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.
Sunday, December 19, 2010
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.
Sunday, December 5, 2010
Quantitative Easing: Bernanke: More Fed Bond Buys 'Certainly Possible' - CNBC
The Federal Reserve could end up buying more than the $600 billion in U.S. government bonds it has committed to purchase if the economy fails to respond or unemployment stays too high, Fed Chairman Ben Bernanke said.
In a rare televised interview, Bernanke told the CBS program "60 Minutes" the Fed's actions are aimed at supporting what is still a fragile economic recovery, dismissing critics who argue the policy will lead to future inflation.
"This fear of inflation I think is way overstated," Bernanke said in the interview aired on Sunday.
"What we're doing is lowering interest rates by buying Treasury securities," he said. "And by lowering interest rates, we hope to stimulate the economy to grow faster. The trick is to find the appropriate moment when to begin to unwind this policy. And that's what we're going to do."
Bernanke said it would take four to five years for the country's unemployment rate, which rose to 9.8 percent in November, to come down to what he called more "normal" levels of around 5 percent to 6 percent.
Asked if the central bank could go beyond the $600 billion of bond buys announced at its November meeting, Bernanke said: "Oh, it's certainly possible. It depends on the efficacy of the program. It depends, on inflation. And finally it depends on how the economy looks," he said.
The U.S. economy grew at a modest 2.5 percent annual rate in the third quarter, and more vigorous growth is needed to bring down unemployment.
The "60 Minutes" interview is as part of a broader effort to raise the Fed chairman's public profile in order to counter critics of Fed policy — both in Washington and within the central bank itself.
Not Printing Money
The decision to offer further monetary stimulus at a time overnight borrowing costs are already effectively at zero and the banking system is awash with $2.3 trillion in Fed-created credit has proven controversial both at home and abroad.
Many economists, some Republican lawmakers, and a small but vocal minority of top officials within the Fed worry that the central bank's actions are unlikely to do much to spur economic growth with borrowing costs already unusually low.
Instead, they worry the massive bond purchases will lead to distortions in financial markets, potentially sparking asset bubbles in unexpected places. Some also fear, as Charles Plosser of the Philadelphia Fed has argued, the expansion of reserves could create the "kindling" that will spark inflation in the future.
But Bernanke continued to argue firmly against that view.
"It's a very bad development," he said. "It's creating two societies."
He stressed that the issue of long-term unemployment is a major concern. Over 40 percent of unemployed Americans have been jobless for six months or more, the highest reading on record.
The ability of interest rate policy to affect such complex matters remains an open question. But Bernanke appears willing to use monetary policy to its fullest extent in trying.
"People who are unemployed for such a long time ... their skills erode. Their attachment to the labor force diminishes and it may be a very, very long time before they find themselves back in a normal working position."
The last time Bernanke appeared on "60 Minutes" was in March 2009, just as the worst phase of the global financial crisis was beginning to subside.
In a rare televised interview, Bernanke told the CBS program "60 Minutes" the Fed's actions are aimed at supporting what is still a fragile economic recovery, dismissing critics who argue the policy will lead to future inflation.
"This fear of inflation I think is way overstated," Bernanke said in the interview aired on Sunday.
"What we're doing is lowering interest rates by buying Treasury securities," he said. "And by lowering interest rates, we hope to stimulate the economy to grow faster. The trick is to find the appropriate moment when to begin to unwind this policy. And that's what we're going to do."
Bernanke said it would take four to five years for the country's unemployment rate, which rose to 9.8 percent in November, to come down to what he called more "normal" levels of around 5 percent to 6 percent.
Asked if the central bank could go beyond the $600 billion of bond buys announced at its November meeting, Bernanke said: "Oh, it's certainly possible. It depends on the efficacy of the program. It depends, on inflation. And finally it depends on how the economy looks," he said.
The U.S. economy grew at a modest 2.5 percent annual rate in the third quarter, and more vigorous growth is needed to bring down unemployment.
The "60 Minutes" interview is as part of a broader effort to raise the Fed chairman's public profile in order to counter critics of Fed policy — both in Washington and within the central bank itself.
Not Printing Money
The decision to offer further monetary stimulus at a time overnight borrowing costs are already effectively at zero and the banking system is awash with $2.3 trillion in Fed-created credit has proven controversial both at home and abroad.
Many economists, some Republican lawmakers, and a small but vocal minority of top officials within the Fed worry that the central bank's actions are unlikely to do much to spur economic growth with borrowing costs already unusually low.
Instead, they worry the massive bond purchases will lead to distortions in financial markets, potentially sparking asset bubbles in unexpected places. Some also fear, as Charles Plosser of the Philadelphia Fed has argued, the expansion of reserves could create the "kindling" that will spark inflation in the future.
But Bernanke continued to argue firmly against that view.
"It's a very bad development," he said. "It's creating two societies."
He stressed that the issue of long-term unemployment is a major concern. Over 40 percent of unemployed Americans have been jobless for six months or more, the highest reading on record.
The ability of interest rate policy to affect such complex matters remains an open question. But Bernanke appears willing to use monetary policy to its fullest extent in trying.
"People who are unemployed for such a long time ... their skills erode. Their attachment to the labor force diminishes and it may be a very, very long time before they find themselves back in a normal working position."
The last time Bernanke appeared on "60 Minutes" was in March 2009, just as the worst phase of the global financial crisis was beginning to subside.
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