Two years after it was bailed out American International Group and the government agreed in principle on a plan for the government to sell its stake in the insurer, AIG said on Thursday.
Under the plan, AIG expects to repay the entire amount and terminate the Federal Reserve Bank of New York (FRBNY) senior secured credit facility.
It also foresees an exit of the U.S. Government's interests in two special purpose vehicles.
Currently, the FRBNY holds preferred shares in the two vehicles, holding overseas life-insurance units AIA and ALICO, worth some $26 billion.
AIG plans to draw down up to $22 billion of undrawn funds available to the company under the Troubled Asset Relief Program (TARP) to purchase an equal amount of the FRBNY preferred stake in the vehicles.
AIG will then immediately transfer these preferred interests to the U.S. Treasury, the statement said.
The Treasury is expected to receive approximately 1.655 billion shares of AIG common stock in exchange for the $49.1 billion of TARP preferred shares, AIG said in a statement.
Ultimately, the Treasury Department will own 92.1 percent of AIG common stock, which it will then sell on the open market.
AIG [AIG 37.45 --- UNCH (0) ] finalized the terms of the exit deal early on Thursday. AIG was up 2.4 percent before hours.
"We are very pleased that this agreement vastly simplifies current government support of AIG, sets forth a clear path for AIG to repay the FRBNY in full, and sets in motion the steps for the U.S. Treasury to exit its ownership of AIG over time," AIG President and CEO Robert H. Benmosche said in the press release.
The plan is subject to approval from Treasury, the Federal Reserve, AIG's board and trustees that oversee the government's majority interest in AIG.
AIG expects to repay FRBNY credit facility and complete the issuance of common stock to the U.S. Treasury before the end of the first quarter of 2011.
AIG announced early on Thursday it will sell its two Japanese life insurance units to Prudential Financial for $4.8 billion, marking further progress in disentangling itself from the government.
Thursday, September 30, 2010
Thursday's Senate Banking Testimony - What to Expect - CNBC
Wall Street will be closely watching the Senate Banking Committee on Thursday as the nation's top financial officials testify about the roll out of the Dodd-Frank Wall Street reform law.
Markets will be listening for comments from Deputy Treasury Secretary Neil Wolin on the nation's new systemic risk council and what its actual authorities will be. The council, which has been nicknamed "F-Sock" for its acronym FSOC, will hold its first meeting on Friday. CNBC sources understand that the council will vote on 7 or 8 items related to the Volcker rule — the hotly watched new restrictions on Wall Street trading — during the meeting.
Another key issue will be whether these F-Sock meetings will be held in public or not. There's been some debate over this and the inside word is that the meetings will follow Fed's structure — held behind closed doors with minutes released at a later date.
Investors will also be watching the body language between Wolin and Chairman of the Federal Deposit Insurance Corporation (FDIC) Sheila Bair, on back of speculation of a "violent tension" between Treasury and the FDIC earlier this week over a proposed FDIC rulemaking that was ultimately scrapped. Bankers will be watching to see if Wolin and Bair can smile at each other and make nice for the cameras.
One protocol side note: Wolin is a number two. Every other agency is sending its number one, including the Federal Reserve Chairman, Ben Bernanke. All eyes will be on Wolin to see how he performs at the "grown-up" table.
Below are other issues markets will be paying attention to:
* Consumer Financial Protection Bureau — Some Senators will likely ask whether President Barack Obama evaded the Senate confirmation process with the Elizabeth Warren appointment to a non-confirmable administration job overseeing the new consumer agency.
* Derivatives — I hear there's tension between SEC and CFTC, as there has been for a long time. There is concern by some members of Congress about CFTC interpretations on definitions and end user requirements. Expect questions.
Meanwhile, CNBC has obtained the written testimony of all the principals for tomorrow, and below are some highlights.
SEC Chairman Mary Schapiro will tell Congress she needs 800 more staffers to handle her new duties. With regards to executive compensation, she says that she's setting a December deadline for considering proposed new rules.
Some excerpts from her testimony: "The regulations or guidelines will prohibit incentive-based compensation practices that encourage firms to take inappropriate risks and will require firms to disclose to their respective appropriate financial regulator their incentive-based compensation structures. The Commission staff has met with other regulators in preparation for drafting either proposed regulations or guidelines. To meet the April 2011 adoption deadline, we anticipate that the staff will submit proposed rules to the Commission for consideration as soon as December."
And watch FDIC chairman Sheila Bair's testimony for veiled hints to the tension between regulators."
According to her testimony: "The Council's success will be determined by the willingness of its members to work together closely and expeditiously to implement the Council’s duties and to do so in a way that is not just a 'paper exercise.'”
"It is important to remember that the Council was formed to take a long-term, macro viewpoint. It was not meant to interfere with or complicate the ability of the independent agencies to fulfill their statutory mandates and move ahead with clearly needed reforms. We look forward to collaborating with our colleagues to assure continued progress in strengthening the stability of our financial system and utilizing our respective authorities and individual areas of specialized expertise to close regulatory gaps which contributed so greatly to the financial crisis."
Markets will be listening for comments from Deputy Treasury Secretary Neil Wolin on the nation's new systemic risk council and what its actual authorities will be. The council, which has been nicknamed "F-Sock" for its acronym FSOC, will hold its first meeting on Friday. CNBC sources understand that the council will vote on 7 or 8 items related to the Volcker rule — the hotly watched new restrictions on Wall Street trading — during the meeting.
Another key issue will be whether these F-Sock meetings will be held in public or not. There's been some debate over this and the inside word is that the meetings will follow Fed's structure — held behind closed doors with minutes released at a later date.
Investors will also be watching the body language between Wolin and Chairman of the Federal Deposit Insurance Corporation (FDIC) Sheila Bair, on back of speculation of a "violent tension" between Treasury and the FDIC earlier this week over a proposed FDIC rulemaking that was ultimately scrapped. Bankers will be watching to see if Wolin and Bair can smile at each other and make nice for the cameras.
One protocol side note: Wolin is a number two. Every other agency is sending its number one, including the Federal Reserve Chairman, Ben Bernanke. All eyes will be on Wolin to see how he performs at the "grown-up" table.
Below are other issues markets will be paying attention to:
* Consumer Financial Protection Bureau — Some Senators will likely ask whether President Barack Obama evaded the Senate confirmation process with the Elizabeth Warren appointment to a non-confirmable administration job overseeing the new consumer agency.
* Derivatives — I hear there's tension between SEC and CFTC, as there has been for a long time. There is concern by some members of Congress about CFTC interpretations on definitions and end user requirements. Expect questions.
Meanwhile, CNBC has obtained the written testimony of all the principals for tomorrow, and below are some highlights.
SEC Chairman Mary Schapiro will tell Congress she needs 800 more staffers to handle her new duties. With regards to executive compensation, she says that she's setting a December deadline for considering proposed new rules.
Some excerpts from her testimony: "The regulations or guidelines will prohibit incentive-based compensation practices that encourage firms to take inappropriate risks and will require firms to disclose to their respective appropriate financial regulator their incentive-based compensation structures. The Commission staff has met with other regulators in preparation for drafting either proposed regulations or guidelines. To meet the April 2011 adoption deadline, we anticipate that the staff will submit proposed rules to the Commission for consideration as soon as December."
And watch FDIC chairman Sheila Bair's testimony for veiled hints to the tension between regulators."
According to her testimony: "The Council's success will be determined by the willingness of its members to work together closely and expeditiously to implement the Council’s duties and to do so in a way that is not just a 'paper exercise.'”
"It is important to remember that the Council was formed to take a long-term, macro viewpoint. It was not meant to interfere with or complicate the ability of the independent agencies to fulfill their statutory mandates and move ahead with clearly needed reforms. We look forward to collaborating with our colleagues to assure continued progress in strengthening the stability of our financial system and utilizing our respective authorities and individual areas of specialized expertise to close regulatory gaps which contributed so greatly to the financial crisis."
Wednesday, September 29, 2010
China Hits Back on US Yuan Bill, Says It Violates WTO - CNBC
China on Thursday hit back at a bill passed by the U.S. House of Representatives aimed at pressuring Beijing to let its currency rise faster by branding it in violation of world trade rules.
China's tight leash on the yuan is under intense scrutiny as countries around the world look to export their way back to economic health, raising concerns they will intentionally weaken their currencies to gain an edge.
The bill allows the U.S. Commerce Department to treat "fundamentally undervalued currencies" as an illegal export subsidy so that U.S. companies can request a countervailing duty to offset China's price advantage.
In response, the official Xinhua news agency quoted China's commerce ministry spokesman, Yao Jian, as saying: "Starting a countervailing investigation in the name of exchange rates does not conform with relevant WTO rules."
The bill would need to be passed by the Senate — far from certain — and signed by President Barack Obama to become law.
The American Chamber of Commerce in China voiced its opposition to the Chinese currency legislation in an email, saying "if enacted into law, the chamber does not believe the bill will be effective in achieving its objectives and would fail to create significant U.S. job growth".
China's central bank fixed the yuan's daily mid-point versus the dollar at a lower level on Thursday.
Ahead of the U.S. vote, the People's Bank of China had said China would increase the flexibility of the yuan and improve the way it manages the exchange rate with reference to a basket of currencies of the country's trading partners.
The PBOC issues mid-point data through the Shanghai-based interbank market, the China Foreign Exchange Trade System (CFETS), on the market's website, www.chinamoney.com.cn. The yuan may rise or fall 0.5 percent against the dollar from its mid-point each day.
The bill is likely to fan the flames of a long-running dispute with China over trade and jobs.
It passed with solid bipartisan support just over a month ahead of mid-term elections as voters focus on the still-struggling U.S. economy and persistently high unemployment.
Many lawmakers both in the House and the Senate have complained for years that China's policies create an unfair trade advantage, but this is strongest step taken yet.
The bill passed by a vote of 348-79.
Any vote in the Senate, however, won't come until after congressional elections on Nov. 2 when the U.S. political landscape could be greatly changed.
"China's persistent manipulation of its currency contributes to the outsourcing of American jobs and poses a very serious problem that requires real action," said House Ways and Means Committee Chairman Sander Levin.
House Speaker Nancy Pelosi said the bill would give Obama leverage in talks with China.
Before the House vote, China's central bank reaffirmed its pledge to increase the flexibility of the yuan and improve the way it manages the exchange rate.
Obama and Chinese Premier Wen Jiabao talked about China's currency and huge trade surplus with the United States on the sidelines of the U.N. General Assembly last week.
Many lawmakers said the United States was already in a trade war with China and needed new tools to fight it.
Senator Charles Schumer, a Democrat who has been one of the loudest critics in Congress of China's trade policy, said after the vote that he was ready to
take up the cause in the Senate. "We plan to push our bill in the Senate when we
return later this year," he said.
China, the largest foreign buyer of U.S. government debt with holdings of nearly $847 billion as of July, also says its big trade surplus with the United States is due to Americans saving too little and no longer making the goods China sells.
While Obama has not taken a position on the legislation, House Majority Leader Steny Hoyer said lawmakers worked with the White House to ensure the bill did not violate WTO rules.
Treasury Secretary Timothy Geithner told Congress two weeks ago that Washington would work with Group of 20 nations to push China for faster appreciation but several allies expressed reluctance to join the effort. G20 leaders are set to meet in Seoul on Nov. 10-11.
China and the United States have a difficult but vital diplomatic relationship, not least in dealing with nuclear threats from Iran and North Korea.
In recent months, Washington and Beijing have also sparred over Chinesegovernment procurement policies, Internet censorship, U.S. arms sales to Taiwan and U.S. sympathy for the Dalai Lama, the exiled Tibetan spiritual leader.
China's tight leash on the yuan is under intense scrutiny as countries around the world look to export their way back to economic health, raising concerns they will intentionally weaken their currencies to gain an edge.
The bill allows the U.S. Commerce Department to treat "fundamentally undervalued currencies" as an illegal export subsidy so that U.S. companies can request a countervailing duty to offset China's price advantage.
In response, the official Xinhua news agency quoted China's commerce ministry spokesman, Yao Jian, as saying: "Starting a countervailing investigation in the name of exchange rates does not conform with relevant WTO rules."
The bill would need to be passed by the Senate — far from certain — and signed by President Barack Obama to become law.
The American Chamber of Commerce in China voiced its opposition to the Chinese currency legislation in an email, saying "if enacted into law, the chamber does not believe the bill will be effective in achieving its objectives and would fail to create significant U.S. job growth".
China's central bank fixed the yuan's daily mid-point versus the dollar at a lower level on Thursday.
Ahead of the U.S. vote, the People's Bank of China had said China would increase the flexibility of the yuan and improve the way it manages the exchange rate with reference to a basket of currencies of the country's trading partners.
The PBOC issues mid-point data through the Shanghai-based interbank market, the China Foreign Exchange Trade System (CFETS), on the market's website, www.chinamoney.com.cn. The yuan may rise or fall 0.5 percent against the dollar from its mid-point each day.
The bill is likely to fan the flames of a long-running dispute with China over trade and jobs.
It passed with solid bipartisan support just over a month ahead of mid-term elections as voters focus on the still-struggling U.S. economy and persistently high unemployment.
Many lawmakers both in the House and the Senate have complained for years that China's policies create an unfair trade advantage, but this is strongest step taken yet.
The bill passed by a vote of 348-79.
Any vote in the Senate, however, won't come until after congressional elections on Nov. 2 when the U.S. political landscape could be greatly changed.
"China's persistent manipulation of its currency contributes to the outsourcing of American jobs and poses a very serious problem that requires real action," said House Ways and Means Committee Chairman Sander Levin.
House Speaker Nancy Pelosi said the bill would give Obama leverage in talks with China.
Before the House vote, China's central bank reaffirmed its pledge to increase the flexibility of the yuan and improve the way it manages the exchange rate.
Obama and Chinese Premier Wen Jiabao talked about China's currency and huge trade surplus with the United States on the sidelines of the U.N. General Assembly last week.
Many lawmakers said the United States was already in a trade war with China and needed new tools to fight it.
Senator Charles Schumer, a Democrat who has been one of the loudest critics in Congress of China's trade policy, said after the vote that he was ready to
take up the cause in the Senate. "We plan to push our bill in the Senate when we
return later this year," he said.
China, the largest foreign buyer of U.S. government debt with holdings of nearly $847 billion as of July, also says its big trade surplus with the United States is due to Americans saving too little and no longer making the goods China sells.
While Obama has not taken a position on the legislation, House Majority Leader Steny Hoyer said lawmakers worked with the White House to ensure the bill did not violate WTO rules.
Treasury Secretary Timothy Geithner told Congress two weeks ago that Washington would work with Group of 20 nations to push China for faster appreciation but several allies expressed reluctance to join the effort. G20 leaders are set to meet in Seoul on Nov. 10-11.
China and the United States have a difficult but vital diplomatic relationship, not least in dealing with nuclear threats from Iran and North Korea.
In recent months, Washington and Beijing have also sparred over Chinesegovernment procurement policies, Internet censorship, U.S. arms sales to Taiwan and U.S. sympathy for the Dalai Lama, the exiled Tibetan spiritual leader.
Friday, September 24, 2010
Stocks and Investing Week Ahead: Stocks Broke Out, but Can They Hold Gains? - CNBC
Stocks broke out of their summertime trading range, and the question now is whether the market can hold on to September's record-setting gains.
With the past week's 2.4 percent gain, the Dow Jones Industrial Average is now up 8.44 percent for the month and is on track for its best September since 1939. The Dow, at 10,860, is up 11.1 percent so far for the third quarter, which ends Thursday. The S&P 500, up 9.5 percent in September, closed above the tough, 1130 resistance level twice in the past week, a signal to some traders that the market may be set to trade in a new higher range. (Get Dow 30 quotes here.)
"Ultimately, the big deal is going to be whether the economic growth rate is really accelerating in the fourth quarter or whether it doesn't," said James Paulsen, chief strategist at Wells Capital Management. "In the short run, these technical levels matter. There's no way to get to 1200 unless you break through what's been the overhead resistance to the trading range since May."
"If I'm worried about anything I am worried a little about the earnings season, only because you had a weak quarter...I'm watching the GDP revisions leading up to the earnings reports. If people are revising down their growth, you generally get a disappointing earnings season. If they're revising up, that's a good sign," he said.
There is a smattering of data in the coming week, including ISM manufacturing data, consumer sentiment readings and monthly auto sales.
Economists are watching the personal consumption expenditure data on Friday, since it is a gauge the Fed looks at as a measure of inflation.
The Fed, in the past week, was the biggest driver of markets, after it promised it would move on quantitative easing, or QE, if the economy warrants it.
The dollar went into a tail spin, losing 3.4 percent against the euro and nearly 2 percent against the yen. For the week, Treasurys were slightly higher, with the 10-year yielding 2.610 percent.
Gold rose 1.6 percent to a record $1,296 per troy ounce, and silver jumped 2.9 percent to $21.38 per ounce, a 30-year high. Oil rose 2.1 percent to $76.49 per barrel as the Fed's comments sent buyers into commodities. Some economists believe the Fed will use its Nov. 3 meeting to announce QE, which would likely be the purchase of a significant amount of Treasury securities by the Fed in an effort to push lending rates even lower.
Some of the economic data also was a bit better than expected in the past week, including Friday's durable goods, which had been disappointing last month. "It was the report that hit forecasting the hardest. Now everybody's wiping their foreheads," said Credit Suisse economist Jonathan Basile.
Basile said the durable goods report, which showed a 1.3 percent decline in August, was actually better than expected because it showed core capital goods orders gained 4.1 percent. "Firms went from major destocking to a little restocking. Then they wet to understocked, to just about right," he said.
September Surprise
September's strong market performance was a surprise to many strategists who had expected the usually tough month to be turbulent on the downside. The question in the next week is whether fund managers will sell to capture their September and third quarter gains, or ride it out into October.
"Our target has been 1100 to 1140 (on the S&P), which would be a pretty flat market," said Scott Wren, of Wells Fargo Advisers. "I think you're in for a period of the stock market working its way higher but at a very modest pace. I think you're going to see a lot of volatility between now and the end of the year, but it wouldn't surprise me to see a pull back here. We're a little cautious in the near term."
Brian Dolan, strategist with Forex.com, said the final days of September could bring an even weaker dollar. (Get currency quotes here.)
"It's month-end. It's quarter-end, and it's going to get a little bit sloppy here. In terms of those kind of flows, in terms of the gains we've seen in U.S. shares, there's probably going to be a need for greater selling on the month end date. It'll probably lead up into that. Certainly the dollar is on its heels at the moment. It's not going to take much to push that," he said.
"We're at some major market levels...1150 in the S&P, $1.35 in the euro and it was $1,300 for gold. We need to surpass those levels to see further immediate gains. There is the risk of some consolidation in the next week," he said.
In the Treasury market, traders are watching the auction of $100 billion in 2-year, 5-year and 7-year notes Tuesday through Thursday.
Econorama
The week's data includes the S&P/Case Shiller home price index and consumer confidence, both released on Tuesday. Thursday's numbers include revisions to second quarter GDP, the Chicago Purchase Managers' index and weekly jobless claims. Friday's reports include consumer spending, ISM manufacturing, and construction spending. There are also personal income and spending numbers and the core PCE deflator Friday.
Other events this week include the first meeting of the Financial Stability Oversight Committee on Friday. That group is headed by Treasury Secretary Tim Geithner, and includes Fed Chairman Ben Bernanke; Securities and Exchange Commission Chair Mary Schapiro; FDIC Chair Sheila Bair, and Commodities Futures Trading Commission Chairman Gary Gensler, among others. The FDIC also has an open board meeting Monday. Its agenda includes discussion of how, under new financial regulatory rules, a large financial firm could be liquidated if it is a risk to the system.
Bernanke also speaks on Thursday at a town hall meeting with educators in Washington. Other Fed speakers include Atlanta Fed president Dennis Lockhart on Tuesday' Minneapolis Fed President Narayana Kocherlakota; Philadelphia Fed President Charles Plosser, and Boston Fed President Eric Rosengren, all speak Wednesday. The New York Fed's William Dudley speaks Friday morning at a journalism conference, and Dallas Fed President Richard Fischer speaks Friday on the economy.
Dolan said he is also watching Chinese purchasing managers' data Wednesday and Friday and the August leading index early in the week. The Japanese Tankan survey is released on Wednesday. European finance ministers meet at the beginning and European Central Bank President Jean-Claude Trichet is expected to speak.
Corporate Bonds
About $20 billion in investment grade corporate bonds were issued in the past week, bringing the monthly total to about $88.8 billion, according to Thomson Reuters IFR. For the quarter, about $217.4 billion has been issued and $535.2 billion for the year-to-date.
Another $20 billion is expected in the week ahead, according to Lisa Coleman, head of the investment grade corporate credit team at JPMorgan Asset Management.
Coleman pointed to an interesting trend in corporate credit. Investors are snapping up investment grade debt at a seemingly faster rate than it is coming to market. "If we had about $450-$460 billion, between maturities and tenders, net supply was looking more like $90 billion. Then if you had also taken into account what's going on with coupon flow, we're actually in a net negative supply situation for the U.S. this year," she said.
At the same time, corporate bonds have become a highly desirable asset class and have seen inflows of about $100 billion into investment grade this year.
"It means we have incredibly positive technicals. The supply demand picture is positive," Coleman said. She also said the weaker economy is not a problem for corporate bond investors.
"A slow growth environment is actually pretty good for investment grade corporates because it keeps them from doing things that are too shareholder friendly and that's what we want to see as bondholders. Most of these companies have room to increase their dividends and buy back some shares," she said.
She said the $4.75 billion 3-year issue from Microsoft [MSFT 24.775 0.345 (+1.41%) ] this past week was interesting. "They issued at 25 basis points over Treasurys. The coupon is less than 1 percent. Here's the better part—not only did they issue at those levels but the bond spreads over Treasurys have tightened since the issuance," she said.
The Microsoft debt offer also highlights an interesting issue. The company has a huge cash hoard and like many other U.S. companies, it keeps cash expatriated because of high U.S. taxes. At the same time, it can easily tap the debt markets for extremely low cost capital. In Microsoft's case, it raised capital it planned to use to pay dividends.
Corporations have been looking for tax relief from the government to repatriate that cash, which totals more than $1 trillion.
What Else to Watch
Even as a number of tech companies warned about softer revenues, the Standard and Poor's tech sector was one of the best performing sectors in the past week, gaining 2.8 percent. Apple [AAPL 292.32 3.40 (+1.18%) ] continued to set new highs in a move toward 300.
The latest challenger to i-Pad will be released Monday, when Research in Motion [RIMM 48.87 1.55 (+3.28%) ] unveils its new tablet at a developers conference. RIM stock was up nearly 5 percent in the past week.
Hewlett-Packard [HPQ 40.98 0.83 (+2.07%) ], still in need of a CEO, holds a meeting with analysts Tuesday.
There are also a few earnings, including Jabil Circuit [JBL 13.57 0.89 (+7.02%) ] and Paychex [PAYX 27.23 0.98 (+3.73%) ] Monday; Walgreen [WAG 30.36 0.85 (+2.88%) ]Tuesday.
Family Dollar [FDO 43.40 0.13 (+0.3%) ] reports Wednesday, while McCormick [MKC 41.72 0.67 (+1.63%) ] and Accenture [ACN 41.90 -0.53 (-1.25%) ] report on Thursday.
With the past week's 2.4 percent gain, the Dow Jones Industrial Average is now up 8.44 percent for the month and is on track for its best September since 1939. The Dow, at 10,860, is up 11.1 percent so far for the third quarter, which ends Thursday. The S&P 500, up 9.5 percent in September, closed above the tough, 1130 resistance level twice in the past week, a signal to some traders that the market may be set to trade in a new higher range. (Get Dow 30 quotes here.)
"Ultimately, the big deal is going to be whether the economic growth rate is really accelerating in the fourth quarter or whether it doesn't," said James Paulsen, chief strategist at Wells Capital Management. "In the short run, these technical levels matter. There's no way to get to 1200 unless you break through what's been the overhead resistance to the trading range since May."
"If I'm worried about anything I am worried a little about the earnings season, only because you had a weak quarter...I'm watching the GDP revisions leading up to the earnings reports. If people are revising down their growth, you generally get a disappointing earnings season. If they're revising up, that's a good sign," he said.
There is a smattering of data in the coming week, including ISM manufacturing data, consumer sentiment readings and monthly auto sales.
Economists are watching the personal consumption expenditure data on Friday, since it is a gauge the Fed looks at as a measure of inflation.
The Fed, in the past week, was the biggest driver of markets, after it promised it would move on quantitative easing, or QE, if the economy warrants it.
The dollar went into a tail spin, losing 3.4 percent against the euro and nearly 2 percent against the yen. For the week, Treasurys were slightly higher, with the 10-year yielding 2.610 percent.
Gold rose 1.6 percent to a record $1,296 per troy ounce, and silver jumped 2.9 percent to $21.38 per ounce, a 30-year high. Oil rose 2.1 percent to $76.49 per barrel as the Fed's comments sent buyers into commodities. Some economists believe the Fed will use its Nov. 3 meeting to announce QE, which would likely be the purchase of a significant amount of Treasury securities by the Fed in an effort to push lending rates even lower.
Some of the economic data also was a bit better than expected in the past week, including Friday's durable goods, which had been disappointing last month. "It was the report that hit forecasting the hardest. Now everybody's wiping their foreheads," said Credit Suisse economist Jonathan Basile.
Basile said the durable goods report, which showed a 1.3 percent decline in August, was actually better than expected because it showed core capital goods orders gained 4.1 percent. "Firms went from major destocking to a little restocking. Then they wet to understocked, to just about right," he said.
September Surprise
September's strong market performance was a surprise to many strategists who had expected the usually tough month to be turbulent on the downside. The question in the next week is whether fund managers will sell to capture their September and third quarter gains, or ride it out into October.
"Our target has been 1100 to 1140 (on the S&P), which would be a pretty flat market," said Scott Wren, of Wells Fargo Advisers. "I think you're in for a period of the stock market working its way higher but at a very modest pace. I think you're going to see a lot of volatility between now and the end of the year, but it wouldn't surprise me to see a pull back here. We're a little cautious in the near term."
Brian Dolan, strategist with Forex.com, said the final days of September could bring an even weaker dollar. (Get currency quotes here.)
"It's month-end. It's quarter-end, and it's going to get a little bit sloppy here. In terms of those kind of flows, in terms of the gains we've seen in U.S. shares, there's probably going to be a need for greater selling on the month end date. It'll probably lead up into that. Certainly the dollar is on its heels at the moment. It's not going to take much to push that," he said.
"We're at some major market levels...1150 in the S&P, $1.35 in the euro and it was $1,300 for gold. We need to surpass those levels to see further immediate gains. There is the risk of some consolidation in the next week," he said.
In the Treasury market, traders are watching the auction of $100 billion in 2-year, 5-year and 7-year notes Tuesday through Thursday.
Econorama
The week's data includes the S&P/Case Shiller home price index and consumer confidence, both released on Tuesday. Thursday's numbers include revisions to second quarter GDP, the Chicago Purchase Managers' index and weekly jobless claims. Friday's reports include consumer spending, ISM manufacturing, and construction spending. There are also personal income and spending numbers and the core PCE deflator Friday.
Other events this week include the first meeting of the Financial Stability Oversight Committee on Friday. That group is headed by Treasury Secretary Tim Geithner, and includes Fed Chairman Ben Bernanke; Securities and Exchange Commission Chair Mary Schapiro; FDIC Chair Sheila Bair, and Commodities Futures Trading Commission Chairman Gary Gensler, among others. The FDIC also has an open board meeting Monday. Its agenda includes discussion of how, under new financial regulatory rules, a large financial firm could be liquidated if it is a risk to the system.
Bernanke also speaks on Thursday at a town hall meeting with educators in Washington. Other Fed speakers include Atlanta Fed president Dennis Lockhart on Tuesday' Minneapolis Fed President Narayana Kocherlakota; Philadelphia Fed President Charles Plosser, and Boston Fed President Eric Rosengren, all speak Wednesday. The New York Fed's William Dudley speaks Friday morning at a journalism conference, and Dallas Fed President Richard Fischer speaks Friday on the economy.
Dolan said he is also watching Chinese purchasing managers' data Wednesday and Friday and the August leading index early in the week. The Japanese Tankan survey is released on Wednesday. European finance ministers meet at the beginning and European Central Bank President Jean-Claude Trichet is expected to speak.
Corporate Bonds
About $20 billion in investment grade corporate bonds were issued in the past week, bringing the monthly total to about $88.8 billion, according to Thomson Reuters IFR. For the quarter, about $217.4 billion has been issued and $535.2 billion for the year-to-date.
Another $20 billion is expected in the week ahead, according to Lisa Coleman, head of the investment grade corporate credit team at JPMorgan Asset Management.
Coleman pointed to an interesting trend in corporate credit. Investors are snapping up investment grade debt at a seemingly faster rate than it is coming to market. "If we had about $450-$460 billion, between maturities and tenders, net supply was looking more like $90 billion. Then if you had also taken into account what's going on with coupon flow, we're actually in a net negative supply situation for the U.S. this year," she said.
At the same time, corporate bonds have become a highly desirable asset class and have seen inflows of about $100 billion into investment grade this year.
"It means we have incredibly positive technicals. The supply demand picture is positive," Coleman said. She also said the weaker economy is not a problem for corporate bond investors.
"A slow growth environment is actually pretty good for investment grade corporates because it keeps them from doing things that are too shareholder friendly and that's what we want to see as bondholders. Most of these companies have room to increase their dividends and buy back some shares," she said.
She said the $4.75 billion 3-year issue from Microsoft [MSFT 24.775 0.345 (+1.41%) ] this past week was interesting. "They issued at 25 basis points over Treasurys. The coupon is less than 1 percent. Here's the better part—not only did they issue at those levels but the bond spreads over Treasurys have tightened since the issuance," she said.
The Microsoft debt offer also highlights an interesting issue. The company has a huge cash hoard and like many other U.S. companies, it keeps cash expatriated because of high U.S. taxes. At the same time, it can easily tap the debt markets for extremely low cost capital. In Microsoft's case, it raised capital it planned to use to pay dividends.
Corporations have been looking for tax relief from the government to repatriate that cash, which totals more than $1 trillion.
What Else to Watch
Even as a number of tech companies warned about softer revenues, the Standard and Poor's tech sector was one of the best performing sectors in the past week, gaining 2.8 percent. Apple [AAPL 292.32 3.40 (+1.18%) ] continued to set new highs in a move toward 300.
The latest challenger to i-Pad will be released Monday, when Research in Motion [RIMM 48.87 1.55 (+3.28%) ] unveils its new tablet at a developers conference. RIM stock was up nearly 5 percent in the past week.
Hewlett-Packard [HPQ 40.98 0.83 (+2.07%) ], still in need of a CEO, holds a meeting with analysts Tuesday.
There are also a few earnings, including Jabil Circuit [JBL 13.57 0.89 (+7.02%) ] and Paychex [PAYX 27.23 0.98 (+3.73%) ] Monday; Walgreen [WAG 30.36 0.85 (+2.88%) ]Tuesday.
Family Dollar [FDO 43.40 0.13 (+0.3%) ] reports Wednesday, while McCormick [MKC 41.72 0.67 (+1.63%) ] and Accenture [ACN 41.90 -0.53 (-1.25%) ] report on Thursday.
Monday, September 20, 2010
Tuesday Look Ahead: Stocks Make a Break for it Ahead of Fed Meeting - CNBC
Stocks crossed an important threshold Monday, and closed sharply higher, but technicians are seeing mixed signals in the recent action.
The S&P 500 [.SPX 1142.71 17.12 (+1.52%) ] sailed through the key 1130 area to close up 17 at 1142. The Dow was up 145, or 1.4 percent to 10,753.
Barclay's technical strategist Jay Govender said Monday's levels may not hold, and the market could retest the 1130 area because the volume did not confirm the move. "We do expect this level to be retested, and probably hold the second time," he said. Monday's consolidated NYSE volume was 3.5 billion, below the September average of 3.8 billion and the August volume of 4 billion. It is also more than 30 percent below volume at this time last year.
Scott Redler of T3Live.com, however, said he thinks the market is setting up for a quick run to the 1155-1160 level very quickly.
"Everyone's trying to make an excuse for why they're not involved in this market, while the leading stocks are marking new highs and even historic highs. Apple today made a historic high. Baidu made a historic high. Amazon made a historic high," said Redler.
The big event for markets this week is Tuesday's Fed meeting, which ends with a 2:15 p.m. statement. Fed watchers expect the Fed to hold off on expanding its quantitative easing program to include substantial purchases of Treasurys. It currently is buying Treasurys with the proceeds of the maturing mortgage securities in its portfolio, in an effort to keep the size of its balance sheet steady.
Some economists believe the Fed would not announce "QE2" until the end of the year though it may tweak the language in its statement, providing clues on its thinking, its view of the economy and what might trigger more Treasury purchases. With its target Fed funds rate at zero, the theory is that QE would help push Treasury rates lower, impacting a range of lending rates.
"I don't think the Fed (statement) would move the (bond) market much. Maybe they'll disappoint the equities market a little by not announcing QE. I don't think it will have much affect on rates. I think the market has come to the conclusion that QE is not on the table. It (the bond market) would respond a little if the Fed does alter the language," said Jefferies Treasury strategist John Spinello.
Pimco senior market strategist Tony Crescenzi says the market is focused on whether the Fed will trim its 2011 economic forecast, and what exactly would prompt it to agree to more QE, as well as what specific actions it would consider. "The Fed is likely to stand pat oat Tuesday's FOMC meeting, at most setting the table for additional quantitative easing, but serving no meal," he wrote in a note.
Tuesday's data includes housing starts, which are expected to come in at 545,000, and building permits, expected at 560,000. The data is released at 8:30 a.m. The National Association of Home Builders survey is released at 10 a.m.
Earnings are expected from AutoZone [AZO 220.14 -0.74 (-0.34%) ], Carnival [CCL 37.06 1.14 (+3.17%) ] and ConAgra [CAG 22.37 0.28 (+1.27%) ] before the bell.
Adobe Systems [ADBE 33.1099 0.3299 (+1.01%) ], Cintas [CTAS 28.12 0.41 (+1.48%) ], and Darden [DRI 45.03 0.30 (+0.67%) ] report after the bell.
Monday Replay
President Obama appeared on CNBC for an hour-long town hall Monday. The market held its gains and moved higher after he spoke, even though traders said he did not provide any new information for investors.
The president appeared not long after the NBER declared that the recession ended in June, 2009 and said the 18-month recession was the longest in the post World War II era.
"A lot of traders were a little worried stocks were going to rally into President Obama and then sell the news..but today we're getting a healthy breakout," said Redler. He said some traders thought there was a chance Obama would show more flexibility on extending the Bush tax cuts for wealthier tax payers.
Obama did say he was considering the idea of a corporate tax holiday, along with other proposals. But he stuck to his position that the wealthiest Americans should pay more taxes.
"He was less belligerent toward businessmen. He was confronted with questions that were pretty specific and he avoided looking anti-business but stood his ground with respect to taxes, I believe. It doesn't mean it will be altered, but he said he was looking at everything," said Spinello.
Whither Markets
Gold continued its race higher Monday, finishing at $1,279, another record. The idea of QE has been supporting gold prices, so the Fed meeting is being watched closely by traders.
The dollar Monday fell against major currencies ahead of the Fed meeting. The euro [EUR=X 1.3073 0.001 (+0.08%) ] was at $1.3061 Monday.
Redler said the 1130 level on the S&P 500 was last challenged around the Aug. 10 Fed meeting, but it failed at that time. The market also failed to breakout above it June 21, and the last time it closed above that level was in May. "This opens the door for a short-term move to 1155 to 1160, and even 1180 to 1200 by year end. Today's break was clean enough that it puts a high probability that we'll see 1155 to 1160 pretty quickly," he said.
However, Mary Ann Bartels, technical strategist with Bank of America Merrill Lynch, said, in a note, that the market's resistance is being tested with mixed signals. She noted that the AAII Bull/Bear ratio last week signaled a contrary sell signal, just four weeks after it gave a contrary bullish reading. Previous sell signals were in April and May 2006, January and February, 2007, October 2007, May 2008 and January 2010. She said all those periods saw at least a short term pull back for the S&P 500.
Bartels also warned that October is usually the month when key bottoms are made. She too noted that volume is not great. "We still need to break and hold above S&P 500 1150 to invalidate a potential head and shoulders distribution top. A test of the July low (1010) is still not ruled out. A break above 1150 would point to a retest of the April high of 1220," she wrote.
Bartels, in the note, also said long/short hedge funds are positioned defensively and if the market breaks resistance levels, short covering and outright buying would occur. She estimates hedge funds reduced their holdings to 17 percent, well below the average bench mark 35-40 percent net long.
What Else to Watch
Secretary of State Hilary Clinton is in New York to meet with foreign leaders from Ireland, Uzbekistan and others at the UN. President Obama speaks at the UN General Assembly Thursday.
Treasury Secretary Tim Geithner and special adviser Elizabeth Warren host a mortgage disclosure forum at 1:00 pm ET.
The S&P 500 [.SPX 1142.71 17.12 (+1.52%) ] sailed through the key 1130 area to close up 17 at 1142. The Dow was up 145, or 1.4 percent to 10,753.
Barclay's technical strategist Jay Govender said Monday's levels may not hold, and the market could retest the 1130 area because the volume did not confirm the move. "We do expect this level to be retested, and probably hold the second time," he said. Monday's consolidated NYSE volume was 3.5 billion, below the September average of 3.8 billion and the August volume of 4 billion. It is also more than 30 percent below volume at this time last year.
Scott Redler of T3Live.com, however, said he thinks the market is setting up for a quick run to the 1155-1160 level very quickly.
"Everyone's trying to make an excuse for why they're not involved in this market, while the leading stocks are marking new highs and even historic highs. Apple today made a historic high. Baidu made a historic high. Amazon made a historic high," said Redler.
The big event for markets this week is Tuesday's Fed meeting, which ends with a 2:15 p.m. statement. Fed watchers expect the Fed to hold off on expanding its quantitative easing program to include substantial purchases of Treasurys. It currently is buying Treasurys with the proceeds of the maturing mortgage securities in its portfolio, in an effort to keep the size of its balance sheet steady.
Some economists believe the Fed would not announce "QE2" until the end of the year though it may tweak the language in its statement, providing clues on its thinking, its view of the economy and what might trigger more Treasury purchases. With its target Fed funds rate at zero, the theory is that QE would help push Treasury rates lower, impacting a range of lending rates.
"I don't think the Fed (statement) would move the (bond) market much. Maybe they'll disappoint the equities market a little by not announcing QE. I don't think it will have much affect on rates. I think the market has come to the conclusion that QE is not on the table. It (the bond market) would respond a little if the Fed does alter the language," said Jefferies Treasury strategist John Spinello.
Pimco senior market strategist Tony Crescenzi says the market is focused on whether the Fed will trim its 2011 economic forecast, and what exactly would prompt it to agree to more QE, as well as what specific actions it would consider. "The Fed is likely to stand pat oat Tuesday's FOMC meeting, at most setting the table for additional quantitative easing, but serving no meal," he wrote in a note.
Tuesday's data includes housing starts, which are expected to come in at 545,000, and building permits, expected at 560,000. The data is released at 8:30 a.m. The National Association of Home Builders survey is released at 10 a.m.
Earnings are expected from AutoZone [AZO 220.14 -0.74 (-0.34%) ], Carnival [CCL 37.06 1.14 (+3.17%) ] and ConAgra [CAG 22.37 0.28 (+1.27%) ] before the bell.
Adobe Systems [ADBE 33.1099 0.3299 (+1.01%) ], Cintas [CTAS 28.12 0.41 (+1.48%) ], and Darden [DRI 45.03 0.30 (+0.67%) ] report after the bell.
Monday Replay
President Obama appeared on CNBC for an hour-long town hall Monday. The market held its gains and moved higher after he spoke, even though traders said he did not provide any new information for investors.
The president appeared not long after the NBER declared that the recession ended in June, 2009 and said the 18-month recession was the longest in the post World War II era.
"A lot of traders were a little worried stocks were going to rally into President Obama and then sell the news..but today we're getting a healthy breakout," said Redler. He said some traders thought there was a chance Obama would show more flexibility on extending the Bush tax cuts for wealthier tax payers.
Obama did say he was considering the idea of a corporate tax holiday, along with other proposals. But he stuck to his position that the wealthiest Americans should pay more taxes.
"He was less belligerent toward businessmen. He was confronted with questions that were pretty specific and he avoided looking anti-business but stood his ground with respect to taxes, I believe. It doesn't mean it will be altered, but he said he was looking at everything," said Spinello.
Whither Markets
Gold continued its race higher Monday, finishing at $1,279, another record. The idea of QE has been supporting gold prices, so the Fed meeting is being watched closely by traders.
The dollar Monday fell against major currencies ahead of the Fed meeting. The euro [EUR=X 1.3073 0.001 (+0.08%) ] was at $1.3061 Monday.
Redler said the 1130 level on the S&P 500 was last challenged around the Aug. 10 Fed meeting, but it failed at that time. The market also failed to breakout above it June 21, and the last time it closed above that level was in May. "This opens the door for a short-term move to 1155 to 1160, and even 1180 to 1200 by year end. Today's break was clean enough that it puts a high probability that we'll see 1155 to 1160 pretty quickly," he said.
However, Mary Ann Bartels, technical strategist with Bank of America Merrill Lynch, said, in a note, that the market's resistance is being tested with mixed signals. She noted that the AAII Bull/Bear ratio last week signaled a contrary sell signal, just four weeks after it gave a contrary bullish reading. Previous sell signals were in April and May 2006, January and February, 2007, October 2007, May 2008 and January 2010. She said all those periods saw at least a short term pull back for the S&P 500.
Bartels also warned that October is usually the month when key bottoms are made. She too noted that volume is not great. "We still need to break and hold above S&P 500 1150 to invalidate a potential head and shoulders distribution top. A test of the July low (1010) is still not ruled out. A break above 1150 would point to a retest of the April high of 1220," she wrote.
Bartels, in the note, also said long/short hedge funds are positioned defensively and if the market breaks resistance levels, short covering and outright buying would occur. She estimates hedge funds reduced their holdings to 17 percent, well below the average bench mark 35-40 percent net long.
What Else to Watch
Secretary of State Hilary Clinton is in New York to meet with foreign leaders from Ireland, Uzbekistan and others at the UN. President Obama speaks at the UN General Assembly Thursday.
Treasury Secretary Tim Geithner and special adviser Elizabeth Warren host a mortgage disclosure forum at 1:00 pm ET.
Saturday, September 18, 2010
Small Business and Personal Tax Plans: How Much Will You Owe? Tax Plans Compared - CNBC
In the debate over the effect of the expiring Bush tax cuts on small business, it’s already possible to do the math. And the Obama administration is pointing to the tax savings that all small-business owners would reap from its own plan to extend the cuts at all but the highest income levels — if, that is, the alternative is letting the cuts expire altogether.
That, of course, is because federal tax rates are marginal tax rates — they apply only to the additional dollars above the next-highest tax bracket. In other words, a person in the 25 percent tax bracket isn’t paying a 25 percent income tax, but paying (for 2010) 10 percent on the first $8,375, plus 15 percent on the next $25,625, and finally 25 percent on any income over that. (For someone making $50,000, the effective tax rate is actually 17.4 percent.) So if President Obama’s plan becomes law, while the top two brackets rise, the remaining four brackets will stay at their depressed rates, and people in the top brackets will pay less in taxes on the share of income that falls within those lower brackets.
President Obama himself tried to highlight this point in his recent press conference. “And by the way,” he said, “for those who make more than $250,000, they’d still get tax relief on the first $250,000; they just wouldn’t get it for income above that.”
So how much money would a top-brackets taxpayer save under the Obama plan compared to doing nothing and simply letting the tax cuts expire? The Tax Policy Center has a handy Tax Calculator to determine just that. Let’s invent a hypothetical small-business-owning taxpayer. To keep things simple, we’ll assume our entrepreneur is married but has no children, and that each spouse earns $50,000 in salary, and that the couple together earns $200,000 in business income. (In reality, only the total income matters, not the mix of salary and profit.) We’ll also forgo other sources of income and deductions.
Under the Obama administration’s proposal, that couple would pay $72,027, or $9,000 less than if all the tax cuts expire. On the other hand, if all the tax cuts were extended, they would owe $70,610, or $1,417 less than under the administration plan.
If the taxpayers earn $500,000, their tax liability under the Obama plan rises to $149,742 or almost $11,000 more than with all the cuts extended. (But a little over $9,000 less than if they all expire.)
You, too, can calculate how much you would pay under the administration proposal compared to the current law, or current law compared to letting all the tax cuts expire. One caveat, though: because Congress has not yet enacted the annual alternative minimum tax “patch” that indexes the A.M.T. exemption to inflation, the patch is not included in the calculator’s current law calculations. It is included in the administration proposal, because permanently fixing the A.M.T. is part of the administration’s proposal.
Congress, though, is likely to pass an A.M.T. patch regardless of the tax cuts, so this creates a somewhat unfair comparison. The Tax Policy Center is hoping to fix that soon, but in the meantime, most people will get a more accurate comparison looking at “Regular Income Tax After Credits” near the bottom of the results, rather than “Tax Liability” near the top. It’s not a perfect fix for everyone, though, because some people would owe the alternative minimum tax even with the patch in place.
That, of course, is because federal tax rates are marginal tax rates — they apply only to the additional dollars above the next-highest tax bracket. In other words, a person in the 25 percent tax bracket isn’t paying a 25 percent income tax, but paying (for 2010) 10 percent on the first $8,375, plus 15 percent on the next $25,625, and finally 25 percent on any income over that. (For someone making $50,000, the effective tax rate is actually 17.4 percent.) So if President Obama’s plan becomes law, while the top two brackets rise, the remaining four brackets will stay at their depressed rates, and people in the top brackets will pay less in taxes on the share of income that falls within those lower brackets.
President Obama himself tried to highlight this point in his recent press conference. “And by the way,” he said, “for those who make more than $250,000, they’d still get tax relief on the first $250,000; they just wouldn’t get it for income above that.”
So how much money would a top-brackets taxpayer save under the Obama plan compared to doing nothing and simply letting the tax cuts expire? The Tax Policy Center has a handy Tax Calculator to determine just that. Let’s invent a hypothetical small-business-owning taxpayer. To keep things simple, we’ll assume our entrepreneur is married but has no children, and that each spouse earns $50,000 in salary, and that the couple together earns $200,000 in business income. (In reality, only the total income matters, not the mix of salary and profit.) We’ll also forgo other sources of income and deductions.
Under the Obama administration’s proposal, that couple would pay $72,027, or $9,000 less than if all the tax cuts expire. On the other hand, if all the tax cuts were extended, they would owe $70,610, or $1,417 less than under the administration plan.
If the taxpayers earn $500,000, their tax liability under the Obama plan rises to $149,742 or almost $11,000 more than with all the cuts extended. (But a little over $9,000 less than if they all expire.)
You, too, can calculate how much you would pay under the administration proposal compared to the current law, or current law compared to letting all the tax cuts expire. One caveat, though: because Congress has not yet enacted the annual alternative minimum tax “patch” that indexes the A.M.T. exemption to inflation, the patch is not included in the calculator’s current law calculations. It is included in the administration proposal, because permanently fixing the A.M.T. is part of the administration’s proposal.
Congress, though, is likely to pass an A.M.T. patch regardless of the tax cuts, so this creates a somewhat unfair comparison. The Tax Policy Center is hoping to fix that soon, but in the meantime, most people will get a more accurate comparison looking at “Regular Income Tax After Credits” near the bottom of the results, rather than “Tax Liability” near the top. It’s not a perfect fix for everyone, though, because some people would owe the alternative minimum tax even with the patch in place.
Wednesday, September 15, 2010
Trading and Investment Strategy: The New Short: What Steve Eisman's Betting Against Now - CNBC
After making the short heard 'round the world with his bet against the subprime mortgage market, Steve Eisman, one of the key players in "The Big Short," now has his crosshairs set on the for-profit education sector.
The industry makes most of its money off of federally-backed student loans and now, the Department of Education has proposed new rules that may significantly curb their profits.
The CEO of ITT Education [ESI 57.81 1.10 (+1.94%) ] recently said on CNBC that the underprivileged will be hurt most by these new regulations.
"His argument is so pathetic. It would be laughable. His argument is essentially that we educate the underprivileged. We provide education that you can't get elsewhere. So leave us alone," Eisman, managing director of FrontPoint Partners, told CNBC's "The Strategy Session" on Wednesday.
Eisman said ITT's argument sounds an awful lot like the argument being made a few years ago for the subprime mortgage market, which was the catalyst for the financial crisis.
"Let me just change a couple of words: Everybody should own a home. We give more mortgages to people who don't deserve them elsewhere — despite the fact that we're ripping off our customers' faces and putting them in a mortgage they can't afford to pay us back," Eisman said.
"The difference between this and subprime is in subprime, the loans went bad no matter what the government did. Here, this scheme is going to go on until the government stops it," Eisman said.
The industry makes most of its money off of federally-backed student loans and now, the Department of Education has proposed new rules that may significantly curb their profits.
The CEO of ITT Education [ESI 57.81 1.10 (+1.94%) ] recently said on CNBC that the underprivileged will be hurt most by these new regulations.
"His argument is so pathetic. It would be laughable. His argument is essentially that we educate the underprivileged. We provide education that you can't get elsewhere. So leave us alone," Eisman, managing director of FrontPoint Partners, told CNBC's "The Strategy Session" on Wednesday.
Eisman said ITT's argument sounds an awful lot like the argument being made a few years ago for the subprime mortgage market, which was the catalyst for the financial crisis.
"Let me just change a couple of words: Everybody should own a home. We give more mortgages to people who don't deserve them elsewhere — despite the fact that we're ripping off our customers' faces and putting them in a mortgage they can't afford to pay us back," Eisman said.
"The difference between this and subprime is in subprime, the loans went bad no matter what the government did. Here, this scheme is going to go on until the government stops it," Eisman said.
Monday, September 6, 2010
Real Estate - Housing Woes Bring New Cry: Let Market Crash - CNBC
The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.
Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.
As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.
When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.
“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”
The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.
The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.
Caught in the middle is an administration that gambled on a recovery that is not happening.
“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”
That was clear last week, when the secretary of housing and urban development, Shaun Donovan, appeared to side with current homeowners, telling CNN the administration would “go everywhere we can” to make sure the slumping market recovers.
Mr. Donovan even opened the door to another housing tax credit like the one that expired last spring, which paid first-time buyers as much as $8,000 and buyers who were moving up $6,500. The cost to taxpayers was in the neighborhood of $30 billion, much of which went to people who would have bought anyway.
Administration press officers quickly backpedaled from Mr. Donovan’s comment, saying a revived credit was either highly unlikely or flat-out impossible. Mr. Donovan declined to be interviewed for this article. In a statement, a White House spokeswoman responded to questions about possible new stimulus measures by pointing to those already in the works.
“In the weeks ahead, we will focus on successfully getting off the ground programs we have recently announced,” the spokeswoman, Amy Brundage, said.
Among those initiatives are $3 billion to keep the unemployed from losing their homes and a refinancing program that will try to cut the mortgage balances of owners who owe more than their property is worth. A previous program with similar goals had limited success.
If last year’s tax credit was supposed to be a bridge over a rough patch, it ended with a glimpse of the abyss. The average home now takes more than a year to sell. Add in the homes that are foreclosed but not yet for sale and the total is greater still.
Builders are in even worse shape. Sales of new homes are lower than in the depths of the recession of the early 1980s, when mortgage rates were double what they are now, unemployment was pervasive and the gloom was at least as thick.
The deteriorating circumstances have given a new voice to the “do nothing” chorus, whose members think the era of trying to buy stability while hoping the market will catch fire — called “extend and pretend” or “delay and pray” — has run its course.
“We have had enough artificial support and need to let the free market do its thing,” said the housing analyst Ivy Zelman.
Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and seven other states, also advocates letting the market fall. “Prices are still artificially high,” he said. “The government is discriminating against the renters who are able to buy at $200,000 but can’t at $250,000.”
A small decline in home prices might not make too much of a difference to a slack economy. But an unchecked drop of 10 percent or more might prove entirely discouraging to the millions of owners just hanging on, especially those who bought in the last few years under the impression that a turnaround had already begun.
The government is on the hook for many of these mortgages, another reason policy makers have been aggressively seeking stability. What helped support the market last year could now cause it to crumble.
Since 2006, the Federal Housing Administration has insured millions of low down payment loans. During the first two years, officials concede, the credit quality of the borrowers was too low.
With little at stake and a queasy economy, buyers bailed: nearly 12 percent were delinquent after a year. Last fall, F.H.A. cash reserves fell below the Congressionally mandated minimum, and the agency had to shore up its finances.
Government-backed loans in 2009 went to buyers with higher credit scores. Yet the percentage of first-year defaults was still 5 percent, according to data from the research firm CoreLogic.
“These are at-risk buyers,” said Sam Khater, a CoreLogic economist. “They have very little equity, and that’s the largest predictor of default.”
This is the risk policy makers face. “If home prices begin to fall again with any serious velocity, borrowers may stay away in such numbers that the market never recovers,” said Mr. Glaser, a consultant whose clients include the National Association of Realtors.
Those sorts of worries have a few people from the world of finance suggesting that the administration should do much more, not less.
William H. Gross, managing director at Pimco, a giant manager of bond funds, has proposed the government refinance at lower rates millions of mortgages it owns or insures. Such a bold action, Mr. Gross said in a recent speech, would “provide a crucial stimulus of $50 to $60 billion in consumption,” as well as increase housing prices.
The idea has gained little traction. Instead, there is a sense that, even with much more modest notions, government intervention is not the answer. The National Association of Realtors, the driving force behind the credit last year, is not calling for a new round of stimulus.
Some members of the National Association of Home Builders say a new credit of $25,000 would raise demand but their chances of getting this through Congress are nonexistent.
“Our members are saying that if we can’t get a very large tax credit — one that really brings people off the bench — why use our political capital at all?” said David Crowe, the chief economist for the home builders.
That might give the Obama administration permission to take the risk of doing nothing.
This story originally appeared in the The New York Times
Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.
As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.
When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.
“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”
The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.
The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.
Caught in the middle is an administration that gambled on a recovery that is not happening.
“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”
That was clear last week, when the secretary of housing and urban development, Shaun Donovan, appeared to side with current homeowners, telling CNN the administration would “go everywhere we can” to make sure the slumping market recovers.
Mr. Donovan even opened the door to another housing tax credit like the one that expired last spring, which paid first-time buyers as much as $8,000 and buyers who were moving up $6,500. The cost to taxpayers was in the neighborhood of $30 billion, much of which went to people who would have bought anyway.
Administration press officers quickly backpedaled from Mr. Donovan’s comment, saying a revived credit was either highly unlikely or flat-out impossible. Mr. Donovan declined to be interviewed for this article. In a statement, a White House spokeswoman responded to questions about possible new stimulus measures by pointing to those already in the works.
“In the weeks ahead, we will focus on successfully getting off the ground programs we have recently announced,” the spokeswoman, Amy Brundage, said.
Among those initiatives are $3 billion to keep the unemployed from losing their homes and a refinancing program that will try to cut the mortgage balances of owners who owe more than their property is worth. A previous program with similar goals had limited success.
If last year’s tax credit was supposed to be a bridge over a rough patch, it ended with a glimpse of the abyss. The average home now takes more than a year to sell. Add in the homes that are foreclosed but not yet for sale and the total is greater still.
Builders are in even worse shape. Sales of new homes are lower than in the depths of the recession of the early 1980s, when mortgage rates were double what they are now, unemployment was pervasive and the gloom was at least as thick.
The deteriorating circumstances have given a new voice to the “do nothing” chorus, whose members think the era of trying to buy stability while hoping the market will catch fire — called “extend and pretend” or “delay and pray” — has run its course.
“We have had enough artificial support and need to let the free market do its thing,” said the housing analyst Ivy Zelman.
Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and seven other states, also advocates letting the market fall. “Prices are still artificially high,” he said. “The government is discriminating against the renters who are able to buy at $200,000 but can’t at $250,000.”
A small decline in home prices might not make too much of a difference to a slack economy. But an unchecked drop of 10 percent or more might prove entirely discouraging to the millions of owners just hanging on, especially those who bought in the last few years under the impression that a turnaround had already begun.
The government is on the hook for many of these mortgages, another reason policy makers have been aggressively seeking stability. What helped support the market last year could now cause it to crumble.
Since 2006, the Federal Housing Administration has insured millions of low down payment loans. During the first two years, officials concede, the credit quality of the borrowers was too low.
With little at stake and a queasy economy, buyers bailed: nearly 12 percent were delinquent after a year. Last fall, F.H.A. cash reserves fell below the Congressionally mandated minimum, and the agency had to shore up its finances.
Government-backed loans in 2009 went to buyers with higher credit scores. Yet the percentage of first-year defaults was still 5 percent, according to data from the research firm CoreLogic.
“These are at-risk buyers,” said Sam Khater, a CoreLogic economist. “They have very little equity, and that’s the largest predictor of default.”
This is the risk policy makers face. “If home prices begin to fall again with any serious velocity, borrowers may stay away in such numbers that the market never recovers,” said Mr. Glaser, a consultant whose clients include the National Association of Realtors.
Those sorts of worries have a few people from the world of finance suggesting that the administration should do much more, not less.
William H. Gross, managing director at Pimco, a giant manager of bond funds, has proposed the government refinance at lower rates millions of mortgages it owns or insures. Such a bold action, Mr. Gross said in a recent speech, would “provide a crucial stimulus of $50 to $60 billion in consumption,” as well as increase housing prices.
The idea has gained little traction. Instead, there is a sense that, even with much more modest notions, government intervention is not the answer. The National Association of Realtors, the driving force behind the credit last year, is not calling for a new round of stimulus.
Some members of the National Association of Home Builders say a new credit of $25,000 would raise demand but their chances of getting this through Congress are nonexistent.
“Our members are saying that if we can’t get a very large tax credit — one that really brings people off the bench — why use our political capital at all?” said David Crowe, the chief economist for the home builders.
That might give the Obama administration permission to take the risk of doing nothing.
This story originally appeared in the The New York Times
Thursday, September 2, 2010
It's NOT the Economy, Stupid: It's the Mess in Washington - CNBC
Despite all the worry about the sluggish US economy, businesses and investors are finding an even bigger reason to be cautious these days: the political mess in Washington.
"Businesses—especially smaller businesses, independent businesses—they don't know what their cost structures are going to be because of government-imposed changes," David Kotok, founder of Cumberland Advisors, said on CNBC this week. "Half the US economy's holding back because of this great uncertainty that's coming from Washington."
Investors, too, are holding back, with control of Congress up for grabs in November and the possibility of sharp policy changes after that. Market pros cite a number of issues—the Bush tax cuts, possible repeal of health care reform, the deficit—for all the unease.
The market, in fact, has basically moved sideways all summer, with the Standard & Poor's 500 [.SPX 1083.89 3.60 (+0.33%) ] virtually unchanged since May 25. Investors, meanwhile, have fled equity funds and plowed money into bonds.
"Why are we stuck in this range? It’s not the (economic growth) issue," says Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh. "It’s the issue of what’s going to happen in November with the election and what’s going to happen with the Bush tax cuts. You’ve got all this uncertainty and…when there’s more uncertainty, people get more uncomfortable with equities."
Some pros, like Keith Springer, president of Capital Financial Advisory Services, think investors would be just fine with the kind of legislative gridlock that gripped Washington in the mid-1990s, when then-President Bill Clinton battled with a Republican-controlled Congress.
In fact, Springer predicts a strong rally if the Republicans manage to take control of at least one congressional chamber after the November election.
"There's a push-pull in the market right now where nobody wants to go through the pain of what we need to get the economy back in shape," he said. "But at the same time nobody wants to stop spending money to make it better."
Investors like gridlock in Washington partly because it removes the possibility of major changes being made that could rattle the landscape.
When the GOP wrested control from the Democrats in the 1994 mid-term elections, the previously moribund S&P 500 gained 34 percent in 1995, another 20 percent in 1996, 31 percent in 1997, 27 percent in 1998 and 19.5 percent in 1999 before hitting a wall in 2000.
"Gridlock would probably make this market soar," Springer says.
In the interim, investors have been trying to outfox the market, employing a buy-the-dips sell-the-rallies stock strategy and going full-bore into bonds.
Many investors have been looking to the Federal Reserve for direction, trying to stay ahead of the central bank as it continues measures, such as buying Treasurys, to boost money flow in the economy, says Kotok of Cumberland Advisors.
"The Fed does not do these trades in isolation," Kotok said in a note to clients earlier this week. "The rest of the world is watching, trading, investing, swapping, hedging, and attempting to front-run the Fed's tsunami every single minute."
One economist predicts the Fed could go as far as buying stocks and real estate to boost the flagging economy.
Michael Pento, senior economist at Euro Pacific Capital in New York, envisions a scenario in which the Fed, desperate to get money into consumers' pockets, starts buying S&P 500 stocks and real estate in an effort to boost asset prices.
The Fed so far has indicated only a switch from mortgage-backed securities into Treasurys, a move aimed at driving interest rates even lower and facilitating the flow of credit, even though low loan demand has largely thwarted the effect of the drop so far in lending rates.
"What is the real difference?" Pento says. "In one instance they're trying to bring down borrowing costs. Maybe if they buy stocks they'll really put a dagger in the heart of deflation. People will see asset prices rise. They'll start spending money."
Pento says "I hope and pray" the Fed does not take that approach, but wouldn't be surprised given that the central bank and Chairman Ben Bernanke "are not limited to purchasing assets from banks but can direct their purchases directly at the consumer in an unlimited fashion."
At least one Fed expert sees such a scenario as unlikely. The only other time a global central bank bought stocks was in the 1997-98 Asian debt crisis when Hong Kong's monetary authority got in the equities business.
"The biggest part of the problem is not monetary. It's not a problem that central banks can solve," says Allan Meltzer, a Carnegie Mellon professor and one of the country's foremost historians on the Fed. "They're certainly not going to be buying real estate."
Meltzer says that even the 2010 election may not cure Wall Street apathy, which he thinks could persist until the 2012 presidential election.
"We'll have two years of stalemate is probably the most likely outcome (this year)...unless the president wants to move to the center the way Bill Clinton did," he says. "This president doesn't seem likely to do that, but politicians surprise you."
Indeed, there are some who think the economy is beyond political help.
"The problems of the economy transcend politics altogether," says Walter Zimmerman, chief strategist at United-ICAP in New York. "It transcends ideology, taxation policy, whether we have a (national) health care system or not."
"What panacea do investors see arising on the scene from a Republican takeover of the House? We're already on an unsustainable course." adds the libertarian Pento. "It's going to be gridlock, which is better than what we have now. But do I think it's going so solve all our problems? Absolutely not."
© 2010 CNBC.com
"Businesses—especially smaller businesses, independent businesses—they don't know what their cost structures are going to be because of government-imposed changes," David Kotok, founder of Cumberland Advisors, said on CNBC this week. "Half the US economy's holding back because of this great uncertainty that's coming from Washington."
Investors, too, are holding back, with control of Congress up for grabs in November and the possibility of sharp policy changes after that. Market pros cite a number of issues—the Bush tax cuts, possible repeal of health care reform, the deficit—for all the unease.
The market, in fact, has basically moved sideways all summer, with the Standard & Poor's 500 [.SPX 1083.89 3.60 (+0.33%) ] virtually unchanged since May 25. Investors, meanwhile, have fled equity funds and plowed money into bonds.
"Why are we stuck in this range? It’s not the (economic growth) issue," says Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh. "It’s the issue of what’s going to happen in November with the election and what’s going to happen with the Bush tax cuts. You’ve got all this uncertainty and…when there’s more uncertainty, people get more uncomfortable with equities."
Some pros, like Keith Springer, president of Capital Financial Advisory Services, think investors would be just fine with the kind of legislative gridlock that gripped Washington in the mid-1990s, when then-President Bill Clinton battled with a Republican-controlled Congress.
In fact, Springer predicts a strong rally if the Republicans manage to take control of at least one congressional chamber after the November election.
"There's a push-pull in the market right now where nobody wants to go through the pain of what we need to get the economy back in shape," he said. "But at the same time nobody wants to stop spending money to make it better."
Investors like gridlock in Washington partly because it removes the possibility of major changes being made that could rattle the landscape.
When the GOP wrested control from the Democrats in the 1994 mid-term elections, the previously moribund S&P 500 gained 34 percent in 1995, another 20 percent in 1996, 31 percent in 1997, 27 percent in 1998 and 19.5 percent in 1999 before hitting a wall in 2000.
"Gridlock would probably make this market soar," Springer says.
In the interim, investors have been trying to outfox the market, employing a buy-the-dips sell-the-rallies stock strategy and going full-bore into bonds.
Many investors have been looking to the Federal Reserve for direction, trying to stay ahead of the central bank as it continues measures, such as buying Treasurys, to boost money flow in the economy, says Kotok of Cumberland Advisors.
"The Fed does not do these trades in isolation," Kotok said in a note to clients earlier this week. "The rest of the world is watching, trading, investing, swapping, hedging, and attempting to front-run the Fed's tsunami every single minute."
One economist predicts the Fed could go as far as buying stocks and real estate to boost the flagging economy.
Michael Pento, senior economist at Euro Pacific Capital in New York, envisions a scenario in which the Fed, desperate to get money into consumers' pockets, starts buying S&P 500 stocks and real estate in an effort to boost asset prices.
The Fed so far has indicated only a switch from mortgage-backed securities into Treasurys, a move aimed at driving interest rates even lower and facilitating the flow of credit, even though low loan demand has largely thwarted the effect of the drop so far in lending rates.
"What is the real difference?" Pento says. "In one instance they're trying to bring down borrowing costs. Maybe if they buy stocks they'll really put a dagger in the heart of deflation. People will see asset prices rise. They'll start spending money."
Pento says "I hope and pray" the Fed does not take that approach, but wouldn't be surprised given that the central bank and Chairman Ben Bernanke "are not limited to purchasing assets from banks but can direct their purchases directly at the consumer in an unlimited fashion."
At least one Fed expert sees such a scenario as unlikely. The only other time a global central bank bought stocks was in the 1997-98 Asian debt crisis when Hong Kong's monetary authority got in the equities business.
"The biggest part of the problem is not monetary. It's not a problem that central banks can solve," says Allan Meltzer, a Carnegie Mellon professor and one of the country's foremost historians on the Fed. "They're certainly not going to be buying real estate."
Meltzer says that even the 2010 election may not cure Wall Street apathy, which he thinks could persist until the 2012 presidential election.
"We'll have two years of stalemate is probably the most likely outcome (this year)...unless the president wants to move to the center the way Bill Clinton did," he says. "This president doesn't seem likely to do that, but politicians surprise you."
Indeed, there are some who think the economy is beyond political help.
"The problems of the economy transcend politics altogether," says Walter Zimmerman, chief strategist at United-ICAP in New York. "It transcends ideology, taxation policy, whether we have a (national) health care system or not."
"What panacea do investors see arising on the scene from a Republican takeover of the House? We're already on an unsustainable course." adds the libertarian Pento. "It's going to be gridlock, which is better than what we have now. But do I think it's going so solve all our problems? Absolutely not."
© 2010 CNBC.com
Wednesday, September 1, 2010
Sedekah
Tak lama lagi kita akan menyambut hari Raya! Seminggu je lagi...
Ramai dah mula melakukan persiapan dan persedian menyambut bulan Syawal. Dalam kemeriahan sambutan Aidilfitri tidak lama lagi, jangan lupa juga pada mereka yang kurang bernasib baik.
Ramai dah mula melakukan persiapan dan persedian menyambut bulan Syawal. Dalam kemeriahan sambutan Aidilfitri tidak lama lagi, jangan lupa juga pada mereka yang kurang bernasib baik.
ECB to Extend Liquidity Lifeline Amid Bumpy Recovery - CNBC
The European Central Bank is expected to extend its liquidity safety-net on Thursday, delaying its exit from crisis support as policymakers confront a lopsided euro zone recovery and vulnerable banks in perimeter countries.
All 78 economists in a Reuters poll predicted the ECB would leave rates at a record low 1 percent for the 16th month in a row in September and the median expectation is for no change until the fourth quarter of 2011.
The ECB's 22-member Governing Council is likely to decide to keep lending banks unlimited funds until early next year, maintaining the lifeline relied on by banks in countries like Spain, Ireland and Greece.
Borrowing from the ECB by banks in these countries has hit record highs in recent months even though total lending has fallen about a third since July, highlighting the difficulties still faced by some institutions.
Ratings agency Standard & Poor's cut Ireland's credit rating last week to AA- on the back of an upward revision to the country's banking crisis bill.
The 10-year Irish/German government bond yield spread has hit record highs and spreads on other peripheral government bonds have also jumped over the last month amid growing evidence of a split between core euro countries and those on the periphery.
Germany grew at its fastest rate since reunification in the second quarter and more than twice as fast as the euro zone average, while Greece is still in recession and Portugal and Spain managed just a tenth of Germany's growth rate.
Analysts said the fragile situation in markets and the uneven recovery meant the ECB, like other central banks, would have to tread carefully in pulling back support measures.
Expectations for unlimited liquidity to be extended were sealed when even German arch-hawk Axel Weber said it would be wise to keep borrowing uncapped past year-end, effectively pre-empting the announcement to be made by ECB President Jean-Claude Trichet at his news conference.
"I'm sure Trichet's not particularly pleased with that but I can't possibly imagine that they would make any other decision," Goldman Sachs economist Erik Nielsen said. "The floodgates will remain open through year-end, followed by a gradual exit."
Growth Upgrade
ECB staff are expected to upgrade growth forecasts on Thursday but analysts said this reflected the strong German showing in Q2 and was no all-clear for the future.
"The hopes the ECB may have had that the (bank) stress tests would restore confidence are now evaporating," RBS economist Jacques Cailloux said.
"The renewed weakness that we are getting in key export markets is probably feeding into concerns that we are facing weakness on the economic front."
Most economists in the Reuters poll expect growth for 2010 to be revised up from June's mid-point of 1 percent but for the outlook for 2011 to remain around 1.2 percent.
Inflation is seen below the ECB's 2 percent ceiling, with most economists expecting staff forecasts to remain around 1.5 percent for 2010 and 1.6 percent for 2011.
Euro zone inflation moderated to 1.6 percent last month from 1.7 percent in July according to Eurostat's preliminary reading.
Still, there are some signs of pressure, notably Germany's powerful steelworkers union demanding a 6 percent pay rise.
Not Alone
Expectations of continued ECB liquidity largesse have pushed market interest rates down from 12-month highs over the last month, although pressure points remain.
Turnover in overnight money markets fell back in August after doubling in July to more than 1 trillion euros and many banks still prefer to deposit excess funds back at the ECB rather than lending them on to counterparts.
Banks also face a liquidity cliff at the end of September when they must repay a total of 225 billion euros in 12-, six- and three-month funds or roll it into shorter maturities.
The ECB is not alone in dragging its feet towards the exit. Although Sweden's Riksbank is expected to hike rates on Thursday, the Bank of Japan has boosted its cheap loan scheme and the U.S. Federal Reserve took steps towards further stimulus by reinvesting maturing mortgage-related securities.
Copyright 2010 Reuters.
All 78 economists in a Reuters poll predicted the ECB would leave rates at a record low 1 percent for the 16th month in a row in September and the median expectation is for no change until the fourth quarter of 2011.
The ECB's 22-member Governing Council is likely to decide to keep lending banks unlimited funds until early next year, maintaining the lifeline relied on by banks in countries like Spain, Ireland and Greece.
Borrowing from the ECB by banks in these countries has hit record highs in recent months even though total lending has fallen about a third since July, highlighting the difficulties still faced by some institutions.
Ratings agency Standard & Poor's cut Ireland's credit rating last week to AA- on the back of an upward revision to the country's banking crisis bill.
The 10-year Irish/German government bond yield spread has hit record highs and spreads on other peripheral government bonds have also jumped over the last month amid growing evidence of a split between core euro countries and those on the periphery.
Germany grew at its fastest rate since reunification in the second quarter and more than twice as fast as the euro zone average, while Greece is still in recession and Portugal and Spain managed just a tenth of Germany's growth rate.
Analysts said the fragile situation in markets and the uneven recovery meant the ECB, like other central banks, would have to tread carefully in pulling back support measures.
Expectations for unlimited liquidity to be extended were sealed when even German arch-hawk Axel Weber said it would be wise to keep borrowing uncapped past year-end, effectively pre-empting the announcement to be made by ECB President Jean-Claude Trichet at his news conference.
"I'm sure Trichet's not particularly pleased with that but I can't possibly imagine that they would make any other decision," Goldman Sachs economist Erik Nielsen said. "The floodgates will remain open through year-end, followed by a gradual exit."
Growth Upgrade
ECB staff are expected to upgrade growth forecasts on Thursday but analysts said this reflected the strong German showing in Q2 and was no all-clear for the future.
"The hopes the ECB may have had that the (bank) stress tests would restore confidence are now evaporating," RBS economist Jacques Cailloux said.
"The renewed weakness that we are getting in key export markets is probably feeding into concerns that we are facing weakness on the economic front."
Most economists in the Reuters poll expect growth for 2010 to be revised up from June's mid-point of 1 percent but for the outlook for 2011 to remain around 1.2 percent.
Inflation is seen below the ECB's 2 percent ceiling, with most economists expecting staff forecasts to remain around 1.5 percent for 2010 and 1.6 percent for 2011.
Euro zone inflation moderated to 1.6 percent last month from 1.7 percent in July according to Eurostat's preliminary reading.
Still, there are some signs of pressure, notably Germany's powerful steelworkers union demanding a 6 percent pay rise.
Not Alone
Expectations of continued ECB liquidity largesse have pushed market interest rates down from 12-month highs over the last month, although pressure points remain.
Turnover in overnight money markets fell back in August after doubling in July to more than 1 trillion euros and many banks still prefer to deposit excess funds back at the ECB rather than lending them on to counterparts.
Banks also face a liquidity cliff at the end of September when they must repay a total of 225 billion euros in 12-, six- and three-month funds or roll it into shorter maturities.
The ECB is not alone in dragging its feet towards the exit. Although Sweden's Riksbank is expected to hike rates on Thursday, the Bank of Japan has boosted its cheap loan scheme and the U.S. Federal Reserve took steps towards further stimulus by reinvesting maturing mortgage-related securities.
Copyright 2010 Reuters.
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