Hedge-fund managers ponder Armageddon

LAS VEGAS — A collapse of the banking system, the demise of the U.S. dollar as the reserve currency, another oil shock, a new round of junk-bond defaults and a meltdown in Japan’s bond market were among the doomsday scenarios explored by hedge-fund managers at a conference in Las Vegas Thursday.
Since the 2008 financial crisis, many hedge funds have added trades that could protect against losses from big, unexpected events — now known as black swans, a term coined by investor Nassim Taleb.
“These black swans are interbreeding,” said Robert Sinnott, chief executive of hedge fund and private-equity firm Kayne Anderson Capital Advisors, during the SkyBridge Alternatives Conference.

 

Commodities rebound in wild day

Paul Vigna describes volatility on Wall Street brought on by commodities, foreign exchanges and the euro. (REUTERS/Lucas Jackson)
Sinnott expects another oil shock, like the one that plunged the U.S. economy into recession during the 1970s. During that period, energy costs went from 8% of U.S. gross domestic product to about 15%, “and our economy crashed,” he added. “That’s likely to happen again.”
Kayne is a major investor in the energy industry; its private-equity business owns roughly 40 companies in the sector that are mainly focused on drilling.
One way to handle black-swan events, according to Sinnott, is to own companies, or large stakes in companies, and actively improve them — something he called “thrust” investing.
“In our hedge funds, we don’t have an investment where we don’t personally know the CEO,” he said, noting that the firm has about 70 of such positions.

‘Unrepentant bear’

Eric Sprott of Sprott Asset Management called himself an “unrepentant bear” during the conference.
“We’ve been in a secular bear market since 2000,” he said. “Governments and central banks have tried to prevent the natural flow of that, which has led to housing mania, bank bailouts and financial crisis.”
Banks remain too leveraged at roughly 20 to 1 and their assets are still mainly government bonds and mortgages, argued Sprott, while noting that government bonds may be overvalued and the housing market keeps going down.
Sprott has been a bullish on gold for more than a decade. He recently started a silver fund, and said Thursday that precious metals are “the way to survive the coming Armageddon.”
Silver slumped in recent weeks, and Sprott said the price of the metal has been “manipulated down.”
Silver fell by $6 in 13 minutes late on a recent Sunday, when the market was thinnest, he commented. That was followed by four margin increases, Sprott elaborated.

Asian common currency

China may create a common currency in Asia, part of a shift away from the U.S. dollar as the world’s reserve currency, Karthik Sankaran of currency-trading hedge fund firm Covepoint Capital Advisors said at the conference.

Ex-Citi exec discusses debt crisis

William Rhodes, former vice chairman at Citigroup and current head of Rhodes Global Advisors, talks about Europe's debt crisis and his experiences as a banker during some turbulent times.
“The rest of the world is getting increasingly concerned about the willingness of the U.S. to maintain the dollar as a reserve currency and a store of value,” he remarked.
 

China May Limit Rate Increases

Asia Stocks, Commodities Fall on China Concern

Photographer: Nelson Ching

China Raises Bank Reserve Ratios 0.5% to Cool Inflation


May 12  -- China raised banks’ reserve requirements for the fifth time this year to restrain prices, underscoring the risk that tightening measures will cause a slowdown in the world’s second-biggest economy. Reserve ratios will increase 0.5 percentage point from May 18, the People’s Bank of China said on its website today. Bloomberg's John Liu discusses the ratio hike with Erik Schatzker on Bloomberg Television's "InsideTrack."

Jim Bianco Interview on China's Economy


May 12  -- Jim Bianco, president of Bianco Research LLC, talks about the outlook for China's banking rules, inflation and economy. China's central bank yesterday raised banks’ reserve requirements for the fifth time this year. Bianco speaks with Carol Massar and Matt Miller on Bloomberg Television's "Street Smart."

Shen Interview on China Monetary Policy

May 13 -- Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd., talks about China's monetary policy and the timing of convertibility of the nation's currency. China’s inflation is spreading beyond food, signaling Premier Wen Jiabao’s strategy of quarter-point interest-rate increases every two months has yet to contain consumer prices. Shen speaks with Susan Li on Bloomberg Television's "First Up."
China may limit interest-rate increases over the rest of the year, focusing on other tools for combating inflation as the government seeks to cool prices without choking off growth.
The central bank yesterday raised banks’ reserve requirements for the fifth time this year. The half-point increase takes effect May 18 and will boost levels for the nation’s biggest lenders to a record 21 percent.
Policy makers will raise borrowing costs only once more this year, after four increases in the past seven months, Goldman Sachs Group Inc. and Deutsche Bank AG predicted yesterday. Higher interest rates may damp growth while also attracting speculative capital, or “hot money,” to the fastest-growing major economy. Alternative tools include quicker gains in the yuan, as sought by the U.S.
“The room for further rate hikes is quite small this year on concerns of hot money and economic growth,” said Lu Ting, a Hong Kong-based economist for Bank of America Merrill Lynch. “We surely expect more reserve requirement ratio hikes.”
Goldman analysts said officials may allow the yuan to keep climbing against the dollar at a 6 percent annual pace. The currency traded at 6.5013 per dollar as of 11:49 a.m. in Shanghai. The Shanghai Composite Index rose 0.1 percent as of the 11:30 a.m. local time break in trading.

‘Hard Landing’ Concern

The Conference Board said today that the risk of an economic “hard landing” for China may be easing as the New York-based research organization reported that its leading index for the nation climbed in March.
The central bank raised reserve requirements a day after reports showed inflation and lending exceeded economists’ estimates in April, with consumer prices rising more than 5 percent. The same batch of data showed industrial output growth slowed, suggesting that the nation’s expansion may be cooling from a 9.7 percent annual pace in the first quarter.
Stocks and commodities fell after the central bank announcement on speculation that slower growth will curb demand for raw materials. At Deutsche, Hong Kong-based economist Ma Jun said calls from within the government to avoid policy “over- tightening” may influence interest-rate decisions.

Stronger Currency

Accelerated gains in the yuan saw the currency break 6.5 per dollar for the first time since 1993 on April 29. U.S. Treasury Secretary Timothy F. Geithner pushed at talks in Washington this week for a faster appreciation that he says would boost consumption in China, ease inflation and limit global economic imbalances.
Alongside monetary tools, the government has used administrative measures. This month, the National Development and Reform Commission said Unilever, the world’s second-largest consumer-goods maker, will be fined $300,000 for telling the media that it planned to raise prices, reportedly triggering panic buying and hoarding.
Jim O’Neill, who chairs Goldman Sachs Asset Management and coined the acronym BRIC for the economies of Brazil, Russia, India and China, said yesterday that China’s inflation “won’t be a problem” in the second half of this year. The nations’ stocks may have a “big rally” as price gains moderate and tightening ends, he told reporters in Hong Kong.
Yesterday’s move locked up about 370 billion yuan ($57 billion), according to Barclays Capital. It may have been triggered by the extra cash entering the financial system from maturing central bank bills, according to Royal Bank of Scotland Plc. Inflows of so-called hot money may also have been a factor, said Bank of America’s Lu.

Food, Housing, Clothes

The ruling Communist Party aims to prevent increases in food and housing costs from fueling social unrest. Consumer prices jumped 5.4 percent in March, the most since July 2008. In April, the gain was 5.3 percent.
Clothing costs climbed 1.4 percent last month from a year earlier, the biggest gain since 1997, a statistics bureau report showed this week. Non-food inflation held at 2.7 percent, the fastest pace in at least six years. Food inflation, the biggest single driver of the consumer-price index, exceeded 11 percent for a third month.
Higher commodity costs, inflows of capital, and the extra cash in the economy from a stimulus program started in late 2008 have added to inflation risks. The nation’s world-record foreign-exchange reserves exceeded $3 trillion for the first time in March.
 

U.S. Stocks Advance as Commodity Prices Rebound Amid Decline of Dollar

Credit Suisse's Cliggott Interview on U.S. Stocks, Fed

May 12 -- Doug Cliggott, U.S. equity strategist at Credit Suisse, talks about the outlook for Federal Reserve policy and the U.S. stock market. He speaks on Bloomberg Television's "InBusiness with Margaret Brennan."

Cisco's Chambers Interview

May 12  -- John Chambers, chief executive officer at Cisco Systems Inc., discusses the company's business strategy and growth outlook. Cisco, the largest maker of networking gear, yesterday forecast profit and sales that may miss analysts’ estimates amid price pressure in the markets for routers and switches, which direct Internet traffic. Chambers speaks with Betty Liu and Dominic Chu on Bloomberg Television's "In the Loop."
U.S. Stock Market Wrap

May 12  -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks advanced, erasing the second straight decline for the Standard & Poor’s 500 Index, as the dollar fell and commodities rebounded from an early slump triggered by China’s efforts to curb lending. Bloomberg's Pimm Fox also speaks. (Source: Bloomberg)
U.S. stocks advanced, erasing the second straight decline for the Standard & Poor’s 500 Index, as the dollar fell and commodities rebounded from an early slump triggered by China’s efforts to curb lending.
Cliffs Natural Resources Inc. (CLF) and Schlumberger Ltd. (SLB) rose at least 1.5 percent. Symantec Corp. (SYMC), the biggest maker of security software, climbed 5.2 percent after forecasting higher revenue than analysts estimated. Tyson Foods Inc. (TSN) added 4.6 percent as the biggest U.S. meat processor announced a stock buyback. Cisco Systems Inc. (CSCO) slumped 4.8 percent and helped drag the market down earlier today after forecasting profit that missed estimates.
The S&P 500 rose 0.5 percent to 1,348.65 at 4 p.m. in New York, reversing a decline of as much as 0.8 percent. The Dow Jones Industrial Average added 65.89 points, or 0.5 percent, to 12,695.92. The Dollar Index, which tracks the greenback against the currencies of six major trading partners, declined 0.2 percent to 75.18 after gaining 0.4 percent.
“The more commodity-sensitive industries have been driving the market either up or down,” said Wasif Latif, vice president of equity investments at USAA Investment Management Co., which oversees about $50 billion in San Antonio. “One sector’s gain could be another sector’s pain. The recent decline in oil may not be that good for energy companies. However, consumer staples will do better because of lower input costs.”

Commodity Shares Slump

The S&P 500 has fallen 1.1 percent this month as gauges of energy and raw-materials producers have slumped at least 4.2 percent. Still, the S&P 500 is up 7.2 percent this year amid government stimulus measures and higher-than-estimated corporate profits.
Earlier today, stocks fell after China raised reserve ratios for its largest lenders by 0.5 percentage point to a record 21 percent. The central bank’s announcement followed reports yesterday showing inflation and lending exceeded economists’ estimates in April, with consumer prices rising more than 5 percent for a second month.
Federal Reserve Bank of Philadelphia President Charles Plosser said the U.S. economic recovery is nearing a point where the central bank should begin pulling back record stimulus.
“If the economy continues to make progress, then monetary policy will need to exit from its extraordinary accommodation in the not-too-distant future,” Plosser said today in a speech in Aventura, Florida. “While my expectation is that oil-price increases will level off and that the currently elevated inflation measures will reverse, the risks to the inflation outlook are tilted to the upside,” requiring that the Fed have a plan for tightening, he said.

Wholesale Costs

Wholesale costs rose more than forecast in April, led by food and fuel. Another report showed that retail sales gained 0.5 percent in April, the smallest increase since July. Sales excluding automobiles and gasoline rose 0.2 percent, less than half the median economist projection. First-time jobless claims decreased 44,000 to 434,000, Labor Department figures showed, topping the median economists forecast of 430,000.
Consumer confidence fell to a six-week low as the costliest gasoline in almost three years worsened Americans’ perceptions of their finances. The Bloomberg Consumer Comfort Index dropped to minus 46.9 in the period to May 8, the worst reading since March, from the prior week’s minus 46.2. Across regions, sentiment suffered the most in the West, where fuel prices exceed the national average.

Commodities Rebound

Commodities rebounded from earlier losses as the dollar reversed a gain, bolstering the appeal of energy and raw- materials as alternative investments. The Thomson Reuters/Jefferies CRB Index of commodities rose 0.1 percent, reversing an earlier decline of as much as 1.4 percent.
Cliffs Natural, North America’s largest iron-ore producer, gained 1.7 percent to $87.19. Schlumberger, the world’s biggest oilfield services provider, added 1.5 percent to $83.52.
Steven A. Cohen, the billionaire founder of hedge fund SAC Capital Advisors LP, said last week’s sell-off in commodity markets makes this a good time to buy stock in energy companies.
Energy is “an interesting sector,” he said yesterday at the SALT, or SkyBridge Alternatives, Conference in Las Vegas, speaking to a packed room with 1,750 seating capacity. “Energy stocks are discounting oil prices much lower than where we are trading today.”
Symantec climbed 5.2 percent to $20.42. The world’s largest security-software maker forecast higher revenue than analysts predicted, bolstered by demand for data backup cloud- computing programs, and the effect of a weaker dollar on overseas sales.

Tyson’s Buyback

Tyson added 4.6 percent, the most since Feb. 4, to $18.84. The biggest U.S. meat processor said it plans to buy back as many as 22.5 million shares.
First Solar Inc. (FSLR) advanced 6.3 percent, the most in the S&P 500, to $132.07. The world’s largest maker of thin-film solar modules received positive letters from the U.S. Energy Department on three projects.
Cisco Systems tumbled 4.8 percent to $16.93. The company, which has lost about $50 billion in market value in the last year, is revamping management and scaling back some businesses after losing share to rivals such as Hewlett-Packard Co.
Chief Executive Officer John Chambers said he’ll eliminate jobs while girding for weakness and lower public-sector spending this quarter. He ditched a longstanding prediction for annual sales growth of 12 percent to 17 percent.

Goldman Sachs Slumps

Goldman Sachs Group Inc. (GS) slumped 3.5 percent to $142.75. Richard Bove, analyst at Rochdale Securities, cut his recommendation for the stock to “sell” from “neutral,” citing pressure on the Justice Department to file a criminal lawsuit against the firm after a Rolling Stone Magazine article that the analyst called an “all-out attack.”
U.S. industrial companies will probably trail the rest of the market because of slowing demand overseas, MKM Partners LP’s Michael Darda said.
Manufacturers and transportation companies are poised to suffer amid a slowdown in China that may prove “sharp,” wrote Darda, the Stamford, Connecticut-based chief market strategist at MKM. Last June, Darda told investors to buy stocks, saying they were cheap relative to bonds. The S&P 500 Index (SPX) is up 30 percent since he made the recommendation.
“The changes are based on our stepped-up concern regarding a sharp slowdown in China and, to a lesser extent, India,” Darda wrote in a note to clients today. “We also have had an increasingly negative view of the euro zone.”
The Institute for Supply Management’s manufacturing index, which rose to 61.4 in February, the highest level since 2004, is in danger of falling back to 50 as global demand slows, Darda wrote. That could spur a decline of 10 percent or more in the S&P 500, which has gained 7.2 percent this year and reached an almost three-year high of 1,363.61 on April 29.
 

Dollar Rises Before Data on Sentiment, Homes; Won Drops as BOK Holds Rates

Nomura's Kwon Interview on S. Korean Economy, BOK Policy

May 13  -- Young Sun Kwon, a Hong Kong-based economist at Nomura Holdings Inc., talks about the South Korean economy, central bank monetary policy, and currency. The Bank of Korea unexpectedly kept interest rates unchanged after two increases this year, opting to judge whether a won appreciation will contribute to a slowdown in inflation. Kwon speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia."
HSBC's Bloom Discusses Currencies, May 12

May 12  -- David Bloom, global head of currency strategy at HSBC Holdings Plc, discusses his currency market strategy. He talks with Mark Barton on Bloomberg Television's "Countdown."

RBS's Oakley Interview on Asian Currencies, Dollar, May 11

May 11 -- Stuart Oakley, Singapore-based head of emerging markets foreign exchange for Asia at Royal Bank of Scotland Group Plc, talks about the region's currencies and the dollar. Asian currencies advanced, led by South Korea’s won and Taiwan’s dollar, as gains in stocks and commodities boosted confidence in the global economic recovery, increasing investor appetite for emerging-market assets. Oakley also discusses China's economy. He speaks with John Dawson on Bloomberg Television's "On the Move Asia."
Fireapps's Koester Interview on Currencies, May 12

May 12 -- Wolfgang Koester, chief executive officer of Fireapps Inc, talks about volatility in global currency markets and the outlook for China's yuan. Koester talks with Lisa Murphy on Bloomberg Television's "Fast Forward." (Source: Bloomberg)
The dollar rose toward a six-week high against the euro after Treasury yields climbed and economists projected that U.S. consumer confidence improved, boosting demand for assets in the world’s largest economy.
The greenback headed for a weekly gain against 12 of its 16 major counterparts before a report next week forecast to show U.S. housing starts advanced last month. South Korea’s won dropped to a one-week low after the central bank unexpectedly held off from increasing interest rates. The yen rose versus the euro as tightening measures by China spurred drops in Asian stocks, supporting demand for Japan’s currency as a refuge.
“There will be chatter about a gradual reduction in monetary easing as the U.S. continues to recover for a few months, albeit at a slow pace,” said Daisaku Ueno, president of Gaitame.com Research Institute Ltd. in Tokyo, a unit of Japan’s largest online currency broker. “I expect the dollar to rise.”
The dollar advanced to $1.4196 as of 12:45 p.m. in Tokyo from $1.4246 in New York, after gaining to $1.4124 yesterday, the highest since April 1. The yen climbed to 114.79 per euro from 115.31 yesterday, when it reached 114.19, the strongest since March 28. The dollar slipped to 80.85 yen from 80.94
The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, advanced 0.3 percent to 75.382. It’s up 0.7 percent this week, second for a second-straight gain.

Consumer Confidence

The Thomson Reuters/University of Michigan preliminary consumer sentiment index rose to 70 this month from 69.8 in April, according to the median estimate of economists in a Bloomberg News survey before today’s data. Treasury 10-year yields climbed six basis points to 3.22 percent yesterday and were little changed today.
U.S. housing starts increased 3.8 percent to a 570,000 annual rate in April, a separate Bloomberg survey showed before the Commerce Department reports the data on May 17.
The won dropped after the Bank of Korea kept its benchmark rate at 3 percent, having increased it twice this year to help tame inflation. Two of 14 economists surveyed by Bloomberg forecast the decision, while 12 predicted a quarter of a percentage point increase.
“Expectations for a rate increase had been limiting declines in the won this week,” said Yun Se Min, a currency dealer at Busan Bank in Seoul.
The won lost 0.6 percent to 1,091.58 per dollar. It touched 1,092.38, the weakest level since April 19.

Reserve Ratios

China’s central bank raised reserve requirements yesterday after reports showed inflation and lending exceeded economists’ estimates in April, with consumer prices gaining more than 5 percent. The half-point increase in banks’ reserve requirements takes effect May 18 and will boost levels for the nation’s biggest lenders to a record 21 percent.
The MSCI Asia Pacific Index of regional shares slipped 0.8 percent after rising 0.1 percent earlier today.
The euro extended its second weekly drop against the greenback before European finance ministers meet in Brussels on May 16. They will discuss more support for Greece beyond the 110 billion-euro ($156 billion) rescue granted a year ago, Luxembourg’s Jean-Claude Juncker, who leads the group, said yesterday in Mainz, Germany.
“Ahead of European financial ministers’ meetings next week, we may get some comments from high-ranking officials,” said Keiji Matsumoto, a currency strategist in Tokyo at SMBC Nikko Securities Inc. “Investors are reluctant to buy the euro.”

Europe Growth, Rates

The euro has dropped 1.7 percent over the past month in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. The yen has gained 4.2 percent, while the dollar is up 0.2 percent.
Losses in the euro were limited before a report today that may show the region’s economy grew at a faster pace, adding to evidence that the European Central Bank will raise interest rates further.
Europe’s economy expanded at a 2.2 percent annual rate in the first quarter after a 2 percent pace of growth in the last three months of 2010, according to the median forecast of 24 economists in a Bloomberg News survey before today’s report.
“Economic fundamentals in Europe are resilient,” said Kengo Suzuki, manager of the foreign bond department in Tokyo at Mizuho Securities Co. “It supports expectations for a series of interest-rate increases.”
The ECB will boost its benchmark rate by 91 basis points over the next 12 months, a Credit Suisse Group AG index based on swaps showed yesterday, compared with a prediction for 78 basis points of increases on May 6.
The central bank on May 5 left its benchmark interest rate at 1.25 percent after lifting the rate in April. President Jean- Claude Trichet said the ECB will monitor inflation risks “very closely,” while he signaled the central bank will wait until after June to lift borrowing costs again.
 

Gold, Silver Decline as Dollar Gain Reduces Alternative Investment Demand

Gold and silver dropped, erasing earlier gains, as the dollar advanced against major currencies, reducing demand for precious metals as an alternative investment.
Immediate-delivery gold fell as much as 0.7 percent to $1,491.30 an ounce, reversing a 0.4 percent advance earlier, and traded at $1,491.30 an ounce at 2:49 p.m. in Singapore. Silver futures slumped as much as 5.2 percent to $33.655 an ounce, extending yesterday’s 7.7 percent plunge.
“Gold is coming under pressure as the dollar is gaining some ground,” said Ong Yi Ling, Singapore-based analyst with Phillip Futures Pte. “The trend for precious metals in the short term is still bearish.”
The Dollar Index, a six-currency gauge of the dollar’s value, rose 0.1 percent, reversing an earlier decline, following yesterday’s 1 percent gain. Demand for gold has strengthened this year as investors sought protection against the prospect of currency debasement and inflation. Gold reached a record $1,577.57 on May 2, advancing 6 percent this year after a 30 percent jump in 2010.
Silver led a decline in commodities yesterday as the Standard & Poor’s GSCI Index of 24 futures weakened 3.9 percent. Gasoline plunged as much as 9 percent amid declining U.S. demand for motor fuel. Corn dropped the most allowed by the Chicago Board of Trade on forecasts that U.S. stockpiles will be bigger than analysts expected. Copper fell to the lowest since December.
Spot silver weakened as much as 4.2 percent to $33.6875 an ounce, extending an 8.6 percent slump yesterday. The metal, which touched an all-time high of $49.79 an ounce on April 25, tumbled 26 percent last week after five increases in margin requirements on the Comex.
The selloff in commodities represents opportunities for long-term investors, with prices rising in the next five to seven years, Chris Hyzy, chief investment officer at U.S. Trust Co., said yesterday.
Immediate-delivery palladium shed 1.1 percent to $710 an ounce, while platinum weakened 0.9 percent to $1,760.95.
 

Euro Rises as Growth Boosts Rate Outlook

Euro Trades Near 3-Week Low on Concern Greek Aid Delayed

A pedestrian looks in the window of a store advertising discounted euro prices in the shopping district of central Athens. Photographer: Kostas Tsironis/Bloomberg

Westpac's Cavenagh Interview on Currencies From May 10

May 10 (Bloomberg) -- Jonathan Cavenagh, a currency strategist in Singapore at Westpac Banking Corp., talks about global currencies. Cavenagh also discusses Europe's sovereign-debt crisis, and the outlook for Australia's federal budget. He speaks with John Dawson on Bloomberg Television's "First Up."(Source: Bloomberg)
The euro rose from a three-week low versus the dollar as optimism growth in Europe is accelerating overshadowed concern the region’s debt crisis will worsen.
The single currency strengthened against 12 of its 16 major counterparts before a report tomorrow forecast to show Europe’s economy grew at a faster pace in the first quarter. Australia’s dollar weakened after a government report showed employers unexpectedly cut workers last month. South Korea’s won fell as a decline in stocks around the world reduced demand for emerging- market assets.
“Market participants are aware economic data in the euro- zone have been strong,” said Junichi Ishikawa, a Tokyo-based market analyst at IG Markets Securities Ltd. “The underlying theme is rate differentials, which is a supportive factor for the euro.”
The euro advanced to $1.4214 as of 6:40 a.m. in London from $1.4192 yesterday in New York, when it depreciated to $1.4172, the weakest since April 18. The single currency rose 0.2 percent to 115.31 yen, after slipping 1.3 percent yesterday. The dollar was little changed at 81.13 yen from 81.05 yen.
The 17-nation region’s economy expanded at a 2.2 percent annual rate in the first quarter, up from 2 percent growth in the previous three months, according to a Bloomberg News survey before tomorrow’s report.
The European Central Bank will raise its target rate by 93 basis points over the next 12 months, a Credit Suisse Group AG index showed yesterday. That’s up from 74 basis points of tightening predicted on May 10. The Federal Reserve is forecast to boost its benchmark by 29 basis points over the same period, a separate index showed.
Greece Concerns
Europe’s currency slumped 1.5 percent against the dollar yesterday on speculation European leaders are slowing the drive to grant Greece additional aid fueled concern the nation may have to restructure debt.
Standard & Poor’s cut Greece’s debt rating two levels to B on May 9, citing the likelihood of debt restructuring. European finance chiefs held an unscheduled meeting in Luxembourg on May 6 and said Greece needs “a further adjustment program” on top of its existing 110 billion-euro ($156 billion) rescue package.
“The issue remains the periphery and while there was no fresh news, apart from some fresh suggestions of possible Finnish recalcitrance regarding Portugal’s bailout, the euro will be curtailed by uncertainty,” Daragh Maher, deputy head of global foreign exchange strategy at Credit Agricole CIB in London, wrote in a note today.

Portugal Rating

S&P may downgrade its BBB- sovereign-debt rating for Portugal if the nation’s banks are unable to meet capital rules or if they require more funding than currently anticipated, the ratings company said yesterday. Finland will back a bailout for Portugal, provided it agrees to conditions including state asset sales, said Finance Minister Jyrki Katainen.
Australia’s dollar dropped for a second day as investors trimmed bets on central-bank rate increases after employment dropped by the most since 2009.
The number of people employed in Australia declined by 22,100, following a 43,300 gain in March, the statistics bureau said. The jobless rate held at 4.9 percent.
The Reserve Bank of Australia will raise its benchmark by 33 basis points over the next 12 months, down from 38 basis points of increases predicted yesterday, another Credit Suisse index showed.

Shine Removed

“With high fuel prices, a strong currency and concerns about taxation, you get the sense that this mixture of negatives is beginning to weigh on the manufacturing states,” said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp. “Today’s data takes a bit of the shine and mystery off the Aussie dollar.”
Australia’s currency dropped 0.6 percent to $1.0634, and slid 0.5 percent to 86.27 yen.
The won fell against all its major peers as the MSCI Asia Pacific Index of shares slid 1.2 percent. The Reuters/Jefferies CRB Index of raw materials dropped 3 percent yesterday.
“The decline in commodities prices, which led global stocks to fall, is prompting investors to turn to safer assets,” said Cho Young Bok, a Seoul-based currency dealer at Daegu Bank.
 

U.S. Stocks Rise on Higher-Than-Estimated Earnings, Microsoft’s Skype Deal

Stocks Rise on Earnings as Greek Bonds Rebound


Traders work on the floor of the New York Stock Exchange in New York on May 10, 2011. Photographer: Ramin Talaie/Bloomberg

U.S. stocks rose for a third day as higher-than-estimated profit forecasts and Microsoft Corp. (MSFT)’s purchase of Skype Technologies SA bolstered optimism that earnings and takeovers will keep fueling the rally.

Dean Foods Co. (DF), the largest U.S. milk processor, jumped 11 percent after its earnings forecast beat analysts’ estimates. Microsoft fell 0.6 percent after agreeing to buy Skype for $8.5 billion to expand its Internet presence after past failures. Titanium Metals Corp. (TIE) gained 2 percent, pacing gains in raw- material producers, as metal prices advanced before the release of figures that may show weaker inflation in China.

The S&P 500 gained 0.8 percent to 1,357.16 at 4 p.m. in New York. The benchmark gauge has risen 1.7 percent over the past three days. The Dow Jones Industrial Average advanced 75.68 points, or 0.6 percent, to 12,760.36 today.

“The earnings season has been a pleasant surprise,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which manages $53 billion. “There wasn’t a great deal of optimism that earnings were going to beat estimates with the vigor that we’ve seen. On top of that, we’re getting big M&A deals. That’s an indication that companies have a lot of cash and will continue to do deals.”

The S&P 500 fell 1.7 percent last week following a rout in raw materials that knocked off $99 billion of market value from commodities. The S&P 500 has advanced 7.9 percent this year amid government stimulus measures and higher-than-projected corporate profits. Earnings-per-share have beaten analyst estimates at 72 percent of the 423 companies in the S&P 500 that reported results since April 11, Bloomberg data show.

Import Prices

Prices of goods imported into the U.S. rose more than forecast in April, driven by gains in fuel and food that may put pressure on some companies to raise prices.

The 2.2 percent increase in the import-price index followed a revised 2.6 percent gain in March, Labor Department figures showed. Economists projected a 1.8 percent increase, according to the median estimate in a Bloomberg News survey. Prices excluding fuel advanced 0.6 percent.

Financial, technology and health-care stocks offer “value,” Bill Miller, the chairman and chief investment officer of Legg Mason Capital Management Inc., wrote in the Financial Times today. He said valuations in those industries have been more expensive 90 percent of the time during about the past 60 years.

Higher Commodity Prices

Miller, whose Legg Mason Capital Management Value Trust (LMVTX) fund outperformed the S&P 500 annually for 15 straight years through 2005, said a lower U.S. dollar and higher commodity prices will be “bearish not bullish” for stocks as the Federal Reserve is set to end its asset-purchase program next month. The fund was outperformed by 98 percent of peers in 2010, according to data compiled by Bloomberg.

“We believe now is a good time to buy what’s on sale, and a bad time to buy what’s marked up,” Miller said.

S&P 500 financial companies are currently trading at 13.7 times reported operating earnings, while technology stocks are trading at 15.8 times and health-care shares are selling at a multiple of 13.4.

Dean Foods jumped 11 percent to $12.24. The company forecast full-year profit excluding some items of at least 67 cents a share. On average, the analysts surveyed by Bloomberg estimated earnings of 57 cents.

Microsoft’s Deal

Microsoft lost 0.6 percent to $25.67. Microsoft will acquire Luxembourg-based Skype, with 170 million active users, from an investor group led by Silver Lake, the companies said in a statement today. The agreement was approved by the boards of directors of both companies.

The takeover may help Microsoft Chief Executive Officer Steve Ballmer attract Web users and narrow Google Inc.’s lead in Web advertising. Microsoft will connect Skype to its Outlook e- mail, Xbox game console, Windows mobile phones and corporate- phone software. The acquisition is Redmond, Washington-based Microsoft’s largest, surpassing the purchase of AQuantive Inc. for about $6 billion in 2007.

Overall, there have been 8,768 deals announced globally this year, totaling $883.8 billion, a 26 percent increase from the $699.13 billion in the same period in 2010, according to data compiled by Bloomberg.

A gauge of raw-material producers in the S&P 500 rose 0.7 percent as metal prices rallied. Titanium Metals, a Dallas-based producer of the metal, added 2 percent to $19.89.

China Prices

Chinese consumer prices climbed 5.2 percent in April, slowing from 5.4 percent in March, according to a Bloomberg News survey of economists. Concern that Chinese demand may slow as authorities move to tighten credit contributed to copper’s 7.1 percent drop in March and April in New York.

The biggest weekly retreat in U.S. equities since March did “little damage” to the S&P 500 and the pullback presents a buying opportunity, according to MKM Partners.

The benchmark for U.S. stocks maintained its “positive momentum” despite falling four of the five days last week, said Katie Stockton, MKM’s chief market technician. The index’s Moving Average Convergence/Divergence line, calculated by subtracting the index’s average level during the past 26 days from the average over the past 12 days, stayed above its uptrend line since March, a sign that the market may resume its rally and extend its gain to as high as 1,420, she said.

“The pullback did surprisingly little damage from a technical standpoint,” Stockton wrote in a note dated May 8. It’s “a testament to the strength of the uptrend.”

Via - www.bloomberg.com

 

Crude Oil Futures Halt Two-Day Advance on Chinese Inflation, European Debt

Oil snapped a two-day surge in New York on concerns that China will boost interest rates to tame inflation and on signs that U.S. crude supplies are increasing.

Gasoline dropped as much as 1.9 percent on speculation that a 9 percent rally in the past two days was excessive. The fuel had advanced on concern that flooding on the Mississippi River will disrupt U.S. supplies. Yesterday the industry-funded American Petroleum Institute said crude inventories jumped last week. The Energy Department will release its data today. Consumer price rises in China exceeded the government’s target last month, data from the statistics bureau in Beijing showed.

“The API report took the wind out of the market’s sails,” said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt. “The latest U.S. demand data has been weaker than normal for the time of year, but the fact prices have not fallen further is a sign of strength, and we could see Brent return to $120.”

Crude for June delivery declined as much as 74 cents, or 0.7 percent, to $103.14 a barrel on the New York Mercantile Exchange. It was at $103.35 at 9:55 a.m. London time. Yesterday, the contract rose 1.3 percent to $103.88, the highest settlement since May 4. Prices are up 37 percent in the past year.

Brent crude for June settlement on the London-based ICE Futures Europe exchange was 42 cents lower at $117.21 a barrel. Yesterday, it gained 1.5 percent to $117.63, the highest settlement since May 4.

North Sea Brent crude’s premium to U.S. benchmark West Texas Intermediate widened for a fourth day. The spread between the two front-month contracts increased to $13.87 a barrel from $13.75 at settlement yesterday, according to data compiled by Bloomberg.

China Inflation

China’s consumer prices climbed 5.3 percent in April from a year earlier, according to the statistics bureau in Beijing. That’s higher than the government’s 4 percent full-year target and above the 5.2 percent median forecast in a Bloomberg News survey of economists.

The country’s central bank will increase interest rates once more this year, adding to four since mid-October, another Bloomberg News survey showed. Officials have boosted banks’ reserve requirements and reined in credit growth from record levels in 2009 and 2010.

U.S. crude stockpiles climbed 2.95 million barrels last week to 367.2 million, the API said. The Energy Department’s weekly report, scheduled for release at 10:30 a.m. in Washington may show supplies rose 1.5 million barrels, based on the Bloomberg News survey.

Via - www.bloomberg.com

 

Rolls Royce, Apple, Righthaven, Louis Vuitton: Intellectual Property

Rolls-Royce Group Plc (RR/) must lower the $3.7 billion in damages sought in a patent lawsuit against United Technologies Corp.’s Pratt & Whitney because the jet- engine maker overstated the effect of competition, a judge ruled.

Estimates for engine prices, units sold and the value of service contracts are “based on misstatements of the law, a lack of sound evidence, and unsupported economic assumptions,” U.S. District Judge Leonie Brinkema in Alexandria, Virginia, said in a May 4 ruling. Brinkema didn’t say what the damages can be should Rolls-Royce prove during trial that Pratt used a patented design for engine fan blades without permission.

Rolls-Royce claims Pratt’s GP7200 Fan Stage violates patent rights issued in 2000 for a Rolls-Royce Trent engine used on Airbus SAS A380s. London-based Rolls-Royce argued that it should be entitled to $1.35 billion for the lower prices it said it was forced to charge on engines, plus $2.3 billion in profit lost because of engines sold by a venture of Pratt and General Electric Co. (GE)

The list price for the Trent engine is $20 million, which was discounted an average of 87.3 percent to $2.54 million, the judge said, citing company data. She rejected Rolls-Royce arguments that without competition from East Hartford, Connecticut-based Pratt’s GP7200 engine, the discount would have been 77 percent, for a price of $4.6 million, the filing shows.

A damages consultant hired by Rolls-Royce “cannot just simply assume that airlines would happily pay millions of dollars more per engine,” Brinkema wrote in throwing out the consultant’s report. “It is not even clear whether Airbus would have undertaken the project of producing the Airbus 380 in the first place if it had only one engine supplier to rely upon.”.

“Rolls-Royce takes protection of its technology and intellectual property very seriously and will vigorously pursue legal action against any attempts to infringe it,” Mia Walton, a spokeswoman for Rolls-Royce in the U.S., said in an e-mail.

Pratt told the judge it plans to install different blades on further engines that design around the Rolls-Royce invention.

As an alternative to the $3.7 billion in damages, Rolls- Royce said it could instead be entitled to $1.3 billion as a lump sum of royalties owed. The company based that claim on interest from the consultant’s estimate that a royalty agreement with Pratt would have been signed for $493 million in 2000.

Brinkema said Rolls-Royce could ask for $493 million at most, and Pratt can challenge that figure because it equals almost the entire amount Pratt invested in the joint venture with GE and is “highly speculative.”

Pratt in November filed its own patent-infringement case against Rolls-Royce with the U.S. International Trade Commission in Washington. A trial is scheduled for October before the agency, which has the power to block imports of products found to violate U.S. patents.

The case is Rolls-Royce Plc v. United Technologies Corp. (UTX), 10cv457, U.S. District Court for the Eastern District of Virginia (Alexandria).

Apple, HP, Aruba Accused by Linex of Infringing Wi-Fi Patents

Hewlett-Packard Co. and Apple Inc. were among five companies accused by closely held Linex Technologies Inc. of infringing patents for wireless communications used in laptop computers.

Aruba Networks Inc. (ARUN), Meru Networks Inc. (MERU) and Ruckus Wireless Inc., all based in Sunnyvale, California, were also named in the May 6 complaint with the U.S. International Trade Commission in Washington, which has the power to block imports of products found to infringe patents. Linex also filed suit in federal court in Wilmington, Delaware, the same day, seeking cash compensation.

Linex, a Palm Beach Gardens, Florida-based licenser of technology, claims two of its patents cover inventions used in the standard for wireless communication, including a way to limit the fading of signal strength in buildings. The complaint cites at least nine models by Palo Alto, California-based HP, including the Pavilion and Envy laptops, as well as Cupertino, California-based Apple’s MacBook Air, MacBook Pro, Airport Extreme and Time Capsule products.

The case is In the Matter of Certain Wireless Communication Devices and Systems, Complaint No. 2802, U.S. International Trade Commission (Washington). The civil case is Linex Technologies Inc. v. Hewlett-Packard Co. (HPQ), 11cv400, U.S. District Court for the District of Delaware (Wilmington).

For more patent news, click here.

Copyright

Righthaven Brings in Dale Cendali for Copyright Dispute

Righthaven LLC, the Las Vegas-based company that has filed more than 200 cases attempting to enforce copyrights for Stephens Media Group, has turned to a marquee name for one of its suits.

According to a May 4 filing, Righthaven hired Kirkland & Ellis LLP’s Dale Cendali to help litigate a case against the Pahrump Life website on which an article from the Las Vegas Review-Journal was posted without authorization.

Cendali replaces Righthaven’s in-house counsel John Charles Coons, who withdrew from the case Feb. 2, according to court records.

Cendali may be best known for her successful representation of Harry Potter’s U.S. publisher Scholastic Corp. (SCHL) in a trademark case. She has also represented Associated Press in the copyright infringement case involving the photo of President Obama against artist Shepard Fairey.

When she was with Los Angeles-based O’Melveny & Myers LLP she represented the Martha Graham Center of Contemporary Dance in a trademark suit involving the name of the late Martha Graham. Cendali moved from O’Melveny to Chicago-based Kirkland & Ellis in March 2009.

Righthaven hasn’t been faring well with its suits. In the case against Pahrump Life, U.S. District Judge James C. Mahan noted in an April 27 order that the company’s ownership of the newspaper’s copyrights is presently being contested in another case, and may not have standing to sue anyone for copyright infringement.

The case is Righthaven LLC v. Pahrump Life, 2:10-cv-01574- JCM-PAL, U.S. District Court, District of Nevada (Las Vegas).

‘Origami Series’ Painted by Sarah Morris Infringes, Designers Say

Six designers of origami figures have sued a New York artist for copyright infringement.

The designers, who have created diagrams for creating complex folded-paper figures such as weasels and praying mantises, accuse Sarah Morris of using their designs without authorization in her paintings.

According to an art-auction website, Morris uses household gloss paint on square-format canvasses based on an exploration of “the grid forms that result from the creasing and folding” of paper or other materials.

A press statement for a 2008 exhibition of her work in London that is quoted on the auction website says that Morris based her origami series “on found origami diagrams.”

The six artists, one of whom is Livermore, California-based physicist Robert J. Lang, say the so-called “found” diagrams are their original work for which they didn’t give Morris permission to use.

The case was filed federal court in San Francisco March 22, and, so far, Morris is unrepresented by counsel and has made no court filings herself. An e-mail to New York’s Friedrich Petzel Gallery, which has shown work from the Morris Origami series, didn’t receive an immediate response.

The six origami designers are represented by Andrew K. Jacobson of the Bay Oak Law Firm APLC and Caroline Noel Valentino of Haims MacGowan Valentino & Peebles LLP, both of Oakland, California.

The case is Robert J. Lang v. Sarah Morris, 3:11-cv-01366- EMC, U.S. District Court, Northern District of California (San Francisco).

For more copyright news, click here.

Trademark

Louis Vuitton Rises, Gucci Slips in Brand-Valuation Study

Louis Vuitton, the French maker of laminated canvas handbags, is the world’s most-valuable luxury brand for the sixth consecutive year, a research group said.

The brand, owned by Paris-based LVMH Moet Hennessy Louis Vuitton SA (MC), has a value of $24.3 billion, an increase of 23 percent from 2010, according to Millward Brown Optimor’s 2011 BrandZ study published yesterday. That’s almost as much as the combined values of Hermes, Gucci and Chanel, which ranked second, third and fourth in this year’s luxury-brand standings.

Vuitton’s value amounts to almost 28 percent of LVMH’s market capitalization. The brand is benefiting from demand for status symbols in developing markets such as Brazil, Russia, India and China, and the perception in Europe and the U.S. that its products are exclusive, said Cristiana Pearson, a director at Millward Brown Optimor who led the study.

“As we continue to come out of the recession, people will continue to spend more on luxury, and the BRIC countries don’t look like they’re slowing,” with growth in Brazil and China particularly strong, Pearson said by phone from London.

Hermes International (RMS) SCA, in which LVMH holds a 20.2 percent stake, posted the biggest increase in brand value in the luxury industry with a 41 percent jump to $11.9 billion, according to the BrandZ study. Florence, Italy-based Gucci’s value declined 2 percent to $7.45 billion, affected by French parent PPR (PP) SA’s financial performance, Pearson said. Chanel advanced 23 percent to $6.82 billion.

Hennessy, Moet & Chandon and Fendi placed seventh, eighth and ninth in the study, respectively, with values of $3.42 billion to $5 billion, meaning LVMH, the world’s largest luxury- goods maker, owns or has a stake in five of the industry’s 10 most-valuable brands.

The Cartier and Rolex brands ranked fifth and sixth in the luxury-brand ranking, while Burberry replaced Tiffany as No. 10. The brand values of Burberry, Chanel and Vuitton benefited from investment in technology, Millward Brown Optimor said.

Vuitton placed 26th worldwide among 100 companies across 13 industries in the BrandZ study. Apple Inc. (AAPL), maker of the iPad tablet, is the world’s most valuable brand, with its estimated value surging 84 percent from a year earlier to $153 billion, according to Millward Brown Optimor.

The study was based on interviews with consumers as well as analysis of company performance.

Taiwan Lawmakers Looking at Revisions to Trademark Law

A measure under consideration by Taiwan lawmakers would expand the scope of that nation’s trademark law, the China Post reported today.

Holograms, three-dimensional shapes and movements such as the startup animations in some mobile phones would receive protection, Wang Mei-hua, director-general of Taiwan’s Intellectual Property Office told the China Post.

A ban on the online listing of fake items would be barred under the proposed bill, the newspaper reported

Minimum limits for trademark infringement fines would be reduced under the bill, according to the China Post.

Via - www.bloomberg.com

 

Bernanke’s QE2 Averts Deflation, Spurs Rally, Expands Credit

U.S. Federal Reserve Chairman Ben S. Bernanke

Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Brendan Hoffman/Bloomberg

BlackRock's Koesterich on Treasuries

May 10 (Bloomberg) -- Russ Koesterich, global chief investment strategist at BlackRock Inc.'s iShares unit, discusses his asset allocation strategy. He talks with Francine Lacqua on Bloomberg Television's "On The Move." (Source: Bloomberg)

Ben S. Bernanke’s $600 billion strike against deflation is paying off, as stock and debt markets rise, bank lending grows and economists forecast faster growth.

The Standard & Poor’s 500 Index has gained 13.5 percent since the Federal Reserve chairman announced on Nov. 3 the plan to buy Treasuries through its so-called quantitative easing policy. Government bond yields show investors expect consumer prices to rise in line with historical averages. The riskiest companies are obtaining credit at the cheapest borrowing costs ever and Fed data show that commercial and industrial loans outstanding are rising for the first time since 2008.

“Looking at market indicators, you have to be convinced it’s been a success,” said Bradley Tank, chief investment officer for fixed-income in Chicago at Neuberger Berman Fixed Income LLC, which oversees about $83 billion. “When you get into periods of aggressive central bank easing, and we’re clearly in the most aggressive period of easing that we’ve ever seen, the markets tend to lead the real economy.”

The Fed said last month it won’t need to extend the $600 billion buying program beyond its scheduled end next month. Payrolls expanded by 244,000 in April, the biggest gain since May 2010, after a revised 221,000 increase the prior month, the Labor Department said May 6. The jobless rate climbed to 9 percent, the first increase since November, a separate survey of households showed.

‘Stopped the Hemorrhaging’

“We are starting to see the impact, albeit slowly,” said Jim Sarni, managing principal in Los Angeles at Payden & Rygel, which oversees more than $55 billion in fixed-income assets. “The unemployment rate has slowly started to come down. We have a long way to go, but at least it stopped the hemorrhaging.”

Bernanke’s quantitative easing program, dubbed QE2 by analysts and investors because it followed an earlier round of $1.7 trillion in bond purchases in 2009 and the first quarter of 2010, was criticized by officials around the world.

Chinese Premier Wen Jiabao said that the policy would foster financial instability and asset bubbles. Six days after the Fed suggested at its Sept. 21 meeting that it was ready to start buying Treasuries, Brazilian Finance Minister Guido Mantega said governments were engaging in a “currency war.” German Finance Minister Wolfgang Schaeuble called the asset- purchase program “clueless” on Nov. 5 and suggested it was designed to erode the value of the U.S. dollar.

Fighting Deflation

Back in November, the biggest concern for the Fed was preventing a general decline in prices, which can paralyze an economy by hindering investment, as the jobless rate held at 9.5 percent or higher for 14 months. Core consumer prices rose 0.6 percent in October from a year earlier, the smallest gain since records began in 1958, government data at the time showed.

“Measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate” of promoting full employment and containing consumer prices gains, the central bank’s Federal Open Market Committee said in a Nov. 3 statement.

Since reaching a 20-month low of 2.18 percent in August, a bond market measure of inflation expectations the Fed uses to help determine monetary policy has risen to 2.87 percent. The five-year forward breakeven rate projects what consumer price increases may be beginning in 2016, smoothing blips in inflation expectations from swings in oil prices and other temporary events.

Controlling Inflation

The gauge is down from 3.28 percent in December even with energy and food costs reaching record highs in a sign that investors expect Bernanke will be able to withdraw the unprecedented stimulus before inflation gets out of hand. The current level compares with the average of 2.71 percent in the five years before credit markets seized up in 2008. The core inflation rate has increased to 1.2 percent.

“We’ve seen a bit of a lift in breakeven inflation rates, but it’s not dramatic,” Tank of Neuberger Berman said.

The Fed’s policy of pumping cash into the financial markets risks longer term damage, according to Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees $85 billion. He compared the Fed’s current policy to the one it adopted following recession of 2001-2002, when policy makers slashed its target rate to 1 percent in 2003 to spark the housing market and the economy.

“It was a failure,” Bittles said. “I don’t think it’s very healthy to artificially boost stock prices. What are the long-term consequences of that? We don’t know. The Fed did this with housing back in the last decade, and the unintended consequences were a disaster.”

Dollar Depreciation

QE2 has contributed to an 11.9 percent decline since August in the dollar based on Bloomberg Correlation-Weighted Indexes, which measure its performance against nine of the most-traded currencies in the world, including the euro, yen and pound.

Gold and silver reached records in April as investors sought to hedge financial assets against the weakening dollar and accelerating inflation. Gold advanced 25.8 percent in the past year, while silver more than doubled as investors increased their holdings in exchange-traded products to a record 15,518 metric tons on April 26.

Rising commodities may be restraining the economy. The Commerce Department said April 28 that the gross domestic product rose at a 1.8 percent annual rate in the first quarter after a 3.1 percent pace in the final three months of 2010. The Bloomberg Consumer Comfort Index fell to minus 46.2 in the week ended May 1, the lowest level since the end of March, as the highest gasoline prices in almost three years soured Americans’ views of the buying climate.

‘Fed’s Ventilator’

“What’s important for people to understand is the Fed is simply stepping in to create some credit in a situation where the banking system apparently is unable to create credit,” said Paul Kasriel, chief economist at Northern Trust Corp. in Chicago. “The patient right now is incapable of breathing on its own, and it needs the help of the Fed’s ventilator.”

Credit provided by the Fed, commercial lenders, savings and loans, and credit unions increased 1.67 percent in the last three months of 2010, according to a Northern Trust report. That compares with a long-term average of 4.58 percent since 1953. Treasury yields may fall after QE2 ends as investors seek to protect themselves from a worsening economy, Kasriel said.

Yields on 10-year Treasuries, which are a benchmark for everything from home mortgages to corporate bonds, have fallen to 3.16 percent from this year’s high of 3.74 percent on Feb. 8, according to Bloomberg Bond Trader prices. Treasuries of all maturities have returned 1.76 percent this year, while corporate bonds have gained 4.1 percent, including reinvested interest, Bank of America Merrill Lynch indexes show.

‘Improving Gradually’

In deciding to end QE2 as scheduled in June policy makers are betting that economy will rebound. The median estimate of 73 economists surveyed by Bloomberg is for GDP to exceed 3 percent in the remaining three quarters of the year.

“The labor market is improving gradually,” Bernanke said at a press conference after the Fed’s two-day meeting ended April 27. “The longer it goes on, the more confident we are.”

Bernanke said the Fed would initially hold its balance sheet, currently with $2.723 trillion in assets, steady after completing the purchases by reinvesting the proceeds of maturing Treasuries and mortgage bonds it during QE1.

The Fed has bought about $470 billion of government debt under the program, said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC. That money has encouraged investors to wade into riskier assets.

Record Pace

Speculative-grade companies have sold $130.7 billion of junk bonds this year, compared with $106.3 billion at this time last year, when sales set a record $287.6 billion, according to data compiled by Bloomberg. Yields on debt rated below Baa3 by Moody’s Investors Service and less than BBB- at S&P average 7.23 percent, down from 8.88 percent a year ago and 14.7 percent in 2009, according to Bank of America Merrill Lynch indexes.

Banks eased lending terms in the first quarter as they forecast improvement in the U.S. economy and companies sought more loans, a Fed survey released this week of loan officers at 55 domestic banks and 22 U.S. branches and agencies of foreign banks conducted from March 29 to April 12 showed.

Fifty-five percent of domestic banks surveyed reported improvements in the credit quality of large and middle-sized loan applicants, the Fed said. About 35 percent reported improvements in small firms, according to the survey.

Commercial and industrial loans totaled $1.25 trillion as of April 20, according to the Fed. While that’s down from the peak of $1.62 trillion in October 2008, it’s up from last year’s low of $1.21 trillion in September, marking the longest sustained increase since 2008.

Household credit limits rose about $30 billion in the first three months of this year from the previous period, the first increase since the third quarter of 2008, the New York Fed Bank said May 9 in a report. Foreclosures declined 17.7 percent and bankruptcies fell 13.3 percent.

QE2 “slowed the pace of deleveraging, and it clearly helped to mitigate the risk of deflation,” said William Cunningham, co-head of global active fixed income in Boston at State Street Global Advisors, which oversees $2.1 trillion. “It had a positive impact on net.”

via bloomberg.com
via deflationwatch.com

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