repeating the pattern of the IPO resumption.'
Mr. Dong said he expects local companies to issue between 120 billion yuan and 180 billion yuan worth of exchange-traded bonds this year.
Shanghai Yuyuan said it will use the proceeds from the bond issue to repay bank loans and to supplement its working capital.
Haitong Securities Co. will be the main underwriter of the deal, it said.
The National Development and Reform Commission, China's top economic-planning agency, regulates bonds issued by mostly state-owned enterprises and government agencies for long-term funding needs. The Chinese central bank operates a separate medium-term note program and approves sales of short-term bills.
The CSRC imposed its moratorium on stock-exchange corporate-bond issues and IPOs in September as part of its efforts to boost China's equities market.
The last exchange-traded bond was a 5.9 billion yuan issue by China Vanke Co., the country's biggest property developer, in September.
Before the bond moratorium, nearly 40 companies had gained preliminary regulatory approval for bond issues, with a combined issuance size of about 140 billion yuan.
Among them, PetroChina Co., China's largest listed oil and gas producer by capacity, proposed selling 30 billion yuan worth of debt, and China Petroleum & Chemical Corp. planned to issue 20 billion yuan worth of bonds.
Wang Ming
中国6月末M2再创增速新高
中国6月末广义货币供应量(M2)继续维持高速增长，再创增速新高，同时6月份当月新增贷款也大幅增加，显示货币信贷环境依然异常宽松。
中国央行周三公布，截至2009年6月末M2为人民币56.89万亿元，较上年同期增长28.46%，增速快于5月末的25.74%，再创1999年以来公开数据中的新高。
同时，中国6月末外汇储备余额2.13万亿美元，较上年同期增长17.84%。
此外，中国6月份当月人民币新增贷款为人民币1.53万亿元，较上年同期多增加1.2万亿元。
而1－6月累计，人民币各项贷款增加7.37万亿元，较上年同期多增加4.92万亿元。
今年3月份当月新增人民币贷款曾创下1.89万亿元的历史高点。
中国2009年全年M2增速目标为17%左右，而此前3年的M2年度增速目标均为16%。为增加信贷对投资的支持力度以刺激经济增长，中国将今年的新增贷款目标设定在人民币5万亿元以上。
中国2008年全年新增人民币贷款4.91万亿元。
中国6月份货币信贷数据显示，中国当前流动性环境继续保持十分宽松的状态，这将有利于帮助中国经济在全球金融危机之下率先回暖。
不过，中国官方是否能够坚定支持当前强劲的货币信贷增速，将成为未来经济能否持续回暖的关键之一。
此外，继续不断增长的过度庞大的外汇储备也仍然是中国经济的隐忧所在。
中国央行周三公布，截至2009年6月末M2为人民币56.89万亿元，较上年同期增长28.46%，增速快于5月末的25.74%，再创1999年以来公开数据中的新高。
同时，中国6月末外汇储备余额2.13万亿美元，较上年同期增长17.84%。
此外，中国6月份当月人民币新增贷款为人民币1.53万亿元，较上年同期多增加1.2万亿元。
而1－6月累计，人民币各项贷款增加7.37万亿元，较上年同期多增加4.92万亿元。
今年3月份当月新增人民币贷款曾创下1.89万亿元的历史高点。
中国2009年全年M2增速目标为17%左右，而此前3年的M2年度增速目标均为16%。为增加信贷对投资的支持力度以刺激经济增长，中国将今年的新增贷款目标设定在人民币5万亿元以上。
中国2008年全年新增人民币贷款4.91万亿元。
中国6月份货币信贷数据显示，中国当前流动性环境继续保持十分宽松的状态，这将有利于帮助中国经济在全球金融危机之下率先回暖。
不过，中国官方是否能够坚定支持当前强劲的货币信贷增速，将成为未来经济能否持续回暖的关键之一。
此外，继续不断增长的过度庞大的外汇储备也仍然是中国经济的隐忧所在。
Small Business Faces Big Bite
House Health Bill Penalizes All but Tiniest Employers for Not Providing Insurance
By JANET ADAMY and LAURA MECKLER
House Democrats on Tuesday unveiled sweeping health-care legislation that would hit all but the smallest businesses with a penalty equal to 8% of payroll if they fail to provide health insurance to workers.
The House bill, which also would impose new taxes on the wealthy estimated to bring in more than $544 billion over a decade, came as lawmakers in the Senate raced against a self-imposed deadline of this week to introduce a bill in time for action this summer.
Senators face a tougher battle because they are striving for a bipartisan bill. Key senators are weighing a combination of several more-modest fund-raising provisions, including some new fees on health-care industries.
Under the House measure, employers with payrolls exceeding $400,000 a year would have to provide health insurance or pay the 8% penalty. Employers with payrolls between $250,000 and $400,000 a year would pay a smaller penalty, and those less than $250,000 would be exempt. Certain small firms would get tax credits to help buy coverage.
The relatively low thresholds for penalties triggered the sharpest criticism yet from employer groups, who said the burden on small business is too high and doesn't do enough to help them expand insurance coverage.
According to 2006 data from the federation, businesses with between five and nine workers, representing about one million employers, had an average payroll of around $375,000 a year. A report from the Kaiser Family Foundation found that only about half of firms with three to nine workers offered health benefits in 2008.
House Speaker Nancy Pelosi unveiled the measure on Tuesday, praising it as a historic step toward insuring all Americans that has eluded lawmakers for decades. "This bill is a starting point and a path to success to lower costs to consumers and businesses," the California Democrat said.
The Congressional Budget Office on Tuesday calculated the cost of the House's plan to expand insurance coverage at $1.04 trillion over 10 years, and predicted the measure would eventually lead 97% of legal American residents to have insurance. That's in line with President Barack Obama's desired budget for a health overhaul and lawmakers' pledges for expanding coverage.
The estimate doesn't factor in the plan to pay for the bill, including the new tax on wealthy Americans, or certain changes to Medicare and Medicaid, all of which could affect the final price tag.
The House bill would place new taxes on the wealthiest people to help expand insurance coverage to the nation's 46 million uninsured people. The legislation calls for a 5.4% surtax on those with annual gross incomes exceeding $1 million.
Households with annual income between $500,000 a year and $1 million would be hit with a 1.5% surtax, and those earning between $350,000 and $500,000 would face a 1% surtax. Those rates could eventually increase to 3% and 2%, respectively, if the government doesn't achieve certain health-cost savings.
The 1,018-page initiative contains several components pushed by liberal Democrats that were long expected to be part of House legislation, but which face considerable opposition in the Senate. Most notably, the House bill creates a new public health-insurance plan aimed at individuals and small businesses that otherwise can't get affordable coverage.
The House measure would bar insurance companies from denying coverage to individuals who are sick, while also requiring most Americans to carry health insurance or pay a penalty equal to about 2.5% of their gross income. It would provide families earning up to $88,000 a year with subsidies to help them buy coverage. And it would expand health-insurance coverage through the Medicaid federal-state insurance program for the poor.
The Senate legislation is also expected to include mandates on insurers to provide coverage and individuals to carry it, although the details may differ. The bigger differences will come on the financing side, where many senators are cautious about introducing major new taxes on the wealthy to pay for health care.
The White House is pushing for action before the August recess in both houses of Congress to give lawmakers time to reconcile their two versions, pass that compromise through the House and the Senate and send Mr. Obama a final bill by autumn. The Senate Health, Education, Labor and Pensions Committee could approve its health overhaul bill as soon as Wednesday.
That will get merged with a bill in the Senate Finance Committee, where lawmakers are trying to craft a bipartisan measure. Chairman Max Baucus on Tuesday was pitching his colleagues on a plan to finance the bill through a combination of more-modest tax increases. He is trying to fill a hole of about $320 billion over 10 years, after Democrats objected to a provision to tax upper-end employee health benefits.
The fresh package included a new fee on pharmaceuticals and other health-care industries, and stiffer corporate-reporting measures aimed at collecting a greater share of corporate taxes owed each year, two Senate aides said.
Under the first proposal, health industries including drug makers and insurers would be charged an assessment, with individual companies' fees based on their market share. It's not clear how large the total assessment would be.
The proposal also seeks to raise $75 billion to $100 billion over 10 years by giving states an incentive to issue bonds that would help offset the expanded federal share of Medicaid.
"The goal here is a bunch of smaller, less controversial items that can add up," one official said.
The package may still include a modified version of the plan to tax high-end employer-provided health insurance, though on a smaller scale, aides said.
Mr. Baucus spent much of the day meeting one-on-one with members of his committee, and he put on an optimistic face. "We're going to pass very significant health reform this year," the Montana Democrat said.
But the pre-recess deadline appeared in danger as Republicans expressed concern that the process is moving too quickly.
Sen. Olympia Snowe, a key Republican whom Mr. Baucus is trying to win over, said Tuesday that the legislation is far too complex to rush and that she saw little chance of moving a bill through the Senate before the August break.
"I frankly couldn't imagine at this point bringing it to the floor and completing our deliberations...before the August recess," the Maine senator said. She said "arbitrary, artificial time frames really are not realistic given the magnitude of the task we are assigned to do."
In addition to health care, the White House also hopes for action on energy and financial-sector regulation, both of which would consume time this fall.
At a White House meeting with top Democratic leaders on Monday, Mr. Obama pushed Mr. Baucus to produce legislation by Thursday.
Senators are now talking openly of keeping the chamber in session an extra week, though some say that is simply a tactic to discourage delay by senators who have plans for vacations, congressional trips and hometown activities.
A further complication is that if it looks as if the Senate can't or won't act this summer, many House Democrats are likely to hesitate about voting on a contentious issue -- including raising taxes -- for something that might never become law.
Write to Janet Adamy at janet.adamy@wsj.com and Laura Meckler at laura.meckler@wsj.com
By JANET ADAMY and LAURA MECKLER
House Democrats on Tuesday unveiled sweeping health-care legislation that would hit all but the smallest businesses with a penalty equal to 8% of payroll if they fail to provide health insurance to workers.
The House bill, which also would impose new taxes on the wealthy estimated to bring in more than $544 billion over a decade, came as lawmakers in the Senate raced against a self-imposed deadline of this week to introduce a bill in time for action this summer.
Senators face a tougher battle because they are striving for a bipartisan bill. Key senators are weighing a combination of several more-modest fund-raising provisions, including some new fees on health-care industries.
Under the House measure, employers with payrolls exceeding $400,000 a year would have to provide health insurance or pay the 8% penalty. Employers with payrolls between $250,000 and $400,000 a year would pay a smaller penalty, and those less than $250,000 would be exempt. Certain small firms would get tax credits to help buy coverage.
The relatively low thresholds for penalties triggered the sharpest criticism yet from employer groups, who said the burden on small business is too high and doesn't do enough to help them expand insurance coverage.
According to 2006 data from the federation, businesses with between five and nine workers, representing about one million employers, had an average payroll of around $375,000 a year. A report from the Kaiser Family Foundation found that only about half of firms with three to nine workers offered health benefits in 2008.
House Speaker Nancy Pelosi unveiled the measure on Tuesday, praising it as a historic step toward insuring all Americans that has eluded lawmakers for decades. "This bill is a starting point and a path to success to lower costs to consumers and businesses," the California Democrat said.
The Congressional Budget Office on Tuesday calculated the cost of the House's plan to expand insurance coverage at $1.04 trillion over 10 years, and predicted the measure would eventually lead 97% of legal American residents to have insurance. That's in line with President Barack Obama's desired budget for a health overhaul and lawmakers' pledges for expanding coverage.
The estimate doesn't factor in the plan to pay for the bill, including the new tax on wealthy Americans, or certain changes to Medicare and Medicaid, all of which could affect the final price tag.
The House bill would place new taxes on the wealthiest people to help expand insurance coverage to the nation's 46 million uninsured people. The legislation calls for a 5.4% surtax on those with annual gross incomes exceeding $1 million.
Households with annual income between $500,000 a year and $1 million would be hit with a 1.5% surtax, and those earning between $350,000 and $500,000 would face a 1% surtax. Those rates could eventually increase to 3% and 2%, respectively, if the government doesn't achieve certain health-cost savings.
The 1,018-page initiative contains several components pushed by liberal Democrats that were long expected to be part of House legislation, but which face considerable opposition in the Senate. Most notably, the House bill creates a new public health-insurance plan aimed at individuals and small businesses that otherwise can't get affordable coverage.
The House measure would bar insurance companies from denying coverage to individuals who are sick, while also requiring most Americans to carry health insurance or pay a penalty equal to about 2.5% of their gross income. It would provide families earning up to $88,000 a year with subsidies to help them buy coverage. And it would expand health-insurance coverage through the Medicaid federal-state insurance program for the poor.
The Senate legislation is also expected to include mandates on insurers to provide coverage and individuals to carry it, although the details may differ. The bigger differences will come on the financing side, where many senators are cautious about introducing major new taxes on the wealthy to pay for health care.
The White House is pushing for action before the August recess in both houses of Congress to give lawmakers time to reconcile their two versions, pass that compromise through the House and the Senate and send Mr. Obama a final bill by autumn. The Senate Health, Education, Labor and Pensions Committee could approve its health overhaul bill as soon as Wednesday.
That will get merged with a bill in the Senate Finance Committee, where lawmakers are trying to craft a bipartisan measure. Chairman Max Baucus on Tuesday was pitching his colleagues on a plan to finance the bill through a combination of more-modest tax increases. He is trying to fill a hole of about $320 billion over 10 years, after Democrats objected to a provision to tax upper-end employee health benefits.
The fresh package included a new fee on pharmaceuticals and other health-care industries, and stiffer corporate-reporting measures aimed at collecting a greater share of corporate taxes owed each year, two Senate aides said.
Under the first proposal, health industries including drug makers and insurers would be charged an assessment, with individual companies' fees based on their market share. It's not clear how large the total assessment would be.
The proposal also seeks to raise $75 billion to $100 billion over 10 years by giving states an incentive to issue bonds that would help offset the expanded federal share of Medicaid.
"The goal here is a bunch of smaller, less controversial items that can add up," one official said.
The package may still include a modified version of the plan to tax high-end employer-provided health insurance, though on a smaller scale, aides said.
Mr. Baucus spent much of the day meeting one-on-one with members of his committee, and he put on an optimistic face. "We're going to pass very significant health reform this year," the Montana Democrat said.
But the pre-recess deadline appeared in danger as Republicans expressed concern that the process is moving too quickly.
Sen. Olympia Snowe, a key Republican whom Mr. Baucus is trying to win over, said Tuesday that the legislation is far too complex to rush and that she saw little chance of moving a bill through the Senate before the August break.
"I frankly couldn't imagine at this point bringing it to the floor and completing our deliberations...before the August recess," the Maine senator said. She said "arbitrary, artificial time frames really are not realistic given the magnitude of the task we are assigned to do."
In addition to health care, the White House also hopes for action on energy and financial-sector regulation, both of which would consume time this fall.
At a White House meeting with top Democratic leaders on Monday, Mr. Obama pushed Mr. Baucus to produce legislation by Thursday.
Senators are now talking openly of keeping the chamber in session an extra week, though some say that is simply a tactic to discourage delay by senators who have plans for vacations, congressional trips and hometown activities.
A further complication is that if it looks as if the Senate can't or won't act this summer, many House Democrats are likely to hesitate about voting on a contentious issue -- including raising taxes -- for something that might never become law.
Write to Janet Adamy at janet.adamy@wsj.com and Laura Meckler at laura.meckler@wsj.com
Intel Gives Upbeat Outlook as Sales Revive
Chip Giant Posts Quarterly Loss After EU Fine but Sees Improving Demand for PCs; 'A Nice Tailwind
By DON CLARK
Intel Corp. provided fresh evidence that PC sales are rebounding for some vendors, though the company's second-quarter results were marred by a rare loss due to a $1.45 billion antitrust fine.
The Silicon Valley chip giant posted revenue and profit margins for the period ended June 29 that were much stronger than the first quarter.
"While the global economic environment is still recovering, our customers signaled increased confidence" with their ordering patterns, said Intel Chief Executive Paul Otellini during a conference call Tuesday.
Digits
Live-Blogging Intel's Earnings Call Intel projected that revenue would expand further in the current period, with additional improvements in profit margins. The company's stock jumped 7% in after-hours trading following the news to $18.02. It finished the 4 p.m. Nasdaq Stock Market session at $16.83.
"These results really do show that the worst is behind for Intel," said Doug Freedman, an analyst at Broadpoint AmTech.
The company declared in April that the PC market had bottomed out, and suggested that revenue would be flat with the $7.1 billion reported in the first period. Analysts were expecting slightly better than that.
Instead, Intel reported second-quarter revenue of $8.02 billion, up 13% from the first quarter though still 15% below year-earlier levels.
The improvement in profitability was more dramatic; Intel in April projected a gross margin percentage for the second quarter in the "mid-40s," but Tuesday reported 50.8%.
The company's remarks contrast sharply with those of Dell Inc., which is second to Hewlett-Packard Co. in global PC sales. Dell on Monday projected shrinking profit margins, and on Tuesday told analysts that companies continue to put off technology purchases.
But Intel's sales lately have been much more closely tied to spending by consumers -- particularly for laptop computers -- while most of Dell's sales go to businesses.
Mr. Otellini said Intel had a strong rebound in shipments of microprocessors for laptop computers, though he said sales of chips for server systems also were surprisingly strong because of demand spurred by a new chip family dubbed Nehalem, which offers a big leap in computing performance.
Stacy Smith, Intel's chief financial officer, added that the company reduced inventories and headcount. "We have a nice tailwind going into the third quarter," he said in an interview.
Not that all is rosy. Intel, which helped push for inexpensive laptops called netbooks, faces analyst fears that the low-priced chip called Atom used in those products will steal sales from more profitable products. Intel said that its average sales prices declined from the first quarter, even excluding Atom.
Then there is the fine from the European Union, which in May found that the company had abused its dominant position in competing against Advanced Micro Devices Inc.
Because of the fine, Intel swung to a loss of $398 million, or seven cents a share, from a profit in the year-earlier period of $1.6 billion, or 28 cents a share.
Intel, which is appealing the EU ruling, had not posted a quarterly loss since the mid-1980s.
Write to Don Clark at don.clark@wsj.com
By DON CLARK
Intel Corp. provided fresh evidence that PC sales are rebounding for some vendors, though the company's second-quarter results were marred by a rare loss due to a $1.45 billion antitrust fine.
The Silicon Valley chip giant posted revenue and profit margins for the period ended June 29 that were much stronger than the first quarter.
"While the global economic environment is still recovering, our customers signaled increased confidence" with their ordering patterns, said Intel Chief Executive Paul Otellini during a conference call Tuesday.
Digits
Live-Blogging Intel's Earnings Call Intel projected that revenue would expand further in the current period, with additional improvements in profit margins. The company's stock jumped 7% in after-hours trading following the news to $18.02. It finished the 4 p.m. Nasdaq Stock Market session at $16.83.
"These results really do show that the worst is behind for Intel," said Doug Freedman, an analyst at Broadpoint AmTech.
The company declared in April that the PC market had bottomed out, and suggested that revenue would be flat with the $7.1 billion reported in the first period. Analysts were expecting slightly better than that.
Instead, Intel reported second-quarter revenue of $8.02 billion, up 13% from the first quarter though still 15% below year-earlier levels.
The improvement in profitability was more dramatic; Intel in April projected a gross margin percentage for the second quarter in the "mid-40s," but Tuesday reported 50.8%.
The company's remarks contrast sharply with those of Dell Inc., which is second to Hewlett-Packard Co. in global PC sales. Dell on Monday projected shrinking profit margins, and on Tuesday told analysts that companies continue to put off technology purchases.
But Intel's sales lately have been much more closely tied to spending by consumers -- particularly for laptop computers -- while most of Dell's sales go to businesses.
Mr. Otellini said Intel had a strong rebound in shipments of microprocessors for laptop computers, though he said sales of chips for server systems also were surprisingly strong because of demand spurred by a new chip family dubbed Nehalem, which offers a big leap in computing performance.
Stacy Smith, Intel's chief financial officer, added that the company reduced inventories and headcount. "We have a nice tailwind going into the third quarter," he said in an interview.
Not that all is rosy. Intel, which helped push for inexpensive laptops called netbooks, faces analyst fears that the low-priced chip called Atom used in those products will steal sales from more profitable products. Intel said that its average sales prices declined from the first quarter, even excluding Atom.
Then there is the fine from the European Union, which in May found that the company had abused its dominant position in competing against Advanced Micro Devices Inc.
Because of the fine, Intel swung to a loss of $398 million, or seven cents a share, from a profit in the year-earlier period of $1.6 billion, or 28 cents a share.
Intel, which is appealing the EU ruling, had not posted a quarterly loss since the mid-1980s.
Write to Don Clark at don.clark@wsj.com
Tuesday, July 14, 2009
Intel Q2 2009
Based on non-gapp (ex EC fine)
--Revenue was $8 bil, up 879 mil from Q1 2009, down 1.4 bil from Q2 2008
--NI was 1 bil, up 420 mil from Q1 2009, down 552 mil from Q2 2008
--Inventories were down by 240 mil from 3,045 mil in Q1 2009, further down from Q2 2008
--Revenue was $8 bil, up 879 mil from Q1 2009, down 1.4 bil from Q2 2008
--NI was 1 bil, up 420 mil from Q1 2009, down 552 mil from Q2 2008
--Inventories were down by 240 mil from 3,045 mil in Q1 2009, further down from Q2 2008
GS Q2 2009
--Net Revenue $13.76 bil, v.s. $9.4 bil in Q2 2008 and $9.4 in Q1 2009
--Net Income was $3.44 bil, v.s. 1.66 bil in Q2 2008 and $2.05 bil in Q1 2009
--The major drivers are trading and principal investments business. Compared to Q1 2009, fixed income (FICC) trading continued to hold up well, contributing $6.8 bil of revenue v.s. $6.6 bil inQ2 2009. Investmentin ICBC contributed $950 mil v.s -151 mil in Q1 2009. Improvement in capital market conditions help contributed more revenues in equity trading and underwriting as well.
--The company wrote off $700 million from commercial mortgage loans. By the end of Q1 2009, the company's exposure to commercial mortgage loans is 8.76 bil.
--Net Income was $3.44 bil, v.s. 1.66 bil in Q2 2008 and $2.05 bil in Q1 2009
--The major drivers are trading and principal investments business. Compared to Q1 2009, fixed income (FICC) trading continued to hold up well, contributing $6.8 bil of revenue v.s. $6.6 bil inQ2 2009. Investmentin ICBC contributed $950 mil v.s -151 mil in Q1 2009. Improvement in capital market conditions help contributed more revenues in equity trading and underwriting as well.
--The company wrote off $700 million from commercial mortgage loans. By the end of Q1 2009, the company's exposure to commercial mortgage loans is 8.76 bil.
Signs of Upturn in Inventories Remain Elusive
By ALEX FRANGOS and ELIZABETH HOLMES
When businesses add merchandise to store shelves again and consumers gobble up the goods, the signs of an economic turnaround will have arrived. That hasn't happened yet.
U.S. retail sales rose in June, but mostly because of higher gasoline prices and volatile auto sales, the Commerce Department reported Tuesday. Meanwhile, businesses continued to slash inventories.
Retail sales climbed 0.6% in June from a month earlier on a seasonally adjusted basis to $342.1 billion, according to the Commerce Department. Excluding gas and autos, retail sales actually declined for the fourth consecutive month.
Amid high unemployment and stagnant wage growth, consumers' thriftiness is likely to persist in the second half of the year, even as some economists predict the economy will begin to grow again. "People will continue to prioritize spending until income growth comes back -- until mid-2010 at the earliest," said Adam York, an economist at Wells Fargo. "People will have to be really careful about where they are spending."
That consumer behavior is prompting retailers to keep stocks of goods low, seeking to avoid a discount bloodbath similar to the one last year, when many were forced to liquidate merchandise in order to raise cash. Such caution means that the bounce to the economy from any restocking -- which spurs production -- could be muted.
Terry Lundgren, president and chief executive of Macy's Inc., said he doesn't expect a repeat of the panic promotions of last year, because supply and demand are "relatively at parity again."
"There will not be the same level of promotions to clear inventory" as there was last year, Mr. Lundgren said.
But retailers streamlining inventory ahead of the back-to-school and end-of-year holiday selling seasons are also under pressure. If they don't produce enough shiny new items, customers will remain content with their old products. If they don't stock up on enough of the new products, customers will get angry when stores run out of the popular ones.
Cheryl Kehl, a 56-year-old homemaker from the Chicago suburbs, has noticed far less merchandise in stores where she regularly shops for her adult children, including Old Navy by Gap Inc. and Ann Taylor Loft by AnnTaylor Stores Corp. "It's so much sparser," Ms. Kehl said. "In some subliminal way, instead of encouraging you, it discourages you from shopping."
To replenish inventories more quickly and decrease costs, some sellers are narrowing their assortment of materials or customer choices.
Clothing retailer Aeropostale Inc. has cut down on the number of different fabrics it uses. The thermal fabric for some of its T-shirts, for example, is also used in hooded shirts and dorm apparel. By having a smaller range of fabric, Aeropostale can be more flexible in the use of its materials and restock more quickly, said Mindy Meads, the company's president.
Sealy Corp., the large mattress manufacturer, has reduced its inventory by cutting out some of the choices it provides consumers, such as different quilting patterns on mattress borders.
Meanwhile, companies are continuing to pare inventory, albeit at a slower rate. Businesses cut inventories 1% in May from the month earlier on a seasonally adjusted basis to $1.368 trillion, according to the Commerce Department. That follows a 1.3% decline in April. Inventories are down 8% from a year earlier.
Intel Corp. said Tuesday that its inventories were down 25% since the start of the year, and that its outlook for the second half of the year has improved. Aluminum titan Alcoa Inc. told investors last week that it has reduced inventories 23% since the start of the year.
The hope among more optimistic analysts is that eventually businesses -- and consumers -- will work through their stocks of goods and be forced to buy again. Socks with holes in them will need to be replaced, and empty cupboards restocked.
"Low inventories will contribute to increased production, which will bring people back to work," said Robert Dye, an economist at PNC Financial Services. "The groundwork is being put in place, and we'll see that cycle re-engage" in the second half of the year.
Of course, consumers may decide to darn their socks rather than buy new ones. "Household balance sheets are a wreck," said Joshua Shapiro of economic consultants MFR Inc. in New York.
Some businesses said they might begin restocking soon. Rick Gold, chief executive of wireless equipment manufacturer CalAmp Corp., said his customers are beginning to wade back into purchasing again.
"The inventory correction in the markets we serve is done," he said. CalAmp, based in Oxnard, Calif., had $98 million in revenue last year. It cut inventory for the fifth quarter in a row in the period ended May 31. Its stock of equipment declined by 6.5%. "Now we are seeing the demand from the end user," Mr. Gold said.
Write to Alex Frangos at alex.frangos@wsj.com and Elizabeth Holmes at elizabeth.holmes@wsj.com
When businesses add merchandise to store shelves again and consumers gobble up the goods, the signs of an economic turnaround will have arrived. That hasn't happened yet.
U.S. retail sales rose in June, but mostly because of higher gasoline prices and volatile auto sales, the Commerce Department reported Tuesday. Meanwhile, businesses continued to slash inventories.
Retail sales climbed 0.6% in June from a month earlier on a seasonally adjusted basis to $342.1 billion, according to the Commerce Department. Excluding gas and autos, retail sales actually declined for the fourth consecutive month.
Amid high unemployment and stagnant wage growth, consumers' thriftiness is likely to persist in the second half of the year, even as some economists predict the economy will begin to grow again. "People will continue to prioritize spending until income growth comes back -- until mid-2010 at the earliest," said Adam York, an economist at Wells Fargo. "People will have to be really careful about where they are spending."
That consumer behavior is prompting retailers to keep stocks of goods low, seeking to avoid a discount bloodbath similar to the one last year, when many were forced to liquidate merchandise in order to raise cash. Such caution means that the bounce to the economy from any restocking -- which spurs production -- could be muted.
Terry Lundgren, president and chief executive of Macy's Inc., said he doesn't expect a repeat of the panic promotions of last year, because supply and demand are "relatively at parity again."
"There will not be the same level of promotions to clear inventory" as there was last year, Mr. Lundgren said.
But retailers streamlining inventory ahead of the back-to-school and end-of-year holiday selling seasons are also under pressure. If they don't produce enough shiny new items, customers will remain content with their old products. If they don't stock up on enough of the new products, customers will get angry when stores run out of the popular ones.
Cheryl Kehl, a 56-year-old homemaker from the Chicago suburbs, has noticed far less merchandise in stores where she regularly shops for her adult children, including Old Navy by Gap Inc. and Ann Taylor Loft by AnnTaylor Stores Corp. "It's so much sparser," Ms. Kehl said. "In some subliminal way, instead of encouraging you, it discourages you from shopping."
To replenish inventories more quickly and decrease costs, some sellers are narrowing their assortment of materials or customer choices.
Clothing retailer Aeropostale Inc. has cut down on the number of different fabrics it uses. The thermal fabric for some of its T-shirts, for example, is also used in hooded shirts and dorm apparel. By having a smaller range of fabric, Aeropostale can be more flexible in the use of its materials and restock more quickly, said Mindy Meads, the company's president.
Sealy Corp., the large mattress manufacturer, has reduced its inventory by cutting out some of the choices it provides consumers, such as different quilting patterns on mattress borders.
Meanwhile, companies are continuing to pare inventory, albeit at a slower rate. Businesses cut inventories 1% in May from the month earlier on a seasonally adjusted basis to $1.368 trillion, according to the Commerce Department. That follows a 1.3% decline in April. Inventories are down 8% from a year earlier.
Intel Corp. said Tuesday that its inventories were down 25% since the start of the year, and that its outlook for the second half of the year has improved. Aluminum titan Alcoa Inc. told investors last week that it has reduced inventories 23% since the start of the year.
The hope among more optimistic analysts is that eventually businesses -- and consumers -- will work through their stocks of goods and be forced to buy again. Socks with holes in them will need to be replaced, and empty cupboards restocked.
"Low inventories will contribute to increased production, which will bring people back to work," said Robert Dye, an economist at PNC Financial Services. "The groundwork is being put in place, and we'll see that cycle re-engage" in the second half of the year.
Of course, consumers may decide to darn their socks rather than buy new ones. "Household balance sheets are a wreck," said Joshua Shapiro of economic consultants MFR Inc. in New York.
Some businesses said they might begin restocking soon. Rick Gold, chief executive of wireless equipment manufacturer CalAmp Corp., said his customers are beginning to wade back into purchasing again.
"The inventory correction in the markets we serve is done," he said. CalAmp, based in Oxnard, Calif., had $98 million in revenue last year. It cut inventory for the fifth quarter in a row in the period ended May 31. Its stock of equipment declined by 6.5%. "Now we are seeing the demand from the end user," Mr. Gold said.
Write to Alex Frangos at alex.frangos@wsj.com and Elizabeth Holmes at elizabeth.holmes@wsj.com
Monday, July 13, 2009
Pick-a-Pay Loans: Worse Than Subprime
By MARSHALL ECKBLAD
For the third straight month, option adjustable-rate mortgages are generating proportionally more delinquencies and foreclosures than subprime mortgages, the scourge of the U.S.
Option ARMs were typically issued to creditworthy homeowners and allow borrowers to make a range of monthly payments. The payment options include a partial-interest payment that adds the unpaid interest to the loan's balance. On many such loans, balances have risen while values of the underlying properties have plummeted amid the housing crisis.
As of April, 36.9% of Pick-A-Pay loans were at least 60 days past due, while 19% were in foreclosure, according to data from First American CoreLogic, a unit of Santa Ana, Calif.-based First American Corp. In contrast, 33.9% of subprime loans were delinquent, with 14.5% of those loans in foreclosure, the figures show.
Payment-option mortgages are heavily concentrated in the worst-hit regions in the housing market, including California and Florida, making borrowers inordinately vulnerable to declining property values. The deepening loan turmoil could mean higher-than-expected losses for Wells Fargo & Co., J.P. Morgan Chase & Co. and the Federal Deposit Insurance Corp.'s own insurance fund.
"The realization of the issues related to option ARMs is just beginning," said Chris Marinac, director of research at Atlanta-based FIG Partners.
Option-ARM loans are a much smaller portion of outstanding mortgages than subprime loans, but they occupy substantial chunks of certain banks' balance sheets. San Francisco-based Wells Fargo holds a mountain of Pick-A-Pays, having acquired $115 billion of the loans in its purchase of teetering Wachovia Corp., which it agreed to buy late last year.
Due to complicated accounting rules, Wells Fargo assigns the loans a value of $93.2 billion, giving it room to absorb future losses on the loans. The bank, however, won't say whether losses from the loans have risen beyond the firm's original expectations. Wells Fargo declined to comment Friday.
In a securities filing in May, the company said that borrowers accounting for 51% of its outstanding Pick-A-Pay balances made only the minimum payment as of March 31. Wachovia used the Pick-A-Pay name for its option ARMs.
J.P. Morgan holds $40.2 billion in option ARMs that the bank acquired when it purchased most of Washington Mutual Inc. last year. The Seattle company's banking operations were seized by regulators, and the holding company filed for bankruptcy protection.
The New York company said in a filing it has some exposure to an additional $46.5 billion in option-ARMs sitting in complex off-balance-sheet entities. J.P. Morgan declined to comment.
The FDIC also could face future losses due to rising problems with the loans. The federal agency agreed to soak up most future losses from about $5 billion in option-ARMs once held by Coral Gables, Fla.-based BankUnited FSB, which the FDIC seized in May and sold to private investors.
Write to Marshall Eckblad at marshall.eckblad@dowjones.com
For the third straight month, option adjustable-rate mortgages are generating proportionally more delinquencies and foreclosures than subprime mortgages, the scourge of the U.S.
Option ARMs were typically issued to creditworthy homeowners and allow borrowers to make a range of monthly payments. The payment options include a partial-interest payment that adds the unpaid interest to the loan's balance. On many such loans, balances have risen while values of the underlying properties have plummeted amid the housing crisis.
As of April, 36.9% of Pick-A-Pay loans were at least 60 days past due, while 19% were in foreclosure, according to data from First American CoreLogic, a unit of Santa Ana, Calif.-based First American Corp. In contrast, 33.9% of subprime loans were delinquent, with 14.5% of those loans in foreclosure, the figures show.
Payment-option mortgages are heavily concentrated in the worst-hit regions in the housing market, including California and Florida, making borrowers inordinately vulnerable to declining property values. The deepening loan turmoil could mean higher-than-expected losses for Wells Fargo & Co., J.P. Morgan Chase & Co. and the Federal Deposit Insurance Corp.'s own insurance fund.
"The realization of the issues related to option ARMs is just beginning," said Chris Marinac, director of research at Atlanta-based FIG Partners.
Option-ARM loans are a much smaller portion of outstanding mortgages than subprime loans, but they occupy substantial chunks of certain banks' balance sheets. San Francisco-based Wells Fargo holds a mountain of Pick-A-Pays, having acquired $115 billion of the loans in its purchase of teetering Wachovia Corp., which it agreed to buy late last year.
Due to complicated accounting rules, Wells Fargo assigns the loans a value of $93.2 billion, giving it room to absorb future losses on the loans. The bank, however, won't say whether losses from the loans have risen beyond the firm's original expectations. Wells Fargo declined to comment Friday.
In a securities filing in May, the company said that borrowers accounting for 51% of its outstanding Pick-A-Pay balances made only the minimum payment as of March 31. Wachovia used the Pick-A-Pay name for its option ARMs.
J.P. Morgan holds $40.2 billion in option ARMs that the bank acquired when it purchased most of Washington Mutual Inc. last year. The Seattle company's banking operations were seized by regulators, and the holding company filed for bankruptcy protection.
The New York company said in a filing it has some exposure to an additional $46.5 billion in option-ARMs sitting in complex off-balance-sheet entities. J.P. Morgan declined to comment.
The FDIC also could face future losses due to rising problems with the loans. The federal agency agreed to soak up most future losses from about $5 billion in option-ARMs once held by Coral Gables, Fla.-based BankUnited FSB, which the FDIC seized in May and sold to private investors.
Write to Marshall Eckblad at marshall.eckblad@dowjones.com
Boiling the Frog
By PAUL KRUGMAN
Published: July 12, 2009
Is America on its way to becoming a boiled frog?
I’m referring, of course, to the proverbial frog that, placed in a pot of cold water that is gradually heated, never realizes the danger it’s in and is boiled alive. Real frogs will, in fact, jump out of the pot — but never mind. The hypothetical boiled frog is a useful metaphor for a very real problem: the difficulty of responding to disasters that creep up on you a bit at a time.
And creeping disasters are what we mostly face these days.
I started thinking about boiled frogs recently as I watched the depressing state of debate over both economic and environmental policy. These are both areas in which there is a substantial lag before policy actions have their full effect — a year or more in the case of the economy, decades in the case of the planet — yet in which it’s very hard to get people to do what it takes to head off a catastrophe foretold.
And right now, both the economic and the environmental frogs are sitting still while the water gets hotter.
Start with economics: last winter the economy was in acute crisis, with a replay of the Great Depression seeming all too possible. And there was a fairly strong policy response in the form of the Obama stimulus plan, even if that plan wasn’t as strong as some of us thought it should have been.
At this point, however, the acute crisis has given way to a much more insidious threat. Most economic forecasters now expect gross domestic product to start growing soon, if it hasn’t already. But all the signs point to a “jobless recovery”: on average, forecasters surveyed by The Wall Street Journal believe that the unemployment rate will keep rising into next year, and that it will be as high at the end of 2010 as it is now.
Now, it’s bad enough to be jobless for a few weeks; it’s much worse being unemployed for months or years. Yet that’s exactly what will happen to millions of Americans if the average forecast is right — which means that many of the unemployed will lose their savings, their homes and more.
To head off this outcome — and remember, this isn’t what economic Cassandras are saying; it’s the forecasting consensus — we’d need to get another round of fiscal stimulus under way very soon. But neither Congress nor, alas, the Obama administration is showing any inclination to act. Now that the free fall is over, all sense of urgency seems to have vanished.
This will probably change once the reality of the jobless recovery becomes all too apparent. But by then it will be too late to avoid a slow-motion human and social disaster.
Still, the boiled-frog problem on the economy is nothing compared with the problem of getting action on climate change.
Put it this way: if the consensus of the economic experts is grim, the consensus of the climate experts is utterly terrifying. At this point, the central forecast of leading climate models — not the worst-case scenario but the most likely outcome — is utter catastrophe, a rise in temperatures that will totally disrupt life as we know it, if we continue along our present path. How to head off that catastrophe should be the dominant policy issue of our time.
But it isn’t, because climate change is a creeping threat rather than an attention-grabbing crisis. The full dimensions of the catastrophe won’t be apparent for decades, perhaps generations. In fact, it will probably be many years before the upward trend in temperatures is so obvious to casual observers that it silences the skeptics. Unfortunately, if we wait to act until the climate crisis is that obvious, catastrophe will already have become inevitable.
And while a major environmental bill has passed the House, which was an amazing and inspiring political achievement, the bill fell well short of what the planet really needs — and despite this faces steep odds in the Senate.
What makes the apparent paralysis of policy especially alarming is that so little is happening when the political situation seems, on the surface, to be so favorable to action.
After all, supply-siders and climate-change-deniers no longer control the White House and key Congressional committees. Democrats have a popular president to lead them, a large majority in the House of Representatives and 60 votes in the Senate. And this isn’t the old Democratic majority, which was an awkward coalition between Northern liberals and Southern conservatives; this is, by historical standards, a relatively solid progressive bloc.
And let’s be clear: both the president and the party’s Congressional leadership understand the economic and environmental issues perfectly well. So if we can’t get action to head off disaster now, what would it take?
I don’t know the answer. And that’s why I keep thinking about boiling frogs.
Published: July 12, 2009
Is America on its way to becoming a boiled frog?
I’m referring, of course, to the proverbial frog that, placed in a pot of cold water that is gradually heated, never realizes the danger it’s in and is boiled alive. Real frogs will, in fact, jump out of the pot — but never mind. The hypothetical boiled frog is a useful metaphor for a very real problem: the difficulty of responding to disasters that creep up on you a bit at a time.
And creeping disasters are what we mostly face these days.
I started thinking about boiled frogs recently as I watched the depressing state of debate over both economic and environmental policy. These are both areas in which there is a substantial lag before policy actions have their full effect — a year or more in the case of the economy, decades in the case of the planet — yet in which it’s very hard to get people to do what it takes to head off a catastrophe foretold.
And right now, both the economic and the environmental frogs are sitting still while the water gets hotter.
Start with economics: last winter the economy was in acute crisis, with a replay of the Great Depression seeming all too possible. And there was a fairly strong policy response in the form of the Obama stimulus plan, even if that plan wasn’t as strong as some of us thought it should have been.
At this point, however, the acute crisis has given way to a much more insidious threat. Most economic forecasters now expect gross domestic product to start growing soon, if it hasn’t already. But all the signs point to a “jobless recovery”: on average, forecasters surveyed by The Wall Street Journal believe that the unemployment rate will keep rising into next year, and that it will be as high at the end of 2010 as it is now.
Now, it’s bad enough to be jobless for a few weeks; it’s much worse being unemployed for months or years. Yet that’s exactly what will happen to millions of Americans if the average forecast is right — which means that many of the unemployed will lose their savings, their homes and more.
To head off this outcome — and remember, this isn’t what economic Cassandras are saying; it’s the forecasting consensus — we’d need to get another round of fiscal stimulus under way very soon. But neither Congress nor, alas, the Obama administration is showing any inclination to act. Now that the free fall is over, all sense of urgency seems to have vanished.
This will probably change once the reality of the jobless recovery becomes all too apparent. But by then it will be too late to avoid a slow-motion human and social disaster.
Still, the boiled-frog problem on the economy is nothing compared with the problem of getting action on climate change.
Put it this way: if the consensus of the economic experts is grim, the consensus of the climate experts is utterly terrifying. At this point, the central forecast of leading climate models — not the worst-case scenario but the most likely outcome — is utter catastrophe, a rise in temperatures that will totally disrupt life as we know it, if we continue along our present path. How to head off that catastrophe should be the dominant policy issue of our time.
But it isn’t, because climate change is a creeping threat rather than an attention-grabbing crisis. The full dimensions of the catastrophe won’t be apparent for decades, perhaps generations. In fact, it will probably be many years before the upward trend in temperatures is so obvious to casual observers that it silences the skeptics. Unfortunately, if we wait to act until the climate crisis is that obvious, catastrophe will already have become inevitable.
And while a major environmental bill has passed the House, which was an amazing and inspiring political achievement, the bill fell well short of what the planet really needs — and despite this faces steep odds in the Senate.
What makes the apparent paralysis of policy especially alarming is that so little is happening when the political situation seems, on the surface, to be so favorable to action.
After all, supply-siders and climate-change-deniers no longer control the White House and key Congressional committees. Democrats have a popular president to lead them, a large majority in the House of Representatives and 60 votes in the Senate. And this isn’t the old Democratic majority, which was an awkward coalition between Northern liberals and Southern conservatives; this is, by historical standards, a relatively solid progressive bloc.
And let’s be clear: both the president and the party’s Congressional leadership understand the economic and environmental issues perfectly well. So if we can’t get action to head off disaster now, what would it take?
I don’t know the answer. And that’s why I keep thinking about boiling frogs.
Jobless Recovery Would Call for Nuanced Investing
By JEFF D. OPDYKE
The unemployed don't spend much.
They do, however, brush their teeth and power their homes and seek medical care. And the companies that sell such products or services could remain attractive investments as the economy heads into what many see as a jobless recovery.
The U.S.'s unemployment rate recently hit 9.5%, its highest level since the early 1980s. Many economists see it going above 10% and only slowly receding. They say an economic recovery won't inspire much hiring as companies grapple with slower economic growth, overcapacity in numerous sectors, and slack demand driven in part by a newfound saving ethic among overleveraged consumers.
Double-digit unemployment, says Peter Gutmann, economics professor at Baruch College of the City University of New York, "could be with us for some time."
A jobless recovery might not decimate the stock market overall since high unemployment limits wage pressures and keeps interest rates low. Low rates "are helpful for the P/E [price/earnings] multiples on stocks" because investors perceive better upside in equities than in safe, low-return Treasury bonds, says Richard B. Hoey, chief economist at Bank of New York Mellon.
Investors accustomed to milder recessions in which consumer spending remained relatively strong may be in for a shock. Heavily indebted consumers are unlikely to resume spending for quite some time. That means investing in an era of high unemployment will be an exercise in nuance.
Health-care spending should generally hold up since sick people will still seek medical care. Yet increasing unemployment brings larger numbers of uninsured patients, possibly leading to "the largest shift in recent U.S. history" of patients away from health-maintenance organizations and into the ranks of Medicaid or the uninsured, says Jason Gurda, analyst at Leerink Swann. That pinches HMO providers such as Aetna Inc. and Humana Inc.
Unemployed, uninsured people will struggle to pay medical bills, and some will forgo elective procedures. Standard & Poor's analyst Jeff Englander has a "sell" rating on companies like AmSurg Corp., an operator of specialty hospitals, and a "hold" on community-hospital chain LifePoint Hospitals Inc.
He finds better health-care plays in stocks like St. Jude Medical Inc. and Boston Scientific Corp., medical-device makers tied to nonelective care; and in stocks of skilled-nursing and long-term care facilities such as Kindred Healthcare Inc. and Sun Healthcare Group Inc., which benefit from an aging populace unaffected by unemployment.
Retailing is equally bifurcated. Cash-conscious consumers are keeping their pocketbooks closed. That is troubling for retailers like clothier Abercrombie & Fitch and department-store chain Nordstrom Inc. that live on discretionary dollars. Low-price leaders such as Wal-Mart Stores Inc. and McDonald's Corp. could continue to hold up well. Share prices of the two companies are close to their market peaks. Even some sellers of discretionary products like clothiers Aeropostale Inc. and Buckle Inc. are hanging on to customers by aggressively lowering prices, says Brian Sozzi, analyst at Wall Street Strategies.
David Kovacs, chief investment officer of quantitative strategies at Turner Investment Partners, likes consumer-products companies like Philip Morris International Inc., Kraft Foods Inc., Colgate-Palmolive Co., Coca-Cola Co. and PepsiCo Inc. -- all "businesses that supply what people need." And with consumers scaling back restaurant outings, low-price grocer Kroger Co. looks to be the "best-positioned supermarket," according to a recent research report from Andrew Wolf, analyst at BB&T Capital Markets.
Banks would normally be heading into an easier environment, since low interest rates associated with a jobless recovery typically help banks boost profits. Yet heavily indebted consumers have little reason to borrow, and persistent joblessness raises the risk of more home foreclosures in a financial system already crippled by homeowners unable to repay mortgages.
"We estimate another $1 trillion of losses in the next few years, and we see another big wave of foreclosures coming," says Barry Knapp, head of U.S. portfolio strategy at Barclays Capital. Regional banks will have it the hardest, Mr. Knapp says, in part because of their heavy construction lending, while banks like J.P. Morgan Chase & Co. "will be well-positioned for whatever kind of recovery we have."
As the economy recovers, companies often employ temporary help before hiring full-time workers. Yet Jeff Silber, analyst at BMO Capital Markets, says that historically, companies like Manpower Inc., Robert Half International Inc. and others surge early, only to sink later. The BMO Capital Markets Staffing Index shows staffing companies typically hit their ultimate trough "just about the same time a jobless recovery ends," which is usually well after the economy has turned around, Mr. Silber says.
Finally, Deutsche Bank chief U.S. economist Joseph Lavorgna says U.S.-based, export-dependent companies that sell into emerging markets "make a lot of sense" in a jobless recovery. That is because those areas of the world continue to grow at a faster pace than the U.S., and the expanding consumer base there remains relatively healthy and unencumbered by debt. Companies that stand to benefit include firms such as Honeywell International Inc., United Technologies Corp. and Tyco International Ltd.
Write to Jeff D. Opdyke at jeff.opdyke@wsj.com
The unemployed don't spend much.
They do, however, brush their teeth and power their homes and seek medical care. And the companies that sell such products or services could remain attractive investments as the economy heads into what many see as a jobless recovery.
The U.S.'s unemployment rate recently hit 9.5%, its highest level since the early 1980s. Many economists see it going above 10% and only slowly receding. They say an economic recovery won't inspire much hiring as companies grapple with slower economic growth, overcapacity in numerous sectors, and slack demand driven in part by a newfound saving ethic among overleveraged consumers.
Double-digit unemployment, says Peter Gutmann, economics professor at Baruch College of the City University of New York, "could be with us for some time."
A jobless recovery might not decimate the stock market overall since high unemployment limits wage pressures and keeps interest rates low. Low rates "are helpful for the P/E [price/earnings] multiples on stocks" because investors perceive better upside in equities than in safe, low-return Treasury bonds, says Richard B. Hoey, chief economist at Bank of New York Mellon.
Investors accustomed to milder recessions in which consumer spending remained relatively strong may be in for a shock. Heavily indebted consumers are unlikely to resume spending for quite some time. That means investing in an era of high unemployment will be an exercise in nuance.
Health-care spending should generally hold up since sick people will still seek medical care. Yet increasing unemployment brings larger numbers of uninsured patients, possibly leading to "the largest shift in recent U.S. history" of patients away from health-maintenance organizations and into the ranks of Medicaid or the uninsured, says Jason Gurda, analyst at Leerink Swann. That pinches HMO providers such as Aetna Inc. and Humana Inc.
Unemployed, uninsured people will struggle to pay medical bills, and some will forgo elective procedures. Standard & Poor's analyst Jeff Englander has a "sell" rating on companies like AmSurg Corp., an operator of specialty hospitals, and a "hold" on community-hospital chain LifePoint Hospitals Inc.
He finds better health-care plays in stocks like St. Jude Medical Inc. and Boston Scientific Corp., medical-device makers tied to nonelective care; and in stocks of skilled-nursing and long-term care facilities such as Kindred Healthcare Inc. and Sun Healthcare Group Inc., which benefit from an aging populace unaffected by unemployment.
Retailing is equally bifurcated. Cash-conscious consumers are keeping their pocketbooks closed. That is troubling for retailers like clothier Abercrombie & Fitch and department-store chain Nordstrom Inc. that live on discretionary dollars. Low-price leaders such as Wal-Mart Stores Inc. and McDonald's Corp. could continue to hold up well. Share prices of the two companies are close to their market peaks. Even some sellers of discretionary products like clothiers Aeropostale Inc. and Buckle Inc. are hanging on to customers by aggressively lowering prices, says Brian Sozzi, analyst at Wall Street Strategies.
David Kovacs, chief investment officer of quantitative strategies at Turner Investment Partners, likes consumer-products companies like Philip Morris International Inc., Kraft Foods Inc., Colgate-Palmolive Co., Coca-Cola Co. and PepsiCo Inc. -- all "businesses that supply what people need." And with consumers scaling back restaurant outings, low-price grocer Kroger Co. looks to be the "best-positioned supermarket," according to a recent research report from Andrew Wolf, analyst at BB&T Capital Markets.
Banks would normally be heading into an easier environment, since low interest rates associated with a jobless recovery typically help banks boost profits. Yet heavily indebted consumers have little reason to borrow, and persistent joblessness raises the risk of more home foreclosures in a financial system already crippled by homeowners unable to repay mortgages.
"We estimate another $1 trillion of losses in the next few years, and we see another big wave of foreclosures coming," says Barry Knapp, head of U.S. portfolio strategy at Barclays Capital. Regional banks will have it the hardest, Mr. Knapp says, in part because of their heavy construction lending, while banks like J.P. Morgan Chase & Co. "will be well-positioned for whatever kind of recovery we have."
As the economy recovers, companies often employ temporary help before hiring full-time workers. Yet Jeff Silber, analyst at BMO Capital Markets, says that historically, companies like Manpower Inc., Robert Half International Inc. and others surge early, only to sink later. The BMO Capital Markets Staffing Index shows staffing companies typically hit their ultimate trough "just about the same time a jobless recovery ends," which is usually well after the economy has turned around, Mr. Silber says.
Finally, Deutsche Bank chief U.S. economist Joseph Lavorgna says U.S.-based, export-dependent companies that sell into emerging markets "make a lot of sense" in a jobless recovery. That is because those areas of the world continue to grow at a faster pace than the U.S., and the expanding consumer base there remains relatively healthy and unencumbered by debt. Companies that stand to benefit include firms such as Honeywell International Inc., United Technologies Corp. and Tyco International Ltd.
Write to Jeff D. Opdyke at jeff.opdyke@wsj.com
U.S. Airlines Fly Into Credit Squeeze
Plunge in Travel Demand Could Result in Bankruptcy Filings by Winter if Conditions Don't Improve
By SUSAN CAREY and MIKE ESTERL
The recession, plunging travel demand and a tough lending environment are battering U.S. airlines, raising the prospect of a liquidity squeeze that could lead to bankruptcy filings by winter if conditions don't improve.
The five largest hub-and-spoke carriers are expected to report second-quarter losses, starting with AMR Corp.'s American Airlines on Wednesday and followed by Delta Air Lines Inc., UAL Corp.'s United Airlines, Continental Airlines Inc. and US Airways Group Inc. next week.
Darkening Landscape
The second quarter normally brings strong traffic and profitability, but this wasn't a typical spring. The few bright spots in a darkening industry landscape are the modest second-quarter profits expected from discount carriers Southwest Airlines Co., JetBlue Airways Corp. and AirTran Holdings Inc., and from Alaska Air Group Inc. Those four will also report earnings next week.
"Just as the airline industry was not built for $130 [per barrel] oil, neither was it built for an environment of negative global economic growth and nonfunctioning capital markets," Gerard Arpey, AMR's chief executive, said last month at an investor conference.
The recession continues to discourage high-yield business traffic, forcing carriers to discount heavily to fill planes with leisure travelers. May passenger revenue was down 26% on 9.5% fewer passengers paying nearly 18% less per ticket than a year earlier, according to the Air Transport Association trade group.
Continental and US Airways reported that their unit revenue -- the amount taken in for each seat flown one mile -- fell 20% in June compared with the year-ago month. Meanwhile, American's June traffic declined 8% and United's 10%. In a research note last week, Morgan Stanley estimated revenue at U.S. airlines will drop 18% for all of 2009.
Burning Cash
Pinched capital lending remains a problem for airlines trying to maintain or build cash balances as they're burning cash. Only Southwest has an investment-grade credit rating, and Moody's Investors Service has negative outlooks on eight of the nine biggest U.S. airlines.
Reflecting pessimism about autumn bookings, Southwest last week launched one of its biggest fare sales ever, offering one-way tickets for as little as $30 starting in September, when demand historically tails off. "A recovery doesn't appear to be on the way yet," said Laura Wright, Southwest's chief financial officer, in an interview.
Fuel prices, which a year ago shattered records, are now at about $60 a barrel, $10 below the June 2008 average. But carriers' savings on one of their top expenses aren't enough to offset the plunge in demand, even though airlines have slashed the number of seats they're offering.
"The sheer collapse in unit revenue is pretty much unprecedented," said Bill Warlick, an airline bond analyst for Fitch Ratings.
Mr. Warlick recently cut the corporate credit ratings of Delta and United, pushing them deeper into speculative territory. While Delta has a relatively strong $5.3 billion in unrestricted cash, the company faces scheduled debt maturities of roughly the same amount before the end of 2011. Delta's ability to maintain its liquidity at current levels depends on improved credit-market openness and industry stabilization in 2010, Mr. Warlick said.
United, with about $2.5 billion in cash, must meet more than $650 million of debt and lease payments later this year and more than $1 billion in 2010. With this "unsustainable" capital structure, United may have trouble raising a large amount of fresh capital in the near term, Mr. Warlick said. United declined to comment.
Some carriers may have no choice but to seek protection from creditors this winter, when cash flow typically dries up. United, American and US Airways are the most vulnerable among large carriers, according to credit-rating agencies and Wall Street investment houses.
While he doesn't rule out one or more carriers filing as soon as this fall, Philip Baggaley, a debt analyst for Standard & Poor's Corp., says that "the more likely scenario is that they will manage to scrape by again." He adds, though, that "there's not a lot of room for error."
US Airways has been through Chapter 11 twice since the 2001 terrorist attacks, and United and Delta, as well as Delta's recent acquisition, Northwest Airlines, have been through it once.
Some analysts wonder what good further restructurings would do.
"We might lose one along the way," said Bill Swelbar, a researcher at the Massachusetts Institute of Technology's International Center for Air Transportation. "It's hard to restructure zero demand."
Write to Susan Carey at susan.carey@wsj.com and Mike Esterl at mike.esterl@wsj.com
By SUSAN CAREY and MIKE ESTERL
The recession, plunging travel demand and a tough lending environment are battering U.S. airlines, raising the prospect of a liquidity squeeze that could lead to bankruptcy filings by winter if conditions don't improve.
The five largest hub-and-spoke carriers are expected to report second-quarter losses, starting with AMR Corp.'s American Airlines on Wednesday and followed by Delta Air Lines Inc., UAL Corp.'s United Airlines, Continental Airlines Inc. and US Airways Group Inc. next week.
Darkening Landscape
The second quarter normally brings strong traffic and profitability, but this wasn't a typical spring. The few bright spots in a darkening industry landscape are the modest second-quarter profits expected from discount carriers Southwest Airlines Co., JetBlue Airways Corp. and AirTran Holdings Inc., and from Alaska Air Group Inc. Those four will also report earnings next week.
"Just as the airline industry was not built for $130 [per barrel] oil, neither was it built for an environment of negative global economic growth and nonfunctioning capital markets," Gerard Arpey, AMR's chief executive, said last month at an investor conference.
The recession continues to discourage high-yield business traffic, forcing carriers to discount heavily to fill planes with leisure travelers. May passenger revenue was down 26% on 9.5% fewer passengers paying nearly 18% less per ticket than a year earlier, according to the Air Transport Association trade group.
Continental and US Airways reported that their unit revenue -- the amount taken in for each seat flown one mile -- fell 20% in June compared with the year-ago month. Meanwhile, American's June traffic declined 8% and United's 10%. In a research note last week, Morgan Stanley estimated revenue at U.S. airlines will drop 18% for all of 2009.
Burning Cash
Pinched capital lending remains a problem for airlines trying to maintain or build cash balances as they're burning cash. Only Southwest has an investment-grade credit rating, and Moody's Investors Service has negative outlooks on eight of the nine biggest U.S. airlines.
Reflecting pessimism about autumn bookings, Southwest last week launched one of its biggest fare sales ever, offering one-way tickets for as little as $30 starting in September, when demand historically tails off. "A recovery doesn't appear to be on the way yet," said Laura Wright, Southwest's chief financial officer, in an interview.
Fuel prices, which a year ago shattered records, are now at about $60 a barrel, $10 below the June 2008 average. But carriers' savings on one of their top expenses aren't enough to offset the plunge in demand, even though airlines have slashed the number of seats they're offering.
"The sheer collapse in unit revenue is pretty much unprecedented," said Bill Warlick, an airline bond analyst for Fitch Ratings.
Mr. Warlick recently cut the corporate credit ratings of Delta and United, pushing them deeper into speculative territory. While Delta has a relatively strong $5.3 billion in unrestricted cash, the company faces scheduled debt maturities of roughly the same amount before the end of 2011. Delta's ability to maintain its liquidity at current levels depends on improved credit-market openness and industry stabilization in 2010, Mr. Warlick said.
United, with about $2.5 billion in cash, must meet more than $650 million of debt and lease payments later this year and more than $1 billion in 2010. With this "unsustainable" capital structure, United may have trouble raising a large amount of fresh capital in the near term, Mr. Warlick said. United declined to comment.
Some carriers may have no choice but to seek protection from creditors this winter, when cash flow typically dries up. United, American and US Airways are the most vulnerable among large carriers, according to credit-rating agencies and Wall Street investment houses.
While he doesn't rule out one or more carriers filing as soon as this fall, Philip Baggaley, a debt analyst for Standard & Poor's Corp., says that "the more likely scenario is that they will manage to scrape by again." He adds, though, that "there's not a lot of room for error."
US Airways has been through Chapter 11 twice since the 2001 terrorist attacks, and United and Delta, as well as Delta's recent acquisition, Northwest Airlines, have been through it once.
Some analysts wonder what good further restructurings would do.
"We might lose one along the way," said Bill Swelbar, a researcher at the Massachusetts Institute of Technology's International Center for Air Transportation. "It's hard to restructure zero demand."
Write to Susan Carey at susan.carey@wsj.com and Mike Esterl at mike.esterl@wsj.com
Sunday, July 12, 2009
CIT Red Flags
The company is heading for bankruptcy or debt restrcture.
One thing stands out in terms of its financial condition is its leverage. By the end of Q1 2009, CIT group Inc's total debt was $68 bil while equity was $7.5 bil. The company funds its operations primarily through long term debts. By the end of Q1 2009, $59.5 bil out of $68 bil was long term borrowing. Its interest income shrank to nearly 1 bil to 640 mil while interest payment decreased from 765 mil to 633 mil. The earning power from the rest was limited in helping paying off interests. Net income before tax from the rest non-interest earning business could only contributed to $220 mil in Q3. The credit provision further deteriorated the company's capability to cushion against intereset payment. It provisioned $535 mil in Q1 2009, increasing from 247 mil in Q1 2008.
The pressing issue is that the company has to pay back $1 bil debt principal in August, $1.4 bil by the end of year and another $8 bil by 2010. But the company has been downgraded in June to junk status. Its long term 10 year bonds are trading at 16%. Its stock traded at 1.15 by 07/11/2009, the historic low. Given no clear sign of economic recovery in the near term and the company's deteriorating financial condtions, its equity and bond financing power might be puny and expensive. The implcation is that the company could only raise money from public market, from government. It has borrowed $2.3 bil tarp money. FDIC has said on July 10th to withhold CIT debt garantuee due to its risk. This would be a devastating blow to the company. The hawk stance would take a toll on the company.
It seems that the only solution is either bankruptcy or asking debt holders for concession. Government are unwilling to broker a debt concession deal since the company's failure might not pose systematic risk to the financial markets. It will become clear next week that the bankruptcy might be only option.
One thing stands out in terms of its financial condition is its leverage. By the end of Q1 2009, CIT group Inc's total debt was $68 bil while equity was $7.5 bil. The company funds its operations primarily through long term debts. By the end of Q1 2009, $59.5 bil out of $68 bil was long term borrowing. Its interest income shrank to nearly 1 bil to 640 mil while interest payment decreased from 765 mil to 633 mil. The earning power from the rest was limited in helping paying off interests. Net income before tax from the rest non-interest earning business could only contributed to $220 mil in Q3. The credit provision further deteriorated the company's capability to cushion against intereset payment. It provisioned $535 mil in Q1 2009, increasing from 247 mil in Q1 2008.
The pressing issue is that the company has to pay back $1 bil debt principal in August, $1.4 bil by the end of year and another $8 bil by 2010. But the company has been downgraded in June to junk status. Its long term 10 year bonds are trading at 16%. Its stock traded at 1.15 by 07/11/2009, the historic low. Given no clear sign of economic recovery in the near term and the company's deteriorating financial condtions, its equity and bond financing power might be puny and expensive. The implcation is that the company could only raise money from public market, from government. It has borrowed $2.3 bil tarp money. FDIC has said on July 10th to withhold CIT debt garantuee due to its risk. This would be a devastating blow to the company. The hawk stance would take a toll on the company.
It seems that the only solution is either bankruptcy or asking debt holders for concession. Government are unwilling to broker a debt concession deal since the company's failure might not pose systematic risk to the financial markets. It will become clear next week that the bankruptcy might be only option.
Major Lender Faces Crunch
CIT Hires Bankruptcy Adviser as Payment Looms; Financier to 1 Million Businesses
By JEFFREY MCCRACKEN and SERENA NG
CIT Group Inc., a lender to almost a million mostly small and midsize businesses across the country, is preparing for a possible bankruptcy filing after so far failing to win a government guarantee to help it borrow, said people familiar with the matter.
To prepare for a possible filing, CIT has retained the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, which has a prominent bankruptcy practice, these people said.
The mere hiring of bankruptcy counsel doesn't mean a company will actually make a bankruptcy filing. CIT has been pressing its case "with increased urgency to the government," said a person familiar with the matter, and is hopeful because "the government has not said absolutely no to anything."
CIT has a $1 billion payment due in mid-August and it is unclear the company "will be able to handle that," said this person. The company will give more guidance when it discusses second quarter earnings in two weeks.
CIT declined to comment on whether it was preparing a filing or why it had retained Skadden Arps. But if CIT did file, the consequences could be considerable, because the 101-year-old company, as of March 31, had $68 billion of liabilities.
CIT is registered as a bank holding company and has a bank in Utah with roughly $3.5 billion in deposits. But to get most of its funds to lend, it has historically relied on bonds and the short-term debt market known as commercial paper. It has been largely unable to tap the credit markets since mid 2007 and is trying to raise more money through its bank.
The New York-based lender has been stuck for months in a bureaucratic tangle over government assistance. It received $2.3 billion from the federal Troubled Asset Relief Program in December, after winning approval to become a bank holding company. But CIT has so far been unable to access another federal program, one that helps banks and thrifts sell debt with government guarantees. Access to that program would enable CIT, which has a below-investment-grade, or "junk," credit rating, to sell bonds at a low interest rate.
CIT confirmed Friday that the Federal Deposit Insurance Corp., which oversees the debt guarantee program, has yet to approve its application. CIT said that its application to the FDIC remains outstanding and the company "continues to be in active dialogue with the government."
A bankruptcy filing by CIT could affect thousands of small borrowers, from Dunkin' Donuts franchisees to restaurant owners and clothing retailers. "If CIT were to go away, it would take a financing option away from franchisees who want to buy stores or expand their networks," said Kate Lavelle, chief financial officer of Dunkin' Brands, the which owns Dunkin' Donuts and has had a 50-year relationship with CIT.
On Friday, many CIT bonds slumped on heavy trading, and its stock tumbled to its lowest since the lender went public in 2002, further hurting its chances of raising capital from the private sector without more government aid. CIT bonds that mature in February 2010 were trading at 83.5 cents on the dollar and yielding over 40%, indicating that debt investors think it is unlikely they will be repaid in full. CIT shares sank 33 cents, or 18%, to $1.53, after dipping as low as $1.13 during the day.
The company's most pressing issue, said those familiar with the situation, is that it has a debt payment coming due in August. In all, CIT has about $2.7 billion that comes due this year and $8 billion more due next year.
The FDIC has been considering CIT's application for a federal debt guarantee since January and hasn't reached a decision. The agency is concerned about CIT's deteriorating financial position and operating losses.
A few months ago, CIT hired former Deputy Treasury Secretary Roger Altman and his boutique investment bank Evercore Partners to try to get more TARP funds or find another financial solution with the government, said the people familiar with the matter.
One problem with getting more aid is that the government has made it clear it doesn't see the company as a systemic risk to the financial system. The people familiar with the matter said the government feels that other lenders, such as J.P. Morgan Chase & Co. or Deutsche Bank AG, can handle many of the same loans that CIT specializes in, such as loans to small retailers or rail-car leasing firms.
Meanwhile, competitors like GE Capital Corp. and GMAC LLC have been able to sell debt with the backing of the government's top credit rating.
According to confidential documents reviewed by The Wall Street Journal, CIT has in recent weeks tried to assess the consequences of a failure of the lender on Middle America. Among them: Companies would lose access to $4 billion in untapped credit lines and thousands of manufacturers could run into problems.
CIT competes with the likes of Wells Fargo, Bank of America, General Electric Capital Corp. and regional banks in the sectors in which it is active. But many CIT customers say that the lender is often willing to make loans to businesses and borrowers that most banks typically shun. CIT now ranks 20th among U.S. bank holding companies, with assets of over $75 billion.
Heard on the Street: CIT Offers Litmus Test for Washington's Faith in the System Founded in 1908, CIT, which used to be known as Commercial Investment Trust, has had a somewhat tumultuous history, its fortunes rising and falling during past credit cycles. In the 1990s it expanded into areas such as manufactured housing and financing technology equipment, only to get burned when those bubbles burst.
In 2001, following the dot-com bust, the company was acquired by Tyco International Ltd. , but was spun off in mid-2002 when Tyco became ensnared in an accounting scandal.
In 2003, CIT appointed its current chairman and chief executive, Jeffrey Peek, a former Merrill Lynch executive. Under his leadership, it expanded consumer-finance activities such as student lending. It also increased its presence in subprime mortgage lending during the credit boom.
When the credit crunch hit, the company rushed to leave those two businesses, concentrating instead on lending to small businesses and midsize companies, leasing railcars and providing cash advances to manufacturers and companies in exchange for their receivables.
"They are our sole financing partner and we are heavily reliant on them," said Haresh Tharani, founder and president of the Tharanco Group, a company in the apparel business.
Tharanco has a loan from CIT and also gets cash advances from the lender for its receivables. "I worry about the company.... If CIT fails, it would be detrimental to the confidence of many businesses," Mr. Tharani said.
Write to Jeffrey McCracken at jeff.mccracken@wsj.com and Serena Ng at serena.ng@wsj.com
By JEFFREY MCCRACKEN and SERENA NG
CIT Group Inc., a lender to almost a million mostly small and midsize businesses across the country, is preparing for a possible bankruptcy filing after so far failing to win a government guarantee to help it borrow, said people familiar with the matter.
To prepare for a possible filing, CIT has retained the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, which has a prominent bankruptcy practice, these people said.
The mere hiring of bankruptcy counsel doesn't mean a company will actually make a bankruptcy filing. CIT has been pressing its case "with increased urgency to the government," said a person familiar with the matter, and is hopeful because "the government has not said absolutely no to anything."
CIT has a $1 billion payment due in mid-August and it is unclear the company "will be able to handle that," said this person. The company will give more guidance when it discusses second quarter earnings in two weeks.
CIT declined to comment on whether it was preparing a filing or why it had retained Skadden Arps. But if CIT did file, the consequences could be considerable, because the 101-year-old company, as of March 31, had $68 billion of liabilities.
CIT is registered as a bank holding company and has a bank in Utah with roughly $3.5 billion in deposits. But to get most of its funds to lend, it has historically relied on bonds and the short-term debt market known as commercial paper. It has been largely unable to tap the credit markets since mid 2007 and is trying to raise more money through its bank.
The New York-based lender has been stuck for months in a bureaucratic tangle over government assistance. It received $2.3 billion from the federal Troubled Asset Relief Program in December, after winning approval to become a bank holding company. But CIT has so far been unable to access another federal program, one that helps banks and thrifts sell debt with government guarantees. Access to that program would enable CIT, which has a below-investment-grade, or "junk," credit rating, to sell bonds at a low interest rate.
CIT confirmed Friday that the Federal Deposit Insurance Corp., which oversees the debt guarantee program, has yet to approve its application. CIT said that its application to the FDIC remains outstanding and the company "continues to be in active dialogue with the government."
A bankruptcy filing by CIT could affect thousands of small borrowers, from Dunkin' Donuts franchisees to restaurant owners and clothing retailers. "If CIT were to go away, it would take a financing option away from franchisees who want to buy stores or expand their networks," said Kate Lavelle, chief financial officer of Dunkin' Brands, the which owns Dunkin' Donuts and has had a 50-year relationship with CIT.
On Friday, many CIT bonds slumped on heavy trading, and its stock tumbled to its lowest since the lender went public in 2002, further hurting its chances of raising capital from the private sector without more government aid. CIT bonds that mature in February 2010 were trading at 83.5 cents on the dollar and yielding over 40%, indicating that debt investors think it is unlikely they will be repaid in full. CIT shares sank 33 cents, or 18%, to $1.53, after dipping as low as $1.13 during the day.
The company's most pressing issue, said those familiar with the situation, is that it has a debt payment coming due in August. In all, CIT has about $2.7 billion that comes due this year and $8 billion more due next year.
The FDIC has been considering CIT's application for a federal debt guarantee since January and hasn't reached a decision. The agency is concerned about CIT's deteriorating financial position and operating losses.
A few months ago, CIT hired former Deputy Treasury Secretary Roger Altman and his boutique investment bank Evercore Partners to try to get more TARP funds or find another financial solution with the government, said the people familiar with the matter.
One problem with getting more aid is that the government has made it clear it doesn't see the company as a systemic risk to the financial system. The people familiar with the matter said the government feels that other lenders, such as J.P. Morgan Chase & Co. or Deutsche Bank AG, can handle many of the same loans that CIT specializes in, such as loans to small retailers or rail-car leasing firms.
Meanwhile, competitors like GE Capital Corp. and GMAC LLC have been able to sell debt with the backing of the government's top credit rating.
According to confidential documents reviewed by The Wall Street Journal, CIT has in recent weeks tried to assess the consequences of a failure of the lender on Middle America. Among them: Companies would lose access to $4 billion in untapped credit lines and thousands of manufacturers could run into problems.
CIT competes with the likes of Wells Fargo, Bank of America, General Electric Capital Corp. and regional banks in the sectors in which it is active. But many CIT customers say that the lender is often willing to make loans to businesses and borrowers that most banks typically shun. CIT now ranks 20th among U.S. bank holding companies, with assets of over $75 billion.
Heard on the Street: CIT Offers Litmus Test for Washington's Faith in the System Founded in 1908, CIT, which used to be known as Commercial Investment Trust, has had a somewhat tumultuous history, its fortunes rising and falling during past credit cycles. In the 1990s it expanded into areas such as manufactured housing and financing technology equipment, only to get burned when those bubbles burst.
In 2001, following the dot-com bust, the company was acquired by Tyco International Ltd. , but was spun off in mid-2002 when Tyco became ensnared in an accounting scandal.
In 2003, CIT appointed its current chairman and chief executive, Jeffrey Peek, a former Merrill Lynch executive. Under his leadership, it expanded consumer-finance activities such as student lending. It also increased its presence in subprime mortgage lending during the credit boom.
When the credit crunch hit, the company rushed to leave those two businesses, concentrating instead on lending to small businesses and midsize companies, leasing railcars and providing cash advances to manufacturers and companies in exchange for their receivables.
"They are our sole financing partner and we are heavily reliant on them," said Haresh Tharani, founder and president of the Tharanco Group, a company in the apparel business.
Tharanco has a loan from CIT and also gets cash advances from the lender for its receivables. "I worry about the company.... If CIT fails, it would be detrimental to the confidence of many businesses," Mr. Tharani said.
Write to Jeffrey McCracken at jeff.mccracken@wsj.com and Serena Ng at serena.ng@wsj.com
Thursday, July 9, 2009
Subprime Resurfaces as Housing-Market Woe
By CARRICK MOLLENKAMP
The U.S. housing market is facing new downward pressure as holders of subprime-mortgage bonds flood the market with foreclosed homes at prices that are much lower than where many banks are willing to sell.
While nationwide figures are scarce, a review of thousands of foreclosures in the Atlanta area shows that trusts managing pools of securitized mortgages sold six times as many properties as banks during the six months ended March 31. And homes dumped by subprime bondholders sold for thousands of dollars less on average than bank-owned properties, the data show.
Fire Sale
Resale prices for four foreclosed houses in the Atlanta area Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy.
"While the banks are trying frantically to get loans off their books, they face the problem of large shadow inventories of housing being dumped on the market, which would depress prices further," said Anthony Sanders, real-estate finance professor at George Mason University in Fairfax, Va.
In the Atlanta area, hit hard by foreclosures and declining home values in the past two years, mortgage-backed securitization entities completed 6,260 foreclosures in last year's fourth quarter and the first quarter of 2009, according to data compiled by Data Intelligence Corp., a Marietta, Ga., real-estate analytics firm which reviewed the records for The Wall Street Journal. That was more than double the 2,737 foreclosures by banks in the same period.
Of those foreclosures, securitization entities sold 2,963 homes during the same period for an average of 62% of the original loan amount. Banks unloaded just 442 of the homes they foreclosed upon, with an average selling price of 69% of the original loan amount.
There still is much more inventory that mortgage-servicing firms are racing to sell for securitization trusts. Such entities tend to sell in bulk so that they can cut losses, finding it more cost-efficient to move homes through foreclosure and subsequent sale than to try to restructure the mortgage with the borrower. Securitization trusts also realize that potential buyers won't step in unless the price is attractive.
"You have to haircut that in a big way," said Christopher Marinac, managing principal at FIG Partners, a bank-research firm in Atlanta.
According to Karen Weaver, global head of securitization research at Deutsche Bank AG, the steepest losses are on subprime loans, where lenders generally are recovering just 26% of the original loan amount.
Analysts said Atlanta is typical of a pattern that is emerging across the U.S. In the first quarter, Atlanta had the 35th-highest foreclosure rate out of 203 metropolitan areas with a population of at least 200,000, according to RealtyTrac Inc. Nine Georgia banks have failed so far this year.
On a nationwide basis, foreclosures were started on a record high of nearly 1.4% of all first-lien mortgages in the first quarter, according to the Mortgage Bankers Association. U.S. home prices in 20 major cities fell an average of 0.6% in April, a smaller decline than March's drop of 2.2%, according to the Standard & Poor's/Case-Shiller index released last week.
Residential mortgage-backed securities helped feed the subprime boom, winding up in the hands of investment funds or in more complicated pools known as collateralized debt obligations, where underlying mortgage pools were ultimately sliced into different risk tranches. Insurance contracts known as credit-default swaps often were sold on top of the CDOs.
Securities sold by Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co., companies that filed for bankruptcy protection or were sold in the past 14 months, included residential loans from Atlanta.
In March, the mortgage-processing firm that works on behalf of a Goldman Sachs Group Inc. mortgage trust sold a house in southwest Atlanta for $17,000 -- a markdown of 87% from the original loan value. A Goldman spokeswoman declined to comment.
In the fourth and first quarters, Bear-issued trusts sold 29 properties in Fulton County, which includes Atlanta, for a total of $3.5 million. That was 60% of the combined original loan amounts of $5.8 million.
The loans were pooled in the vehicle during a period of Bear securitizations that were sold to investors prior to the firm's sale to J.P. Morgan Chase & Co. a little more than a year ago.
A J.P. Morgan spokesman said the depressed prices are representative of a housing market correcting itself in a period that is vastly different from a few years ago. Many of the regions facing the largest declines in value are the same ones that soared and saw a frenzy of construction during the housing boom.
In comparison, Countrywide Financial Corp., now owned by Bank of America Corp., completed the sale of 23 properties in Fulton for $3.7 million, or 86% of the original loan amount during the same time period, the real-estate records analyzed by Data Intelligence show.
A Bank of America spokesman said prices being fetched in the Atlanta area for the Countrywide portfolio reflect a reluctance to dump properties far below prevailing market values. The bank is getting an average of 99% of the appraised value of homes on an average sale, while selling within one year 99% of the properties that end up on its books.
"We see local and regional banks having to withstand continued devaluation pressure from the disposition of mortgage-backed securitized properties," said Mason Maynard, founder of Data Intelligence.
The good news is that at least foreclosed homes are moving -- up to a point. And buyers of houses being dumped by securitized trusts are getting a very good deal. Late last year, for example, a property at 1169 Old Fincher Trail in Cherokee County, Ga., that was in a Bear trust was foreclosed on, Data Intelligence said. The original loan was $292,000. When the owners couldn't keep up with the payments, the home fell into foreclosure.
Realtor Tim Hamill of Re/Max Greater Atlanta, who was handling the sale for an asset-management firm working on behalf of the trust, said his mandate had been to sell homes in 30 days.
Greg Foster, a neighbor who built the home 13 years ago, saw an opportunity to buy it for his 25-year-old daughter, Ashleigh, a nurse and single mother of two children. When she wasn't able to secure financing in time, her grandfather bought the house for $164,000 -- or 56% of the original loan amount -- and then sold it to Ms. Foster.
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com
The U.S. housing market is facing new downward pressure as holders of subprime-mortgage bonds flood the market with foreclosed homes at prices that are much lower than where many banks are willing to sell.
While nationwide figures are scarce, a review of thousands of foreclosures in the Atlanta area shows that trusts managing pools of securitized mortgages sold six times as many properties as banks during the six months ended March 31. And homes dumped by subprime bondholders sold for thousands of dollars less on average than bank-owned properties, the data show.
Fire Sale
Resale prices for four foreclosed houses in the Atlanta area Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy.
"While the banks are trying frantically to get loans off their books, they face the problem of large shadow inventories of housing being dumped on the market, which would depress prices further," said Anthony Sanders, real-estate finance professor at George Mason University in Fairfax, Va.
In the Atlanta area, hit hard by foreclosures and declining home values in the past two years, mortgage-backed securitization entities completed 6,260 foreclosures in last year's fourth quarter and the first quarter of 2009, according to data compiled by Data Intelligence Corp., a Marietta, Ga., real-estate analytics firm which reviewed the records for The Wall Street Journal. That was more than double the 2,737 foreclosures by banks in the same period.
Of those foreclosures, securitization entities sold 2,963 homes during the same period for an average of 62% of the original loan amount. Banks unloaded just 442 of the homes they foreclosed upon, with an average selling price of 69% of the original loan amount.
There still is much more inventory that mortgage-servicing firms are racing to sell for securitization trusts. Such entities tend to sell in bulk so that they can cut losses, finding it more cost-efficient to move homes through foreclosure and subsequent sale than to try to restructure the mortgage with the borrower. Securitization trusts also realize that potential buyers won't step in unless the price is attractive.
"You have to haircut that in a big way," said Christopher Marinac, managing principal at FIG Partners, a bank-research firm in Atlanta.
According to Karen Weaver, global head of securitization research at Deutsche Bank AG, the steepest losses are on subprime loans, where lenders generally are recovering just 26% of the original loan amount.
Analysts said Atlanta is typical of a pattern that is emerging across the U.S. In the first quarter, Atlanta had the 35th-highest foreclosure rate out of 203 metropolitan areas with a population of at least 200,000, according to RealtyTrac Inc. Nine Georgia banks have failed so far this year.
On a nationwide basis, foreclosures were started on a record high of nearly 1.4% of all first-lien mortgages in the first quarter, according to the Mortgage Bankers Association. U.S. home prices in 20 major cities fell an average of 0.6% in April, a smaller decline than March's drop of 2.2%, according to the Standard & Poor's/Case-Shiller index released last week.
Residential mortgage-backed securities helped feed the subprime boom, winding up in the hands of investment funds or in more complicated pools known as collateralized debt obligations, where underlying mortgage pools were ultimately sliced into different risk tranches. Insurance contracts known as credit-default swaps often were sold on top of the CDOs.
Securities sold by Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co., companies that filed for bankruptcy protection or were sold in the past 14 months, included residential loans from Atlanta.
In March, the mortgage-processing firm that works on behalf of a Goldman Sachs Group Inc. mortgage trust sold a house in southwest Atlanta for $17,000 -- a markdown of 87% from the original loan value. A Goldman spokeswoman declined to comment.
In the fourth and first quarters, Bear-issued trusts sold 29 properties in Fulton County, which includes Atlanta, for a total of $3.5 million. That was 60% of the combined original loan amounts of $5.8 million.
The loans were pooled in the vehicle during a period of Bear securitizations that were sold to investors prior to the firm's sale to J.P. Morgan Chase & Co. a little more than a year ago.
A J.P. Morgan spokesman said the depressed prices are representative of a housing market correcting itself in a period that is vastly different from a few years ago. Many of the regions facing the largest declines in value are the same ones that soared and saw a frenzy of construction during the housing boom.
In comparison, Countrywide Financial Corp., now owned by Bank of America Corp., completed the sale of 23 properties in Fulton for $3.7 million, or 86% of the original loan amount during the same time period, the real-estate records analyzed by Data Intelligence show.
A Bank of America spokesman said prices being fetched in the Atlanta area for the Countrywide portfolio reflect a reluctance to dump properties far below prevailing market values. The bank is getting an average of 99% of the appraised value of homes on an average sale, while selling within one year 99% of the properties that end up on its books.
"We see local and regional banks having to withstand continued devaluation pressure from the disposition of mortgage-backed securitized properties," said Mason Maynard, founder of Data Intelligence.
The good news is that at least foreclosed homes are moving -- up to a point. And buyers of houses being dumped by securitized trusts are getting a very good deal. Late last year, for example, a property at 1169 Old Fincher Trail in Cherokee County, Ga., that was in a Bear trust was foreclosed on, Data Intelligence said. The original loan was $292,000. When the owners couldn't keep up with the payments, the home fell into foreclosure.
Realtor Tim Hamill of Re/Max Greater Atlanta, who was handling the sale for an asset-management firm working on behalf of the trust, said his mandate had been to sell homes in 30 days.
Greg Foster, a neighbor who built the home 13 years ago, saw an opportunity to buy it for his 25-year-old daughter, Ashleigh, a nurse and single mother of two children. When she wasn't able to secure financing in time, her grandfather bought the house for $164,000 -- or 56% of the original loan amount -- and then sold it to Ms. Foster.
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com
Health-Care Overhaul Goals Prove Challenging
By JANET ADAMY
WASHINGTON -- Lawmakers are trying to keep the price of a health overhaul near $1 trillion over a decade. They also want the plan to result in near-universal coverage, so that more than 95% of Americans have health insurance.
Reaching both of those numbers at the same time is turning into one of hardest tasks for Congress and the White House. The nonpartisan Congressional Budget Office has found that several initial efforts either sailed beyond the targeted price tag or left many people without insurance.
The CBO said this week that one Senate proposal, when combined with certain expansions to the Medicaid program, would cost about $1.1 trillion over a decade and still leave 15 million to 20 million Americans uninsured in 2019. Currently, about 46 million U.S. residents lack insurance, according to the Census Bureau.
The Senate Health, Education, Labor and Pensions Committee at first developed a plan that offered generous subsidies to lower-income Americans to help them buy health insurance. The proposal would require most people to carry insurance or pay a penalty.
When the price tag came in too high, lawmakers whittled the subsidies, which helped the cost problem but made it difficult for people to buy insurance. "The more you're going to make people pay, the harder it is to say to them, 'You must buy it,'" said David Cutler, a professor of economics at Harvard University.
Keeping the federal cost to around $1 trillion or less is critical because the White House is emphasizing that the plan won't increase the deficit -- meaning savings must be found for every dollar spent.
Lawmakers are making progress in reducing costs in a healthcare reform bill they'd like to pass in August. WSJ's Janet Adamy looks at recent developments that help smooth over some of the bumps they've had in their debates.
"Rising costs are crushing us," Vice President Joe Biden said Wednesday. "They're crushing families, crushing businesses, crushing state budgets -- and they are crushing the health-care industry itself." Mr. Biden trumpeted a deal with the hospital industry to cut government payments through Medicare and Medicaid by $155 billion over a decade, savings that could be used to fund an overhaul.
According to a CBO estimate last week, the Senate health committee's proposal would cost $611 billion over 10 years. That estimate didn't include the cost of expanding Medicaid, the federal-state insurance program for the poor, because that's outside the committee's jurisdiction. The CBO said Tuesday that expanding Medicaid to a new batch of Americans with incomes as high as $33,000 a year for a family of four would add $500 billion to the cost of the proposal.
The high cost estimates and prospect that millions would remain uninsured has left negotiators scrambling for ways to make the numbers work. The Senate Finance Committee, which is working on a parallel health bill, has discussed delaying the Medicaid expansion until 2013. That would reduce the 10-year cost of the bill. The committee is considering a narrower expansion of the program than the one calculated by the CBO, so the measure may result in a smaller reduction in the uninsured number by the end of the 10-year period.
Republicans say the expansion of public programs would undercut the current employer-based health-insurance system. Sen. Mike Enzi of Wyoming, the ranking Republican on the health committee, said Wednesday that the committee's bill "breaks the Democrats' promise that if you like the care you have, you can keep it." Sen. Enzi said the plan "will force millions of Americans to lose their current health insurance."
Another way to bring down the number of uninsured while keeping down the cost is to enact stricter mandates on businesses to offer health insurance and individuals to have it. However, those mandates are politically sensitive and carry costs of their own -- albeit not directly paid by the government.
Write to Janet Adamy at janet.adamy@wsj.com
WASHINGTON -- Lawmakers are trying to keep the price of a health overhaul near $1 trillion over a decade. They also want the plan to result in near-universal coverage, so that more than 95% of Americans have health insurance.
Reaching both of those numbers at the same time is turning into one of hardest tasks for Congress and the White House. The nonpartisan Congressional Budget Office has found that several initial efforts either sailed beyond the targeted price tag or left many people without insurance.
The CBO said this week that one Senate proposal, when combined with certain expansions to the Medicaid program, would cost about $1.1 trillion over a decade and still leave 15 million to 20 million Americans uninsured in 2019. Currently, about 46 million U.S. residents lack insurance, according to the Census Bureau.
The Senate Health, Education, Labor and Pensions Committee at first developed a plan that offered generous subsidies to lower-income Americans to help them buy health insurance. The proposal would require most people to carry insurance or pay a penalty.
When the price tag came in too high, lawmakers whittled the subsidies, which helped the cost problem but made it difficult for people to buy insurance. "The more you're going to make people pay, the harder it is to say to them, 'You must buy it,'" said David Cutler, a professor of economics at Harvard University.
Keeping the federal cost to around $1 trillion or less is critical because the White House is emphasizing that the plan won't increase the deficit -- meaning savings must be found for every dollar spent.
Lawmakers are making progress in reducing costs in a healthcare reform bill they'd like to pass in August. WSJ's Janet Adamy looks at recent developments that help smooth over some of the bumps they've had in their debates.
"Rising costs are crushing us," Vice President Joe Biden said Wednesday. "They're crushing families, crushing businesses, crushing state budgets -- and they are crushing the health-care industry itself." Mr. Biden trumpeted a deal with the hospital industry to cut government payments through Medicare and Medicaid by $155 billion over a decade, savings that could be used to fund an overhaul.
According to a CBO estimate last week, the Senate health committee's proposal would cost $611 billion over 10 years. That estimate didn't include the cost of expanding Medicaid, the federal-state insurance program for the poor, because that's outside the committee's jurisdiction. The CBO said Tuesday that expanding Medicaid to a new batch of Americans with incomes as high as $33,000 a year for a family of four would add $500 billion to the cost of the proposal.
The high cost estimates and prospect that millions would remain uninsured has left negotiators scrambling for ways to make the numbers work. The Senate Finance Committee, which is working on a parallel health bill, has discussed delaying the Medicaid expansion until 2013. That would reduce the 10-year cost of the bill. The committee is considering a narrower expansion of the program than the one calculated by the CBO, so the measure may result in a smaller reduction in the uninsured number by the end of the 10-year period.
Republicans say the expansion of public programs would undercut the current employer-based health-insurance system. Sen. Mike Enzi of Wyoming, the ranking Republican on the health committee, said Wednesday that the committee's bill "breaks the Democrats' promise that if you like the care you have, you can keep it." Sen. Enzi said the plan "will force millions of Americans to lose their current health insurance."
Another way to bring down the number of uninsured while keeping down the cost is to enact stricter mandates on businesses to offer health insurance and individuals to have it. However, those mandates are politically sensitive and carry costs of their own -- albeit not directly paid by the government.
Write to Janet Adamy at janet.adamy@wsj.com
Wednesday, July 8, 2009
America's Fiscal Train Wreck
July 06, 2009
By Richard Berner New York
America's long-awaited fiscal train wreck is now underway. Depending on policy actions taken now and over the next few years, federal deficits will likely average as much as 6% of GDP through 2019, contributing to a jump in debt held by the public to as high as 82% of GDP by then - a doubling over the next decade. Worse, barring aggressive policy actions, deficits and debt will rise even more sharply thereafter as entitlement spending accelerates relative to GDP. Keeping entitlement promises would require unsustainable borrowing, taxes or both, severely testing the credibility of our policies and hurting our long-term ability to finance investment and sustain growth. And soaring debt will force up real interest rates, reducing capital and productivity and boosting debt service. Not only will those factors steadily lower our standard of living, but they will imperil economic and financial stability.
Familiar challenges. Sound familiar? Warning about these challenges has long been a staple for economists. Five years ago, for example, I summarized my concerns about our coming fiscal problems, along with the interplay among them and unexpected longevity, inadequate thrift and saving infrastructure, mediocre education outcomes, and inadequate energy policy (see America's Long-Term Challenges, May 21 and May 24, 2004). I was merely the latest in a long line of alarmists; for example, Pete Peterson famously noted more than 20 years ago that "America has let its infrastructure crumble, its foreign markets decline, its productivity dwindle, its savings evaporate, and its budget and borrowing burgeon. And now the day of reckoning is at hand" (see "The Morning After," Atlantic Monthly, October 1987). The Congressional Budget Office (CBO) has since 1997 - under directors from both sides of the aisle - carefully laid out ever-more depressing fiscal scenarios in its annual Long Term Budget Outlook, the latest of which appeared last week.
The problem, ironically, is that the day of reckoning hasn't come. This has seriously undermined doomsayers' credibility and, more importantly, it has made the electorate and elected officials complacent about the threat from unsustainable fiscal policies. Some even proclaimed that "deficits don't matter."
Fast forward to today. Yet the last five years have brought our ever-distant fiscal crisis rapidly forward. Some of the deterioration is obviously cyclical: Courtesy of the financial crisis and recession, aggressive fiscal stimulus, and ongoing military outlays, the federal deficit has ballooned to US$1.8 trillion or 13% of GDP in fiscal 2009. But the bulk of the threat is structural: The fiscal stimulus package included spending increases with minimal bang for the buck, leaving more debt than growth. In its FY2010 budget, the administration proposes to extend several tax cuts enacted in 2001 and 2003, provide relief from the alternative minimum tax, and increase both mandatory and discretionary spending compared with current law. Most important, by 2019 the full force of rising entitlement outlays and debt service will begin to hit the budget. No rosy growth scenario will provide sufficient resources to meet all the claims on future federal revenue. And while tax hikes or a broader tax base will likely be part of the solution, the real cure is to curb the growth of entitlement spending.
Against that backdrop, voters and politicians are nervous: Two recent polls suggest that Americans are more worried about deficits than healthcare by a ratio of 2:1. But despite voters' deficit anxiety, near-term action to reduce long-term deficits seems highly unlikely for two reasons. First, no one wants to endanger a still-fragile economy by raising revenues or cutting spending until they are sure of economic recovery. Second, while there is no shortage of fiscal scolds inside the Beltway, the political will to change popular entitlement programs is still absent.
Healthcare the main culprit. Analysis of those programs makes it easy to see why. The rise in federal healthcare outlays under Medicare and Medicaid is the main long-term factor boosting deficits. These popular programs create a safety net for the elderly and disadvantaged that has been a band-aid for our flawed system of financing healthcare.
The base is already large: In 2010, some 100 million Americans will be enrolled in Medicare, Medicaid and SCHIP (the State Children's Health Insurance Program), and outlays amount to 5% of GDP. Longer term, Medicare enrollment will rise significantly as the population ages. More importantly, future per capita cost growth for both programs is well in excess of per capita GDP, meaning that outlays for these three programs will double to 10% of GDP by 2035 and nearly double again by 2080. Translated into budget outcomes, according to CBO, these programs will account for virtually all of the likely growth in primary federal spending - total spending less interest on debt held by the public - in relation to GDP, and thus all the likely expansion of the deficit and debt. In contrast, social security cost increases will play a relatively minor supporting role.
There is no lack of options to alter the unsustainable path for Medicare and Medicaid outlays. At the end of 2008, for example, CBO analyzed 115 of them, any handful of which could significantly slow the growth of spending or find the means to pay for it. To name two: Raising the age of eligibility for Medicare by two years (to 67) starting in 2014 would save US$85 billion by 2019. Limiting the tax exclusion for employment-based health insurance to amounts below the 75th percentile for such premiums and doing the same for health-insurance deductibles for the self employed would net US$452 billion over 2009-18. Note that the second option would raise additional revenue, but would not address burgeoning entitlement spending. Yet the prospects for actually adopting any of these measures are dim. There is no serious discussion in Washington of, or appetite for, curbing eligibility for federal health programs. Nor, more important, is there the will to rein in the growth of per capita costs.
Meanwhile, the current healthcare reform effort aims at the apparently conflicting goals of curbing costs and increasing access and quality. In the long run, those goals may turn out to be complementary. But in the near term, politics likely dictate that increasing access will take priority over cutting costs. And increasing access to today's health options will be expensive. For example, preliminary CBO estimates of Subtitles A through D of Title I of the proposed "Affordable Health Choices Act" indicate that expanding access to health insurance for 39 million Americans by granting subsidies will cost US$1 trillion over the next decade. Proposals to cut costs may yet emerge to fulfill the president's requirement that any healthcare reform be deficit-neutral. But political agreement will be hard to come by; witness the storm of opposition to a "public insurance plan" when the outline for any such plan is still vague. Thus, in the short-to-intermediate term, increasing access first means bigger deficits are likely. Pundits are describing the president's ability to deliver a healthcare reform package that improves Americans' lives and contains costs as a defining moment for his leadership. As I see it, it is also a bellwether for our willingness to tackle our fiscal challenges.
Deficit disorder. America's now chronically rising deficit will almost surely expand debt beyond the appetite of global investors to hold it without significant concessions in the form of higher interest rates or a big enough decline in the dollar to make it look cheap, or both. Soaring deficits and debt imply higher real interest rates. That hasn't happened in the current recession, of course, because of the weakness in private credit demands resulting from the collapse of corporate external financing needs and the deleveraging of the American consumer. But rates likely will rise significantly when recovery begins to lift private credit demands. Standard estimates suggest that a 20-point sustained increase in debt/GDP - what we will experience between 2008 and 2010 - will boost real rates by 70-110bp.
But many question whether rising deficits and debt will have significant longer-term market consequences. Optimists cite the example of Japan, where massive deficits boosted government debt to 160% of GDP with apparently no effect on interest rates. The comparison is not apt for two reasons. First, Japan's lost deflationary decade pulled down nominal yields, but there were serious consequences for real yields. Real 10-year JGB yields averaged 1.7% over that period, much higher than the 30bp of annual real growth experienced in Japan. Indeed, my colleague Robert Feldman points out that this positive gap between real rates and real growth clearly boosted Japan's deficits and debt unsustainably (see Fiscal Reform and the r-g Problem, June 17, 2005). Second, Japan's massive current account surplus, which averaged 3% of GDP, means that Japan has no need to rely on foreign saving inflows.
In contrast, America's budget deficits are worsening our persistent internal and external saving-investment imbalances. Our chronic external deficit has shrunk to 2.9% of GDP in recession, but rebounding oil prices and imports suggest it will grow in recovery. Even a coming sea change in consumer behavior and the incipient rise in our personal saving rate to 7-10% of disposable income (5-8% of GDP) won't be enough to offset federal dissaving. State and local governments are awash in red ink, now more than 1% of GDP and growing. Consequently, we still need sizeable inflows of saving from abroad to finance federal deficits.
Fiscal credibility deteriorating. Some are concerned that our reckless fiscal policy will trigger a downgrade of the US sovereign debt rating, making the financing of our burgeoning deficits more difficult. While worries that the US will default on its debt are illogical, global investors and officials are concerned about the credibility and the sustainability of our fiscal policies. So am I. They fear that we will adopt policies that will undermine the dollar and the domestic value of dollar-denominated assets through a combination of risk premiums and inflation. I worry about that too, although such policies probably would be accidental rather than deliberate. As a result, interest rates may have to rise significantly to compensate investors, including reserve portfolio managers and sovereign wealth funds, for such dangers. While the dollar will for now retain its reserve-currency status, such concerns put it at risk.
By Richard Berner New York
America's long-awaited fiscal train wreck is now underway. Depending on policy actions taken now and over the next few years, federal deficits will likely average as much as 6% of GDP through 2019, contributing to a jump in debt held by the public to as high as 82% of GDP by then - a doubling over the next decade. Worse, barring aggressive policy actions, deficits and debt will rise even more sharply thereafter as entitlement spending accelerates relative to GDP. Keeping entitlement promises would require unsustainable borrowing, taxes or both, severely testing the credibility of our policies and hurting our long-term ability to finance investment and sustain growth. And soaring debt will force up real interest rates, reducing capital and productivity and boosting debt service. Not only will those factors steadily lower our standard of living, but they will imperil economic and financial stability.
Familiar challenges. Sound familiar? Warning about these challenges has long been a staple for economists. Five years ago, for example, I summarized my concerns about our coming fiscal problems, along with the interplay among them and unexpected longevity, inadequate thrift and saving infrastructure, mediocre education outcomes, and inadequate energy policy (see America's Long-Term Challenges, May 21 and May 24, 2004). I was merely the latest in a long line of alarmists; for example, Pete Peterson famously noted more than 20 years ago that "America has let its infrastructure crumble, its foreign markets decline, its productivity dwindle, its savings evaporate, and its budget and borrowing burgeon. And now the day of reckoning is at hand" (see "The Morning After," Atlantic Monthly, October 1987). The Congressional Budget Office (CBO) has since 1997 - under directors from both sides of the aisle - carefully laid out ever-more depressing fiscal scenarios in its annual Long Term Budget Outlook, the latest of which appeared last week.
The problem, ironically, is that the day of reckoning hasn't come. This has seriously undermined doomsayers' credibility and, more importantly, it has made the electorate and elected officials complacent about the threat from unsustainable fiscal policies. Some even proclaimed that "deficits don't matter."
Fast forward to today. Yet the last five years have brought our ever-distant fiscal crisis rapidly forward. Some of the deterioration is obviously cyclical: Courtesy of the financial crisis and recession, aggressive fiscal stimulus, and ongoing military outlays, the federal deficit has ballooned to US$1.8 trillion or 13% of GDP in fiscal 2009. But the bulk of the threat is structural: The fiscal stimulus package included spending increases with minimal bang for the buck, leaving more debt than growth. In its FY2010 budget, the administration proposes to extend several tax cuts enacted in 2001 and 2003, provide relief from the alternative minimum tax, and increase both mandatory and discretionary spending compared with current law. Most important, by 2019 the full force of rising entitlement outlays and debt service will begin to hit the budget. No rosy growth scenario will provide sufficient resources to meet all the claims on future federal revenue. And while tax hikes or a broader tax base will likely be part of the solution, the real cure is to curb the growth of entitlement spending.
Against that backdrop, voters and politicians are nervous: Two recent polls suggest that Americans are more worried about deficits than healthcare by a ratio of 2:1. But despite voters' deficit anxiety, near-term action to reduce long-term deficits seems highly unlikely for two reasons. First, no one wants to endanger a still-fragile economy by raising revenues or cutting spending until they are sure of economic recovery. Second, while there is no shortage of fiscal scolds inside the Beltway, the political will to change popular entitlement programs is still absent.
Healthcare the main culprit. Analysis of those programs makes it easy to see why. The rise in federal healthcare outlays under Medicare and Medicaid is the main long-term factor boosting deficits. These popular programs create a safety net for the elderly and disadvantaged that has been a band-aid for our flawed system of financing healthcare.
The base is already large: In 2010, some 100 million Americans will be enrolled in Medicare, Medicaid and SCHIP (the State Children's Health Insurance Program), and outlays amount to 5% of GDP. Longer term, Medicare enrollment will rise significantly as the population ages. More importantly, future per capita cost growth for both programs is well in excess of per capita GDP, meaning that outlays for these three programs will double to 10% of GDP by 2035 and nearly double again by 2080. Translated into budget outcomes, according to CBO, these programs will account for virtually all of the likely growth in primary federal spending - total spending less interest on debt held by the public - in relation to GDP, and thus all the likely expansion of the deficit and debt. In contrast, social security cost increases will play a relatively minor supporting role.
There is no lack of options to alter the unsustainable path for Medicare and Medicaid outlays. At the end of 2008, for example, CBO analyzed 115 of them, any handful of which could significantly slow the growth of spending or find the means to pay for it. To name two: Raising the age of eligibility for Medicare by two years (to 67) starting in 2014 would save US$85 billion by 2019. Limiting the tax exclusion for employment-based health insurance to amounts below the 75th percentile for such premiums and doing the same for health-insurance deductibles for the self employed would net US$452 billion over 2009-18. Note that the second option would raise additional revenue, but would not address burgeoning entitlement spending. Yet the prospects for actually adopting any of these measures are dim. There is no serious discussion in Washington of, or appetite for, curbing eligibility for federal health programs. Nor, more important, is there the will to rein in the growth of per capita costs.
Meanwhile, the current healthcare reform effort aims at the apparently conflicting goals of curbing costs and increasing access and quality. In the long run, those goals may turn out to be complementary. But in the near term, politics likely dictate that increasing access will take priority over cutting costs. And increasing access to today's health options will be expensive. For example, preliminary CBO estimates of Subtitles A through D of Title I of the proposed "Affordable Health Choices Act" indicate that expanding access to health insurance for 39 million Americans by granting subsidies will cost US$1 trillion over the next decade. Proposals to cut costs may yet emerge to fulfill the president's requirement that any healthcare reform be deficit-neutral. But political agreement will be hard to come by; witness the storm of opposition to a "public insurance plan" when the outline for any such plan is still vague. Thus, in the short-to-intermediate term, increasing access first means bigger deficits are likely. Pundits are describing the president's ability to deliver a healthcare reform package that improves Americans' lives and contains costs as a defining moment for his leadership. As I see it, it is also a bellwether for our willingness to tackle our fiscal challenges.
Deficit disorder. America's now chronically rising deficit will almost surely expand debt beyond the appetite of global investors to hold it without significant concessions in the form of higher interest rates or a big enough decline in the dollar to make it look cheap, or both. Soaring deficits and debt imply higher real interest rates. That hasn't happened in the current recession, of course, because of the weakness in private credit demands resulting from the collapse of corporate external financing needs and the deleveraging of the American consumer. But rates likely will rise significantly when recovery begins to lift private credit demands. Standard estimates suggest that a 20-point sustained increase in debt/GDP - what we will experience between 2008 and 2010 - will boost real rates by 70-110bp.
But many question whether rising deficits and debt will have significant longer-term market consequences. Optimists cite the example of Japan, where massive deficits boosted government debt to 160% of GDP with apparently no effect on interest rates. The comparison is not apt for two reasons. First, Japan's lost deflationary decade pulled down nominal yields, but there were serious consequences for real yields. Real 10-year JGB yields averaged 1.7% over that period, much higher than the 30bp of annual real growth experienced in Japan. Indeed, my colleague Robert Feldman points out that this positive gap between real rates and real growth clearly boosted Japan's deficits and debt unsustainably (see Fiscal Reform and the r-g Problem, June 17, 2005). Second, Japan's massive current account surplus, which averaged 3% of GDP, means that Japan has no need to rely on foreign saving inflows.
In contrast, America's budget deficits are worsening our persistent internal and external saving-investment imbalances. Our chronic external deficit has shrunk to 2.9% of GDP in recession, but rebounding oil prices and imports suggest it will grow in recovery. Even a coming sea change in consumer behavior and the incipient rise in our personal saving rate to 7-10% of disposable income (5-8% of GDP) won't be enough to offset federal dissaving. State and local governments are awash in red ink, now more than 1% of GDP and growing. Consequently, we still need sizeable inflows of saving from abroad to finance federal deficits.
Fiscal credibility deteriorating. Some are concerned that our reckless fiscal policy will trigger a downgrade of the US sovereign debt rating, making the financing of our burgeoning deficits more difficult. While worries that the US will default on its debt are illogical, global investors and officials are concerned about the credibility and the sustainability of our fiscal policies. So am I. They fear that we will adopt policies that will undermine the dollar and the domestic value of dollar-denominated assets through a combination of risk premiums and inflation. I worry about that too, although such policies probably would be accidental rather than deliberate. As a result, interest rates may have to rise significantly to compensate investors, including reserve portfolio managers and sovereign wealth funds, for such dangers. While the dollar will for now retain its reserve-currency status, such concerns put it at risk.
Renewable Energy's Power Outage
Stalled Stimulus Programs Deter Investment; 'Artificially Slowed Recovery'
By YULIYA CHERNOVA
The U.S. government stimulus package passed in February promised to reinvigorate the renewable-energy industry with new capital and programs, but the prospect of large flows of government money to the industry is holding up private-sector investment.
New incentive programs haven't yet been defined, and uncertainty about program rules has deterred investors from backing companies that also may get government money. At the same time, companies are holding off from accepting private capital because of the possibility of getting it more cheaply from the government.
"It artificially slowed the recovery," Matt Cheney, chief executive of Renewable Ventures, the U.S. subsidiary of Fotowatio SL, a Spanish developer of renewable-energy projects, said of the stimulus plan.
Three new stimulus programs were hailed by analysts as likely to have the biggest effect in boosting renewable energy: a cash incentive from the U.S. Treasury for 30% of the cost of a renewable energy project, loan guarantees for renewable energy projects, and loan guarantees for renewable energy manufacturing.
None of these incentives has yet been defined with specific rules and none of the programs are yet accepting applications, though both the U.S. Treasury Department and the U.S. Department of Energy, which administers the loan-guarantee programs, promise to issue rules and open up to applications soon, possibly in July.
Keith Martin, a partner at law firm Chadbourne & Parke LLP who has advised on tax and project finance in renewable energy, said the absence of those rules is chilling project finance.
One uncertainty, he said, is what will happen when a project changes hands and whether, for example, the ownership change would prompt the government to reclaim its money. Typically, renewable-energy projects are structured so that investors own 95% and then "flip" the project back to its developers after 10 years. Many backers of such projects are "tax equity" investors who use tax credits available from the federal government to offset their taxable income.
Though a number of tax-equity deals "looked in May like they would push over the finish line, negotiations are stretching out," Mr. Martin said, a situation that he ties directly to questions surrounding government programs.
A similar uncertainty haunts project lenders, Mr. Martin said. These bankers are worried about how the government would handle a situation in which a bank forecloses on a project within five years. "Will it come in and take part of the collateral?" Mr. Martin said.
Very few large project-financing deals that weren't carryovers from last year actually closed in the first half of 2009. The ones that did include a $100 million commitment from Wells Fargo & Co. to finance SunPower Corp.'s 2009 projects and an undisclosed amount of tax equity finance for SolarCity Inc.'s solar projects from U.S. Bancorp. These financings worked under the assumption that the underlying projects won't take advantage of the new stimulus provisions, according to the developers involved.
For companies that need the money, on the other hand, government debt and capital are tantalizingly cheap.
"We will not close on anything until we finally hear from the DOE on the loan guarantee," said Keshav Prasad, vice president of business development at Signet Solar Inc.
Signet applied for a loan guarantee under the federal government's previous set of applications in February. The company will need at least $200 million to proceed with its goal to build a thin-film manufacturing facility in New Mexico. Signet is talking to private-equity investors, said Mr. Prasad, in parallel to working with the Department of Energy on its application.
Write to Yuliya Chernova at yuliya Chernova@dowjones.com
By YULIYA CHERNOVA
The U.S. government stimulus package passed in February promised to reinvigorate the renewable-energy industry with new capital and programs, but the prospect of large flows of government money to the industry is holding up private-sector investment.
New incentive programs haven't yet been defined, and uncertainty about program rules has deterred investors from backing companies that also may get government money. At the same time, companies are holding off from accepting private capital because of the possibility of getting it more cheaply from the government.
"It artificially slowed the recovery," Matt Cheney, chief executive of Renewable Ventures, the U.S. subsidiary of Fotowatio SL, a Spanish developer of renewable-energy projects, said of the stimulus plan.
Three new stimulus programs were hailed by analysts as likely to have the biggest effect in boosting renewable energy: a cash incentive from the U.S. Treasury for 30% of the cost of a renewable energy project, loan guarantees for renewable energy projects, and loan guarantees for renewable energy manufacturing.
None of these incentives has yet been defined with specific rules and none of the programs are yet accepting applications, though both the U.S. Treasury Department and the U.S. Department of Energy, which administers the loan-guarantee programs, promise to issue rules and open up to applications soon, possibly in July.
Keith Martin, a partner at law firm Chadbourne & Parke LLP who has advised on tax and project finance in renewable energy, said the absence of those rules is chilling project finance.
One uncertainty, he said, is what will happen when a project changes hands and whether, for example, the ownership change would prompt the government to reclaim its money. Typically, renewable-energy projects are structured so that investors own 95% and then "flip" the project back to its developers after 10 years. Many backers of such projects are "tax equity" investors who use tax credits available from the federal government to offset their taxable income.
Though a number of tax-equity deals "looked in May like they would push over the finish line, negotiations are stretching out," Mr. Martin said, a situation that he ties directly to questions surrounding government programs.
A similar uncertainty haunts project lenders, Mr. Martin said. These bankers are worried about how the government would handle a situation in which a bank forecloses on a project within five years. "Will it come in and take part of the collateral?" Mr. Martin said.
Very few large project-financing deals that weren't carryovers from last year actually closed in the first half of 2009. The ones that did include a $100 million commitment from Wells Fargo & Co. to finance SunPower Corp.'s 2009 projects and an undisclosed amount of tax equity finance for SolarCity Inc.'s solar projects from U.S. Bancorp. These financings worked under the assumption that the underlying projects won't take advantage of the new stimulus provisions, according to the developers involved.
For companies that need the money, on the other hand, government debt and capital are tantalizingly cheap.
"We will not close on anything until we finally hear from the DOE on the loan guarantee," said Keshav Prasad, vice president of business development at Signet Solar Inc.
Signet applied for a loan guarantee under the federal government's previous set of applications in February. The company will need at least $200 million to proceed with its goal to build a thin-film manufacturing facility in New Mexico. Signet is talking to private-equity investors, said Mr. Prasad, in parallel to working with the Department of Energy on its application.
Write to Yuliya Chernova at yuliya Chernova@dowjones.com
Aluminum Bellwether Only: Alcoa's Results
By MARK GONGLOFF
Investors tempted to draw broad conclusions about commodity demand from Alcoa's earnings report should resist.
The aluminum maker reports second-quarter results Wednesday afternoon, marking the unofficial kickoff of earnings season. Wall Street analysts, on average, estimate that Alcoa lost 38 cents a share in the quarter, compared with earnings of 66 cents a year ago.
It would mark Alcoa's third consecutive quarterly loss, due largely to falling aluminum prices, which dropped along with the global economy from roughly $1.50 a pound last summer to less than 60 cents in February. During that time, Alcoa's share price sank from about $35 to less than $6.
Hopes for an economic rebound have pushed aluminum prices up 24% in the past few months, while Alcoa shares have rallied roughly 80%.<
Investors tempted to draw broad conclusions about commodity demand from Alcoa's earnings report should resist.
The aluminum maker reports second-quarter results Wednesday afternoon, marking the unofficial kickoff of earnings season. Wall Street analysts, on average, estimate that Alcoa lost 38 cents a share in the quarter, compared with earnings of 66 cents a year ago.
It would mark Alcoa's third consecutive quarterly loss, due largely to falling aluminum prices, which dropped along with the global economy from roughly $1.50 a pound last summer to less than 60 cents in February. During that time, Alcoa's share price sank from about $35 to less than $6.
Hopes for an economic rebound have pushed aluminum prices up 24% in the past few months, while Alcoa shares have rallied roughly 80%.<