By The Arizona Daily Star, Tucson
Publication: The Arizona Daily Star (Tucson)
We agree that public safety must be a priority, but we believe there are superior alternatives to the unfair rental tax. Renters and homeowners both already pay property tax, although renters pay indirectly, through their landlords.
In addition to fast-tracking the core-services-tax vote, the City Council must:
–Raise fees that residents choose to pay, and the increases must be meaningful. For instance, Letcher’s proposal would raise adult admission to city pools from $1 to $2, according to Kelly Gottschalk, the city’s new chief financial officer. That’s not much; those for whom swimming is purely recreational should be asked to pay more.
–Step up and cut its own costs. The city gives each council member $399,000 to cover staffing, ward offices and other expenses; it’s time to dig deep and give back as much as possible, even if that means cutting staff support.
–Evaluate whether more layoffs of city workers may be necessary.
–Bite a politically bitter bullet and make deep cuts to the city’s outside-agency contributions, which total $12 million. Unless these agencies are important to health, public safety, education or protecting vulnerable populations, the social contract must be voided.
This will be difficult, because each group has assertive advocates, and no cut will be politically popular.
Among the outside agencies: the Critical Path Institute, the Metropolitan Education Commission, the Pima County-Tucson Women’s Commission, Tucson Regional Economic Opportunities, Tucson Botanical Gardens, Tucson Sister Cities Association, Tucson Museum of Art, Tucson Children’s Museum, Tucson Pops Orchestra, Tucson-Pima Arts Council and the Southern Arizona Regional Science and Engineering Fair.
The city has budgeted $258,000 for events such as the Rodeo Parade and Tucson Meet Yourself that must either go into hibernation, downsize or find private support during the crisis. The city should get out of the neighborhood-mailings business altogether until the economy recovers; bulletin boards, Web pages and e-mails should suffice.
The city’s television station, Access Tucson, is budgeted at $758,000 and should be cut to the bone, preserving primarily its valuable live programming of council meetings and study sessions.
The crisis is real. The answer is not a rental tax. Instead, the council must move ahead with all deliberate haste on getting a core-services tax to voters, making significant increases in fees that residents choose to pay and taking a politically courageous stance on cutting spending until the crisis is past.
To see more of The Arizona Daily Star, or to subscribe to the newspaper, go to http://www.azstarnet.com . Copyright (c) 2009, The Arizona Daily Star, Tucson Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com , call 800-374-7985 or 847-635-6550 , send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
Deadline looms for college saving tax deduction
December 31st, 2009 | Posted by taxBy Wendy Leonard Deseret News
Publication: Deseret Morning News (Salt Lake City)
Utah taxpayers have until 5 p.m. Thursday to make tax-deductible contributions to valuable college savings plans. Benefits for the year will run out with the year-end tax deadline, but Utahns can take advantage of additional savings incentives by contributing up to $1,740 to individual Utah Educational Savings Plan accounts. The tax benefits increase for joint filers is up to $3,480. “The Utah state tax credit deadline is a reminder to Utahns to prepare financially for college expenses,” said Lynne Ward, UESP director.
The accounts, he said, are easy enough to manage to allow for saving whenever it is feasible. UESP is Utah’s state-sponsored savings option available to comply with Section 529 of the Internal Revenue Code, and is administered and managed by the Utah State Board of Regents and the Utah Higher Education Assistance Authority. Earnings on each account are exempt from either federal or Utah state taxes when used for qualified higher education expenses such as tuition, fees, certain room and board costs and required books and supplies at any eligible educational institution that accepts federal financial aid, not just institutions in Utah. Earlier this year, UESP was ranked by investment researchers at Morningstar as one of the top five 529 plans in the country. It has nearly $3 billion in assets and more than 149,000 accounts, with approximately 113,800 belonging to individuals outside of Utah. Ward said the program has undergone a number of improvements in the past year, including lower fees, new investment options and improved online account management. UESP, she said, works for all families, regardless of household income. To receive the 2009 Utah state tax credit, new account applications and contributions need to be submitted to the UESP office, located at The Gateway 2, Board of Regents building, 60 S. 400 West, Salt Lake City, by 5 p.m. on Dec. 31. Contributions can also be made online at uesp.org, or mailed to UESP at P.O. Box 145100, Salt Lake City, UT 84114-5100. “With the year-end tax deadline approaching, now is the time to remind Utahns that saving for college with the Utah Educational Savings Plan shows our children that the decision to seek a college education is as important as the decisions we make regarding a career and family,” said Utah Commissioner of Higher Education William Sederburg. “It requires long-term preparation.” To receive the tax credit, beneficiaries on the accounts must have been designated before turning 19. More information about the plan can be found online at www.uesp.org . e-mail: wleonard@desnews.com
Gold: What a Difference a Month Makes
December 31st, 2009 | Posted by goldLess than one month ago today, the price of gold was trading above $1,200 per ounce, and hitting record highs what seemed like every day. Since then, the fortunes of gold have reversed dramatically. After breaking below its 50-day moving average before Christmas, gold attempted to rally back above that level on Monday but was quickly met with additional selling. Today, however, gold is making another run at the 50-day after failing to make a new low yesterday.
click to enlarge
//
Have Your Gold … and Dividends, Too
December 31st, 2009 | Posted by goldThis Fund does not invest directly in precious metals but buys equity in companies involved in the precious metal industry. Under normal market conditions, the Fund will attempt to achieve its objectives by investing at least 80% of its assets in equity securities of companies principally engaged in the gold industry and the natural resources industries. The Fund will invest at least 25% of its assets in the equity securities of companies principally engaged in the exploration, mining, fabrication, processing, distribution or trading of gold or the financing, managing, controlling or operating of companies engaged in “gold-related” activities. In addition, the Fund will invest at least 25% of its assets in the equity securities of companies principally engaged in the exploration, production or distribution of natural resources, such as gas, oil, paper, food and agriculture, forestry products, metals and minerals as well as related transportation companies and equipment manufacturers.
The income component is generated by the sell of covered calls against the Fund’s holdings. GGN pay a monthly dividend of $0.14 for an annual dividend of $1.68. Trading at $16.00 per share, the annual dividend yield is 10.5%. As of December 29, 2009 the fund has a one-year return of 78.2% but only sells at a 3% premium to its NAV. Over the Fund’s four year history, the range has fluctuated from a 56% premium in January 2009 to a 10% discount in April 2008. GGn has a market cap of $350 million and an expense ratio of 1.28%.
What the investing gurus are saying about gold:
Marc Faber says gold stocks are the best bet against global financial meltdown.
Jim Rogers has already predicted that gold will zoom to touch $2000 per ounce. He says gold consuming countries like China and India, central bank buying and declining dollar value are driving up gold prices and therefore, gold is not sitting on a bubble.
In contrast, Bloomberg quoted Nouriel Roubini as saying the idea of gold going to $2,000 per ounce was “utter nonsense”. Maybe $1,100 or so, says Roubini, but that’s about it.
//
Investors like myself tend to get a little romantic about gold.
After all, we’re in the midst of the greatest bull market in history since 2001. It’s hard not to love gold. Sure, it pays you squat in income. But the dollar also pays you nothing and even if it did, when adjusted for its long-term decline vis-à-vis gold and hard currencies— what are you left with?
The dollar is dead money.
It also shares this role with the other drunks at the currency bar; only on a relative scale, the EUR and the rest are a bit better.
Still, since 2005 all currencies are declining against gold…
Since I expect interest rate volatility to emerge in 2010, I also expect a more subdued environment for gold and silver. Higher rates, if only temporary, will hurt gold and silver. Evidence of this price action already began in mid-December.
But as we approach the second half of the year bonds will rally and so will most commodities, including the metals. I just think it’ll be a little bumpy over the first half.
By 2015, give or take a year or two, I think gold and silver will peak. By that time, prices should be about $2,500 or more for gold and $75 an ounce or more for silver. Sound outlandish? Eight years ago I forecasted similar projections at numerous international seminars; people don’t look at me like I’m crazy anymore.
Unfortunately, the last super-cycle for gold and silver will also coincide with a major conflict, crises or crash across world markets, sparking the next global recession or worse. That will be the time to sell gold and silver. But it’s still not too late to buy gold or silver at these prices.
In general, my favorite commodities in 2010 include the grains, coffee, cocoa, soybean and palm oil. I also like gold and silver but believe 2010 will be a moderate year for the metals, meaning maybe a 10% to 15% gain. I’m neutral-to-bearish on crude oil but like natural gas.
Currencies (Specifically the Dollar…)Congress and America’s politicians must literally live on another planet.
These guys and dolls just keep on spending with no clear understanding about the long-term fiscal consequences. Someone should show Congress what a buck bought back in 1970 and what it buys now.
Of course, spending like mad goes back decades and was escalated by Reagan until Bush Jr. took the booby-prize. Now we have Obama and the financial crisis he inherited. What a mess…
Here’s why 2009 was the Year of Dollar-Bashing
The dollar is hated by most investors – in a way it’s similar to their romantic relationship with gold, only in reverse.
The dollar might post a rally in 2010 on higher interest rate expectations and, possibly, a blowup or a renewed banking crisis in Europe, which would be dollar bullish. Personally, I’d use any significant U.S. dollar rally as an opportunity to unload and buy gold, silver, Norwegian kroner, Canadian dollars and the Chinese yuan, which you can do through currency synthetics at Everbank.
The CAD, by the way, is flat in December versus the surging American dollar while most other currencies are down sharply; that’s a bullish sign for the Canuck buck.
What would make me turn bullish on the U.S. dollar?
Budget surpluses like the mid-1990s, a deficit VAT to reduce some of that never-ending red ink and less government in Washington. Also, U.S. military withdrawals in Iraq and Afghanistan.
Ultimately though, I have zero confidence in the dollar. Its best days are numbered. The American financial model is redundant and Asia is where the big money lies this century. Asia is now largely a creditor region – similarly to the United States after WW II.
It would be prudent for investors to follow the path of those nations with surplus currencies harboring low-to-no external deficits and a high savings rate. The dollar, the reserve system and the global exchange-rate mechanism have been dysfunctional for more than three decades. And at some point, another currency will challenge the dollar for supremacy. Like all economic confrontations, this could likely result in a crisis, conflict and, ultimately, war. Such is the history of nations.
Disclosure: none
//
Stocks on the Move: Barrick, Halliburton, YRC
December 31st, 2009 | Posted by stockDec. 31 (Bloomberg) — Shares of the following companies may have unusual moves in U.S. trading. Stock symbols are in parentheses, and prices are as of 8:45 a.m.
Gold and mining companies advanced after the metal rose in London, heading for a ninth straight annual gain, on speculation climbing commodity prices and a weaker dollar will spur demand for the metal as a hedge against inflation.
Barrick Gold Corp. (ABX), the largest gold miner, gained 1.4% to 40.10. Newmont Mining Corp. (NEM), the largest U.S. producer, added 0.9% to 48.03. Randgold Resources Ltd. (GOLD) rose 1.4% to 80.56. Gold Fields Ltd. (GFI) increased 1.8% 13.15. Hecla Mining Co. (HL) climbed 2.2% to 6.38.
American Tower Corp. (AMT): The second-largest U.S. operator of mobile-phone tower is in talks to buy a controlling stake in Essar Telecom Infrastructure Pvt. Ltd., a unit of India’s Essar Group, the Wall Street Journal reported, citing an unidentified person. American Tower may pay 20 billion rupees ($427.8 million), according to the report.
City National Corp. (CYN): The parent company of City National Bank said it bought back $200 million of preferred shares from the U.S. Treasury Department and intends to repurchase the remaining $200 million held by the government.
Halliburton Co. (HAL) rose 1.4% to 30.39. The world’s second-largest oilfield-services provider had its share estimate raised to 36 from 34 at Credit Suisse Group AG, which cited better opportunities to increase revenue growth than its rivals.
Pantry Inc. (PTRY): The owner of the Kangaroo Express convenience-store chain was rated new “neutral” at Global Hunter Securities.
Pilgrim’s Pride Corp. (PPC): The chicken producer that just emerged from bankruptcy protection said it will pay $4.5 million over three years as part of a settlement agreement over allegations of identity theft and the employment of individuals who are not authorized to work in the U.S.
Preferred Bank (PFBC) fell 7% to 2. The Los Angeles-based bank was cut to “underperform” from “market perform” by FBR Capital Markets Corp., which said the company may need to raise money to bolster its capital.
YRC Worldwide Inc. (YRCW) surged 14% to 1.13. The largest U.S. trucking company said bondholders agreed to swap their debt for equity in the largest U.S. trucker, enabling the company to avoid a bankruptcy filing that may have resulted in liquidation.
To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net
Stock Picks: MasterCard, Interpublic, YRC
December 31st, 2009 | Posted by stock12-31-2009
MasterCard (MA)
Signal Hill Capital initiates coverage with buy
Signal Hill analyst Mayank Tandon initiated coverage of MasterCard with a buy rating on Dec. 31, saying the second-biggest credit-card company “is positioned at the heart of the global shift from paper to plastic”.
Tandon expects a return to low double-digit revenue growth for MasterCard on a global consumer recovery in fiscal 2010. “Combined with continued operating margin gains, we see MasterCard growing earnings at a 20-30% pace over the next 3-5 years,” the analyst wrote in a note.
Tandon noted that after seeing a decline in payment volumes as consumers cut back on spending, MasterCard “is seeing early signs of life”. Better payment volumes, favorable currency effects, and easier comparisons should all translate into accelerating revenue trends through fiscal 2010 and into fiscal 2011, acting as a catalyst for the shares, the analyst said.
“As one of the premier companies in the payment space, with strong secular tailwinds, we believe MasterCard is a core holding name for investors”, Tandon wrote. The analyst sees upside in the share price to $325 within 12-18 months.
Interpublic Group of Companies (IPG)
Wedbush Securities upgrades to outperform from neutral; raises estimates, price target
Wedbush analyst James Dix lifted his rating on shares of Interpublic Group on Dec. 31 as he raised estimates on the second-largest U.S. advertising company. Dix thinks Interpublic “should be able to return to peer organic revenue growth in 2010-11.”
The analyst raised his fourth-quarter earnings per share (EPS) estimate to 25 cents from 23 cents, and his full-year 2010 EPS forecast to 34 cents from 29 cents.
Dix sees “positive balance sheet catalysts” that could lift the stock by year-end 2010 as the company’s operational turnaround regains traction. He estimates that Interpublic should finish 2010 with over $2.0 billion in cash on its balance sheet, with its ratio of total debt to EBITDA (earnings before interest, taxes, depreciation and amortization) of around 2.5x, down from 3.1x at Sept. 30, 2009.
The analyst raised his price target on the shares to $9 from $5.50.
YRC Worldwide (YRCW)
Standard & Poor’s Equity Research maintains hold
YRC Worldwide, the largest U.S. trucking company, said on Dec. 31 that bondholders agreed to swap their debt for equity, enabling the company to avoid a bankruptcy filing that may have resulted in liquidation. S&P equity analyst Kevin Kirkeby said in a Dec. 31 note that YRC reported that 88% of certain notes were tendered, allowing it to proceed, as per revised terms from lenders, with a debt restructuring.
Completion of the debt-for-equity exchange also allows YRCW to defer interest and fee payments while it continues to struggle with liquidity constraints, he said. Current shareholders will see significant dilution as tendering noteholders will receive stock representing a 94% equity stake in the company, Kirkeby said.
The analyst maintained a $2 target price on the shares.
Corporate Bonds: 2010′s Big Winners
December 31st, 2009 | Posted by stock12-31-2009 (Bloomberg) — AT&T Inc. (T), with $6.63 billion of debt coming due, may be the biggest beneficiary of the record rally in U.S. corporate bonds in 2009.
Borrowing costs have fallen to almost a five-year low, meaning the Dallas-based phone company and the rest of corporate America with $429 billion of debt maturing are poised to shave $17.4 billion off annual interest expense in 2010, according Moody’s Investors Service and data compiled by Bloomberg.
Investors are lending money to borrowers at ever-cheaper rates as the economy rebounds and borrowers accumulate cash. Non-financial companies had $708 billion of cash at the end of the third quarter, up from about $500 billion between 2004 and 2008, according to New York-based JPMorgan Chase & Co. (JPM).
“Managements are running these companies very lean and very efficiently,” said Mark Kiesel, the global head of corporate debt portfolios at Newport Beach, California-based Pacific Investment Management Co., which manages the world’s largest bond fund. “Corporate profit growth is improving, the credit fundamentals have turned positive.”
Non-financial borrowers have $96 billion of debt maturing in 2010, 18.6 percent less than this year, according to Moody’s. Financial issuers led by Bank of America Corp. (BAC) have $333 billion due, a 30 percent decline. Not only are refinancing needs falling, so are interest expenses. Yields tumbled to 5.58 percent on Dec. 17, the lowest since March 2005, Merrill Lynch & Co. indexes show.
Standard & Poor’s raised the ratings on 183 U.S. borrowers this quarter and cut 180, the first time upgrades exceeded downgrades since the three months ended June 30, 2007, according to Bloomberg data. Fewer corporate debt sales as government borrowings increase will help the securities outperform Treasuries again in 2010, according to Kiesel.
While record debt sales by the government led to a 3.58 percent loss for Treasuries, optimism that a recovering economy will make it easier for companies to meet debt payments spurred a 26 percent average return this year for corporate bonds, including reinvested interest, according to Merrill Lynch indexes. The securities lost 10.9 percent in 2008 while Treasuries gained 14 percent.
Treasurers took advantage of soaring demand to sell a record $1.24 trillion of corporate bonds this year, up from $874 billion in 2008, Bloomberg data show.
Citigroup Inc. (C), once the most valuable bank in the nation, is the biggest underwriter of bond sales for U.S. companies this year with 14.3 percent of the market, data compiled by Bloomberg show. The New York-based lender came ahead of JPMorgan Chase & Co. with a 13.2 percent market share and Bank of America Merrill Lynch at 12.8 percent.
Government programs to guarantee sales by banks, coupled with special lending programs by the Federal Reserve, helped revive confidence after credit markets seized up following the collapse of Lehman Brothers Holdings Inc. in 2008. Financial issuers sold $216.4 billion of non-government-guaranteed debt this year, the least in a decade, Bloomberg data show.
“As far as banks go, especially the large, too-big-to-fail banks, I think they’re out of the woods,” said Matt Freund, vice president of fixed-income investments at San Antonio-based USAA Investment Management Co., which oversees $73.6 billion of assets.
A year ago, corporate yields averaged about 9.76 percent, Merrill Lynch data show. For borrowers that need to refinance in 2010, the decline amounts to as much as $17.4 billion in potential annual interest savings on $429 billion of bond sales.
AT&T has $6.63 billion of debt due in 2010, the most of any non-financial borrower in the S&P 500 index, Bloomberg data show. The largest U.S. phone company sold $6.5 billion of bonds in the U.S. in 2009 at yields ranging from as high as 6.59 percent in January to 4.95 percent for an offering issued through its Bellsouth Corp. unit in April.
Including debt that can be redeemed at face value by holders, AT&T could have as much as $7.3 billion maturing, said Fletcher Cook, a spokesman for the company. He declined to comment further on the company’s refinancing plans.
Bank of America Corp., the biggest U.S. lender, has $80.1 billion of bonds maturing next year, the most of any S&P 500 company, Bloomberg data show. The Charlotte, North Carolina- based bank’s fortunes improved this year, allowing it to raise $19 billion from a stock sale this month and redeem $45 billion of U.S.-owned preferred shares issued as part of a bailout.
“Our consumer banking franchise is able to fund the loan book,” said Jerry Dubrowski, a spokesman for Bank of America. “That’s an important advantage.” Bank of America had $975 billion in deposits and $914 billion of loans and leases at the end of the third quarter, according to a filing with the U.S. Securities and Exchange Commission.
The bank sold $8.28 billion of dollar-denominated debt without a government guarantee in 2009, Bloomberg data show. The lender issued bonds without U.S. backing at yields that fell from 7.738 percent in a May issue to 6.546 percent in a July offering, the data show.
AT&T and Bank of America won’t “have any problems” raising cash in the corporate bond market, Kiesel said. “If you and I were talking a little over a year ago, the answer would have been different. It’s amazing how things have changed.”
Financial companies sold $309.4 billion of debt through the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program, which expired on Oct. 31, Bloomberg data show. The program provided a guarantee for financial company debt in exchange for a fee.
Companies sold $41.6 billion of TLGP bonds that mature in 2010, $99.5 billion the next year and $166 billion in 2012, according to data compiled by Bloomberg.
“In the latter half of 2010 we would expect banks to start thinking about the TLGP debt that matures in 2012,” said Anne Daley, a managing director in U.S. fixed-income syndicate at Barclays Capital in New York.
Financial companies, seeking to shrink their balance sheets as their government backing disappears, may cause bond sales to drop 43 percent in 2010, according to Barclays Capital. Financial company debt shrank 5.17 percent to $16.1 trillion in the third quarter from a year earlier, the lowest level in two years, Fed data show. Non-financial fixed-rate borrowing may decline 30 percent, Barclays forecasts.
Banks in the Americas have diversified their funding sources, raising $51.6 billion in common equity in 2009. U.S. commercial bank deposits soared to $7.7 trillion in November, the highest level on record, Bloomberg data show.
“As banks shrink in size, the need to issue debt declines,” said Pri de Silva, a bank and brokerage analyst at debt research firm CreditSights in New York. “If you shrink the financial system, you’re going to bring down the issuance.”
Of the non-financial amount maturing in 2010, $82 billion consists of investment-grade debt and $14 billion is high-yield, high-risk obligations, Moody’s analysts wrote in a September report. High-yield debentures are rated below Baa3 by Moody’s and BBB- by S&P.
Yields on corporate bonds may rise “moderately” as U.S. government borrowing costs increase in 2010, Kiesel said. The yield on the benchmark 10-year Treasury will fall to 3.45 percent in the first quarter from 3.79 percent yesterday before rising to 3.97 percent in the fourth quarter, according to a Bloomberg survey of 60 economists.
The average U.S. corporate bond yields 2.85 percentage points more than Treasuries, so changes in government debt borrowing costs may produce yields of 6.3 percent to 6.82 percent for company bonds next year, Bloomberg data show.
JPMorgan is more bearish, expecting “significantly higher U.S. Treasury yields by 2010″ as the Fed “moves closer to raising policy rates in 2011 and increased Treasury issuance pushes up” benchmark borrowing costs, the New York-based bank’s analysts wrote in a report this month.
A “wall of cash” may support corporate bonds as assets earning next to nothing in money-market-funds flow into longer- term credit, said Scott MacDonald, head of research at Stamford, Connecticut-based broker-dealer and investment firm Aladdin Capital Management LLC.
Almost $3.27 trillion was invested in U.S. money-market accounts as of Dec. 23, data from Washington-based Investment Company Institute show. While that’s down 17 percent from a record $3.92 trillion in January, it’s up from less than $2.5 trillion before credit markets began to seize up in mid-2007.
Net inflows to taxable bond funds totaled $323.4 billion this year through November, up from $45.4 billion in 2008, according to data compiled by Strategic Insight, a New York- based fund industry research firm.
“You have sort of a tsunami level of flows into bond funds,” said Avi Nachmany, director of research at Strategic Insight, which predicts inflows for 2009 will be $400 billion.
To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Gabrielle Coppola in New York at gcoppola@bloomberg.net
Experts Talk Jobless Claims, 2010 Outlook
December 31st, 2009 | Posted by stock12-31-2009 Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Dec. 31.
Michael Englund, Action Economics
The U.S. Labor Dept. provided a Christmas present as we enter the New Year celebration via a sharp drop in [jobless] claims for the week of Christmas. The decline reinforces what we hope will be the end of payroll declines for this cycle with the close of the year.
Initial claims fell by 22,000 for the fourth week of December to a new recent low of 432,000, following a 26,000 drop to 454,000 (revised from 452,000) in the prior week. Claims are tracking ongoing improvement in the monthly payroll figures, and may suggest upside risk to our forecast of a flat December figure. Yet, today’s drop can mostly be attributed to the difficulty of seasonally adjusting the Christmas week.
Indeed, we are in the vortex of the two-month period of heightened volatility that extends from Veterans Day through the MLK weekend. This volatility is usually associated with upward spikes in claims around each holiday with intervening declines, though in some years the gyrations swing in the opposite direction—as has occurred with this year’s holidays.
Guy LeBas, Jefferies & Co. (JEF)
The final payrolls result of 2009 is likely to show that the total number of jobs in the domestic economy declined by a total of 4.1 million during the year. That would mark far and away the worst year for payrolls in the history of contemporary data collection, with 2008 ranking as a distant second (adjusting for population growth, however, 1945′s job losses exceeded 2009′s by a sizable margin).
For December, the question, as always, is whether the increase in holiday employment exceeded or fell below seasonal adjustments. Given mixed expectations for holiday retail activity and the large number of stores that closed their doors in 2009, we tend to believe that seasonal employment will fall somewhat short of the adjustments, leading to a slight disappointment vs. consensus in total payrolls numbers.
Christian Broda, Piero Ghezzi, Nick Verdi, Barclays Capital
We expect strong global growth in the next two quarters: Asia is likely to slow significantly from its recent rapid pace, while growth in the U.S. and Europe is likely to remain robust. We see relatively little risk of a serious disappointment to this call in 2010, as the forces behind the cyclical rebound in activity in developed economies (ex-Japan) should be strongest in the coming quarters. Inflation risks remain muted globally, as excess capacity remains pervasive.
In China, Korea, and India, we expect inflation to rebound early in the year and this to be a trigger for monetary tightening earlier than in the U.S. and Europe. We expect the end of quantitative easing in major economies to take long-term rates gradually higher globally. But we do not think exit strategies will spook business activity in 2010, as tighter policies should mostly be the result of strong economic activity.
Steven Major, HSBC Bank (HBC)
HSBC’s central view is that U.S. Fed funds will not increase before 2012 and that other central banks, especially those in the developed economies, will keep rates at extremely low levels. Unconvinced by the improving data in the second half of 2009, HSBC takes the view that growth will generally disappoint in 2010, constrained by continuing deleveraging and high levels of unemployment.
The first quarter of 2010 is likely to present opportunities to take more bullish strategic positions, particularly on [sovereign debt]. Heavy government bond supply and the possibility of regional policy divergence, however, could be the catalyst for modestly higher yields near-term. Ultimately HSBC believes this should be regarded as a buying opportunity; 10-year T-Note, [German] Bund, and even U.K. gilt yields are expected to be nearer 3.0% than 4.0% by the summer of 2010.
Given HSBC’s strategic view, that U.S. rates will stay low for longer, and in consideration of the relative cheapening vs. the euro zone, buying 30-year Treasuries at yields above 4.50% is recommended.
Malkiel: Market Risk-Taking Must Be Restrained
December 31st, 2009 | Posted by stock
12-31-2009 (Bloomberg) — What caused the great financial crisis of 2008-2009, how are we adjusting to its aftermath and what have we learned in the process?
The extraordinary housing bubble that preceded the crisis was particularly damaging. It was accompanied by huge increases in debt and leverage both by individuals and financial institutions. The bubble was associated with a fundamental change in the way the U.S. banking system operated.
During the 20th century, banks made mortgage loans to individual homeowners and then kept these loans as assets on their balance sheets until they were repaid. This system was known as the originate-and-hold model.
That system changed, however, during the 2000s to an originate-and-distribute model. Banks continued to originate mortgage loans (as well as other kinds of loans) but held them only briefly until they could be sold to an investment banking institution, which packaged the mortgages into mortgage-backed securities.
The mortgage-backed securities themselves were sliced into tranches. The first (or senior) tranche had first claim on principal and interest payments, and the lower tranches had only residual claims. Through this system, by a kind of alchemy, investment banks produced very highly rated securities on the senior tranches, even though the underlying mortgages might be of relatively low quality or subprime.
The system led to a deterioration in lending standards. If the originating institution held the mortgage for only a few days, the lending officers were far less careful to ensure the credit worthiness of the borrower.
The federal government contributed to the problem as well. Government-sponsored enterprises (GSEs) such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) also securitized home loans and encouraged originators to make credit available to borrowers who could not afford to make substantial down payments and who had less than perfect credit. Since the bonds of the GSEs had implicit government backing, they could continue to sell increasing amounts of mortgage-backed debt at relatively low interest rates.
The result was to make vast additional sums of money available for the purchase of housing, which led to an enormous increase in the amount of debt carried by consumers. Investment banks and commercial banks decided to eat their own cooking, holding considerable amounts of the derivative mortgage-backed securities they had underwritten and increasing their leverage ratios.
Moreover, a substantial share of their debt was short-term rather than long-term, increasing the risk that they would be unable to roll over their indebtedness during a crisis.
To make matters even more complicated, second order derivatives were sold on the mortgage-backed bonds. Credit- default swaps were sold as insurance policies that would pay off if the underlying bond defaulted.
The lowered lending standards and the vast increase in the amount of funds available for mortgages led to an enormous bubble in house prices. According to the Case-Shiller home price index, the inflation-adjusted price of a typical single family home was approximately the same in 1999 as it was in 1899. Between 2000 and 2006, however, inflation-adjusted home prices doubled.
When the bubble burst, house prices began to plummet. By the mid-2009, they had declined by more than one-third from their peak. Many homeowners found that their houses were worth less than the amount of the money owed on their mortgage and simply returned their keys to the lenders and stopped servicing their loans. As defaults increased, the value of the vast amounts of mortgage-backed securities declined precipitously. Since these securities were held by highly leveraged institutions, a major panic ensued.
As we slowly and painfully dig out from the bursting of the bubble and the ensuing meltdown, our economy is faced with strong headwinds that will restrain the pace of the recovery. The de-leveraging process has just begun. Consumers still carry an extraordinary amount of debt and have just begun to repair their balance sheets by restraining spending. Financial institutions are still overleveraged and aren’t lending freely, especially to small businesses.
We have learned that our regulatory system must be more effective. Systemically important institutions can’t be allowed to assume so much leverage that they impose instability on the entire financial system. Improved regulation of capital standards also needs to be buttressed by imposing liquidity standards as well. Most credit default swaps should be fully collateralized and traded on organized exchanges. These kinds of changes are currently under consideration.
But we have not come to grips with the fundamental fallacy of the too-big-to-fail doctrine. If large institutions believe that they will always be rescued in times of distress, they will tend to assume too much leverage and to reach for extra yield with low-quality assets. If gains are to be privatized and losses socialized, institutions will assume excessive risk and the financial system will be far too fragile.
What we need is an effective resolution mechanism whereby financial institutions with complicated sets of liabilities can be recapitalized quickly without government subsidies. Losses must be assumed by bondholders and methods found to unwind a variety of swap contracts without prolonged litigation. Only then will we be able to rely on market incentives to rein in excessive risk-taking.
Burton Malkiel is a professor of economics at Princeton University and author of “The Elements of Investing.” The opinions expressed are his own.
Recent Blog Posts:
Popular Blog Posts:
Subscribe to our RSS