Posts from Wednesday Jan 26 2011

Macro Live 5: US GDP edition

You didn’t think we’d given these up, didja?

This Friday (January 28) brings the advance release of the Q4 US GDP numbers. Therefore we think it’s about time for the next installment of Macro Live, our sporadic real-time chat about the US economy. Read more

Fed statement sparks Treasury selling

The Dow Jones Industrial Average looked to close above 12,000 for the first time since June 2008, but investors ended the day in only lukewarm spirits following a slightly upgraded outlook from the Federal Reserve, reports the FT’s global market overview. The Fed held the federal funds rates steady once again at between 0 and 25 basis points and commented that inflation in commodities had not spilled over into the consumer economy. The dollar was stronger against the yen, but still weaker against the currencies of faster-growing economies like Sweden and Mexico. Otherwise, a busy day for company reporting propelled the FTSE All-World equity index up 0.6 per cent. Commodities were firmer and Wall Street’s benchmark S&P 500 was up 0.4 per cent. The FTSE Eurofirst 300 was up 0.8 per cent, with technology stocks to the fore. London’s FTSE 100 was higher by 0.9 per cent as a better showing in mining stocks helps the UK benchmark outperform.

Egyptian government bans protests

The Egyptian authorities have moved to ban demonstrations, saying that participants would be detained, but leading opposition members insisted that further protests were planned, the FT reports. “No provocative movements or protest gatherings or organising marches or demonstrations will be allowed,” the state news agency cited the Interior Ministry as saying on Wednesday. Anti-regime protests have rattled local stock and debt markets, as investors become increasingly concerned about the political stability of the most populous Arab country, the FT also reports.

Federal Reserve makes cautious growth upgrade

The Federal Reserve made a cautious upgrade to its growth outlook and kept its asset purchase programme at $600bn after its first unanimous vote since 2009, reports the FT. The most important change to its statement was a reference to rising commodity prices. “Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward,” said the rate-setting Federal Open Market Committee.

Dreamliner delays to hit Boeing profits

Boeing expects earnings to fall by up to 15 per cent this year compared with 2010 as the cost of delays to its troubled 787 Dreamliner starts to become clear, reports the FT. The world’s second-biggest aircraft maker by sales last week revealed the seventh delay to the 787 programme – a further six-month postponement until the third quarter of this year – meaning first deliveries will be more than three years later than originally planned.

Ho stands by SJM share transfer

Stanley Ho, the billionaire who has long dominated the lucrative Macao gaming industry, on Wednesday made a rare television appearance to damp speculation about a family feud over his vast empire, reports the FT. The ailing 89-year old tycoon said he had no intention of taking legal action to reverse the transfer of a controlling stake in his empire to his third wife and the five children from his second marriage.

LG Electronics posts record quarterly loss

LG Electronics, the world’s third-largest mobile phone maker by volume, reported a record operating loss for the past quarter as its struggles to produce a hit smartphone to compete with models from Apple and Samsung, reports the FT. The results highlight the stern challenge facing Koo Bon-joon, who took over in October as chief executive of the company his family founded, in reviving a business also undermined by falling television prices. Most urgently, Mr Koo will have to play catch-up after LG misread the mobile market, concentrating on so-called feature phones with luxury brand names such as Prada rather than on smartphones.

Tourists flock to Japan despite China spat

The number of foreign tourists visiting Japan was up more than a quarter to a record 8.6m last year despite a rising yen and a diplomatic dispute with Beijing that hit arrivals from China, reports the FT. While the number of visitors fell well short of a 10m target set three years ago, the rapid recovery in inbound tourism from its post-Lehman collapse slump offers encouragement to policymakers who see the sector as a future pillar of the national economy.

India unveils indigenous fighter jet

India has highlighted its growing defence technology capabilities by revealing its first domestically-built fighter jet just hours after the US lifted sanctions on its military research establishment, reports the FT. The first public sighting of the light combat aircraft, which has been 30 years in the making, came at the Republic Day parade in New Delhi, India’s annual showcase for its defence forces. The jet also known as the Tejas Trainer has faced escalating development costs and domestic criticism but is now expected to be deployed by the Indian Air Force next year.

Further further reading

For the commute home, and to help you win the future,

– “A substantial divergence between employment and output growth has been the hallmark of the last three recoveries (1990’s, 2000’s, and the current episode).” Read more

FOMC Statement

The language remained nearly identical to the December statement except for a (dismissive) mention of commodity inflation and, of course, no dissenters. Here it is.

Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward. Read more

Shadow inventory update

As we wrote in early January, we remain somewhat uncertain about the broader economic impact of the ongoing slowdown in new foreclosures (brought about by the added scrutiny on bank procedures).

But the impact on housing prices is a bit more straightforward. Fewer homes coming to market would likely serve either to steady prices or at least temper their decline, though it would also increase how long it takes to ultimately clear the huge inventory of unsold homes, thereby delaying any meaningful rebound. Read more

A record deficit and the fiscal future(s)

The President gave the State of the Union on Tuesday night. You may have noticed that he mentioned the future. A lot. Something about “winning” it.

But with the speech having to cover all the bases and undergoing thousands of iterations it was almost inevitably short on detail. Read more

Dear Sir John

Which anarchist added this to the list of public responses sent to the UK’s Independent Banking Commission? (H/T to the FT’s Paul Davies):

While again emphasising that this is a personal view, I do believe that in the interests of competition, the merger of HBOS and Lloyds was misconceived and Lloyds Banking Group should be broken up. Under normal circumstances this would never have been allowed and nothing has happened since to make the decision any more correct…

 Read more

New home sales, and the monkey gets excited

From the Census Bureau, our emphasis:

Sales of new single-family houses in December 2010 were at a seasonally adjusted annual rate of 329,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 17.5 percent (±17.7%)* above the revised November rate of 280,000, but is 7.6 percent (±17.0%)* below the December 2009 estimate of 356,000. … Read more

Dodd-Frank vs Damien Hirst

Remember magic-eye pictures?

You know, the ones where you would stare, squint, relax your eye muscles and hey presto, a 3D picture emerges from a 2D psychedelic fuzz. Read more

WTI’s upcoming ‘Keystone’ problem

If you thought the distortions in the WTI-Brent spread couldn’t keep going for much longer, you may be interested in the following.

TransCanada’s extension of its Keystone pipeline could see it pumping as much as an additional 156,000 barrels per day into Cushing, Oklahoma, as of next month — putting further pressure on capacity at the Nymex WTI future delivery point. Read more

Spain’s smallish, wrongish, non-Basel III, bank steps

By Tracy Alloway and Joseph Cotterill

Just how Basel III is Spain’s recently-announced bank recapitalisation plan? Read more

The new volatility FX carry trade

FT Alphaville wrote last year about how the Federal Reserve’s experimentation with quantitative easing — while managing to alleviate stress in money markets —  may have unwittingly transferred volatility into the foreign exchange market.

Now, a new paper posted on VoxEu by three business academics, Pasquale Della Corte, Lucio Sarno and Ilias Tsiakas, looks deeper at the issue — even speculating whether the volatility of foreign exchange has since become a new global carry trade. Read more

Markets Live transcript 26 Jan 2011

Live markets commentary from 

Pursuit Dynamics and the ‘dodgy dossier’ [updated]

Many FT Alphaville readers won’t have heard of Pursuit Dynamics, a London-listed company that claims to have developed a sophisticated fluid processing technology.

But the firm is at the centre of an extraordinary battle between short sellers, City dealers and day traders that’s being played out on internet chat forums and is becoming increasingly more poisonous by the day. Read more

Rivals circle as Yahoo sales slide

Yahoo’s fourth-quarter sales have fallen 4 per cent as the internet group continued to cede audience time and advertising income to rivals, the FT reports. A move to outsource search results to Microsoft has so far failed to deliver results, even as Yahoo’s chief executive Carol Bartz promised that the partnership would lift revenue growth in 2011’s second half, Reuters says. Yahoo stock fell 2 per cent in after-hours trading. Revenue from display advertising, in which Yahoo has led the industry for years, has increased 16 per cent — but the company’s share of the market is slipping fast compared to rivals Google and Facebook, whose shares doubled, adds the FT.

Lehman revises bankruptcy plan

Lehman Brothers has revised its original plan for bankruptcy in order to offer bigger payments to bondholders, Reuters reports. Holders including Paulson & Co and Calpers had resisted the earlier proposal. Lehman’s new proposal will offer senior unsecured creditors 21.4 per cent of their claims, versus 14.7 per cent before, in return for their voting to accept the plan, reports the WSJ. The plan’s other big feature is to continue with original proposals to split Lehman into 23 separate subsidiaries, some of which will offer greater recoveries of assets than others. Bondholders’ rival plans had counted Lehman as a single unit.

Investors accuse Countrywide of ‘massive fraud’

Mortgage-backed securities investors have accused Countrywide, Bank of America’s mortgage unit, of ‘massive fraud’ in its sales, says Reuters. The lawsuit was filed in a New York court on Monday by plaintiffs including big institutional investors. The filing alleges that Countrywide misrepresented securities sold from 2005 to 2007 as low-risk and safe in its documentation and ignored underwriting guidelines. Bank of America took a $2bn write-down on Countrywide and set aside $4.1bn in legal costs for buybacks of loans from investors in its last financial results.

Morgan Stanley CEO defends bonus deferrals

Morgan Stanley’s chief executive James Gorman has defended his decision to defer a larger portion of bonuses for employees than ever before, telling staff the bank had to strike a balance between their interests and those of shareholders, the FT reports. Morgan Stanley said last week that an average of 60 per cent of 2010 bonuses would be distributed in stock or cash over the next three years, up from 40 per cent a year earlier. Senior managers have expressed concerns at the ratio, citing effects on bank employees who receive lower pay-outs than traders. While Morgan Stanley is pre-empting new regulations on bonuses, its move is unique on Wall Street. “We are all asking: is this the new norm?” said another senior employee. “Because if it is, we will be looking to move.”

State of the Union? Pretty vague.

A five-year freeze on non-defense discretionary spending, saving $400bn over the next decade, notes Reuters. Lower corporate tax rates so long as they don’t add to the deficit, reports the WSJ. President Barack Obama’s State of the Union speech last night laid out a broad agenda but was still short on the specifics of cutting the deficit, meaning that the White House’s coming battles with Republicans on the issue matter even more, says the FT. Mark Thoma at Economist’s View tackles whether the commitment to freeze spending is a good idea in a weak economy. President Obama said that he hoped to reduce the share of spending in the economy to levels last seen during the Eisenhower period. Of course, Pragmatic Capitalist notes, President Eisenhower presided over three recessions in eight years.

Klaus Regling, the record breaker

How unpleasant.

The sound of crowing from the eurozone following Tuesday’s ultra successful bail-out bond issue. From Wednesday’s Daily TelegraphRead more

Searching for BoE credibility on inflation

From Deutsche Bank, the number of news stories that match three topical terms:

 Read more

Financial crisis avoidable, apparently

Banks, Fed chairmen, the Bush administration, ratings agencies, the OCC, plenty of others – but not so much Fannie Mae and Freddie Mac. The NYT reports that the Financial Crisis Inquiry Commission will cast a wide net in finding blame for tanking financial markets in 2008, when it releases a final report this week. Dealbreaker has a condensed list. The main lesson of the report: “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done.” Wall Street will probably end up bearing the brunt of the blame in any case, the FT says — and warns that if you were hoping for a modern version of the Pecora Commission’s comprehensive investigation of the 1929 Wall Street Crash, you’re likely to come away disappointed.

Questions over Merrill SEC settlement

Merrill Lynch has agreed to pay $10m to settle SEC allegations that its proprietary traders misused client information for their own strategies, reports the FT. The SEC had alleged that proprietary traders on Merrill’s Equity Strategy Desk, which managed $1bn for the company’s own account, sat on the same floor as, and shared information with, market makers from 2002 to 2007. Bank of America, which now owns Merrill, said it has taken action to separate trading desks physically. Enforcement cases over prop trading have so far been rare, the WSJ says, adding that the settlement is likely to increase suspicions among investors that banks use their constant flow of client orders for their own benefit.