The dollar is closing out December near its lows for the month, but odds are good that it will rebound in January. The greenback is up a little over 1.5 percent against a basket of currencies in 2010, but in December, the dollar index — at 79.15 Friday — was down 2.5 percent, and the dollar was down 2.8 percent against the euro.
"It's gotten pretty beaten up, as it often does during December. January is usually a pretty good month, and we're suspecting we'll see some of that activity" said Robert Sinche, global currency strategist at RBS. He said the dollar has declined in six of the last 10 Decembers, for an average loss of 1.45 percent, while it has risen in seven of the last 10 Januarys, for an average 1 percent gain.
While the dollar index [.DXY 78.965 -0.555 (-0.7%) ] is just slightly higher for the year, the dollar's moves against some currencies have been dramatic. The dollar is down more than 12 percent against the yen in 2010 and is about 6.5 percent higher versus the euro. The dollar is also down more than 13 percent against the Australian dollar [AUD=X 1.0231 0.0012 (+0.12%) ] and nearly 10 percent against the Swiss franc [CHF=X 0.9338 --- UNCH ] for the year.
On Friday, the euro [EUR=X 1.3368 --- UNCH ] was up nearly a half percent at 1.3346 against the dollar, for a gain of 1.7 percent for the week.
"Oversold positions in the euro, a lot of end of the year squaring and positioning, and all of that kind of feeds on itself. You had end-of-year euro demand and it created a lot of short covering and drove the euro up substantially," said Boris Schlossberg of GFT Forex.
"Next week, we'll see if this rally has legs on the euro, when everyone comes back to the market. I think all the euro skeptics closed up their books and went away on vacation and gave the euro a chance to rally," he said.
Sinche expects the dollar to get a boost from improving U.S. economic data in the first half of 2011. He said the euro could touch 1.20, and dollar/yen could be in the upper 80s. Dollar/yen was at 81.21 Friday. "We then see some reversal in the second half of the year," he said.
Schlossberg said dollar/yen needs to break 85, in order to rally. "It feels like dollar/yen is really flirting with all time lows. It really feels like they want to push it and test the metal below it. 85 has been a cement ceiling for the dollar/yen and in order for us to have a true dollar/yen rally, we would need to break that level," he said.
Sinche also expects to see a turn in the yen trade. "The dollar/yen performance is extremely unusual, and we think there's potential for the yen to weaken a fair amount in the first part of next year. Our favorite trade for the first part of the year is long Canadian dollar versus yen," he said.
Friday, December 31, 2010
Stock Market and Investing: Stock Traders Tough Out Full Day on New Year's Eve - CNBC
Just as they do every New Year's Eve, bond traders will be slipping out the door several hours ahead of their counterparts in the stock market.
It's not that bond traders are slackers. They have had a rough couple of weeks, after all. But the bond market rules are a bit less rigid than stock exchange rules, which require a full day of trading on year end.
A New York Stock Exchange spokesman said it's historically always been this way. The NYSE's own website points out that when a holiday falls on a Saturday, it normally would close the Friday before, but definitely not if that Friday is also the end of the year.
Here's what it said:
"The rules of the applicable exchanges state that when a holiday falls on a Saturday, we observe the preceding Friday unless the Friday is the end of a monthly or yearly accounting period. In this case, Friday, December 31, 2010 is the end of both a monthly and yearly accounting period; therefore the exchanges will be open that day and the following Monday."
"They have a tradition of making sure they get as much tax selling in as possible, I suspect," said Art Cashin, UBS director of floor operations at the New York Stock Exchange. "I know it used to be there were special tax implications for selling on the last day of the year."
Cashin, a 46-year trading floor veteran, said NYSE traders carry on anyway and have traditions of their own to keep. At 2:05 p.m., they will break into song, with a rendition of "Wait til the Sun Shines Nellie," just as bond traders are skipping out for the day. (Check out Cashin's "Nellie" history.)
Bond traders are not the only ones getting an early pass. The cash bond market closes at 2 p.m., but bond futures and many commodities futures markets close floor trading at about 1 p.m. New York time. The Nymex floor, where oil and metals are traded, is open regular hours in New York, but electronic trading closes one hour early at 4:15 p.m. Stock futures are also traded regular hours in Chicago.
And if you really just care about how much money you might have made this year, the S&P 500 [.SPX 1256.14 -1.74 (-0.14%) ] is up 12.8 percent. You can take it from there.
It's not that bond traders are slackers. They have had a rough couple of weeks, after all. But the bond market rules are a bit less rigid than stock exchange rules, which require a full day of trading on year end.
A New York Stock Exchange spokesman said it's historically always been this way. The NYSE's own website points out that when a holiday falls on a Saturday, it normally would close the Friday before, but definitely not if that Friday is also the end of the year.
Here's what it said:
"The rules of the applicable exchanges state that when a holiday falls on a Saturday, we observe the preceding Friday unless the Friday is the end of a monthly or yearly accounting period. In this case, Friday, December 31, 2010 is the end of both a monthly and yearly accounting period; therefore the exchanges will be open that day and the following Monday."
"They have a tradition of making sure they get as much tax selling in as possible, I suspect," said Art Cashin, UBS director of floor operations at the New York Stock Exchange. "I know it used to be there were special tax implications for selling on the last day of the year."
Cashin, a 46-year trading floor veteran, said NYSE traders carry on anyway and have traditions of their own to keep. At 2:05 p.m., they will break into song, with a rendition of "Wait til the Sun Shines Nellie," just as bond traders are skipping out for the day. (Check out Cashin's "Nellie" history.)
Bond traders are not the only ones getting an early pass. The cash bond market closes at 2 p.m., but bond futures and many commodities futures markets close floor trading at about 1 p.m. New York time. The Nymex floor, where oil and metals are traded, is open regular hours in New York, but electronic trading closes one hour early at 4:15 p.m. Stock futures are also traded regular hours in Chicago.
And if you really just care about how much money you might have made this year, the S&P 500 [.SPX 1256.14 -1.74 (-0.14%) ] is up 12.8 percent. You can take it from there.
Mergers and Acquisitions: Goldman Looks Set for Win in M&A Photo Finish - CNBC
The race to the top of the global mergers and acquisitions league table looks set to end with Goldman Sachs retaking the honors from the rival which derailed its nine-year grip on the ranking last year.
Investment banks Goldman and Morgan Stanley have been neck-and-neck in the M&A stakes throughout the year, according to Thomson Reuters data, ahead of rivals JP Morgan, Credit Suisse, Deutsche Bank, UBS, Bank of America and Citigroup.
But with only a few hours before the ranking is officially closed, Goldman looks set to beat last year's top adviser Morgan Stanley, marking a return to form after getting hurt in the financial crisis.
Goldman has advised on 368 deals worth $553.5 billion so far this year, compared with Morgan Stanley's 393 deals worth $537.9 billion. The slim $15.6 billion margin between the two firms—or about half a percent—could still change when the final numbers are counted.
And with the gap so small, slight differences in the methods used to determine which deals to include in the charts could also still mean Morgan Stanley does come up on top in the rankings of rival data providers, such as Dealogic.
In the Thomson Reuters league tables, Goldman was ahead at the end of the first quarter and Morgan Stanley led in the second quarter. The two firms swapped first and second slots in the second half of the year.
While both firms have suffered because the financial crisis sent M&A volumes tumbling, their strong track records have helped them win more deals and get ahead of rivals.
"These banks have a reputation. Nobody would ever get fired in the boardroom for recommending Goldman or Morgan Stanley," said Scott Moeller, director of the M&A practice at London's Cass Business School.
Goldman was the most active M&A adviser for nine years—a period that included the bottom of the previous cycle after the technology bubble burst—until it was unseated by Morgan Stanley last year.
Goldman's key partners include London-based Karen Cook, who serves as a non-executive director at retailer Tesco, and natural-resources specialist Julian Metherell.
Morgan Stanley's star names include Simon Robey, who has worked on a string of high profile mandates for the firm.
The M&A stakes could be higher in 2011, with bankers hoping for the start of a new multi-year cycle that will feature more companies looking for advice on takeovers and an increase in cross-border deals.
"I sense that people will still be using cash and rising share prices to fund M&A in 2011, which means there will be less need for leverage and (which) plays again to the strengths of Goldman and Morgan Stanley," Moeller said.
Thomson Reuters preliminary data showed announced M&A grew by nearly a fifth in 2010 to $2.25 trillion globally, with bankers and analysts expecting a further rise in the year ahead.
Morgan Stanley's role on the $62.5 billion restructuring bailout for crippled U.S. financial group AIG [AIG 57.88 0.35 (+0.61%) ]—not yet included in this year's data—is set to give the bank a strong boost in the league tables next year.
Goldman and Morgan Stanley declined to comment.
Investment banks Goldman and Morgan Stanley have been neck-and-neck in the M&A stakes throughout the year, according to Thomson Reuters data, ahead of rivals JP Morgan, Credit Suisse, Deutsche Bank, UBS, Bank of America and Citigroup.
But with only a few hours before the ranking is officially closed, Goldman looks set to beat last year's top adviser Morgan Stanley, marking a return to form after getting hurt in the financial crisis.
Goldman has advised on 368 deals worth $553.5 billion so far this year, compared with Morgan Stanley's 393 deals worth $537.9 billion. The slim $15.6 billion margin between the two firms—or about half a percent—could still change when the final numbers are counted.
And with the gap so small, slight differences in the methods used to determine which deals to include in the charts could also still mean Morgan Stanley does come up on top in the rankings of rival data providers, such as Dealogic.
In the Thomson Reuters league tables, Goldman was ahead at the end of the first quarter and Morgan Stanley led in the second quarter. The two firms swapped first and second slots in the second half of the year.
While both firms have suffered because the financial crisis sent M&A volumes tumbling, their strong track records have helped them win more deals and get ahead of rivals.
"These banks have a reputation. Nobody would ever get fired in the boardroom for recommending Goldman or Morgan Stanley," said Scott Moeller, director of the M&A practice at London's Cass Business School.
Goldman was the most active M&A adviser for nine years—a period that included the bottom of the previous cycle after the technology bubble burst—until it was unseated by Morgan Stanley last year.
Goldman's key partners include London-based Karen Cook, who serves as a non-executive director at retailer Tesco, and natural-resources specialist Julian Metherell.
Morgan Stanley's star names include Simon Robey, who has worked on a string of high profile mandates for the firm.
The M&A stakes could be higher in 2011, with bankers hoping for the start of a new multi-year cycle that will feature more companies looking for advice on takeovers and an increase in cross-border deals.
"I sense that people will still be using cash and rising share prices to fund M&A in 2011, which means there will be less need for leverage and (which) plays again to the strengths of Goldman and Morgan Stanley," Moeller said.
Thomson Reuters preliminary data showed announced M&A grew by nearly a fifth in 2010 to $2.25 trillion globally, with bankers and analysts expecting a further rise in the year ahead.
Morgan Stanley's role on the $62.5 billion restructuring bailout for crippled U.S. financial group AIG [AIG 57.88 0.35 (+0.61%) ]—not yet included in this year's data—is set to give the bank a strong boost in the league tables next year.
Goldman and Morgan Stanley declined to comment.
Thursday, December 30, 2010
Covered Bonds Hit Record $356 Billion - CNBC
Banks have sold a record amount of covered bonds this year, as jittery investors backed the ultra-safe forms of debt, in a trend expected to continue in 2011.
Worldwide issuance of the bonds has reached $356.5 billion this year – up nearly 20 percent from 2009, according to data from Dealogic.
Unlike regular securitisations, where investors have no recourse to the issuing bank, the loans backing covered bonds remain on a bank’s books and are ring-fenced, protecting bondholders even in bankruptcy.
Issuance has been heavily dominated by European banks – the format was developed in 18th-century Germany – but countries elsewhere are beginning to alter laws to give investors the protection the bonds require.
South Korean and New Zealand banks have recently begun issuing the bonds, while Australia is planning to introduce legislation to allow the use of the instrument. Crucially for the market, equivalent US legislation could also be passed next year, allowing US banks to tap a surge in US investor appetite.
“US banks are interested in jumping into this market,” said Ralf Grossmann, head of covered bond origination at Société Générale, which estimates that issuance targeted at US investors by European and Canadian banks will double to about $60 billion next year.
“This growth in their home market should be a real incentive to the US to push through the necessary legislation.”
This extra security has been attractive to investors uneasy about other highly-rated forms of debt, such as government bonds, where politicians have called for forcing losses on bondholders in future bail-outs.
“A lot of investors would rather have the solid assets of a bank backing their bonds than the promise of a sovereign with weak finances,” said Ted Lord, head of European covered bonds at Barclays Capital.
Covered bonds have proved particularly attractive to investors worried about changes to bank resolution regimes in Europe.
Germany passed a law in November that will force bondholders to take losses if a bank fails – but this does not include covered bonds. Other countries are expected to follow suit.
“With more discussion about special resolution regimes, we expect investors to seek assets with some kind of security attached,” said Vinod Vasan, head of European financial institutions’ debt capital markets at Deutsche Bank.
Covered bonds accounted for a third of all European banks’ borrowing this year – the highest proportion in eight years. Straightforward securitisations meanwhile totalled just 7 percent – still a fraction of their pre-crisis 25 percent average.“If banks are trying to re-enter the market, then covered is the most secure form,” said Mr Vasan.
The extra security offered by covered bonds has been particularly helpful for banks in countries shunned by the markets, such as Spain, where it has enabled them to use their loan book to generate funds even as the far bigger senior debt markets have been closed to them.
Worldwide issuance of the bonds has reached $356.5 billion this year – up nearly 20 percent from 2009, according to data from Dealogic.
Unlike regular securitisations, where investors have no recourse to the issuing bank, the loans backing covered bonds remain on a bank’s books and are ring-fenced, protecting bondholders even in bankruptcy.
Issuance has been heavily dominated by European banks – the format was developed in 18th-century Germany – but countries elsewhere are beginning to alter laws to give investors the protection the bonds require.
South Korean and New Zealand banks have recently begun issuing the bonds, while Australia is planning to introduce legislation to allow the use of the instrument. Crucially for the market, equivalent US legislation could also be passed next year, allowing US banks to tap a surge in US investor appetite.
“US banks are interested in jumping into this market,” said Ralf Grossmann, head of covered bond origination at Société Générale, which estimates that issuance targeted at US investors by European and Canadian banks will double to about $60 billion next year.
“This growth in their home market should be a real incentive to the US to push through the necessary legislation.”
This extra security has been attractive to investors uneasy about other highly-rated forms of debt, such as government bonds, where politicians have called for forcing losses on bondholders in future bail-outs.
“A lot of investors would rather have the solid assets of a bank backing their bonds than the promise of a sovereign with weak finances,” said Ted Lord, head of European covered bonds at Barclays Capital.
Covered bonds have proved particularly attractive to investors worried about changes to bank resolution regimes in Europe.
Germany passed a law in November that will force bondholders to take losses if a bank fails – but this does not include covered bonds. Other countries are expected to follow suit.
“With more discussion about special resolution regimes, we expect investors to seek assets with some kind of security attached,” said Vinod Vasan, head of European financial institutions’ debt capital markets at Deutsche Bank.
Covered bonds accounted for a third of all European banks’ borrowing this year – the highest proportion in eight years. Straightforward securitisations meanwhile totalled just 7 percent – still a fraction of their pre-crisis 25 percent average.“If banks are trying to re-enter the market, then covered is the most secure form,” said Mr Vasan.
The extra security offered by covered bonds has been particularly helpful for banks in countries shunned by the markets, such as Spain, where it has enabled them to use their loan book to generate funds even as the far bigger senior debt markets have been closed to them.
Wednesday, December 29, 2010
Stock Market and Investing: Rate Fears Stalk Market as 2010 Draws to Close - CNBC
While traders fear rising bond yields could crimp stocks' gains, some bond strategists don't expect interest rates to rise beyond the range of the past year.
"We look at 2011 as a trading, not trending year," said William O'Donnell, who heads rates strategy at RBS. He expects the 10-year yield to stay in a range of 2.75 percent to 4 percent, the top of its 2010 range.
"I know the economy is percolating along. Our economic staff does not think it's sustainable at the pace we've seen in the last couple of months," he said. Some of the worries include a possible further 7-10 percent decline in housing prices, high unemployment and now, rising gasoline prices, he said.
Higher rates caught the attention of stock traders once more this week, as a thinly traded bond market saw rates ricochet over the course of the past two sessions. First, the Treasury's 5-year auction Tuesday suffered from seriously weak demand, which spurred more selling of bonds and resulted in higher yields.
Treasury yields then relaxed going into Wednesday as buyers moved in, and finished the day lower after a strong showing at the Treasury's $29 billion 7-year auction. The 10-year ended the day with a yield of 3.37 percent, well below Tuesday's 3.48 percent close, and very near where yields began a volatile trading day Tuesday morning.
Peter Boockvar, equities strategist at Miller Tabak, said aside from this week's action, the recent backup in rates since November is indicative of more to come.
"I think the violence of the move is pretty telling. It's not like this is a small market. It's a multi-trillion dollar market, trading like an Internet stock, which is pretty amazing. It tells me there's a definite change here," he said. "The main theme in 2011 is that it's the bond market more than anything that will determine how equities go. There's nothing that can spoil a party in equities more than higher interest rates."
Stocks, meanwhile, were subdued Wednesday, with the Dow rising 9 points to 11,585 in a low volume market. The S&P 500 tacked on 1 point to 1259, giving it a 0.2 percent gain for the week so far.
Pimco senior strategist Tony Crescenzi said the success of the 7-year auction was not a surprise. "The 7-year was cheap on the yield curve...It doesn't mean the market looked cheap, but that issue was particularly cheap," said Crescenzi. "I wouldn't get crazy happy about the market because of the 7-year because historically, it's always been an ugly duckling."
"It seems like the market is settling in on its new trading range, which for now seems to be 3 to 3.5 percent (10-year yield), and it's trading in the upper band of the new range," he said. Crescenzi expects the range on the 10-year to be roughly 3 to 4 percent in 2011, though it is possible it could slip back below 3 percent.
"Early in the year, the economy is likely to be strong enough to keep people romanticizing about the idea of both higher inflation and a rate hike, and that'll prevent the yield from declining below 3 percent," he said.
What to Watch
While much of the wild action in bonds may be over for the week, O'Donnell said the year end may spur some buying Thursday and Friday as traders square positions, and that may generate some more volatile moves just because volume is so light.
Traders Thursday are also watching for the release of the final economic reports of the year—weekly jobless claims at 8:30 a.m. and Chicago purchasing managers at 9:45 a.m. Economists expect jobless claims of about 418,000.
"On the claims, it'll probably fall a few thousand after the previous week is revised up. That's been the pattern. It's still a grinding downtrend in the four-week moving average," said Deutsche Bank economist Joseph LaVorgna.
LaVorgna said the bond market's action this week was probably not reflective of much more than a thin year-end market. "At the end of the year, you get these moves and you don't want to read too much into them," he said.
While many strategists believe rates are rising on an improving economy, others, like Boockvar, believe rates are rising on inflation concerns.
"Rates are not going up for a good reason. It's inflation expectations, and of course you're getting higher interest rates in Europe for debt and deficit concerns, and you have rates going up in Asia because central banks are raising rates and they're worried about inflation. You'll probably see a rate hike in Taiwan tomorrow night. Last week, Brazil raised inflation expectations, and the central bank indicated they would raise rates in January," he said.
"Whether it's inflation, deficits or growth, the bottom line is they're still going higher and that'll be a challenge for equities, and again it will matter most for the areas of the world where they're more indebted, like the U.S. and Europe," Boockvar said.
He said the problem with higher rates is that the economy has been depending on cheap money. "Higher interest rates are enough to impact things. You now get a move to 4 percent in the 10-year, and you're going to see 5.5 percent mortgage rates. While that's still historically low, that's a lot higher than where they were, and what's scary is the Fed didn't want that to happen," he said.
Rates have moved higher since the Fed began its $600 billion Treasury purchase program in November. The Fed next week is expected to buy up to $27 billion in Treasury securities and as much as $2.5 billion in TIPS in five days of purchases. This week, it only came to market on two days.
"We have to remember the Fed's buying program ends in June. What's going to happen going into that when everyone knows it's going to stop? Just imagine what's going to happen when everyone knows you're taking the 800-pound gorilla out of the market," Boockvar said.
LaVorgna said that, ironically, the Fed's program could have created market volatility. In theory, the so-called "quantitative easing" program was intended to keep interest rates low and to reflate asset prices, by driving investors into riskier investments. He also said he didn't agree with the Fed's decision to embark on the program.
"I think the Fed's operations have become less relevant to the market. The market is ignoring the Fed because other things have become more important," he said, noting the Fed could be acting at odds with a market that is driving rates higher on expectations. Rates had moved sharply lower after quantitative easing was first discussed by Fed Chairman Ben Bernanke in late August. The lowest rates of the year were in October, before the market turned.
LaVorgna also believes the equities market can take rising rates in stride. "I think the bias is to higher rates as the market starts to realize the economy is going to be healthier, and that's [the] 3.75 to 3.80ish (10-year yield) range," he said.
"If Q4 earnings are solid and equities rally, that would put further pressure on rates," he said. Stocks could react at about a 5 percent 10-year yield, but not in the mid-3 to just above 4 percent yield range, he added.
Oil Drill
Oil slipped $0.37 per barrel Wednesday to $91.12, and it could fall further if government inventory data Thursday matches the API data released late Wednesday. The data showed a build in crude inventories of 3.05 million barrels and distillate inventories increased 1.3 million. Gasoline inventories, however, declined.
"The street was expecting another crude oil [CLG1 91.15 0.03 (+0.03%) ] drawdown. This is a big surprise," said John Kilduff of Again Capital, in a quick note. "Also, distillate build is not supportive of heating oil. The displaced transport demand from the blizzard will only add to the levels in the coming weeks. Gasoline should build in the weeks ahead as well."
Kilduff said he is watching the EIA data at 11 a.m. for confirmation.
"We look at 2011 as a trading, not trending year," said William O'Donnell, who heads rates strategy at RBS. He expects the 10-year yield to stay in a range of 2.75 percent to 4 percent, the top of its 2010 range.
"I know the economy is percolating along. Our economic staff does not think it's sustainable at the pace we've seen in the last couple of months," he said. Some of the worries include a possible further 7-10 percent decline in housing prices, high unemployment and now, rising gasoline prices, he said.
Higher rates caught the attention of stock traders once more this week, as a thinly traded bond market saw rates ricochet over the course of the past two sessions. First, the Treasury's 5-year auction Tuesday suffered from seriously weak demand, which spurred more selling of bonds and resulted in higher yields.
Treasury yields then relaxed going into Wednesday as buyers moved in, and finished the day lower after a strong showing at the Treasury's $29 billion 7-year auction. The 10-year ended the day with a yield of 3.37 percent, well below Tuesday's 3.48 percent close, and very near where yields began a volatile trading day Tuesday morning.
Peter Boockvar, equities strategist at Miller Tabak, said aside from this week's action, the recent backup in rates since November is indicative of more to come.
"I think the violence of the move is pretty telling. It's not like this is a small market. It's a multi-trillion dollar market, trading like an Internet stock, which is pretty amazing. It tells me there's a definite change here," he said. "The main theme in 2011 is that it's the bond market more than anything that will determine how equities go. There's nothing that can spoil a party in equities more than higher interest rates."
Stocks, meanwhile, were subdued Wednesday, with the Dow rising 9 points to 11,585 in a low volume market. The S&P 500 tacked on 1 point to 1259, giving it a 0.2 percent gain for the week so far.
Pimco senior strategist Tony Crescenzi said the success of the 7-year auction was not a surprise. "The 7-year was cheap on the yield curve...It doesn't mean the market looked cheap, but that issue was particularly cheap," said Crescenzi. "I wouldn't get crazy happy about the market because of the 7-year because historically, it's always been an ugly duckling."
"It seems like the market is settling in on its new trading range, which for now seems to be 3 to 3.5 percent (10-year yield), and it's trading in the upper band of the new range," he said. Crescenzi expects the range on the 10-year to be roughly 3 to 4 percent in 2011, though it is possible it could slip back below 3 percent.
"Early in the year, the economy is likely to be strong enough to keep people romanticizing about the idea of both higher inflation and a rate hike, and that'll prevent the yield from declining below 3 percent," he said.
What to Watch
While much of the wild action in bonds may be over for the week, O'Donnell said the year end may spur some buying Thursday and Friday as traders square positions, and that may generate some more volatile moves just because volume is so light.
Traders Thursday are also watching for the release of the final economic reports of the year—weekly jobless claims at 8:30 a.m. and Chicago purchasing managers at 9:45 a.m. Economists expect jobless claims of about 418,000.
"On the claims, it'll probably fall a few thousand after the previous week is revised up. That's been the pattern. It's still a grinding downtrend in the four-week moving average," said Deutsche Bank economist Joseph LaVorgna.
LaVorgna said the bond market's action this week was probably not reflective of much more than a thin year-end market. "At the end of the year, you get these moves and you don't want to read too much into them," he said.
While many strategists believe rates are rising on an improving economy, others, like Boockvar, believe rates are rising on inflation concerns.
"Rates are not going up for a good reason. It's inflation expectations, and of course you're getting higher interest rates in Europe for debt and deficit concerns, and you have rates going up in Asia because central banks are raising rates and they're worried about inflation. You'll probably see a rate hike in Taiwan tomorrow night. Last week, Brazil raised inflation expectations, and the central bank indicated they would raise rates in January," he said.
"Whether it's inflation, deficits or growth, the bottom line is they're still going higher and that'll be a challenge for equities, and again it will matter most for the areas of the world where they're more indebted, like the U.S. and Europe," Boockvar said.
He said the problem with higher rates is that the economy has been depending on cheap money. "Higher interest rates are enough to impact things. You now get a move to 4 percent in the 10-year, and you're going to see 5.5 percent mortgage rates. While that's still historically low, that's a lot higher than where they were, and what's scary is the Fed didn't want that to happen," he said.
Rates have moved higher since the Fed began its $600 billion Treasury purchase program in November. The Fed next week is expected to buy up to $27 billion in Treasury securities and as much as $2.5 billion in TIPS in five days of purchases. This week, it only came to market on two days.
"We have to remember the Fed's buying program ends in June. What's going to happen going into that when everyone knows it's going to stop? Just imagine what's going to happen when everyone knows you're taking the 800-pound gorilla out of the market," Boockvar said.
LaVorgna said that, ironically, the Fed's program could have created market volatility. In theory, the so-called "quantitative easing" program was intended to keep interest rates low and to reflate asset prices, by driving investors into riskier investments. He also said he didn't agree with the Fed's decision to embark on the program.
"I think the Fed's operations have become less relevant to the market. The market is ignoring the Fed because other things have become more important," he said, noting the Fed could be acting at odds with a market that is driving rates higher on expectations. Rates had moved sharply lower after quantitative easing was first discussed by Fed Chairman Ben Bernanke in late August. The lowest rates of the year were in October, before the market turned.
LaVorgna also believes the equities market can take rising rates in stride. "I think the bias is to higher rates as the market starts to realize the economy is going to be healthier, and that's [the] 3.75 to 3.80ish (10-year yield) range," he said.
"If Q4 earnings are solid and equities rally, that would put further pressure on rates," he said. Stocks could react at about a 5 percent 10-year yield, but not in the mid-3 to just above 4 percent yield range, he added.
Oil Drill
Oil slipped $0.37 per barrel Wednesday to $91.12, and it could fall further if government inventory data Thursday matches the API data released late Wednesday. The data showed a build in crude inventories of 3.05 million barrels and distillate inventories increased 1.3 million. Gasoline inventories, however, declined.
"The street was expecting another crude oil [CLG1 91.15 0.03 (+0.03%) ] drawdown. This is a big surprise," said John Kilduff of Again Capital, in a quick note. "Also, distillate build is not supportive of heating oil. The displaced transport demand from the blizzard will only add to the levels in the coming weeks. Gasoline should build in the weeks ahead as well."
Kilduff said he is watching the EIA data at 11 a.m. for confirmation.
Natural Gas Boom Coming—But So Are Major Obstacles - CNBC
The United States may be entering a golden age of natural-gas use, which is good news for consumers, but not necessarily for investors.
In the past three years, huge reserves of domestic natural gas have been brought to the surface with revolutionary breakthroughs in drilling technology to produce a 100-year supply of cheap, clean-burning fuel at current rates of consumption, experts say.
“This is a huge, huge breakthrough for U.S. energy security," says Pete Stark, vice president of industry relations for IHS Global Insight. "It’s the biggest gift we could have been given—a reliable domestic supply that creates jobs, increases the Gross National Product, offsets the balance of payments. It’s ours and it can be used."
Yet despite its huge potential, there are two major obstacles facing the industry—low prices and a push by Washington toward renewable energy.
Many energy experts and government officials see natural gas as only a “bridge fuel” to ease the country’s transition from foreign oil and dirty coal to carbon-free energy powered by wind, solar, biofuel and nuclear sources.
President Obama’s economic recovery package, for instance, earmarked nearly $70 billion for renewable energy projects. And federal and state tax credits still offset the expense of buying hybrid autos and installing solar panels or wind turbines.
But natural gas experts scoff at the suggestion that the fuel is of merely transitional value.
“The subsidy associated with renewables makes no economic sense,” says Porter Bennet, CEO of Bentek Energy Services. “I think the government right now is picking winners and losers. They think renewable ought to be a winner and gas ought to be loser. They’re making tremendous investments in the form of subsidies to make sure that happens."
Adds Stark of IHS Global Insight: “My biggest fear is that politically, D.C. still doesn’t get it. The needle right now is biased toward renewable.“
Pricing Problems
The other problem—for the industry and investors—is that the vast new supplies of natural gas are likely to keep prices low for a long time.
“The reality is that in a world of abundant supply and increasing production, prices will likely stay very low,” says stock analyst Alan Brochstein.
As a result, he thinks the natural gas industry is on the road to "profitless prosperity."
“The clear winners (besides users of natural gas) will be the companies that enable the production, like drillers, machinery manufacturers, infrastructure companies, service providers, etc.," Brochstein says. “The exploration and production companies may or may not be good investments.”
Even so, the industry is expected to see tremendous growth over the next few decades.
Though natural gas is a fossil fuel, it’s far more efficient and cleaner-burning than coal or petroleum-based products. As such, natural gas companies will benefit greatly from a growing trend in the utility industry to convert existing coal-fired power plants to burn the more environmentally-friendly fuel.
In June, scientists at the Massachusetts Institute of Technology released a two-year study that envisions an increase in the use of natural gas over the next few decades, before subsiding in favor of renewables.
“The share (of national energy use) represented by gas is projected to rise from about 20 percent of the current national total to around 40 percent in 2040," said MIT researchers whose major sponsor was the American Clean Skies Foundation, a think tank created and funded by the natural gas industry.
The researchers envision a federal policy aimed at cutting greenhouse gas emissions by 2050 to a level roughly equal to half of 2005 emissions.
National policy will place an economic cost on such emissions, they say, and since natural gas emits roughly 50 percent less greenhouse than coal, it will enjoy a rosy, but short-term future.
"Though gas frequently is touted as a 'bridge' to the future, continuing effort is needed to prepare for that future, lest the gift of greater domestic gas resources turn out to be a bridge with no landing point on the far bank," researchers concluded.
After all, natural gas is still a fossil fuel and even its reduced carbon emissions are more damaging to the atmosphere than sun or wind.
"While gas is less carbon intensive than coal or oil, at the reduction level required by 2050, its [carbon] emissions are beginning to represent an emissions problem," the report explains. "However, even under the pressure of the assumed emissions policy, total gas use is projected to increase from 2005 to 2050 even for the low estimate of domestic gas resources."
As a long-range investment play, natural gas would seem secure. But its newfound abundance has stalled the industry’s near-term growth, frustrating investors and executives.
“I believe at least half of our gas drilling is what I would call involuntary," outgoing Chesapeake Energy CFO Marc Rowland admitted in an earnings call last month. "It's being incentivized by something other than the gas price...It might be the need to hold acreage… And I think that's, in large part, true across the industry that there's an enormous amount of drilling today that is economic. It's just economic for reasons other than what current gas prices are.”
In the past three years, huge reserves of domestic natural gas have been brought to the surface with revolutionary breakthroughs in drilling technology to produce a 100-year supply of cheap, clean-burning fuel at current rates of consumption, experts say.
“This is a huge, huge breakthrough for U.S. energy security," says Pete Stark, vice president of industry relations for IHS Global Insight. "It’s the biggest gift we could have been given—a reliable domestic supply that creates jobs, increases the Gross National Product, offsets the balance of payments. It’s ours and it can be used."
Yet despite its huge potential, there are two major obstacles facing the industry—low prices and a push by Washington toward renewable energy.
Many energy experts and government officials see natural gas as only a “bridge fuel” to ease the country’s transition from foreign oil and dirty coal to carbon-free energy powered by wind, solar, biofuel and nuclear sources.
President Obama’s economic recovery package, for instance, earmarked nearly $70 billion for renewable energy projects. And federal and state tax credits still offset the expense of buying hybrid autos and installing solar panels or wind turbines.
But natural gas experts scoff at the suggestion that the fuel is of merely transitional value.
“The subsidy associated with renewables makes no economic sense,” says Porter Bennet, CEO of Bentek Energy Services. “I think the government right now is picking winners and losers. They think renewable ought to be a winner and gas ought to be loser. They’re making tremendous investments in the form of subsidies to make sure that happens."
Adds Stark of IHS Global Insight: “My biggest fear is that politically, D.C. still doesn’t get it. The needle right now is biased toward renewable.“
Pricing Problems
The other problem—for the industry and investors—is that the vast new supplies of natural gas are likely to keep prices low for a long time.
“The reality is that in a world of abundant supply and increasing production, prices will likely stay very low,” says stock analyst Alan Brochstein.
As a result, he thinks the natural gas industry is on the road to "profitless prosperity."
“The clear winners (besides users of natural gas) will be the companies that enable the production, like drillers, machinery manufacturers, infrastructure companies, service providers, etc.," Brochstein says. “The exploration and production companies may or may not be good investments.”
Even so, the industry is expected to see tremendous growth over the next few decades.
Though natural gas is a fossil fuel, it’s far more efficient and cleaner-burning than coal or petroleum-based products. As such, natural gas companies will benefit greatly from a growing trend in the utility industry to convert existing coal-fired power plants to burn the more environmentally-friendly fuel.
In June, scientists at the Massachusetts Institute of Technology released a two-year study that envisions an increase in the use of natural gas over the next few decades, before subsiding in favor of renewables.
“The share (of national energy use) represented by gas is projected to rise from about 20 percent of the current national total to around 40 percent in 2040," said MIT researchers whose major sponsor was the American Clean Skies Foundation, a think tank created and funded by the natural gas industry.
The researchers envision a federal policy aimed at cutting greenhouse gas emissions by 2050 to a level roughly equal to half of 2005 emissions.
National policy will place an economic cost on such emissions, they say, and since natural gas emits roughly 50 percent less greenhouse than coal, it will enjoy a rosy, but short-term future.
"Though gas frequently is touted as a 'bridge' to the future, continuing effort is needed to prepare for that future, lest the gift of greater domestic gas resources turn out to be a bridge with no landing point on the far bank," researchers concluded.
After all, natural gas is still a fossil fuel and even its reduced carbon emissions are more damaging to the atmosphere than sun or wind.
"While gas is less carbon intensive than coal or oil, at the reduction level required by 2050, its [carbon] emissions are beginning to represent an emissions problem," the report explains. "However, even under the pressure of the assumed emissions policy, total gas use is projected to increase from 2005 to 2050 even for the low estimate of domestic gas resources."
As a long-range investment play, natural gas would seem secure. But its newfound abundance has stalled the industry’s near-term growth, frustrating investors and executives.
“I believe at least half of our gas drilling is what I would call involuntary," outgoing Chesapeake Energy CFO Marc Rowland admitted in an earnings call last month. "It's being incentivized by something other than the gas price...It might be the need to hold acreage… And I think that's, in large part, true across the industry that there's an enormous amount of drilling today that is economic. It's just economic for reasons other than what current gas prices are.”
Tuesday, December 28, 2010
Wednesday Look Ahead: Rate Spike Breaks Holiday Week Doldrums - CNBC
The bond market will be the one to watch Wednesday, after interest rates spiked following a sloppy Treasury auction Tuesday.
There is no economic data scheduled for release, but the government's auction of $29 billion in 7-year notes now has the attention of traders in all markets, as they watch to see whether the rate move had more to do with razor thin volumes or a trend toward higher interest rates. The government's auction of $35 billion 5-year notes at 1 p.m. Tuesday saw the lowest demand since June, prompting further selling.
"Everything I look at tells me this is not a market you want to sell because the risk is a vicious rally...and the time of the year, like last December, we had a dramatic sell off and responded with a 40- to 50-basis point rally in January," said David Ader, chief Treasury strategist at CRT Capital. Rates on the 10-year were at 3.33 percent early in the day Tuesday, and were at 3.48 by day's end.
"It's entirely about the date and has nothing to do with the information. Today we got two piece pieces of weak data, Case-Shiller home prices and consumer sentiment, and those otherwise could have been supportive. It's more about whose around to buy and it's who wants to carry it over year end," said Ader, who had predicted the messy auction in an earlier interview last week.
Ader noted Tuesday that the last time the Treasury auctioned 5-year notes, bond market volume was much higher. Tuesday's volume was 48 percent of that day's total. The outsized move also follows a period where rates had backed off of mid-December's high yields. On Dec. 15, the 10-year hit a high 3.56 percent intraday, and the 30-year was at 4.62 percent, two basis points shy of unchanged for the year.
"When it gets to this arena, you get to the calendar effect...the bearish momentum was reversed last week. It's losing steam, even as prices have a fallen a bit, the momentum is going the other way, suggesting the bear market is tired. A lot of the things I look at say we're supposed to do better," said Ader.
Harris Private Bank Chief Investment Officer Jack Ablin said the rate move is not a negative for stocks, but it bears watching.
"Yesterday, the 2-year auction went pretty well. I'm inclined to kind of withhold judgment until we get a real full market," Ablin said. "...it's hard the last week of the year, when you have light volume, you can have outsized moves even in the most liquid markets, and so I'm not sure I'd read anything into it yet. When we reconvene next week, if rates are here, then there's something really notable to mention, like perhaps demand for Treasurys is beginning to wane."
Ablin said he expects to see rates rise next year, and the 10-year could end 2011 with a yield closer to 4.5 percent, a move he does not believe would stop stocks from advancing. Traders have debated the reason for rising rates, even in the face of the Fed's purchase of Treasury securities. Many believe it is a response to improving economic data, and not necessarily a negative for the stock market. Others believe it is concerns about the unchecked U.S. federal budget deficit or the threat of creeping inflation.
Stocks Tuesday were mixed, with the Dow [.DJIA 11575.54 20.51 (+0.18%) ] ending up 21 at 11,575 and the S&P 500 [.SPX 1258.51 0.97 (+0.08%) ] up less than a point at 1258. While strategists expect a positive 2011, traders are increasingly talking about how excess bullishness could portend a pull back in stocks.
"If we were to sustain some kind of drop off in January, I would use it as a buying opportunity. I'm looking past January to fill up my shopping basket of stocks," Ablin said.
He expects the stock market to gain only about 7 percent in the coming year, about half of what some strategists expect. "I think there is enough of a valuation cushion built into stocks that they can withstand a pretty substantial rate rise and not be upset," he said.
Other market moves of interest Tuesday included another up day for copper, which hit its second record high this week. Copper closed up over 1 percent at $4.3280 per pound, after setting a record high of $4.3350. The Reuters-Jefferies CRB index of 19 commodities settled at tits highest level since October 2008, as oil, soy beans and wheat also hit more than two-year highs.
The dollar gained 0.3 percent against the euro [EUR=X 1.3106 -0.0007 (-0.05%) ], which was at 1.3119.
The best performing stock sectors Tuesday benefited from the commodities rally, with energy shares leading, up 0.4 percent, followed by materials, up 0.3 percent.
General Motors [GM 35.32 0.72 (+2.08%) ] shares rode back into favor on Wall Street, as more than a half dozen firms christened its six-week old stock market debut with buy or overweight ratings.
There is no economic data scheduled for release, but the government's auction of $29 billion in 7-year notes now has the attention of traders in all markets, as they watch to see whether the rate move had more to do with razor thin volumes or a trend toward higher interest rates. The government's auction of $35 billion 5-year notes at 1 p.m. Tuesday saw the lowest demand since June, prompting further selling.
"Everything I look at tells me this is not a market you want to sell because the risk is a vicious rally...and the time of the year, like last December, we had a dramatic sell off and responded with a 40- to 50-basis point rally in January," said David Ader, chief Treasury strategist at CRT Capital. Rates on the 10-year were at 3.33 percent early in the day Tuesday, and were at 3.48 by day's end.
"It's entirely about the date and has nothing to do with the information. Today we got two piece pieces of weak data, Case-Shiller home prices and consumer sentiment, and those otherwise could have been supportive. It's more about whose around to buy and it's who wants to carry it over year end," said Ader, who had predicted the messy auction in an earlier interview last week.
Ader noted Tuesday that the last time the Treasury auctioned 5-year notes, bond market volume was much higher. Tuesday's volume was 48 percent of that day's total. The outsized move also follows a period where rates had backed off of mid-December's high yields. On Dec. 15, the 10-year hit a high 3.56 percent intraday, and the 30-year was at 4.62 percent, two basis points shy of unchanged for the year.
"When it gets to this arena, you get to the calendar effect...the bearish momentum was reversed last week. It's losing steam, even as prices have a fallen a bit, the momentum is going the other way, suggesting the bear market is tired. A lot of the things I look at say we're supposed to do better," said Ader.
Harris Private Bank Chief Investment Officer Jack Ablin said the rate move is not a negative for stocks, but it bears watching.
"Yesterday, the 2-year auction went pretty well. I'm inclined to kind of withhold judgment until we get a real full market," Ablin said. "...it's hard the last week of the year, when you have light volume, you can have outsized moves even in the most liquid markets, and so I'm not sure I'd read anything into it yet. When we reconvene next week, if rates are here, then there's something really notable to mention, like perhaps demand for Treasurys is beginning to wane."
Ablin said he expects to see rates rise next year, and the 10-year could end 2011 with a yield closer to 4.5 percent, a move he does not believe would stop stocks from advancing. Traders have debated the reason for rising rates, even in the face of the Fed's purchase of Treasury securities. Many believe it is a response to improving economic data, and not necessarily a negative for the stock market. Others believe it is concerns about the unchecked U.S. federal budget deficit or the threat of creeping inflation.
Stocks Tuesday were mixed, with the Dow [.DJIA 11575.54 20.51 (+0.18%) ] ending up 21 at 11,575 and the S&P 500 [.SPX 1258.51 0.97 (+0.08%) ] up less than a point at 1258. While strategists expect a positive 2011, traders are increasingly talking about how excess bullishness could portend a pull back in stocks.
"If we were to sustain some kind of drop off in January, I would use it as a buying opportunity. I'm looking past January to fill up my shopping basket of stocks," Ablin said.
He expects the stock market to gain only about 7 percent in the coming year, about half of what some strategists expect. "I think there is enough of a valuation cushion built into stocks that they can withstand a pretty substantial rate rise and not be upset," he said.
Other market moves of interest Tuesday included another up day for copper, which hit its second record high this week. Copper closed up over 1 percent at $4.3280 per pound, after setting a record high of $4.3350. The Reuters-Jefferies CRB index of 19 commodities settled at tits highest level since October 2008, as oil, soy beans and wheat also hit more than two-year highs.
The dollar gained 0.3 percent against the euro [EUR=X 1.3106 -0.0007 (-0.05%) ], which was at 1.3119.
The best performing stock sectors Tuesday benefited from the commodities rally, with energy shares leading, up 0.4 percent, followed by materials, up 0.3 percent.
General Motors [GM 35.32 0.72 (+2.08%) ] shares rode back into favor on Wall Street, as more than a half dozen firms christened its six-week old stock market debut with buy or overweight ratings.
Housing Prices: Home Prices Falling Faster in Biggest Cities: Case-Shiller - CNBC
Home prices are dropping in the nation's largest cities and are expected to fall through next year, with the worst declines coming in areas with high numbers of foreclosures.
The Standard & Poor's/Case-Shiller 20-city home price index fell 1.3 percent in October from September. All cities recorded monthly price declines.
Atlanta recorded the largest decline. Prices there fell 2.9 percent from a month earlier. Washington, which had posted increases for six straight months, dropped 0.2 percent in October.
The 20-city index has risen 4.4 percent from their April 2009 bottom. But it remains 29.6 percent below its July 2006 peak.
The Standard & Poor's/Case-Shiller 20-city home price index fell 1.3 percent in October from September. All cities recorded monthly price declines.
Atlanta recorded the largest decline. Prices there fell 2.9 percent from a month earlier. Washington, which had posted increases for six straight months, dropped 0.2 percent in October.
The 20-city index has risen 4.4 percent from their April 2009 bottom. But it remains 29.6 percent below its July 2006 peak.
Stock Trading in Private Companies Draws Scrutiny - CNBC
A red-hot trading market has developed in the shares of the world’s leading social-networking companies: Facebook, Twitter, Zynga and LinkedIn. What is unusual is that none of the companies are listed on a public stock exchange. Each is privately held.
Now, the Securities and Exchange Commission wants to learn more about the business of these stock trades. The agency has sent information requests to several participants in the buying and selling of these four companies’ stocks, according to two people with direct knowledge of the inquiry who requested anonymity because they were not authorized to speak about it.
It is unclear exactly what has piqued the agency’s interest. An S.E.C. spokesman declined to comment on the matter. But the S.E.C.’s interest comes as a crop of new exchanges is popping up to facilitate these trades.
Over the last year, several private exchanges have matched up buyers and sellers of shares in these fast-growing companies. Though the volume remains thin, the number of transactions is increasing each month.
At the same time, Wall Street brokerage firms have begun forming investment pools to buy these companies’ shares.
Driving this activity is the social-networking phenomenon, which has created the hottest, and most hyped, segment in Silicon Valley in years.
Businesses like Facebook, the social-networking leader, and Zynga, a popular maker of online games, already generate hundreds of millions of dollars in revenue. Twitter has more than 150 million users, and just received $200 million in venture financing. LinkedIn, another social-networking site, has become a Facebook for professionals.
Who is selling these shares? Much of the supply comes from former employees at these companies and their early-stage venture capital investors looking to exit their stakes.
The buyers in these so-called secondary trading markets are mostly wealthy speculators looking to snag a piece of the next Apple, Microsoft or Google before the rest of the investing public can.
Part of what is driving this emerging market is the shifting dynamics of initial public offerings on Wall Street, particularly in the technology sector, as companies take longer to tap the public markets.
“We are serving a growing need,” said David Weir, the chief executive of SharesPost, an online marketplace for private investments started last year that now has 39,000 registered members. “A decade ago, these companies would be public by now. Investors can now buy into these businesses and sellers can exit their already valuable stakes.”
SecondMarket, the leading trading exchange handling transactions in these securities, is expected to execute about $400 million in trades across about 40 private companies this year, roughly a fourfold increase over 2009, the first year it began making markets in the companies, according to a company spokesman.
Facebook, run by Mark Zuckerberg, is SecondMarket’s most actively traded company. Last month, SecondMarket held an auction in which approximately $40 million worth of Facebook shares changed hands.
As the volume has picked up, the worth of these nonpublic companies has ratcheted up as well. The combined value of the top 11 private venture-backed technology businesses has increased by 54 percent since June, according to a recent study by Nyppex, a brokerage firm that facilitates trading in private companies.
Facebook is now trading at an implied valuation of $42.4 billion, according to SharesPost, more than tripling in value from earlier in the year. Twitter is worth $3.6 billion, more than doubling over the last several months.
Another batch of small Wall Street firms is also trying to get in on the action. These companies, which include GreenCrest Capital and Felix Investments, are raising “Facebook funds” or “Twitter funds.” These firms are pooling their clients’ money into investment vehicles to acquire blocks of stock of these companies.
Investors are taking on substantial risk when buying shares in these private companies. Despite Facebook’s ubiquity (it is the subject of at least two books, countless magazine features and a critically acclaimed motion picture) it does not disclose its financial results. And Twitter, despite its popularity and influence, generates minimal revenue.
But investors are betting that Facebook, Twitter and their brethren will ultimately go public at sky-high valuations, delivering big profits similar to Google’s initial public offering in 2004.
It is uncertain what exactly the S.E.C. is looking into, but several securities lawyers say it could relate to understanding the number of shareholders at these companies.
That would be relevant to regulators because Facebook and other start-ups have a reason to keep the number of shareholders to under 499. If they had 500 shareholders, S.E.C. rules would force them to disclose their financial results to the public.
The pooled vehicles being set up to acquire Facebook stock, for instance, could push the company’s shareholder count above 499 if the S.E.C. counted the number of investors in the funds.
In 2008, the S.E.C. and Facebook tangled over a related issue. Then, the agency allowed Facebook to issue restricted stock to employees without having to register the securities, which would have forced the company to provide financial information to prospective investors.
Although the trading in these companies has increased over the last year, the market remains illiquid.
The market is capped by the amount of stock for sale. At Facebook, for example, only former employees can sell stock. In March, Facebook announced a ban on current employees selling stock.
It also announced an “insider trading policy” to better comply with the securities laws and “to protect the interests of the company and its employees and shareholders.” Also, recently hired Facebook employees are given restricted stock units that do not have value unless the company goes public or is sold.
The number of potential buyers is also limited. Because these privately held companies are considered high-risk securities by the S.E.C., the agency’s rules permit only qualified institutions (like ones that manage $100 million or more) and accredited investors (individuals whose net worth exceeds $1 million) to buy their shares. Also, many of the companies, including Facebook, have the right of first refusal to buy any shares of its stock offered on these private exchanges.
Now, the Securities and Exchange Commission wants to learn more about the business of these stock trades. The agency has sent information requests to several participants in the buying and selling of these four companies’ stocks, according to two people with direct knowledge of the inquiry who requested anonymity because they were not authorized to speak about it.
It is unclear exactly what has piqued the agency’s interest. An S.E.C. spokesman declined to comment on the matter. But the S.E.C.’s interest comes as a crop of new exchanges is popping up to facilitate these trades.
Over the last year, several private exchanges have matched up buyers and sellers of shares in these fast-growing companies. Though the volume remains thin, the number of transactions is increasing each month.
At the same time, Wall Street brokerage firms have begun forming investment pools to buy these companies’ shares.
Driving this activity is the social-networking phenomenon, which has created the hottest, and most hyped, segment in Silicon Valley in years.
Businesses like Facebook, the social-networking leader, and Zynga, a popular maker of online games, already generate hundreds of millions of dollars in revenue. Twitter has more than 150 million users, and just received $200 million in venture financing. LinkedIn, another social-networking site, has become a Facebook for professionals.
Who is selling these shares? Much of the supply comes from former employees at these companies and their early-stage venture capital investors looking to exit their stakes.
The buyers in these so-called secondary trading markets are mostly wealthy speculators looking to snag a piece of the next Apple, Microsoft or Google before the rest of the investing public can.
Part of what is driving this emerging market is the shifting dynamics of initial public offerings on Wall Street, particularly in the technology sector, as companies take longer to tap the public markets.
“We are serving a growing need,” said David Weir, the chief executive of SharesPost, an online marketplace for private investments started last year that now has 39,000 registered members. “A decade ago, these companies would be public by now. Investors can now buy into these businesses and sellers can exit their already valuable stakes.”
SecondMarket, the leading trading exchange handling transactions in these securities, is expected to execute about $400 million in trades across about 40 private companies this year, roughly a fourfold increase over 2009, the first year it began making markets in the companies, according to a company spokesman.
Facebook, run by Mark Zuckerberg, is SecondMarket’s most actively traded company. Last month, SecondMarket held an auction in which approximately $40 million worth of Facebook shares changed hands.
As the volume has picked up, the worth of these nonpublic companies has ratcheted up as well. The combined value of the top 11 private venture-backed technology businesses has increased by 54 percent since June, according to a recent study by Nyppex, a brokerage firm that facilitates trading in private companies.
Facebook is now trading at an implied valuation of $42.4 billion, according to SharesPost, more than tripling in value from earlier in the year. Twitter is worth $3.6 billion, more than doubling over the last several months.
Another batch of small Wall Street firms is also trying to get in on the action. These companies, which include GreenCrest Capital and Felix Investments, are raising “Facebook funds” or “Twitter funds.” These firms are pooling their clients’ money into investment vehicles to acquire blocks of stock of these companies.
Investors are taking on substantial risk when buying shares in these private companies. Despite Facebook’s ubiquity (it is the subject of at least two books, countless magazine features and a critically acclaimed motion picture) it does not disclose its financial results. And Twitter, despite its popularity and influence, generates minimal revenue.
But investors are betting that Facebook, Twitter and their brethren will ultimately go public at sky-high valuations, delivering big profits similar to Google’s initial public offering in 2004.
It is uncertain what exactly the S.E.C. is looking into, but several securities lawyers say it could relate to understanding the number of shareholders at these companies.
That would be relevant to regulators because Facebook and other start-ups have a reason to keep the number of shareholders to under 499. If they had 500 shareholders, S.E.C. rules would force them to disclose their financial results to the public.
The pooled vehicles being set up to acquire Facebook stock, for instance, could push the company’s shareholder count above 499 if the S.E.C. counted the number of investors in the funds.
In 2008, the S.E.C. and Facebook tangled over a related issue. Then, the agency allowed Facebook to issue restricted stock to employees without having to register the securities, which would have forced the company to provide financial information to prospective investors.
Although the trading in these companies has increased over the last year, the market remains illiquid.
The market is capped by the amount of stock for sale. At Facebook, for example, only former employees can sell stock. In March, Facebook announced a ban on current employees selling stock.
It also announced an “insider trading policy” to better comply with the securities laws and “to protect the interests of the company and its employees and shareholders.” Also, recently hired Facebook employees are given restricted stock units that do not have value unless the company goes public or is sold.
The number of potential buyers is also limited. Because these privately held companies are considered high-risk securities by the S.E.C., the agency’s rules permit only qualified institutions (like ones that manage $100 million or more) and accredited investors (individuals whose net worth exceeds $1 million) to buy their shares. Also, many of the companies, including Facebook, have the right of first refusal to buy any shares of its stock offered on these private exchanges.
Nasdaq Looking at New Foray into Japan - CNBC
U.S.-based Nasdaq OMX Group is looking at having a second stab at setting up a market in Japan with the Osaka Securities Exchange, hoping to attract investors from emerging Asian economies, domestic media reported.
The two stock market operators opened the Nasdaq Japan market for start-ups in 2000 but closed it two years later after its order-matching system failed to find favour with Japan's No.1 broker Nomura Securities and other major players.
The new exchange could open as early as January 2012 and would offer night and small lot trading to facilitate participation by a broad variety of investors, the Yomiuri newspaper reported. Kyodo news agency said the new market may also allow trading of stocks listed on the Tokyo Stock Exchange.
The Osaka Securities Exchange, Japan's No.2 bourse, declined to comment.
"We have been in touch with Nasdaq as we are cooperating on various projects including the planned use of Nasdaq's derivatives system at the OSE, but the OSE cannot say if the reported plan has been discussed," spokesman Masahiro Yada said.
The OSE merged with Japan's biggest market for start-ups, the Jasdaq, this year. Jasdaq later absorbed the Nasdaq Japan successor, the Hercules market. The Tokyo Stock Exchange also has a section for start-ups, the Mothers market.
While the Tokyo Stock Exchange dominates Japanese stock trading, the Osaka Securities Exchange dominates derivatives trading.
OSE shares dropped 1.2 percent to 417,500 yen on Tuesday morning, underperforming a 0.4 percent decline for the Nikkei stock average.
The two stock market operators opened the Nasdaq Japan market for start-ups in 2000 but closed it two years later after its order-matching system failed to find favour with Japan's No.1 broker Nomura Securities and other major players.
The new exchange could open as early as January 2012 and would offer night and small lot trading to facilitate participation by a broad variety of investors, the Yomiuri newspaper reported. Kyodo news agency said the new market may also allow trading of stocks listed on the Tokyo Stock Exchange.
The Osaka Securities Exchange, Japan's No.2 bourse, declined to comment.
"We have been in touch with Nasdaq as we are cooperating on various projects including the planned use of Nasdaq's derivatives system at the OSE, but the OSE cannot say if the reported plan has been discussed," spokesman Masahiro Yada said.
The OSE merged with Japan's biggest market for start-ups, the Jasdaq, this year. Jasdaq later absorbed the Nasdaq Japan successor, the Hercules market. The Tokyo Stock Exchange also has a section for start-ups, the Mothers market.
While the Tokyo Stock Exchange dominates Japanese stock trading, the Osaka Securities Exchange dominates derivatives trading.
OSE shares dropped 1.2 percent to 417,500 yen on Tuesday morning, underperforming a 0.4 percent decline for the Nikkei stock average.
Monday, December 27, 2010
BOJ Minutes: Japan Industrial Output Rises For First Time in 6 Months - CNBC
Japanese factory output rose for the first time in six months in November and manufacturers expect to boost production in coming months, suggesting that firm demand in Asia will help the economy resume a recovery early next year.
Automakers also increased output to restock in anticipation of a pickup in domestic demand next year, a sign that output may have bottomed out after tumbling when government subsidies on low-emission cars expired in September.
The data bodes well for the fragile economy and underscores the Bank of Japan's forecast view that growth will pick up modestly early next year on continued support from exports to emerging Asia.
"The headline figure was in line with expectations, but forecasts for December and January came in quite strong," said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute.
"Since today's data shows that the downward risks to the economy have eased, we now have a smaller chance of the BOJ easing its policy further as long as there are no wild market fluctuations caused by some overseas factors."
Industrial output rose 1.0 percent in November, matching a median market forecast and marking the first rise in six months, the Ministry of Economy, Trade and Industry said on Tuesday.
Manufacturers surveyed by the ministry expect output to rise 3.4 percent in December and 3.7 percent in January.
Asian Recovery
Companies increased output of automobile, machinery and electronic parts mainly for export to Asia and the Middle East, the data showed.
"We have already got some positive news from Asian neighbours for October and November. This is confirmation that Japan is benefiting from the recovery of the Asian economies," said Masamichi Adachi, senior economist at JPMorgan Securities Japan.
Still, the ministry maintained its assessment that industrial output was moving on a weak note, stressing that production has recovered only moderately after steep declines in the past few months.
Underscoring the fragile state of the economy, household spending fell 0.4 percent in November from a year earlier and the jobless rate was steady at 5.1 percent.
Core consumer prices marked their 21st straight month of annual declines, a sign the country remains mired in deflation due to weak domestic demand and keeping pressure on the BOJ to maintain its ultra-easy monetary policy.
Japan's economy is expected to contract slightly in the final quarter of this year. Analysts expect growth to pick up early next year but only modestly due to weak consumer spending.
The BOJ eased policy in October by pledging to keep interest rates effectively at zero until the end of deflation was in sight and by crafting a 5 trillion yen ($60 billion) pool of funds to buy assets ranging from government bonds to corporate debt, including trust funds investing in stocks and property.
BOJ policymakers have repeatedly said that increasing the size of the fund would be a clear option if the looming economic slowdown proves worse than expected.
Automakers also increased output to restock in anticipation of a pickup in domestic demand next year, a sign that output may have bottomed out after tumbling when government subsidies on low-emission cars expired in September.
The data bodes well for the fragile economy and underscores the Bank of Japan's forecast view that growth will pick up modestly early next year on continued support from exports to emerging Asia.
"The headline figure was in line with expectations, but forecasts for December and January came in quite strong," said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute.
"Since today's data shows that the downward risks to the economy have eased, we now have a smaller chance of the BOJ easing its policy further as long as there are no wild market fluctuations caused by some overseas factors."
Industrial output rose 1.0 percent in November, matching a median market forecast and marking the first rise in six months, the Ministry of Economy, Trade and Industry said on Tuesday.
Manufacturers surveyed by the ministry expect output to rise 3.4 percent in December and 3.7 percent in January.
Asian Recovery
Companies increased output of automobile, machinery and electronic parts mainly for export to Asia and the Middle East, the data showed.
"We have already got some positive news from Asian neighbours for October and November. This is confirmation that Japan is benefiting from the recovery of the Asian economies," said Masamichi Adachi, senior economist at JPMorgan Securities Japan.
Still, the ministry maintained its assessment that industrial output was moving on a weak note, stressing that production has recovered only moderately after steep declines in the past few months.
Underscoring the fragile state of the economy, household spending fell 0.4 percent in November from a year earlier and the jobless rate was steady at 5.1 percent.
Core consumer prices marked their 21st straight month of annual declines, a sign the country remains mired in deflation due to weak domestic demand and keeping pressure on the BOJ to maintain its ultra-easy monetary policy.
Japan's economy is expected to contract slightly in the final quarter of this year. Analysts expect growth to pick up early next year but only modestly due to weak consumer spending.
The BOJ eased policy in October by pledging to keep interest rates effectively at zero until the end of deflation was in sight and by crafting a 5 trillion yen ($60 billion) pool of funds to buy assets ranging from government bonds to corporate debt, including trust funds investing in stocks and property.
BOJ policymakers have repeatedly said that increasing the size of the fund would be a clear option if the looming economic slowdown proves worse than expected.
US Politics: New Voters May Sway Fed Actions - CNBC
As the Federal Reserve debates whether to scale back, continue or expand its $600 billion effort to nurse the economic recovery, four men will have a newly prominent role in influencing the central bank’s path.
One is an economist who fears that the Fed’s easy-money policies could lead to manias like the housing bubble that burst in 2007.
Another is a Texas Democrat who served in the Clinton White House, but is wary of the Fed’s aggressive efforts to combat unemployment.
A third is a precocious economist who graduated from Princeton at 19.
And the fourth is the only one who agreed wholeheartedly with the Fed’s chairman, Ben S. Bernanke, that the economy was at risk of falling into a dangerous cycle of deflation last summer and that an additional monetary boost was needed.
The four men are presidents of regional Fed banks, and under an arcane system that dates to the Depression, they will become voting members in 2011 on the Federal Open Market Committee, which gathers eight times a year around a 27-foot mahogany table to influence the supply of credit in the economy.
While Mr. Bernanke remains the dominant voice on which route the Fed takes, the change in voting composition is likely to give the committee a somewhat more hawkish cast.
This could amplify anxieties about unforeseen effects of Mr. Bernanke’s policies and potentially contribute to the increasingly politicized atmosphere surrounding the Fed.
Since the Fed embarked last month on a second round of quantitative easing — a strategy of buying government securities to hold down mortgage and other long-term interest rates — it has faced an outpouring of criticism from foreign central banks and conservative Republicans.
One of them, Representative Paul D. Ryan of Wisconsin, who is in line to become chairman of the House Budget Committee, said he thought that dissenters within the Fed would influence whether Mr. Bernanke “throttles back, or keeps going,” with the bond-buying plan.
“We’re playing with fire, flirting with disaster,” Mr. Ryan said of the plan, which he believes could jeopardize the dollar’s status as the world’s reserve currency and touch off future inflation.
Most economists think the Fed is unlikely to drastically alter its policy direction, though some of the new members could nudge policy toward more restraint and less activism.
Two of the four new voters are viewed as hawkish on inflation, meaning that they tend to be more worried about unleashing future inflation than they are about reducing unemployment in the short run.
The committee will be “a little more hawkish, on net, although I don’t think it’s a sea change,” said Jan Hatzius, the chief United States economist at Goldman Sachs.
Of the four new voting members, the one drawing the most attention is Charles I. Plosser, 62, president of the Federal Reserve Bank of Philadelphia since 2006.
Mr. Plosser, who formerly taught at the University of Rochester, argued in a speech at the libertarian Cato Institute last month that monetary policy “went off track” a few years ago, an acknowledgment of the criticism that the Fed kept interest rates too low from 2003 to 2005, contributing to the housing bubble.
“I’d like the recovery to be faster, but I’m not sure monetary policy can do much about that,” he said in an interview.
Mr. Plosser said that he has thought all along that the economic slowdown over the summer was temporary and that he “wasn’t a big fan” of Mr. Bernanke’s asset-purchase plan.
He wants the Fed to move back toward normal policy. “If we wait too long, and the economy really begins to pick up and we are too late in reacting, we could end up behind the curve and we could end up with more instability,” he said.
Most economists expect Mr. Plosser to dissent, possibly repeatedly, in 2011, inheriting a role played by Thomas M. Hoenig, president of the Kansas City Fed, who was the lone dissenter eight times this year but does not have a vote next year.
Richard W. Fisher, president of the Dallas Fed since 2005, is another potential dissenter. A former investment banker, he was the Democratic nominee for the Senate in 1994, but lost to Kay Bailey Hutchison, a Republican.
He was a deputy United States trade representative during President Bill Clinton’s second term. Compared with most Democratic politicians, Mr. Fisher, 61, is wary of the Fed’s latest moves.
“The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed,” he said in a speech last month.
His views are also in line with those of fiscal conservatives, like Mr. Ryan, who think the Fed is abetting huge government deficits by “monetizing the federal debt.”
Narayana R. Kocherlakota, 47, the Princeton graduate, who became president of the Minneapolis Fed last year, will be voting for the first time. He has been more measured about quantitative easing.
In a speech last month, he called it “a move in the right direction” but said the ultimate effects were “likely to be relatively modest.”
The fourth new voting member, Charles L. Evans, 52, has led the Chicago Fed since 2007. Unlike the other three, he is associated with the camp of so-called doves within the Fed, who are worried about chronic, long-term joblessness and think the recovery is still quite fragile.
Mr. Evans has advocated price-level targeting, a strategy that would allow inflation to run slightly above the desired level in the future to make up for inflation’s being too low today.
But in an October speech, he conceded that the proposal would be “a hard pill to swallow” for an institution whose credibility rested on its successes at taming high inflation in the early 1980s.
Mr. Evans is likely to side with Mr. Bernanke on the bond purchases; if anything, he might even push to expand them beyond $600 billion if the recovery weakened again.
The Federal Open Market Committee comprises the Fed’s seven-member board of governors in Washington, including Mr. Bernanke; the president of the New York Fed, who is a permanent member; and four members drawn from the heads of the 11 other banks, who share votes through a rotation.
“It’s true that voting members get more attention in the press, but whether people are voting or nonvoting members, everyone has an equal voice at the table and an equal part in the discussions,” said Randall S. Kroszner, a former Fed governor and a professor at the Booth School of Business at the University of Chicago.
“It’s a consensus-based organization.”
For now, Goldman Sachs [GS 167.60 --- UNCH ], Morgan Stanley [MS 27.41 --- UNCH ] and other major forecasters expect the Fed will carry out its plan to buy $600 billion in securities — neither scaling back the program early, nor extending it past June.
But Mr. Bernanke has left his options open, and the committee is likely to wait until the spring before deciding.
Lyle E. Gramley, a former Fed governor who advises the Potomac Research Group, an economic research firm, said he thought the new members would introduce “slightly more uncertainty,” but predicted that the ultimate effect would be limited.
“The chairman has a strong voice in the outcome of the meeting, and there is a tradition that not too many people are going to dissent at any one time,” he said.
What could cause the Fed to scale back, Mr. Gramley said, is an unexpected and sharp rise in inflation expectations.
If the markets come to believe that inflation will eventually rise higher than the Fed’s unofficial long-range target of 2 percent, they could drive up interest rates — and inflation.
So far, there have been few signs of that, but the situation could change quickly.
One is an economist who fears that the Fed’s easy-money policies could lead to manias like the housing bubble that burst in 2007.
Another is a Texas Democrat who served in the Clinton White House, but is wary of the Fed’s aggressive efforts to combat unemployment.
A third is a precocious economist who graduated from Princeton at 19.
And the fourth is the only one who agreed wholeheartedly with the Fed’s chairman, Ben S. Bernanke, that the economy was at risk of falling into a dangerous cycle of deflation last summer and that an additional monetary boost was needed.
The four men are presidents of regional Fed banks, and under an arcane system that dates to the Depression, they will become voting members in 2011 on the Federal Open Market Committee, which gathers eight times a year around a 27-foot mahogany table to influence the supply of credit in the economy.
While Mr. Bernanke remains the dominant voice on which route the Fed takes, the change in voting composition is likely to give the committee a somewhat more hawkish cast.
This could amplify anxieties about unforeseen effects of Mr. Bernanke’s policies and potentially contribute to the increasingly politicized atmosphere surrounding the Fed.
Since the Fed embarked last month on a second round of quantitative easing — a strategy of buying government securities to hold down mortgage and other long-term interest rates — it has faced an outpouring of criticism from foreign central banks and conservative Republicans.
One of them, Representative Paul D. Ryan of Wisconsin, who is in line to become chairman of the House Budget Committee, said he thought that dissenters within the Fed would influence whether Mr. Bernanke “throttles back, or keeps going,” with the bond-buying plan.
“We’re playing with fire, flirting with disaster,” Mr. Ryan said of the plan, which he believes could jeopardize the dollar’s status as the world’s reserve currency and touch off future inflation.
Most economists think the Fed is unlikely to drastically alter its policy direction, though some of the new members could nudge policy toward more restraint and less activism.
Two of the four new voters are viewed as hawkish on inflation, meaning that they tend to be more worried about unleashing future inflation than they are about reducing unemployment in the short run.
The committee will be “a little more hawkish, on net, although I don’t think it’s a sea change,” said Jan Hatzius, the chief United States economist at Goldman Sachs.
Of the four new voting members, the one drawing the most attention is Charles I. Plosser, 62, president of the Federal Reserve Bank of Philadelphia since 2006.
Mr. Plosser, who formerly taught at the University of Rochester, argued in a speech at the libertarian Cato Institute last month that monetary policy “went off track” a few years ago, an acknowledgment of the criticism that the Fed kept interest rates too low from 2003 to 2005, contributing to the housing bubble.
“I’d like the recovery to be faster, but I’m not sure monetary policy can do much about that,” he said in an interview.
Mr. Plosser said that he has thought all along that the economic slowdown over the summer was temporary and that he “wasn’t a big fan” of Mr. Bernanke’s asset-purchase plan.
He wants the Fed to move back toward normal policy. “If we wait too long, and the economy really begins to pick up and we are too late in reacting, we could end up behind the curve and we could end up with more instability,” he said.
Most economists expect Mr. Plosser to dissent, possibly repeatedly, in 2011, inheriting a role played by Thomas M. Hoenig, president of the Kansas City Fed, who was the lone dissenter eight times this year but does not have a vote next year.
Richard W. Fisher, president of the Dallas Fed since 2005, is another potential dissenter. A former investment banker, he was the Democratic nominee for the Senate in 1994, but lost to Kay Bailey Hutchison, a Republican.
He was a deputy United States trade representative during President Bill Clinton’s second term. Compared with most Democratic politicians, Mr. Fisher, 61, is wary of the Fed’s latest moves.
“The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed,” he said in a speech last month.
His views are also in line with those of fiscal conservatives, like Mr. Ryan, who think the Fed is abetting huge government deficits by “monetizing the federal debt.”
Narayana R. Kocherlakota, 47, the Princeton graduate, who became president of the Minneapolis Fed last year, will be voting for the first time. He has been more measured about quantitative easing.
In a speech last month, he called it “a move in the right direction” but said the ultimate effects were “likely to be relatively modest.”
The fourth new voting member, Charles L. Evans, 52, has led the Chicago Fed since 2007. Unlike the other three, he is associated with the camp of so-called doves within the Fed, who are worried about chronic, long-term joblessness and think the recovery is still quite fragile.
Mr. Evans has advocated price-level targeting, a strategy that would allow inflation to run slightly above the desired level in the future to make up for inflation’s being too low today.
But in an October speech, he conceded that the proposal would be “a hard pill to swallow” for an institution whose credibility rested on its successes at taming high inflation in the early 1980s.
Mr. Evans is likely to side with Mr. Bernanke on the bond purchases; if anything, he might even push to expand them beyond $600 billion if the recovery weakened again.
The Federal Open Market Committee comprises the Fed’s seven-member board of governors in Washington, including Mr. Bernanke; the president of the New York Fed, who is a permanent member; and four members drawn from the heads of the 11 other banks, who share votes through a rotation.
“It’s true that voting members get more attention in the press, but whether people are voting or nonvoting members, everyone has an equal voice at the table and an equal part in the discussions,” said Randall S. Kroszner, a former Fed governor and a professor at the Booth School of Business at the University of Chicago.
“It’s a consensus-based organization.”
For now, Goldman Sachs [GS 167.60 --- UNCH ], Morgan Stanley [MS 27.41 --- UNCH ] and other major forecasters expect the Fed will carry out its plan to buy $600 billion in securities — neither scaling back the program early, nor extending it past June.
But Mr. Bernanke has left his options open, and the committee is likely to wait until the spring before deciding.
Lyle E. Gramley, a former Fed governor who advises the Potomac Research Group, an economic research firm, said he thought the new members would introduce “slightly more uncertainty,” but predicted that the ultimate effect would be limited.
“The chairman has a strong voice in the outcome of the meeting, and there is a tradition that not too many people are going to dissent at any one time,” he said.
What could cause the Fed to scale back, Mr. Gramley said, is an unexpected and sharp rise in inflation expectations.
If the markets come to believe that inflation will eventually rise higher than the Fed’s unofficial long-range target of 2 percent, they could drive up interest rates — and inflation.
So far, there have been few signs of that, but the situation could change quickly.
Winter Weather - East Coast Storm Strands Travelers, Vexes Drivers - CNBC
A treacherous commute of lashing winds, slick streets and low visibility buffeted workers returning Monday to their post-Christmas routines as a winter storm that dumped about a foot of snow on southern New England continued crawling up the East Coast, stranding thousands of airline, bus and rail passengers.
The blizzard conditions wreaked havoc on travelers from the Carolinas to Maine, forced the suspension of operations at some of the nation's busiest airports and marooned a passenger bus carrying about 50 people, some with diabetes, on a New Jersey highway.
Airlines scrambled to rebook passengers on thousands of canceled flights — more than 1,400 out of the New York City area's three major airports alone — but said they didn't expect normal service to resume until Tuesday. Amtrak canceled train service from New York to Maine after doing the same earlier for several trains in Virginia. The nation's largest commuter rail system, New York's Long Island Rail Road, also suspended service. Bus companies canceled routes up and down the East Coast, and drivers faced hazardous travel conditions — sometimes with close to zero visibility.
In Monmouth County, N.J., snow drifts of up to five feet contributed to stalling a passenger bus on the Garden State Parkway, where snow plows were having a difficult time cleaning because there were so many stranded cars cluttering the ramps, state police spokesman Steve Jones said. Ambulances couldn't reach the bus, and state troopers were carrying their own water and food to the bus to give to people who were feeling ill, he said.
The state police's superintendent, Col. Rick Fuentes, toured parts of the state in a four-wheel-drive vehicle to assess the conditions of the roadways and pleaded with people to stay home.
Emergency room nurse Tiffany Lema, at Newport Hospital in Rhode Island, said her normally 45-minute commute from Cranston, just south of Providence, was an awful two hours, made all the more harrowing when her husband's truck couldn't get up and over the Newport Bridge. They made a U-turn and parked near an E-ZPass electronic toll payment office, where her father-in-law picked her up and drove her the rest of the way.
"I wasn't going to jump out at any point, so we just turned it around. It was kind of scary," said Lema, who planned to spend the night at the hospital with other nurses. "You could see the car in front of you but not over the hill, not over the bridge."
A blizzard warning, which is issued when snow is accompanied by sustained winds or gusts over 35 mph, was in effect early Monday from Delaware to the far northern tip of Maine. The storm was expected to bring its heaviest snowfall in the pre-dawn hours Monday, sometimes dumping 2 to 4 inches an hour. A total of 12 to 16 inches was expected across nearly all of Rhode Island, Connecticut and eastern Massachusetts, though forecasters said winds of 50 mph could create much deeper snow drifts.
States of emergency were declared in North Carolina, Virginia, Maryland, New Jersey, Maine and Massachusetts, where Gov. Deval Patrick urged people who did not have to be on the roads to stay home, to ensure their safety and that of work crews. Nonessential state workers were told to stay home Monday.
State police in Rhode Island responded to several snow-related car accidents, including at least two rollovers, but no serious injuries were reported.
Air carriers began canceling flights on Saturday and warned that more cancellations were likely Monday. Operations were suspended Sunday at New York's John F. Kennedy International and LaGuardia airports and at New Jersey's Newark Liberty International Airport.
Delta Air Lines, which has canceled 850 flights and expected cancellations Monday in New York and Boston, said it hoped to be back to normal by Tuesday morning, while United Airlines said it could add more flights Monday to accommodate stranded passengers.
Before any snow accumulated in Philadelphia, the NFL moved the Philadelphia Eagles' game against the Minnesota Vikings from Sunday night to Tuesday because of "public safety concerns." Pennsylvania Gov. Ed Rendell, who does football commentaries after Eagles games, wasn't amused and said fans could have handled it.
"This is football; football's played in bad weather," Rendell told KYW-TV. "I, for one, was looking forward to sitting in the stands throughout the snow and seeing an old-time football game."
After he said that, slightly less than a foot of snow fell on the City of Brotherly Love.
In Boston, Mayor Thomas Menino declared a snow emergency that bans parking on all major streets, and the New England Aquarium bubble-wrapped its four 5-foot-tall penguin ice sculptures to protect them from the wind and snow.
More than 2,400 sanitation workers were working in 12-hour shifts to clear New York City's 6,000 miles of streets. Not that Mayor Michael Bloomberg wanted people to use them.
"I understand that a lot of families need to get home after a weekend away, but please don't get on the roads unless you absolutely have to," Bloomberg said.
In Rhode Island, emergency officials encouraged businesses to let employees report to work late Monday, saying road conditions for the morning commute would be treacherous.
"You don't want to get your employees hurt," said Steve Kass, a spokesman for the state Emergency Management Agency. "The roads are not going to be good, that's for sure."
The monster storm is the result of a low pressure system off the North Carolina coast and strengthened as it moved northeast, the National Weather Service said. Because of it, parts of the South had their first white Christmas since records have been kept.
The blizzard conditions wreaked havoc on travelers from the Carolinas to Maine, forced the suspension of operations at some of the nation's busiest airports and marooned a passenger bus carrying about 50 people, some with diabetes, on a New Jersey highway.
Airlines scrambled to rebook passengers on thousands of canceled flights — more than 1,400 out of the New York City area's three major airports alone — but said they didn't expect normal service to resume until Tuesday. Amtrak canceled train service from New York to Maine after doing the same earlier for several trains in Virginia. The nation's largest commuter rail system, New York's Long Island Rail Road, also suspended service. Bus companies canceled routes up and down the East Coast, and drivers faced hazardous travel conditions — sometimes with close to zero visibility.
In Monmouth County, N.J., snow drifts of up to five feet contributed to stalling a passenger bus on the Garden State Parkway, where snow plows were having a difficult time cleaning because there were so many stranded cars cluttering the ramps, state police spokesman Steve Jones said. Ambulances couldn't reach the bus, and state troopers were carrying their own water and food to the bus to give to people who were feeling ill, he said.
The state police's superintendent, Col. Rick Fuentes, toured parts of the state in a four-wheel-drive vehicle to assess the conditions of the roadways and pleaded with people to stay home.
Emergency room nurse Tiffany Lema, at Newport Hospital in Rhode Island, said her normally 45-minute commute from Cranston, just south of Providence, was an awful two hours, made all the more harrowing when her husband's truck couldn't get up and over the Newport Bridge. They made a U-turn and parked near an E-ZPass electronic toll payment office, where her father-in-law picked her up and drove her the rest of the way.
"I wasn't going to jump out at any point, so we just turned it around. It was kind of scary," said Lema, who planned to spend the night at the hospital with other nurses. "You could see the car in front of you but not over the hill, not over the bridge."
A blizzard warning, which is issued when snow is accompanied by sustained winds or gusts over 35 mph, was in effect early Monday from Delaware to the far northern tip of Maine. The storm was expected to bring its heaviest snowfall in the pre-dawn hours Monday, sometimes dumping 2 to 4 inches an hour. A total of 12 to 16 inches was expected across nearly all of Rhode Island, Connecticut and eastern Massachusetts, though forecasters said winds of 50 mph could create much deeper snow drifts.
States of emergency were declared in North Carolina, Virginia, Maryland, New Jersey, Maine and Massachusetts, where Gov. Deval Patrick urged people who did not have to be on the roads to stay home, to ensure their safety and that of work crews. Nonessential state workers were told to stay home Monday.
State police in Rhode Island responded to several snow-related car accidents, including at least two rollovers, but no serious injuries were reported.
Air carriers began canceling flights on Saturday and warned that more cancellations were likely Monday. Operations were suspended Sunday at New York's John F. Kennedy International and LaGuardia airports and at New Jersey's Newark Liberty International Airport.
Delta Air Lines, which has canceled 850 flights and expected cancellations Monday in New York and Boston, said it hoped to be back to normal by Tuesday morning, while United Airlines said it could add more flights Monday to accommodate stranded passengers.
Before any snow accumulated in Philadelphia, the NFL moved the Philadelphia Eagles' game against the Minnesota Vikings from Sunday night to Tuesday because of "public safety concerns." Pennsylvania Gov. Ed Rendell, who does football commentaries after Eagles games, wasn't amused and said fans could have handled it.
"This is football; football's played in bad weather," Rendell told KYW-TV. "I, for one, was looking forward to sitting in the stands throughout the snow and seeing an old-time football game."
After he said that, slightly less than a foot of snow fell on the City of Brotherly Love.
In Boston, Mayor Thomas Menino declared a snow emergency that bans parking on all major streets, and the New England Aquarium bubble-wrapped its four 5-foot-tall penguin ice sculptures to protect them from the wind and snow.
More than 2,400 sanitation workers were working in 12-hour shifts to clear New York City's 6,000 miles of streets. Not that Mayor Michael Bloomberg wanted people to use them.
"I understand that a lot of families need to get home after a weekend away, but please don't get on the roads unless you absolutely have to," Bloomberg said.
In Rhode Island, emergency officials encouraged businesses to let employees report to work late Monday, saying road conditions for the morning commute would be treacherous.
"You don't want to get your employees hurt," said Steve Kass, a spokesman for the state Emergency Management Agency. "The roads are not going to be good, that's for sure."
The monster storm is the result of a low pressure system off the North Carolina coast and strengthened as it moved northeast, the National Weather Service said. Because of it, parts of the South had their first white Christmas since records have been kept.
Wednesday, December 22, 2010
Stocks and Investing Look Ahead: Economic Reports Make for Busiest Morning of Week - CNBC
Reports on weekly jobless claims and durable goods could make Thursday morning the busiest trading session of the week, but a shortened day for bonds and commodities markets could quickly turn the session into a sleeper.
U.S. traders will continue to watch for headlines from Europe, though there may be fewer news alerts ahead of the Christmas Eve holiday. The euro [EUR=X 1.3105 0.0008 (+0.06%) ] Wednesday held its own against the dollar, but sunk to a record low against the Swiss franc [EURCHF=X 1.247 0.0004 (+0.03%) ]. The euro set a new low below 1.25 and was at 1.2466 late Wednesday.
"Right now, the path of least resistance is to the downside. The euro is really feeling this pressure against the Swissie," said Boris Schlossberg of GFT Forex. The flight-to-safety play could push the currency even lower against the franc but the trade may be getting overdone, he said.
The Greek parliament late Wednesday adopted its 2011 austerity budget, and there was a report in the Irish Times newspaper Wednesday evening that the Irish government may be preparing to pump 3.7 billion euros into Allied Irish Banks.
"It feels like all of Europe is crowding into the Swiss franc at this point. It's a tiny little economy. It can't absorb all these capital flows," he said, noting the Swiss National Bank may be waiting until after the holidays to intervene.
Schlossberg said the flight to the Swissie highlights the lingering concerns that Europe has not provided a structural solution to its sovereign debt problems, and next year, there will be a new round of sovereign issuance that will test the markets. "Spain is the big elephant in the room because it has massive refinancing needs," he said.
"The real white knight might be China," he said. China has indicated it will support the EU's efforts to stabilize markets with purchases of sovereign debt. "The Chinese have no interest in having the dollar be the sole reserve currency. They want to do everything in their power to have a multipolar regime."
Stocks on Wednesday continued their slow drift higher, with the Dow [.DJIA 11559.49 26.33 (+0.23%) ] gaining 26 to 11,559, and the S&P 500 [.SPX 1258.84 4.24 (+0.34%) ] up 4 at 1258. Bonds traded lower, with the yield on the 10-year rising to 3.342 percent.
Wednesday's data included a revision to third quarter GDP, which came in at 2.6 percent, below the 2.9 percent expected.
"The GDP number was really softer. It should have helped us. It really didn't. I think the market is just trading softer because of the pending supply and the fact the (Fed) buybacks are out of the way," said Rick Klingman, managing director of Treasury trading at BNP Paribas.
Next week, the Treasury auctions $99 billion in 2-, 5- and 7-year notes. Klingman said the market is watching Thursday's data with interest. Bond futures close at 1 p.m., and the bond market closes at 2 p.m.
"In a thin market, with some important information, if it comes way out of consensus, it definitely could move things," he said.
Weekly jobless claims, durable goods, and personal income and spending are reported at 8:30 a.m. Consumer sentiment is released at 9:55 a.m., and new home sales are released at 10 a.m.
Crude oil Wednesday gained $0.66 per barrel to finish at $90.48, its highest close since Oct. 7, 2008. For the month, oil is up 7.6 percent, and year-to-date, it's up 14 percent.
U.S. traders will continue to watch for headlines from Europe, though there may be fewer news alerts ahead of the Christmas Eve holiday. The euro [EUR=X 1.3105 0.0008 (+0.06%) ] Wednesday held its own against the dollar, but sunk to a record low against the Swiss franc [EURCHF=X 1.247 0.0004 (+0.03%) ]. The euro set a new low below 1.25 and was at 1.2466 late Wednesday.
"Right now, the path of least resistance is to the downside. The euro is really feeling this pressure against the Swissie," said Boris Schlossberg of GFT Forex. The flight-to-safety play could push the currency even lower against the franc but the trade may be getting overdone, he said.
The Greek parliament late Wednesday adopted its 2011 austerity budget, and there was a report in the Irish Times newspaper Wednesday evening that the Irish government may be preparing to pump 3.7 billion euros into Allied Irish Banks.
"It feels like all of Europe is crowding into the Swiss franc at this point. It's a tiny little economy. It can't absorb all these capital flows," he said, noting the Swiss National Bank may be waiting until after the holidays to intervene.
Schlossberg said the flight to the Swissie highlights the lingering concerns that Europe has not provided a structural solution to its sovereign debt problems, and next year, there will be a new round of sovereign issuance that will test the markets. "Spain is the big elephant in the room because it has massive refinancing needs," he said.
"The real white knight might be China," he said. China has indicated it will support the EU's efforts to stabilize markets with purchases of sovereign debt. "The Chinese have no interest in having the dollar be the sole reserve currency. They want to do everything in their power to have a multipolar regime."
Stocks on Wednesday continued their slow drift higher, with the Dow [.DJIA 11559.49 26.33 (+0.23%) ] gaining 26 to 11,559, and the S&P 500 [.SPX 1258.84 4.24 (+0.34%) ] up 4 at 1258. Bonds traded lower, with the yield on the 10-year rising to 3.342 percent.
Wednesday's data included a revision to third quarter GDP, which came in at 2.6 percent, below the 2.9 percent expected.
"The GDP number was really softer. It should have helped us. It really didn't. I think the market is just trading softer because of the pending supply and the fact the (Fed) buybacks are out of the way," said Rick Klingman, managing director of Treasury trading at BNP Paribas.
Next week, the Treasury auctions $99 billion in 2-, 5- and 7-year notes. Klingman said the market is watching Thursday's data with interest. Bond futures close at 1 p.m., and the bond market closes at 2 p.m.
"In a thin market, with some important information, if it comes way out of consensus, it definitely could move things," he said.
Weekly jobless claims, durable goods, and personal income and spending are reported at 8:30 a.m. Consumer sentiment is released at 9:55 a.m., and new home sales are released at 10 a.m.
Crude oil Wednesday gained $0.66 per barrel to finish at $90.48, its highest close since Oct. 7, 2008. For the month, oil is up 7.6 percent, and year-to-date, it's up 14 percent.
Existing Home Sales Edge Up 5.6% in November - CNBC
Sales of previously owned homes rose less than expected in November, suggesting the U.S. housing sector is still struggling to gain traction as high unemployment and tight lending standards continue to hamper recovery.
Sales rose 5.6 percent to a seasonally adjusted annual unit rate of 4.68 million units, the National Association of Realtors said on Wednesday.
Economists polled by Reuters had been looking for a pace of about 4.71 million units.
NAR chief economist Lawrence Yun said about one-third of the market consisted of distressed sales, which include both foreclosures and sales of homes where the bank agrees to take less than what is owed.
Overall sales have fallen 27.9 percent over the past year, while median prices have risen 0.4 percent to $170,600 in the same period. That marks the first annual price increase since August.
Yun said the group expects sales to total about 4.8 million units for all of 2010. He expects sales to rebound to what he considers a "healthy" pace of around 5.2 million by 2011.
Earlier Wednesday, the Mortgage Bankers Association said US mortgage applications tumbled to their lowest level in nearly a year as a six-week-long rise in interest rates took a significant toll on demand.
Sales rose 5.6 percent to a seasonally adjusted annual unit rate of 4.68 million units, the National Association of Realtors said on Wednesday.
Economists polled by Reuters had been looking for a pace of about 4.71 million units.
NAR chief economist Lawrence Yun said about one-third of the market consisted of distressed sales, which include both foreclosures and sales of homes where the bank agrees to take less than what is owed.
Overall sales have fallen 27.9 percent over the past year, while median prices have risen 0.4 percent to $170,600 in the same period. That marks the first annual price increase since August.
Yun said the group expects sales to total about 4.8 million units for all of 2010. He expects sales to rebound to what he considers a "healthy" pace of around 5.2 million by 2011.
Earlier Wednesday, the Mortgage Bankers Association said US mortgage applications tumbled to their lowest level in nearly a year as a six-week-long rise in interest rates took a significant toll on demand.
Fed Action Has Aided Stocks, Not Rates or Jobs: CNBC Survey - CNBC
The Federal Reserve’s policy to purchase $600 billion of bonds in a program widely known as QE2 has been mostly ineffective at lowering interest rates and will do little to improve the unemployment rate, according to the exclusive CNBC Fed Survey in December.
The survey of 76 economists, bond and stock traders, and analysts, found 63 percent saying the Fed’s program has been ineffective at lowering interest rates.
A similar percentage believes the program will not help lower the unemployment rate.
“I see QE2 as mainly pushing on a string,” wrote Scott Wren, senior equity strategist at Wells Fargo [WFC 30.98 0.16 (+0.52%) ] Advisors.
But respondents to the survey say the Fed program has played an important part in raising stock and commodity prices.
In fact, nearly three-quarters of the group say the Fed’s bond purchase program has helped raise stock prices, while 63 percent see it as a reason why commodity prices are higher.
As a result, some see QE2 as a success for pushing up inflation expectations and the stock market. “Those that say the asset-purchase program is a failure are too narrowly focused on the yield on the 10-year Treasury note,’’ wrote Tony Crescenzi, senior vice-president, strategist, portfolio manager of Pimco.
“A substantial effect of the asset-purchase program is that it has led investors to believe that short-term rates will be kept low for an extended extended period. This compels investors to take risk, buoying risk assets,” said Crescenzi.
The Federal Reserve has been the subject of strong criticism since launching its QE2 program in November. Fed Chairman Ben Bernanke suggested it was a way to lower interest rates and unemployment. Since November, however, yields on treasuries have risen by nearly a percentage point.
Asked the reason for the increase in yields, 61 percent of the survey respondents said the main reason was a stronger growth outlook. Their next choice was a worsening outlook for the deficit, likely the result of the recent tax compromise in Washington, followed by a rise in the inflation forecast.
"The economy is strengthening and the extension of the Bush tax cuts for all taxpayers is playing a more important role in boosting growth expectations than QE2 is," says RDQ Economics chief economist John Ryding.
Overall, 72 percent believe the Fed will follow through and purchase the entire $600 billion of Treasuries announced in November. Twenty percent believe the Fed will do less than that amount, and 8 percent think the Fed will do more.
“I doubt the Fed will complete all $600 billion,’’ wrote Chris Rupkey, chief economist at Bank of Tokyo Mitsubishi. “I think they pull the plug on this at April 26-27 meeting, as the outlook will have changed. And if they don't do it, Ron Paul will.”
As for QE3, 41 percent of market participants think there is a chance the Fed will continue to increase the size of its portfolio after June 2011. On average, those who believe in QE3 look for the Fed to add an additional $340 billion in purchases.
But Mark Zandi, Chief Economist at Moody's Analytics [MCO 26.36 0.09 (+0.34%) ], disagrees, saying, "The passage of the tax cut deal significantly improves the economy's prospects in 2011 and reduces the need for any additional QE."
Add it all up, and 42 percent of survey participants give Fed Chairman Ben Bernanke a "B" grade and 26 percent give him an "A," including Mark Vitner, managing director and senior economist at Wells Fargo.
He says, "Bernanke gets a high grade because he is making the best of the lousy policy options that are available to him. He also gets points for having the bravery to go where no Fed chairman has gone before."
Still, almost a third of the group gives Bernanke a "C" or lower. Nearly two-thirds say the Fed has communicated its reasons for QE2 clearly.
The survey of 76 economists, bond and stock traders, and analysts, found 63 percent saying the Fed’s program has been ineffective at lowering interest rates.
A similar percentage believes the program will not help lower the unemployment rate.
“I see QE2 as mainly pushing on a string,” wrote Scott Wren, senior equity strategist at Wells Fargo [WFC 30.98 0.16 (+0.52%) ] Advisors.
But respondents to the survey say the Fed program has played an important part in raising stock and commodity prices.
In fact, nearly three-quarters of the group say the Fed’s bond purchase program has helped raise stock prices, while 63 percent see it as a reason why commodity prices are higher.
As a result, some see QE2 as a success for pushing up inflation expectations and the stock market. “Those that say the asset-purchase program is a failure are too narrowly focused on the yield on the 10-year Treasury note,’’ wrote Tony Crescenzi, senior vice-president, strategist, portfolio manager of Pimco.
“A substantial effect of the asset-purchase program is that it has led investors to believe that short-term rates will be kept low for an extended extended period. This compels investors to take risk, buoying risk assets,” said Crescenzi.
The Federal Reserve has been the subject of strong criticism since launching its QE2 program in November. Fed Chairman Ben Bernanke suggested it was a way to lower interest rates and unemployment. Since November, however, yields on treasuries have risen by nearly a percentage point.
Asked the reason for the increase in yields, 61 percent of the survey respondents said the main reason was a stronger growth outlook. Their next choice was a worsening outlook for the deficit, likely the result of the recent tax compromise in Washington, followed by a rise in the inflation forecast.
"The economy is strengthening and the extension of the Bush tax cuts for all taxpayers is playing a more important role in boosting growth expectations than QE2 is," says RDQ Economics chief economist John Ryding.
Overall, 72 percent believe the Fed will follow through and purchase the entire $600 billion of Treasuries announced in November. Twenty percent believe the Fed will do less than that amount, and 8 percent think the Fed will do more.
“I doubt the Fed will complete all $600 billion,’’ wrote Chris Rupkey, chief economist at Bank of Tokyo Mitsubishi. “I think they pull the plug on this at April 26-27 meeting, as the outlook will have changed. And if they don't do it, Ron Paul will.”
As for QE3, 41 percent of market participants think there is a chance the Fed will continue to increase the size of its portfolio after June 2011. On average, those who believe in QE3 look for the Fed to add an additional $340 billion in purchases.
But Mark Zandi, Chief Economist at Moody's Analytics [MCO 26.36 0.09 (+0.34%) ], disagrees, saying, "The passage of the tax cut deal significantly improves the economy's prospects in 2011 and reduces the need for any additional QE."
Add it all up, and 42 percent of survey participants give Fed Chairman Ben Bernanke a "B" grade and 26 percent give him an "A," including Mark Vitner, managing director and senior economist at Wells Fargo.
He says, "Bernanke gets a high grade because he is making the best of the lousy policy options that are available to him. He also gets points for having the bravery to go where no Fed chairman has gone before."
Still, almost a third of the group gives Bernanke a "C" or lower. Nearly two-thirds say the Fed has communicated its reasons for QE2 clearly.
Monday, December 20, 2010
Retail: Retail Sales Strong Heading Into Final Days Before Christmas - CNBC
Cash registers are continuing to ring up big sales in the final days before Christmas, easing fears of a front-loaded holiday season.
Customer Growth Partners President Craig Johnson expects this holiday season to surpass 2007's total sales record of $508 billion. This means that not only will this holiday season post the strongest year-over-year growth since 2005's 6.1 percent gain, but it could be the best since 1999's 8.8 percent increase, he said.
"If Christmas retail does indeed approach anywhere near the 1999 growth rate, it will have significant broader economic implications, given that the consumer is 70 percent of the economy," Johnson said. "In 1999, when retail sales rose 8.8 percent, fourth-quarter GDP growth was 7.4 percent, and the following full-year 2000 growth rate was a solid 4.1 percent."
Mastercard Advisors' SpendingPulse, a macroeconomic report tracking retail and services sales across all payment forms, said the sales in the first two weeks of December continued November's momentum.
Some of the strongest growth is coming from eCommerce and apparel sales, according to SpendingPulse. The report found eCommerce sales rose 13.5 percent and apparel sales were up 9.8 percent from the start of the holiday season through Dec. 11 compared with the same period a year ago.
Much the growth in apparel has coming from sales of men's and women's clothing, with women's apparel purchases up 4.4 percent and men's apparel sales up 8.4 percent.
Jewelry and luxury sales also are posting gains. Jewelry sales are up 2.6%, while the rest of the luxury category posted a 2.8 percent gain over the same period last year.
Jewelry sales have been trending upward, which bodes well for this week, when the bulk of the holiday jewelry purchases tend to be made.
About 40 percent of December's retail jewelry sales occur in the seven days before Christmas, according to Mike Berry, director of industry research at SpendingPulse.
But electronics sales continue to be hurt by lower prices for flat panel televisions. Sales for the season-to-date are only up 0.4 percent from last year.
"They are under a lot of pricing pressure, especially compared with last year," Berry said. "There is only so much that can be overcome by the increase in volume."
There is some time to shift the balance. According to ShopperTrak, about one-third of all holiday sales occur during the last week of the holiday season.
No doubt many are waiting for big bargains, but discounts aren't likely to be as deep as last year.
A new survey by Nielson shows that 46 percent of Americans will be shopping this week. One fifth of them said they waited in order to get last-minute deals. (Some 18 percent said they waited because they enjoy shopping the last week of the shopping season.)
Nielson has been expecting a more balanced level of essential and discretionary spending this holiday season, and they were expecting online retailer to experience the biggest surge in sales. That looks like it is playing out.
Promotions have been a big part of the online shopping story, with retailers planning several big promotional events such as "Free Shipping Day," which occurred on Dec. 17. On that day, more than 1,500 merchants participated in the event by offering free shipping and other deals to customers.
Despite these events, online promotions have been very targeted this year. Some offers go to selected customers; others are having mystery sales. But clearly there aren't signs of retailers looking to clear out inventory at any cost, and that's encouraging.
ComScore is projecting that $27.46 billion has been spent online in the first 47 days of the November to December holiday season, which is a 12 percent increase compared with the same period last year. However sales in the most recent week ended Dec. 17 reached $5.15 billion, a 14 percent increase from the corresponding week last year.
There were four individual days last week where sales topped $900 million. The strongest was so-called Green Monday (Dec. 13) with $954 million in sales and Free Shipping Day with $942 million.
The promotion behind Free Shipping Day made the event much larger than it was last year. Sales were up 61 percent than the corresponding shopping day last year, showing the appeal of free shipping offers.
Retailers have been looking for ways to make it easy for consumers to shop, and deadlines for online offers have been extended by many retailers. Wal-Mart Stores [WMT 53.77 -0.64 (-1.18%) ] has extended free shipping on nearly 60,000 items, including all electronics with no minimum purchase through 11:30 p.m. Pacific time Monday.
But these extensions may be signs of scrambling. Johnson said the strength of this season's sales are helping retailers across the board, but he sees Wal-mart, Sears [SHLD 68.44 0.66 (+0.97%) ], Gap [GPS 21.16 -0.03 (-0.14%) ], and Talbots [TLB 8.51 -0.09 (-1.05%) ] as notable exceptions.
Customer Growth Partners President Craig Johnson expects this holiday season to surpass 2007's total sales record of $508 billion. This means that not only will this holiday season post the strongest year-over-year growth since 2005's 6.1 percent gain, but it could be the best since 1999's 8.8 percent increase, he said.
"If Christmas retail does indeed approach anywhere near the 1999 growth rate, it will have significant broader economic implications, given that the consumer is 70 percent of the economy," Johnson said. "In 1999, when retail sales rose 8.8 percent, fourth-quarter GDP growth was 7.4 percent, and the following full-year 2000 growth rate was a solid 4.1 percent."
Mastercard Advisors' SpendingPulse, a macroeconomic report tracking retail and services sales across all payment forms, said the sales in the first two weeks of December continued November's momentum.
Some of the strongest growth is coming from eCommerce and apparel sales, according to SpendingPulse. The report found eCommerce sales rose 13.5 percent and apparel sales were up 9.8 percent from the start of the holiday season through Dec. 11 compared with the same period a year ago.
Much the growth in apparel has coming from sales of men's and women's clothing, with women's apparel purchases up 4.4 percent and men's apparel sales up 8.4 percent.
Jewelry and luxury sales also are posting gains. Jewelry sales are up 2.6%, while the rest of the luxury category posted a 2.8 percent gain over the same period last year.
Jewelry sales have been trending upward, which bodes well for this week, when the bulk of the holiday jewelry purchases tend to be made.
About 40 percent of December's retail jewelry sales occur in the seven days before Christmas, according to Mike Berry, director of industry research at SpendingPulse.
But electronics sales continue to be hurt by lower prices for flat panel televisions. Sales for the season-to-date are only up 0.4 percent from last year.
"They are under a lot of pricing pressure, especially compared with last year," Berry said. "There is only so much that can be overcome by the increase in volume."
There is some time to shift the balance. According to ShopperTrak, about one-third of all holiday sales occur during the last week of the holiday season.
No doubt many are waiting for big bargains, but discounts aren't likely to be as deep as last year.
A new survey by Nielson shows that 46 percent of Americans will be shopping this week. One fifth of them said they waited in order to get last-minute deals. (Some 18 percent said they waited because they enjoy shopping the last week of the shopping season.)
Nielson has been expecting a more balanced level of essential and discretionary spending this holiday season, and they were expecting online retailer to experience the biggest surge in sales. That looks like it is playing out.
Promotions have been a big part of the online shopping story, with retailers planning several big promotional events such as "Free Shipping Day," which occurred on Dec. 17. On that day, more than 1,500 merchants participated in the event by offering free shipping and other deals to customers.
Despite these events, online promotions have been very targeted this year. Some offers go to selected customers; others are having mystery sales. But clearly there aren't signs of retailers looking to clear out inventory at any cost, and that's encouraging.
ComScore is projecting that $27.46 billion has been spent online in the first 47 days of the November to December holiday season, which is a 12 percent increase compared with the same period last year. However sales in the most recent week ended Dec. 17 reached $5.15 billion, a 14 percent increase from the corresponding week last year.
There were four individual days last week where sales topped $900 million. The strongest was so-called Green Monday (Dec. 13) with $954 million in sales and Free Shipping Day with $942 million.
The promotion behind Free Shipping Day made the event much larger than it was last year. Sales were up 61 percent than the corresponding shopping day last year, showing the appeal of free shipping offers.
Retailers have been looking for ways to make it easy for consumers to shop, and deadlines for online offers have been extended by many retailers. Wal-Mart Stores [WMT 53.77 -0.64 (-1.18%) ] has extended free shipping on nearly 60,000 items, including all electronics with no minimum purchase through 11:30 p.m. Pacific time Monday.
But these extensions may be signs of scrambling. Johnson said the strength of this season's sales are helping retailers across the board, but he sees Wal-mart, Sears [SHLD 68.44 0.66 (+0.97%) ], Gap [GPS 21.16 -0.03 (-0.14%) ], and Talbots [TLB 8.51 -0.09 (-1.05%) ] as notable exceptions.
Europe Weather - Snow and Ice Cancel Pre-Christmas Travel in Europe - CNBC
Stranded travelers slept on makeshift beds at European airports as wintry weather caused travel havoc, dashing the hopes of those attempting to head away for the holidays by road, rail and air.
It is almost inevitable that some cancelations and delays will continue through this week, potentially causing further disruption for many Christmas travelers, British travel industry group ABTA said.
Heathrow Airport, Europe's busiest hub for air passengers, stopped accepting arrivals Sunday at the start of the Christmas travel rush.
"The domino effect of disruption to services could continue for some days to come," Heathrow spokesman Andrew Teacher said.
Icy conditions curtailed Europe's high speed train services, left cars skidding through slushy streets and saw major events postponed — including music shows and sporting events.
In Paris, a Lady Gaga concert was canceled because trucks delivering sets for the pop diva's extravagant event couldn't get to the city's Bercy stadium. The show was expected to be rescheduled for Tuesday.
British pop star Lily Allen was among those caught in the travel chaos in London, where several thousand people spent the night on the floors of terminal buildings at the city's major airports.
"Bad start to a much needed holiday," Allen said in a post on her Twitter account after her flight was canceled.
About 40 percent of flights were canceled at Frankfurt airport and at Paris' Charles de Gaulle.
Passengers slept in makeshift dormitories at the Paris airport and at Amsterdam's Schiphol, while staff at Heathrow and Gatwick airports in London handed out foam mats and foil blankets to the stranded.
Some fashioned improvised beds from clothes, chairs and stacked suitcases. "Dad are we in Argentina yet?" one elementary school child sobbed, as his father bought sandwiches, playing cards and comic books from a store inside a Heathrow terminal building.
Janos Kalman, a 50-year-old psychiatrist from Szeged in Hungary, said he had braved a night on a terminal floor at Heathrow after his flight to Budapest was canceled. "I've seen people crying and panicking, and the staff trying to cope with it all," he said.
London subway trains were packed with dejected holiday travelers in search of hotel rooms, while many tourists complained there was little clear information amid the chaotic scenes at the city's airports.
"There seems to be a lot of confusion and I have only seen one Heathrow worker. All the airline desks are shut because it is a Sunday — it's absolutely ridiculous," said Elizabeth Herridge, who arrived at the airport to learn her flight to Amsterdam had been canceled.
Airports and tour operators acknowledged there would likely be some disruption to flights through next week, with many aircraft currently stuck in the wrong location. "Inevitably there is always some knock-on effect when there's a situation like this. People will need to consult with their airlines next week to check on their flights," said Sean Tipton, spokesman for Britain's ABTA.
However, he said the disruption caused by Europe's blast of icy weather was minor compared to the chaos triggered by the giant ash cloud spewed from Iceland's Eyjafjallajokull volcano earlier this year.
"To those people caught up in the disruption that's not going to be much consolation," Tipton said.
Britain's national weather forecaster, the Met Office, said the nation has experienced the heaviest snow falls in December in decades and is on course for record low temperatures.
"You have to look back to December 1981 to find similar snow depths," forecaster Helen Chivers said. "If the second half of the month is as cold as the first, this will be the coldest December on record since 1910." France is also having one of its snowiest winters in years.
Many TGV fast trains were running slower than usual, tacking about 20 minutes on to each journey.
Eurostar trains to Britain and Thalys trains to Belgium and the Netherlands were also affected. French weather service Meteo France said it forecasts more snow for the Paris region for Monday and a risk of snow and ice in Paris on Dec. 26 — another major travel day.
In Italy, Florence's airport remained closed Sunday morning amid snow and ice storms that blanketed Tuscany. At Frankfurt airport, Germany's biggest, more than 500 flights were canceled Sunday out of a planned total of 1,330 departures and arrivals.
Temperatures dipped to below -20 C (-4 F) in some parts of Scandinavia, where meteorologists warned snow was piling up on the icy roads following heavy snowfall and strong winds. Airports were operating normally, but several long-distance trains were delayed.
Soccer games in England, Scotland, France and the Netherlands were called off as a result of the conditions, including a high-profile match scheduled for Sunday in London between Chelsea and Manchester United.
It is almost inevitable that some cancelations and delays will continue through this week, potentially causing further disruption for many Christmas travelers, British travel industry group ABTA said.
Heathrow Airport, Europe's busiest hub for air passengers, stopped accepting arrivals Sunday at the start of the Christmas travel rush.
"The domino effect of disruption to services could continue for some days to come," Heathrow spokesman Andrew Teacher said.
Icy conditions curtailed Europe's high speed train services, left cars skidding through slushy streets and saw major events postponed — including music shows and sporting events.
In Paris, a Lady Gaga concert was canceled because trucks delivering sets for the pop diva's extravagant event couldn't get to the city's Bercy stadium. The show was expected to be rescheduled for Tuesday.
British pop star Lily Allen was among those caught in the travel chaos in London, where several thousand people spent the night on the floors of terminal buildings at the city's major airports.
"Bad start to a much needed holiday," Allen said in a post on her Twitter account after her flight was canceled.
About 40 percent of flights were canceled at Frankfurt airport and at Paris' Charles de Gaulle.
Passengers slept in makeshift dormitories at the Paris airport and at Amsterdam's Schiphol, while staff at Heathrow and Gatwick airports in London handed out foam mats and foil blankets to the stranded.
Some fashioned improvised beds from clothes, chairs and stacked suitcases. "Dad are we in Argentina yet?" one elementary school child sobbed, as his father bought sandwiches, playing cards and comic books from a store inside a Heathrow terminal building.
Janos Kalman, a 50-year-old psychiatrist from Szeged in Hungary, said he had braved a night on a terminal floor at Heathrow after his flight to Budapest was canceled. "I've seen people crying and panicking, and the staff trying to cope with it all," he said.
London subway trains were packed with dejected holiday travelers in search of hotel rooms, while many tourists complained there was little clear information amid the chaotic scenes at the city's airports.
"There seems to be a lot of confusion and I have only seen one Heathrow worker. All the airline desks are shut because it is a Sunday — it's absolutely ridiculous," said Elizabeth Herridge, who arrived at the airport to learn her flight to Amsterdam had been canceled.
Airports and tour operators acknowledged there would likely be some disruption to flights through next week, with many aircraft currently stuck in the wrong location. "Inevitably there is always some knock-on effect when there's a situation like this. People will need to consult with their airlines next week to check on their flights," said Sean Tipton, spokesman for Britain's ABTA.
However, he said the disruption caused by Europe's blast of icy weather was minor compared to the chaos triggered by the giant ash cloud spewed from Iceland's Eyjafjallajokull volcano earlier this year.
"To those people caught up in the disruption that's not going to be much consolation," Tipton said.
Britain's national weather forecaster, the Met Office, said the nation has experienced the heaviest snow falls in December in decades and is on course for record low temperatures.
"You have to look back to December 1981 to find similar snow depths," forecaster Helen Chivers said. "If the second half of the month is as cold as the first, this will be the coldest December on record since 1910." France is also having one of its snowiest winters in years.
Many TGV fast trains were running slower than usual, tacking about 20 minutes on to each journey.
Eurostar trains to Britain and Thalys trains to Belgium and the Netherlands were also affected. French weather service Meteo France said it forecasts more snow for the Paris region for Monday and a risk of snow and ice in Paris on Dec. 26 — another major travel day.
In Italy, Florence's airport remained closed Sunday morning amid snow and ice storms that blanketed Tuscany. At Frankfurt airport, Germany's biggest, more than 500 flights were canceled Sunday out of a planned total of 1,330 departures and arrivals.
Temperatures dipped to below -20 C (-4 F) in some parts of Scandinavia, where meteorologists warned snow was piling up on the icy roads following heavy snowfall and strong winds. Airports were operating normally, but several long-distance trains were delayed.
Soccer games in England, Scotland, France and the Netherlands were called off as a result of the conditions, including a high-profile match scheduled for Sunday in London between Chelsea and Manchester United.
Sunday, December 19, 2010
Korea Conflict: Seoul to Go Ahead with Drills Despite Threats of War - CNBC
South Korea will go ahead with live firing drills from a disputed island on Monday, local media said, despite threats of attack by Pyongyang and pressure from Russia and China to cancel the exercise.
The drills were delayed from the weekend by bad weather, giving time for an emergency U.N. Security Council meeting to try to calm tensions. But the meeting ended without agreement after more than eight hours of talks, with the five big powers split on whether to publicly blame North Korea for the crisis.
The meeting may resume on Monday but Susan Rice, the U.S. ambassador to the U.N., said disagreements between the major powers were "unlikely to be bridged".
The last time Seoul conducted live firing drills from Yeonpyeong close to the disputed maritime border off the west coast of the peninsula, Pyongyang shelled the island, killing two civilians and two marines in the worst attack on South Korean territory since the Korean war ended in 1953.
North Korea warned last week that it would strike even harder id the latest drills went ahead. China and Russia have said the exercise should not go ahead, while the United States has backed South Korea's right to hold the drills.
The tension hit Korean markets when they opened on Monday, with the won falling more than one percent to a four-week low against the dollar and stocks also down one percent.
Pyongyang has raised an alert for artillery units along its west coast, Yonhap news agency said, quoting a South Korean government source.
Marines on Yeonpyeong ordered residents into air raid bunkers ahead of the expected start of the drill. Korean TV said residents of nearby islands were also told to take cover.
Both sides have said they will use force to defend what they say is their territory off the west coast, raising international concern that the standoff could quickly spiral out of control.
The 15 Security Council had met behind closed doors to try to agree on a statement that Russian U.N. Ambassador Vitaly Churkin said he hoped would send a "restraining signal" to both the North and the South.
Western envoys inside the meeting said the five permanent veto-wielding members were split over whether to blame North Korea for the crisis, as the United States, Britain, and France — along with Japan — demand, or to urge both sides to avoid acts that could deepen the crisis, as Russia and China want.
The Chinese, North Korea's staunchest supporters on the council, and Russians reject the idea of assigning blame to Pyongyang, the envoys told Reuters on condition of anonymity.
The U.S., British and French delegations rejected a Russian draft that called for U.N. Secretary-General Ban Ki-moon to send an envoy to Seoul and Pyongyang and urged the two sides to exercise "maximum restraint".
Russia and China then revised the text to make it more acceptable to the Western powers, but this was not enough to win an agreement.
U.S. and Chinese officials have described the situation on the peninsula as "extremely precarious" and a "tinderbox".
The U.N. Secretariat distributed to council members a document on an investigation of the Nov. 23 shelling by the so-called U.N. Command, the U.S.-led military forces in South Korea that monitor compliance with the 1953 Armistice Agreement that ended the Korean War.
That probe concluded the South did not violate the armistice with its Nov. 23 military drills in disputed waters, while the North committed a "deliberate and premeditated attack" that was a "serious violation" of the cease-fire, according to the document, which was obtained by Reuters.
North Korea has called the artillery fire drill by the South a suicidal war move that would trigger all-out conflict on the peninsula and said it would strike back in self-defence.
The South has said if it was attacked in the same manner as last month, it would hit back hard with air power and bombing.
Analysts were sceptical the North would carry through with its threats. The North will likely respond by holding a live-fire drill on its side of the tensely guarded sea border if the South goes ahead with its exercise, they said.
Seoul appears determined to go ahead, anxious to avoid a repeat of domestic criticism in November for its perceived weak response to the shelling of Yeonpyeong.
South Korea's marines plan to test artillery firing from the island targeting its territorial waters to its southwest, the same type of exercise that led to last month's exchange of fire.
Concern mounted on the island among the few residents who remained.
"I see they have to do what they have to do, but the people here want peace and quiet," Dan Choon-nam said after a tearful church service on Sunday. "We want things to be back to how they were."
The drills were delayed from the weekend by bad weather, giving time for an emergency U.N. Security Council meeting to try to calm tensions. But the meeting ended without agreement after more than eight hours of talks, with the five big powers split on whether to publicly blame North Korea for the crisis.
The meeting may resume on Monday but Susan Rice, the U.S. ambassador to the U.N., said disagreements between the major powers were "unlikely to be bridged".
The last time Seoul conducted live firing drills from Yeonpyeong close to the disputed maritime border off the west coast of the peninsula, Pyongyang shelled the island, killing two civilians and two marines in the worst attack on South Korean territory since the Korean war ended in 1953.
North Korea warned last week that it would strike even harder id the latest drills went ahead. China and Russia have said the exercise should not go ahead, while the United States has backed South Korea's right to hold the drills.
The tension hit Korean markets when they opened on Monday, with the won falling more than one percent to a four-week low against the dollar and stocks also down one percent.
Pyongyang has raised an alert for artillery units along its west coast, Yonhap news agency said, quoting a South Korean government source.
Marines on Yeonpyeong ordered residents into air raid bunkers ahead of the expected start of the drill. Korean TV said residents of nearby islands were also told to take cover.
Both sides have said they will use force to defend what they say is their territory off the west coast, raising international concern that the standoff could quickly spiral out of control.
The 15 Security Council had met behind closed doors to try to agree on a statement that Russian U.N. Ambassador Vitaly Churkin said he hoped would send a "restraining signal" to both the North and the South.
Western envoys inside the meeting said the five permanent veto-wielding members were split over whether to blame North Korea for the crisis, as the United States, Britain, and France — along with Japan — demand, or to urge both sides to avoid acts that could deepen the crisis, as Russia and China want.
The Chinese, North Korea's staunchest supporters on the council, and Russians reject the idea of assigning blame to Pyongyang, the envoys told Reuters on condition of anonymity.
The U.S., British and French delegations rejected a Russian draft that called for U.N. Secretary-General Ban Ki-moon to send an envoy to Seoul and Pyongyang and urged the two sides to exercise "maximum restraint".
Russia and China then revised the text to make it more acceptable to the Western powers, but this was not enough to win an agreement.
U.S. and Chinese officials have described the situation on the peninsula as "extremely precarious" and a "tinderbox".
The U.N. Secretariat distributed to council members a document on an investigation of the Nov. 23 shelling by the so-called U.N. Command, the U.S.-led military forces in South Korea that monitor compliance with the 1953 Armistice Agreement that ended the Korean War.
That probe concluded the South did not violate the armistice with its Nov. 23 military drills in disputed waters, while the North committed a "deliberate and premeditated attack" that was a "serious violation" of the cease-fire, according to the document, which was obtained by Reuters.
North Korea has called the artillery fire drill by the South a suicidal war move that would trigger all-out conflict on the peninsula and said it would strike back in self-defence.
The South has said if it was attacked in the same manner as last month, it would hit back hard with air power and bombing.
Analysts were sceptical the North would carry through with its threats. The North will likely respond by holding a live-fire drill on its side of the tensely guarded sea border if the South goes ahead with its exercise, they said.
Seoul appears determined to go ahead, anxious to avoid a repeat of domestic criticism in November for its perceived weak response to the shelling of Yeonpyeong.
South Korea's marines plan to test artillery firing from the island targeting its territorial waters to its southwest, the same type of exercise that led to last month's exchange of fire.
Concern mounted on the island among the few residents who remained.
"I see they have to do what they have to do, but the people here want peace and quiet," Dan Choon-nam said after a tearful church service on Sunday. "We want things to be back to how they were."
Wall Street Investors Ready to Place Their 'Bets' for 2011 - CNBC
Investors will be taking advantage next week of the some of the last remaining trading days of the year to place their bets on what will be the winners of 2011.
One of the defining characteristics of 2010 has been the strong correlation across asset classes. Movements in the dollar or in bonds had just as much impact on equities as more fundamental factors, such as corporate outlooks.
The tight relationships came as investors focused on the same factors—further stimulus from the Federal Reserve, sovereign debt worries in the euro zone and the strength of the economic recovery.
The macro focus has meant investors made the same trades rather than differentiating individual sectors and industries.
"No matter how much work you put in trying to pick winners and losers, the profit available from doing so was way below normal," said Charlie Blood, director of financial markets strategy at Brown Brothers Harriman in New York.
Analysts expect that correlation to ease in the coming year, allowing sectors to see more divergence and affording investors more chances to outperform the market.
"It's structurally just unsustainable to have that kind of (correlation) because it doesn't allow for diversification," said Nicholas Colas, chief market strategist at the ConvergEx Group in New York.
"I do think it has to reverse—it's just not a healthy part of the capital market," he said.
Even as investors reposition themselves, the broad market is likely to drift until year-end with next week shortened by the Christmas holiday. Indeed, Wall Street's fear gauge, the CBOE Volatility index, or VIX, Friday fell to its lowest level since April.
Investors will also take in a round of economic data next week, including the final reading of gross domestic product for the third quarter, new and existing home sales for November and December consumer sentiment.
Too Hot to Handle
Stocks that have been the best performers for the year are already seeing a pullback, suggesting investors are happy to lock in profits as they search for fresh opportunities.
Salesforce.com, [CRM 136.50 -1.03 (-0.75%) ]one of the best-performing stocks on the S&P 500 this year, has backed off this week, sliding 8.1 percent. Even so, the stock is up 85 percent for the year.
Mid-cap Netflix, [NFLX 180.02 -1.63 (-0.9%) ] another investor favorite this year, has shed 12.6 percent since the beginning of December, though that still leaves the stock up some 226 percent this year.
Similarly, small- and mid-cap indexes have outpaced blue chips with the S&P MidCap 400 index and S&P SmallCap 600 index both up more than 24 percent in the year to date compared to the S&P 500's 11.6 percent gain.
But with valuations on smaller companies becoming stretched, investors are likely to shift into blue-chip names next year, said Bob Gorman, chief portfolio strategist at TD Wealth Management in Toronto.
"The extent of the valuation gap would suggest to us you probably start to see that rotation into bigger companies with more consistent sales, earnings and dividend growth and that are selling at lower multiples," said Gorman.
Investors will also continue to put their faith in technology shares next year on the expectation they will benefit from corporate and consumer spending as well as strong balance sheets.
The sector's sensitivity to the economy made for a lackluster performance for the sector overall this year with the S&P tech sector gaining 8.7 percent, though some of the year's best gainers were in the tech space.
Financials are starting to look favorable to some, particularly with the possibility the large banks could resume paying dividends next year, but others view the uncertainties of financial reform as too much of a headwind.
Colas said he likes financials as a contrarian play, noting: "They don't seem to go down very much when the bad news strikes and that's usually a sign that it's an OK contrarian investment." Others are betting the less flashy industrials sector will hold onto its leadership position next year after gaining 22.8 percent so far in 2010.
"They haven't attracted the hot money like emerging markets have or like the trendy consumer stocks or cloud computing have," said Derek Hernquist, chief investment officer of Integrative Capital in Charlotte, North Carolina.
"When I see those major broad groups are attracting the smooth, steady money flows that they are, it seems like it would point to a healthier economy," which is not fully priced in yet, said Hernquist.
One of the defining characteristics of 2010 has been the strong correlation across asset classes. Movements in the dollar or in bonds had just as much impact on equities as more fundamental factors, such as corporate outlooks.
The tight relationships came as investors focused on the same factors—further stimulus from the Federal Reserve, sovereign debt worries in the euro zone and the strength of the economic recovery.
The macro focus has meant investors made the same trades rather than differentiating individual sectors and industries.
"No matter how much work you put in trying to pick winners and losers, the profit available from doing so was way below normal," said Charlie Blood, director of financial markets strategy at Brown Brothers Harriman in New York.
Analysts expect that correlation to ease in the coming year, allowing sectors to see more divergence and affording investors more chances to outperform the market.
"It's structurally just unsustainable to have that kind of (correlation) because it doesn't allow for diversification," said Nicholas Colas, chief market strategist at the ConvergEx Group in New York.
"I do think it has to reverse—it's just not a healthy part of the capital market," he said.
Even as investors reposition themselves, the broad market is likely to drift until year-end with next week shortened by the Christmas holiday. Indeed, Wall Street's fear gauge, the CBOE Volatility index, or VIX, Friday fell to its lowest level since April.
Investors will also take in a round of economic data next week, including the final reading of gross domestic product for the third quarter, new and existing home sales for November and December consumer sentiment.
Too Hot to Handle
Stocks that have been the best performers for the year are already seeing a pullback, suggesting investors are happy to lock in profits as they search for fresh opportunities.
Salesforce.com, [CRM 136.50 -1.03 (-0.75%) ]one of the best-performing stocks on the S&P 500 this year, has backed off this week, sliding 8.1 percent. Even so, the stock is up 85 percent for the year.
Mid-cap Netflix, [NFLX 180.02 -1.63 (-0.9%) ] another investor favorite this year, has shed 12.6 percent since the beginning of December, though that still leaves the stock up some 226 percent this year.
Similarly, small- and mid-cap indexes have outpaced blue chips with the S&P MidCap 400 index and S&P SmallCap 600 index both up more than 24 percent in the year to date compared to the S&P 500's 11.6 percent gain.
But with valuations on smaller companies becoming stretched, investors are likely to shift into blue-chip names next year, said Bob Gorman, chief portfolio strategist at TD Wealth Management in Toronto.
"The extent of the valuation gap would suggest to us you probably start to see that rotation into bigger companies with more consistent sales, earnings and dividend growth and that are selling at lower multiples," said Gorman.
Investors will also continue to put their faith in technology shares next year on the expectation they will benefit from corporate and consumer spending as well as strong balance sheets.
The sector's sensitivity to the economy made for a lackluster performance for the sector overall this year with the S&P tech sector gaining 8.7 percent, though some of the year's best gainers were in the tech space.
Financials are starting to look favorable to some, particularly with the possibility the large banks could resume paying dividends next year, but others view the uncertainties of financial reform as too much of a headwind.
Colas said he likes financials as a contrarian play, noting: "They don't seem to go down very much when the bad news strikes and that's usually a sign that it's an OK contrarian investment." Others are betting the less flashy industrials sector will hold onto its leadership position next year after gaining 22.8 percent so far in 2010.
"They haven't attracted the hot money like emerging markets have or like the trendy consumer stocks or cloud computing have," said Derek Hernquist, chief investment officer of Integrative Capital in Charlotte, North Carolina.
"When I see those major broad groups are attracting the smooth, steady money flows that they are, it seems like it would point to a healthier economy," which is not fully priced in yet, said Hernquist.
Friday, December 17, 2010
CNBC's Year-End Investing Tax Tips: Capital Gains? No Worries - CNBC
The uncertainty is over and investors now have all they need to know on how to position their portfolios for tax year 2011.
With both houses of Congress approving legislation to extend the Bush tax cuts—which were set to expire Dec. 31—and President Obama ready to sign it into law, tax rates on income brackets, capital gains and dividends will remain at 2010 levels.
With both houses of Congress approving legislation to extend the Bush tax cuts—which were set to expire Dec. 31—and President Obama ready to sign it into law, tax rates on income brackets, capital gains and dividends will remain at 2010 levels.
In particular, year-end portfolio moves can now be made with the knowledge that capital gains and dividend tax rates will remain at 15 percent.
Low Rates Prevail
With rates remaining favorably low, you’ll want to hold onto your stock market winners, says Christine Benz, director of personal finance for Chicago-based mutual fund tracker Morningstar.
“Defer the realization of capital gains as far into the future as you possibly can,” she says.
You might still want to harvest losses, or sell losing stocks to offset same-year capital gains (plus an additional $3,000 per year against ordinary income), before Dec. 31, to the extent it fits with your investment goals and diversification strategy.
Benz adds that any losses you might be able to harvest this year will be more valuable in future years if the tax rate for your income level climbs.
It’s worth noting, too, that there are no restrictions on buying back your high-flying stock if you wish to maintain your exposure.
The wash-sale rule, which prohibits taxpayers from claiming a loss on the sale of an investment and then repurchasing it within 30 days, applies only to stocks sold at a loss, says Mark Luscombe, principal tax analyst with CCH tax services firm in Riverwoods, Ill.
Those sold at a gain can be immediately repurchased without incurring a penalty.
“Some people mistakenly think that the wash-sale rule applies and it doesn’t,” says Luscombe. “You don’t face that issue on the gains side."
The tax deal also gives some breathing room for investors who have stocked up on dividend paying stocks .
“If you’re in a higher tax bracket in particular and you’ve been investing in such a way to take advantage of the lower dividend rate," Daniel D’Ordine, a certified financial planner with DDO Advisory Services in New York, you don't have to consider selling by year's end because the tax rate won't go up to 20 percent.
For the same reason, such investors may also want to acquire more.
Regardless of the outcome, however, D’Ordine and Benz agree that investors should not let the tax tail wag the investment dog. Investors this year more than ever should make investment decisions guide them.
“If you’ve gone through the rebalancing process and identified areas you want to trim back on it make sense from a tax standpoint to go ahead and do it,” says Benz. “But only make changes if the investment considerations line up with tax considerations.”
With both houses of Congress approving legislation to extend the Bush tax cuts—which were set to expire Dec. 31—and President Obama ready to sign it into law, tax rates on income brackets, capital gains and dividends will remain at 2010 levels.
With both houses of Congress approving legislation to extend the Bush tax cuts—which were set to expire Dec. 31—and President Obama ready to sign it into law, tax rates on income brackets, capital gains and dividends will remain at 2010 levels.
In particular, year-end portfolio moves can now be made with the knowledge that capital gains and dividend tax rates will remain at 15 percent.
Low Rates Prevail
With rates remaining favorably low, you’ll want to hold onto your stock market winners, says Christine Benz, director of personal finance for Chicago-based mutual fund tracker Morningstar.
“Defer the realization of capital gains as far into the future as you possibly can,” she says.
You might still want to harvest losses, or sell losing stocks to offset same-year capital gains (plus an additional $3,000 per year against ordinary income), before Dec. 31, to the extent it fits with your investment goals and diversification strategy.
Benz adds that any losses you might be able to harvest this year will be more valuable in future years if the tax rate for your income level climbs.
It’s worth noting, too, that there are no restrictions on buying back your high-flying stock if you wish to maintain your exposure.
The wash-sale rule, which prohibits taxpayers from claiming a loss on the sale of an investment and then repurchasing it within 30 days, applies only to stocks sold at a loss, says Mark Luscombe, principal tax analyst with CCH tax services firm in Riverwoods, Ill.
Those sold at a gain can be immediately repurchased without incurring a penalty.
“Some people mistakenly think that the wash-sale rule applies and it doesn’t,” says Luscombe. “You don’t face that issue on the gains side."
The tax deal also gives some breathing room for investors who have stocked up on dividend paying stocks .
“If you’re in a higher tax bracket in particular and you’ve been investing in such a way to take advantage of the lower dividend rate," Daniel D’Ordine, a certified financial planner with DDO Advisory Services in New York, you don't have to consider selling by year's end because the tax rate won't go up to 20 percent.
For the same reason, such investors may also want to acquire more.
Regardless of the outcome, however, D’Ordine and Benz agree that investors should not let the tax tail wag the investment dog. Investors this year more than ever should make investment decisions guide them.
“If you’ve gone through the rebalancing process and identified areas you want to trim back on it make sense from a tax standpoint to go ahead and do it,” says Benz. “But only make changes if the investment considerations line up with tax considerations.”
Unemployment Rises in 21 States, Showing Weak Job Market - CNBC
The unemployment rate rose in 21 states and Washington D.C. in November, up from the 14 states that showed increases the month before, according to government data released Friday.
Fifteen states did report decreases in jobless rates in November, while 14 states remained unchanged.
Nevada continues to have the highest rate in the country, creeping up to 14.3 percent in November from 14.2 percent in the previous month. The Nevada Department of Employment, Training and Rehabilitation said in a statement that the rate is stabilizing.
"The stabilizing unemployment rate indicates that the worst of the recession is over,” said Bill Anderson, chief economist for the Nevada Department of Employment, Training and Rehabilitation, in a statement.
“However, the unemployment rate will likely remain elevated well into 2011 before declining slowly over a number of years,” said Anderson.
Michigan and California were tied for the the second highest unemployment rate in the country. Both states reported joblessness at 12.4 percent in November. California’s rate has been stuck at 12.4 percent since September, while Michigan saw its rate fall from 12.8 percent in the previous month.
However, the drop in Michigan wasn’t because there was an increase in hiring in the state, said Rick Waclawek, director of Michigan's Bureau of Labor Market Information and Strategic Initiatives.
"The jobless rate drop was primarily due to fewer state residents in the labor force seeking jobs,” he said in a statement.
Following Nevada, California and Michigan, the next states with the highest rates were Florida at 12.0 percent and Rhode Island at 11.6 percent.
The state with the lowest rate was South Dakota, with 4.5 percent unemployment.
Fifteen states did report decreases in jobless rates in November, while 14 states remained unchanged.
Nevada continues to have the highest rate in the country, creeping up to 14.3 percent in November from 14.2 percent in the previous month. The Nevada Department of Employment, Training and Rehabilitation said in a statement that the rate is stabilizing.
"The stabilizing unemployment rate indicates that the worst of the recession is over,” said Bill Anderson, chief economist for the Nevada Department of Employment, Training and Rehabilitation, in a statement.
“However, the unemployment rate will likely remain elevated well into 2011 before declining slowly over a number of years,” said Anderson.
Michigan and California were tied for the the second highest unemployment rate in the country. Both states reported joblessness at 12.4 percent in November. California’s rate has been stuck at 12.4 percent since September, while Michigan saw its rate fall from 12.8 percent in the previous month.
However, the drop in Michigan wasn’t because there was an increase in hiring in the state, said Rick Waclawek, director of Michigan's Bureau of Labor Market Information and Strategic Initiatives.
"The jobless rate drop was primarily due to fewer state residents in the labor force seeking jobs,” he said in a statement.
Following Nevada, California and Michigan, the next states with the highest rates were Florida at 12.0 percent and Rhode Island at 11.6 percent.
The state with the lowest rate was South Dakota, with 4.5 percent unemployment.
Monday, December 13, 2010
Stock Market and Investing - Tuesday Look Ahead: Fed Meets as Market Fights Fed Moves - CNBC
The Fed meets Tuesday, as rising interest rates continue to defy the central bank's efforts to push them lower.
Economists, however, say there's little chance the Fed will waiver much from its November statement or its commitment to carry out its $600 billion purchase of Treasury securities, announced after its November meeting.
The Fed's controversial quantitative easing program, in theory, was supposed to drive rates lower and help reflate asset prices. Yet since it began the program, the yield on the 10-year Treasury has gone from about 2.6 percent in early November to a high of 3.39 percent Monday. It finished Monday trading closer to 3.293 percent.
"Don't they have to address the 100-basis point gorilla in the room?" said William O'Donnell, who heads Treasury strategy at RBS.
"What I'm most interested in is what they say about the structure of rates," he said. The Fed could note the higher rates reflect better growth, since economic data has improved since its last meeting, or it could say it's concerned rates are rising too much given the slow growth of the economy, he said.
The improvement in the economy has also led to speculation about whether the Fed could hold off on some of its easing, O'Donnell, however, expects the Fed to carry out its full program. "I think they would look at all of this and say a few months don't make a trend," he said.
Ian Lyngen of CRT Capital said it's possible the Fed could give a nod to the economic improvement, in part because of the fiscal stimulus in the tax package being voted on in Congress this week.
"That might influence their spin on the mixed data we are seeing," he said. Lyngen said since beginning the QE program Nov. 12, the Fed has purchased $114 billion in Treasurys, $75 billion of which were related to the new QE program. The balance were Fed purchases related to the reinvestment of the proceeds of maturing mortgage securities.
J.P. Morgan economist Michael Feroli says not much has shifted in the economy to warrant the Fed to do much tweaking to its statement. But he illustrated an interesting point about the Fed, its easing program and the economy in a chart he released Monday.
Feroli tracked the amount of Google searches for the term "double dip," highlighting how internet searches about a double dip recession peaked in late August when Fed Chairman Ben Bernanke first suggested the Fed may do more easing. Since that time, the amount of searches have fallen sharply, and so have market expectations for a double dip.
Fighting the Fed
Markets immediately began to respond to the Fed's easing plans when it was just a suggestion in August. Since then, the stock market has made sharp gains, with key indices at more than two-year highs. Treasury yields initially declined as buyers ran into the bond market, and yields bottomed in October, with the 10-year at just above 2.3 percent.
But since the Fed announced the program, the bond market has been fighting the Fed.
"The Fed by indicating in November that rates would be kept low for an extended period, it basically tried to prod investors to move out the risk spectrum, a rebalancing effect...Risk taking comes at the expense of Treasurys," said Tony Crescenzi, market strategist with Pimco.
Crescenzi said rates, in fact, could have been higher were it not for the Fed purchases. "Oddly, the Fed's actions have hurt Treasurys even as the Fed is purchasing them. The true message of the asset purchase program is to make investors believe that rates will be kept low for an ... extended period. Number one is the signaling effect, and number two, it helps suppress any real rise associated with the improving economy," he said.
Mesirow Financial Chief Economist Diane Swonk says the Fed is unlikely to make any major changes when its statement is released. "But I wouldn't be shocked if something happened, because this is the opportunity to underscore things in a big way," she said.
She said one thing the Fed could do is say it would examine different maturities in the Treasury yield curve to achieve its goals.
Swonk notes that three outspoken Fed dissenters will become voting members of the Federal Open Market Committee in January. "There will be a dissent, but it's interesting to hear the dissenters from within the Fed have been much less verbal now that it's been politicized," she said.
Swonk was referring to the highly unusual level of international and domestic criticism lodged at the Fed over its QE program. As the Fed's very suggestion of QE moved markets, the dollar took a dive, but it has since reversed some losses as the European sovereign crisis took center stage in November.
The dollar's decline sparked an outcry in the international community about the Fed's "manipulation" of the currency. Domestic critics, meanwhile, complain the Fed has too much power. It is also expanding its balance sheet at a time when fiscal constraint is a hot political topic. The euro gained more than 1.2 percent against the dollar Monday, ahead of the Fed meeting. The euro also moved with risk assets, which rose Monday after strong Chinese economic data and the Chinese withheld an expected rate rise.
Besides the Fed meeting Tuesday, investors are watching retail sales at 8:30 a.m. for November, and the NFIB small business survey at 7:30 a.m. Producer price inflation data is also released at 8:30 a.m.
Best Buy [BBY 41.70 -0.10 (-0.24%)] also reports earnings Tuesday.
Economists, however, say there's little chance the Fed will waiver much from its November statement or its commitment to carry out its $600 billion purchase of Treasury securities, announced after its November meeting.
The Fed's controversial quantitative easing program, in theory, was supposed to drive rates lower and help reflate asset prices. Yet since it began the program, the yield on the 10-year Treasury has gone from about 2.6 percent in early November to a high of 3.39 percent Monday. It finished Monday trading closer to 3.293 percent.
"Don't they have to address the 100-basis point gorilla in the room?" said William O'Donnell, who heads Treasury strategy at RBS.
"What I'm most interested in is what they say about the structure of rates," he said. The Fed could note the higher rates reflect better growth, since economic data has improved since its last meeting, or it could say it's concerned rates are rising too much given the slow growth of the economy, he said.
The improvement in the economy has also led to speculation about whether the Fed could hold off on some of its easing, O'Donnell, however, expects the Fed to carry out its full program. "I think they would look at all of this and say a few months don't make a trend," he said.
Ian Lyngen of CRT Capital said it's possible the Fed could give a nod to the economic improvement, in part because of the fiscal stimulus in the tax package being voted on in Congress this week.
"That might influence their spin on the mixed data we are seeing," he said. Lyngen said since beginning the QE program Nov. 12, the Fed has purchased $114 billion in Treasurys, $75 billion of which were related to the new QE program. The balance were Fed purchases related to the reinvestment of the proceeds of maturing mortgage securities.
J.P. Morgan economist Michael Feroli says not much has shifted in the economy to warrant the Fed to do much tweaking to its statement. But he illustrated an interesting point about the Fed, its easing program and the economy in a chart he released Monday.
Feroli tracked the amount of Google searches for the term "double dip," highlighting how internet searches about a double dip recession peaked in late August when Fed Chairman Ben Bernanke first suggested the Fed may do more easing. Since that time, the amount of searches have fallen sharply, and so have market expectations for a double dip.
Fighting the Fed
Markets immediately began to respond to the Fed's easing plans when it was just a suggestion in August. Since then, the stock market has made sharp gains, with key indices at more than two-year highs. Treasury yields initially declined as buyers ran into the bond market, and yields bottomed in October, with the 10-year at just above 2.3 percent.
But since the Fed announced the program, the bond market has been fighting the Fed.
"The Fed by indicating in November that rates would be kept low for an extended period, it basically tried to prod investors to move out the risk spectrum, a rebalancing effect...Risk taking comes at the expense of Treasurys," said Tony Crescenzi, market strategist with Pimco.
Crescenzi said rates, in fact, could have been higher were it not for the Fed purchases. "Oddly, the Fed's actions have hurt Treasurys even as the Fed is purchasing them. The true message of the asset purchase program is to make investors believe that rates will be kept low for an ... extended period. Number one is the signaling effect, and number two, it helps suppress any real rise associated with the improving economy," he said.
Mesirow Financial Chief Economist Diane Swonk says the Fed is unlikely to make any major changes when its statement is released. "But I wouldn't be shocked if something happened, because this is the opportunity to underscore things in a big way," she said.
She said one thing the Fed could do is say it would examine different maturities in the Treasury yield curve to achieve its goals.
Swonk notes that three outspoken Fed dissenters will become voting members of the Federal Open Market Committee in January. "There will be a dissent, but it's interesting to hear the dissenters from within the Fed have been much less verbal now that it's been politicized," she said.
Swonk was referring to the highly unusual level of international and domestic criticism lodged at the Fed over its QE program. As the Fed's very suggestion of QE moved markets, the dollar took a dive, but it has since reversed some losses as the European sovereign crisis took center stage in November.
The dollar's decline sparked an outcry in the international community about the Fed's "manipulation" of the currency. Domestic critics, meanwhile, complain the Fed has too much power. It is also expanding its balance sheet at a time when fiscal constraint is a hot political topic. The euro gained more than 1.2 percent against the dollar Monday, ahead of the Fed meeting. The euro also moved with risk assets, which rose Monday after strong Chinese economic data and the Chinese withheld an expected rate rise.
Besides the Fed meeting Tuesday, investors are watching retail sales at 8:30 a.m. for November, and the NFIB small business survey at 7:30 a.m. Producer price inflation data is also released at 8:30 a.m.
Best Buy [BBY 41.70 -0.10 (-0.24%)] also reports earnings Tuesday.
Dell to Buy Compellent for $960 Million - CNBC
Dell agreed to buy data storage company Compellent Technologies for about $960 million in cash as it seeks to expand beyond PCs and catch up with rivals Hewlett-Packard and IBM in new technologies like cloud computing.
The offer at $27.75 per share is at a 3 percent discount to Compellent's closing price on Friday on the New York Stock Exchange.
Dell [DELL 13.89 --- UNCH (0) ] will pay $820 million, net of cash, it said in a statement.
Compellent [CML 28.71 --- UNCH (0) ] shares have risen about 46 percent since late October when Reuters first reported the deal was being discussed, including a nearly 14 percent fall on Thursday when Dell said it was bidding for the company.
Dell sees the transaction, expected to close in early 2011, adding to its adjusted earnings in fiscal year 2012.
Compellent shares were down 2.7 percent premarket while Dell shares were down 1.4 percent on Nasdaq.
The offer at $27.75 per share is at a 3 percent discount to Compellent's closing price on Friday on the New York Stock Exchange.
Dell [DELL 13.89 --- UNCH (0) ] will pay $820 million, net of cash, it said in a statement.
Compellent [CML 28.71 --- UNCH (0) ] shares have risen about 46 percent since late October when Reuters first reported the deal was being discussed, including a nearly 14 percent fall on Thursday when Dell said it was bidding for the company.
Dell sees the transaction, expected to close in early 2011, adding to its adjusted earnings in fiscal year 2012.
Compellent shares were down 2.7 percent premarket while Dell shares were down 1.4 percent on Nasdaq.
Grocery Chain A&P Files for Bankruptcy - CNBC
Grocery store chain Great Atlantic & Pacific Tea filed for bankruptcy on Sunday, drained of cash by tough competition and a sluggish economic recovery.
Once the largest U.S. grocer, the owner of about 400 stores under brands such as A&P, Waldbaum's and Super Fresh filed for Chapter 11 bankruptcy in New York with more than $1 billion in assets and more than $1 billion in debt, according to court documents.
As of Sept. 11, A&P had total debt of more than $3.2 billion, but it is unclear how much the company is currently carrying.
JP Morgan Chase [JPM 41.43 0.62 (+1.52%)] will provide $800 million in debtor-in-possession financing, the company said. The U.S. Bankruptcy Court for the Southern District of New York will hold a hearing on Monday to approve a portion of the facility.
The Montvale, New Jersey-based company said its stores will remain fully stocked and open with no interruption of business. It has struggled since it acquired Pathmark Stores in 2007 with a $1.4 billion financing package.
A&P had nearly $9 billion in sales in its fiscal year to February 2010, but it has been bleeding cash at a rate of nearly $5 million a week.
The company reported having less than $100 million in cash and short-term investments on hand in September and it faces debt maturities in June.
Its biggest stockholders are activist investor Ron Burkle and the German retail group Tengelmann. A&P said in a statement that its major shareholders support the action.
Burkle's Yucaipa investment firm has built up a large position in the company's debt recently, which could put it in a stronger position to control the bankruptcy, according to people familiar with the firm's activities.
Warehouse Woes
A&P has been challenged by the economic downturn and competitors including warehouse clubs and discount retailers, Frederic Brace, the company's chief restructuring officer, said in court documents.
He said legacy costs for three areas had hurt the company: leases in locations where the company no longer operates, an unfavorable supply agreement with C&S Wholesale Grocers - which supplies 70 percent of its inventory - and a transportation contract with Grocery Haulers, and high labor costs including its pension funding.
Another factor in deciding to file for bankruptcy, he said, was that A&P had a $13.4 million interest payment due on certain unsecured notes on Dec. 15 and that failing to make the payment would have causes issues with its senior debt.
The company was founded in 1859 and grew to be the largest U.S. grocery chain by the 1930s, operating close to 16,000 stores at the time. American novelist John Updike wrote a well-known short story in 1961 called "A&P," after the supermarket chain.
The recession and slow economic recovery have claimed several supermarket chains. They have been squeezed on prices by discounters that have expanded into the food business such as Wal-Mart Stores [WMT 54.28 -0.06 (-0.11%)], while well-heeled customers have been lured away by high-end offerings of competitors such as Whole Foods Market.
Bruno's, Bi-Lo, Penn Traffic and Bashas' have all filed for bankruptcy over the past two years.
Trading in A&P's stock was halted on Friday in the early afternoon because of news pending. Before the halt, A&P's stock lost 67 percent in Friday's session to trade at 93 cents. It had traded as low as 87 cents during Friday's session. The stock peaked this year at $12.97 on Jan. 7, according to Reuters data.
A&P is being advised on the restructuring by Lazard [LAZ 38.57 0.25 (+0.65%)] and law firm Kirkland & Ellis.
Once the largest U.S. grocer, the owner of about 400 stores under brands such as A&P, Waldbaum's and Super Fresh filed for Chapter 11 bankruptcy in New York with more than $1 billion in assets and more than $1 billion in debt, according to court documents.
As of Sept. 11, A&P had total debt of more than $3.2 billion, but it is unclear how much the company is currently carrying.
JP Morgan Chase [JPM 41.43 0.62 (+1.52%)] will provide $800 million in debtor-in-possession financing, the company said. The U.S. Bankruptcy Court for the Southern District of New York will hold a hearing on Monday to approve a portion of the facility.
The Montvale, New Jersey-based company said its stores will remain fully stocked and open with no interruption of business. It has struggled since it acquired Pathmark Stores in 2007 with a $1.4 billion financing package.
A&P had nearly $9 billion in sales in its fiscal year to February 2010, but it has been bleeding cash at a rate of nearly $5 million a week.
The company reported having less than $100 million in cash and short-term investments on hand in September and it faces debt maturities in June.
Its biggest stockholders are activist investor Ron Burkle and the German retail group Tengelmann. A&P said in a statement that its major shareholders support the action.
Burkle's Yucaipa investment firm has built up a large position in the company's debt recently, which could put it in a stronger position to control the bankruptcy, according to people familiar with the firm's activities.
Warehouse Woes
A&P has been challenged by the economic downturn and competitors including warehouse clubs and discount retailers, Frederic Brace, the company's chief restructuring officer, said in court documents.
He said legacy costs for three areas had hurt the company: leases in locations where the company no longer operates, an unfavorable supply agreement with C&S Wholesale Grocers - which supplies 70 percent of its inventory - and a transportation contract with Grocery Haulers, and high labor costs including its pension funding.
Another factor in deciding to file for bankruptcy, he said, was that A&P had a $13.4 million interest payment due on certain unsecured notes on Dec. 15 and that failing to make the payment would have causes issues with its senior debt.
The company was founded in 1859 and grew to be the largest U.S. grocery chain by the 1930s, operating close to 16,000 stores at the time. American novelist John Updike wrote a well-known short story in 1961 called "A&P," after the supermarket chain.
The recession and slow economic recovery have claimed several supermarket chains. They have been squeezed on prices by discounters that have expanded into the food business such as Wal-Mart Stores [WMT 54.28 -0.06 (-0.11%)], while well-heeled customers have been lured away by high-end offerings of competitors such as Whole Foods Market.
Bruno's, Bi-Lo, Penn Traffic and Bashas' have all filed for bankruptcy over the past two years.
Trading in A&P's stock was halted on Friday in the early afternoon because of news pending. Before the halt, A&P's stock lost 67 percent in Friday's session to trade at 93 cents. It had traded as low as 87 cents during Friday's session. The stock peaked this year at $12.97 on Jan. 7, according to Reuters data.
A&P is being advised on the restructuring by Lazard [LAZ 38.57 0.25 (+0.65%)] and law firm Kirkland & Ellis.
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