Business News

Oil has rebounded from $58.78 a barrel earlier this month as stronger economic results from the U.S. and China boosted investor optimism.

The Dow Jones industrial average has risen about 11 percent during the last 10 days.

“Oil is completely mirroring equity markets,” said Jonathan Kornafel, Asia director for market maker Hudson Capital Energy in Singapore. “There’s less risk aversion so more investment in commodities.”

Many companies have reported better than expected second quarter company results, bolstering investor sentiment that the worst of a severe global recession is over.

But U.S. gasoline demand so far this summer has remained weak, raising doubts about whether the economy can emerge this year with a strong recovery.

“I think a lot of the green shoots we’ve seen over the last few month have a lot to do with the government stimulus which are eventually going to run out,” Kornafel said. “The fundamentals should definitely have us lower.”

In other Nymex trading, gasoline for August delivery rose 2.01 cents to $1.94 a gallon and heating oil gained 1.86 cents to $1.80. Natural gas for August delivery fell 6.8 cents to $3.63 per 1,000 cubic feet.

In London, Brent prices rose 52 cents to $70.84 a barrel on the ICE Futures exchange.

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Loans Continue To Shrink

By DAVID ENRICH and DAN FITZPATRICK

Lending continues to slow as bankers and borrowers refrain from taking risks, in a bearish sign for the economy.

The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter, and more than half of the loan volume in April and May came from refinancing mortgages and renewing credit to businesses, not new loans, an analysis by The Wall Street Journal shows.

The numbers underscore two related trends weighing on the economy. Financial institutions are clamping down on lending to conserve capital as a cushion against mounting loan losses. And loan demand is falling as companies shelve expansion plans and consumers trim spending to ride out the recession.

That combination is making it harder for the U.S. economy to rebound, and some analysts predict that loan portfolios won’t start growing until the second half of 2010.

“I think it is good for banks if we continue to be prudent as an industry and not reach to get loan growth by reducing our underwriting,” Richard Davis, chief executive of U.S. Bancorp, said last week. The Minneapolis regional bank’s overall loan portfolio declined 1.2% to $182 billion from March to June, despite issuing $16 billion of mortgages. Most of the mortgages came from refinancing existing loans.

The loan figures reviewed by the Journal include giants such as J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc., as well as regional banks such as Fifth Third Bancorp, based in Cincinnati, and Regions Financial Corp., of Birmingham, Ala. The 15 banks hold 47% of federally insured deposits and got $182.5 billion in taxpayer-funded capital infusions through the Troubled Asset Relief Program. As of June 30, the banks had $4.2 trillion of loans on their balance sheets, down from $4.3 trillion as of March 31.

Loan portfolios shrank at 13 of the big banks, with the steepest decline at Comerica Inc., Dallas, where the loan total was down 4.3% to $46.6 billion in the latest quarter. Just $1.6 billion of the $10.2 billion in credit extended by Comerica in the second quarter came from new commitments. A bank spokesman said many borrowers “are being cautious.”

Bank of America, Charlotte, N.C., reported its loan portfolio slipped 3.6% to $942.2 billion in the second quarter. A spokesman for the largest U.S. bank by assets said the decrease reflects higher loan losses and lower loan demand as borrowers pay off outstanding debts. “There were fewer opportunities to make high-quality loans because of the recession,” he added.

Some borrowers complain banks aren’t trying hard enough to expand credit. Ernie Cambo, a principal with Miami real-estate developer CPF Investment Group, had to halt work earlier this year on a 2.5-million-square-foot project called Ace Aviation and Commerce Center because he couldn’t line up financing beyond the initial phases.

Now he isn’t certain he will be able to find bank financing for a planned $4 million building for a South Florida auto auctioneer, despite having a signed lease. “You will find no more frustrated borrower than me right now,” said Mr. Cambo, 39 years old. “I am growing in this downturn, and I can’t get any incremental debt.”

The slow pace of lending has created political heat for the Obama administration. On Friday, Rep. Spencer Bachus (R., Ala.) pressed Treasury Secretary Timothy Geithner to “tell me why we didn’t really see that multiplier effect” from banks funneling their TARP money into lots of loans.

“I think you did,” Mr. Geithner responded. Each dollar of taxpayer-funded capital gave banks $8 to $12 of lending capacity, and the initial $200 billion infusion by the Bush administration prevented a decline of more than $1 trillion in the overall loan supply, the Treasury secretary said.

Supporters of the bank bailout concede that lending has dipped, but note that the program wasn’t meant to expand loan volume, but rather to prevent a collapse — and has succeeded on that score.

Richard Neiman, a member of the committee formed by Congress to assess the effectiveness of TARP, said in an interview that “you need to be cautious in reading too much into these numbers.” Congress intended to “stabilize the financial markets,” he added, and there “is no specific reference to increasing lending” in the rescue-program legislation that was signed into law last year.

The 15 banks reported about $803 billion in loan volume in the second quarter, up 12.7% from the first quarter. But nearly 60% of the increase in April and May came from refinancing mortgages and renewing business loans, according to data Treasury collected from the banks. In contrast, new home purchases accounted for just 23% of all mortgage loans. May is the latest month for which the government’s figures are available.

At BB&T Corp., of Winston-Salem, N.C., a surge in mortgage refinancing fueled the regional bank’s increase of 0.1% in the size of its overall loan portfolio, which hit $100.3 billion as of June 30. Mortgage lending “is really booming,” CEO Kelly King said, but loan growth slowed in May and June, “especially in the commercial area.”

Banking analysts said the fact that less than half of loan volume is coming from new loans shows how far the economy still has to go to dig out of the recession. “You are looking for net new loans in the marketplace to be a signal of true change, and we have not seen that yet,” said Christopher Marinac, research director at FIG Partners in Atlanta.

“You’ve got to have fewer people paying down loans…and you’ve got to get banks to loosen underwriting standards,” said RBC Capital Markets analyst Gerard Cassidy. “That is when you will see loan balances in the U.S. banking system expand from where they are today. When that happens, you will see the economy really start to blossom.”

On a year-over-year basis, total loans held by the 15 big banks rose 17% from $3.6 trillion in 2008’s second quarter. The increase was skewed by the impact of acquisitions that included J.P. Morgan’s takeover of the banking operations of Washington Mutual Inc. and Wachovia Corp.’s purchase by Wells Fargo & Co. Excluding purchases, loan portfolios shrank by about 10% as of June 30 from a year earlier.

The figures are a strong but imperfect indicator of loan activity. For example, loans sold to other institutions aren’t counted on a bank’s balance sheet at the end of the quarter. Since the financial crisis erupted, though, sales of loans have withered.

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U.S. To Lobby Against Hedge Fund Strict Regulation in Europe

By ALISTAIR MACDONALD

As its hedge-fund and private-equity industries worry about new rules, the U.S. is quietly lobbying Europe to change the terms of proposed financial regulation that could place strict new rules on any U.S. hedge- or private-equity fund doing business in the region, according to a senior Treasury official.

The move wades the U.S. into a fierce battle between the U.K. and other parts of Europe over how tough regulation should be. Some nations, led by Germany and France, are calling for wholesale regulation of financial services in the wake of last fall’s crisis, but the U.K. says that overly stringent rules would damage its large financial sector and close off U.S. and other funds to European investors.

The U.S. and U.K. are lining up to change the European Union’s proposed Alternative Investment Funds Directive, a sweeping bid to overhaul regulation of hedge funds, private equity and other alternative investment funds. In its current form, the directive would, among other things, place limits on how much debt funds can take on; require them to hold capital to cover potential losses and redemptions; and place strict disclosure requirements on private-equity portfolios.

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Bernanke Playing Defense in The Heartland

By Ros Krasny

KANSAS CITY, Missouri (Reuters) – Federal Reserve Chairman Ben Bernanke traveled to the U.S. heartland to defend the central bank’s actions and reaffirm his assessment of an improving, but still vulnerable, U.S. economy.

Taping a special that will air on television network PBS over three days this week on its program The NewsHour, Bernanke said a financial crisis that rivaled that of the 1930s needed decisive actions.

“I was not going to be the Federal Reserve Chairman who presided over the second Great Depression,” Bernanke said.

“When you’re in a situation like this, a perfect storm, sometimes you have to do things that are a little unorthodox, out of the box.”

About 190 citizens from the Kansas City area, assembled by a nonpartisan civic group, were on hand for the taping at the Kansas City Fed, moderated by veteran news anchor Jim Lehrer.

Some two dozen peppered the chairman with questions ranging from the Fed’s role in consumer protection actions, to efforts to stem foreclosures, to the outlook for the dollar.

Bernanke sought to demystify the role of the Federal Reserve, and especially debunk ideas that the Fed has almost unfettered power as an unelected fourth branch of government.

“I’m answerable to the American people,” Bernanke said.

PEDAL TO THE METAL

Bernanke said the Fed is doing all it can to turn the U.S. economy around, and that he was confident the nation would be back on a strong growth track within a few years.

“The Federal Reserve has been putting the pedal to the metal,” he said, adding that “recessions happen,” even though the current one is especially long and painful.

Bernanke’s core message was similar to that he delivered last week in congressional testimony: that the recession should end soon, but that considerable risks remain — especially relating to the labor market.

It takes GDP growth of about 2.5 percent to keep the jobless rate constant, Bernanke noted. But the Fed expects growth of only about 1 percent in the last six months of the year.

“So that’s not enough to bring down the unemployment rate,” he said.

Latest government data show the U.S. unemployment rate at 9.5 percent, the highest since 1983, and many forecasters expect the rate to keep climbing even after the recession technically comes to a end.  Continued…

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China Comes To Washington For Discussions On Chimerica

By Bloomberg News

July 27 (Bloomberg) — The dollar may be the focus of Chinese-U.S. talks starting in Washington today as China presses the Obama administration on how it will tame the fiscal deficit and protect the U.S. currency’s value, Morgan Stanley said.

Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton will host two days of meetings spanning topics from the economic crisis to North Korea. The Strategic and Economic Dialogue is the Obama administration’s first with China.

“If the key issue in the past was the renminbi’s exchange rate, now it’s the U.S. dollar,” said Wang Qing, an economist at Morgan Stanley in Hong Kong. The yuan is a denomination of the renminbi. “What China cares about the most is the stability of the dollar and the stability of U.S. policy.”

The global slump has highlighted the common interests of the economies, ranked first and third largest in the world, as Vice Premier Wang Qishan seeks to preserve the value of the world’s biggest Treasury holdings and the U.S. pushes China to rely more on domestic demand and not exports for growth.

“Raising personal incomes and strengthening the social safety net to address the reasons why Chinese feel compelled to save so much would provide a powerful boost to Chinese domestic demand and global growth,” Geithner and Clinton wrote in a joint article published in today’s Wall Street Journal.

The talks this week will move beyond economic matters for the first time.

‘Fragile States’

Few global problems “can be solved without the U.S. and China together,” Geithner and Clinton wrote. “The strength of the global economy, the health of the global environment, the stability of fragile states and the solution to nonproliferation challenges turn in large measure on cooperation between the U.S. and China.”

The two sides will probably discuss ways to revive the dormant six-party negotiations aimed at persuading North Korea to give up its nuclear program, a U.S. official said last week.

“From the provocative actions of North Korea, to stability in Afghanistan and Pakistan, to the economic possibilities in Africa, the U.S. and China must work together to reach solutions to these urgent challenges,” Geithner and Clinton wrote.

China’s exchange-rate policy will be discussed, an Obama administration official said at a press briefing last week. The U.S. wants a more flexible yuan, though Geithner has avoided a showdown on the issue, declining to repeat comments he made in written remarks to lawmakers after his Senate confirmation hearing in January that China was “manipulating” its currency.

‘Unfortunate Timing’

“This was a most unfortunate thing to say publicly,” said Donald Straszheim, managing principal of Straszheim Global Advisors in Los Angeles. “They think the playing field is basically tilted by China managing its currency.”

Both nations are pumping cash into their economies to revive growth in the face of the worst financial crisis since the Great Depression. Though Premier Wen Jiabao said in March he was worried about the safety of the nation’s U.S. assets, China bought $38 billion of U.S. notes and bonds in May, taking its holdings to $801.5 billion.

The U.S. deficit may reach a record $1.85 trillion for the fiscal year ending Sept. 30, almost four times the previous fiscal year’s $455 billion shortfall, according to the Congressional Budget Office.

Federal Reserve Chairman Ben S. Bernanke will brief Chinese officials about how the U.S. plans to keep inflation in check over the next few years, people advised of the plan said this month. In June, Geithner told China that the U.S. wants to shrink its budget gap as soon as an economic recovery takes hold.

“Both nations must avoid the temptation to close off our respective markets to trade and investment,” Geithner and Clinton wrote. “Both must work hard to create new opportunities for our workers and our firms to compete equally, so that the people of each country see the benefit from the rapidly expanding U.S.-China economic relationship.”

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VALE Resists China’s Request For Price Breaks

By Diana Kinch

July 27 (Bloomberg) — Vale SA, the world’s biggest iron- ore producer, is resisting Chinese demands for record price cuts as the steel industry recovers from its biggest collapse since World War II.

Vale agreed last month to a 28 percent lower price on iron ore supplied to Japanese steel mills under annual contracts, the first reduction in seven years, while China pressed for a discount of as much as 45 percent. Iron ore in the open market has jumped 38 percent since this year’s contract prices were first set, weakening China’s position.

Chief Executive Officer Roger Agnelli said June 25 that he won’t give Chinese customers bigger discounts in what have become the longest-running price talks ever. China’s detention of iron-ore executives from Rio Tinto Group, the world’s second-largest iron-ore exporter, on allegations of espionage has created a split between Australia and China that may also benefit Vale, according to McKinsey & Co.

“The possibility of Chinese steelmakers achieving a bigger discount is very, very unlikely,” Paul Cliff, a mining analyst with Nomura Securities in London, said in a July 22 interview. “Either the Chinese agree to the current benchmark already set or they buy on the spot market.”

Vale, based in Rio de Janeiro, has risen 35 percent in Sao Paulo this year, compared with a 45 percent gain for the Bovespa stock index. Rio advanced 97 percent in London, while BHP Billiton Ltd., the world’s third-biggest iron-ore exporter, rose 23 percent. Rio is based in London and BHP in Melbourne.

China Steel

China’s steel output, which accounts for about half the world’s total, rose 1.2 percent in the first half, the World Steel Association said July 20. Production will climb about 5 percent this year as the nation’s $586 billion infrastructure stimulus package takes effect, according to Gilberto Cardoso, an analyst with Banif Securities in Rio…..

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Hong Kong Exports Posts Its Lowest Drop in 7 Months

By Sophie Leung

July 27 (Bloomberg) — Hong Kong exports fell by the least in seven months in June as a revival in the mainland Chinese economy bolstered demand.

Overseas sales dropped 5.4 percent to HK$211.1 billion ($27.2 billion) from a year earlier, the government said today on its Web site, after shrinking 14.5 percent in May. The median estimate of 12 economists surveyed by Bloomberg News was for a 7.9 percent decline.

Japan, South Korea and Singapore reported smaller declines in overseas shipments in June, signaling that global demand is picking up as the worst financial crisis since the Great Depression begins to ease. Hong Kong is a trade hub for China, where the economy rebounded in the second quarter on record bank lending and a 4 trillion yuan ($586 billion) stimulus package.

“Hong Kong’s exports have already seen their worst in January and February this year,” said Kevin Lai, an economist at Daiwa Institute of Research in Hong Kong. “Exports may have slight positive growth as early as August.”

Imports fell 7.9 percent in June from a year earlier, leaving a trade deficit of HK$16.5 billion.

Exports to China rose 9.3 percent, snapping seven months of declines. Shipments to the U.S. fell 23.7 percent, a bigger drop than in the previous month.

Exports probably passed their worst in the first quarter, the government said in the statement, predicting a “relative improvement” in the months ahead. The global economy “remains weak with signs of a strong rebound not yet in sight,” it said.

Slide Into Recession

Improved export demand helps the government’s efforts to revive Hong Kong’s economy, which slid into recession in the third quarter of last year.

Financial Secretary John Tsang said July 6 that Hong Kong’s economy probably grew in the second quarter of this year from the first as the decline in exports slowed. Hong Kong has allocated HK$87.6 billion, or about 5.2 percent of gross domestic product, to stimulus and relief spending since 2008, creating temporary jobs and handing out subsidies and tax cuts.

The city’s GDP shrank 7.8 percent in the first quarter from a year earlier, the biggest decline in a decade, as exports slid by the most since 1954. The economy may shrink by as much as 6.5 percent this year, the government forecasts.

Overseas shipments may fall as much as 12 percent in 2009 from a year earlier, the Hong Kong Trade Development Council said June 16. That compares with a 5.1 percent gain in 2008.

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Iceland Figures If You Can’t Beat Them Then Join Them

By James G. Neuger and Patrick Donahue

July 27 (Bloomberg) — Iceland cleared the first procedural hurdle en route to joining the European Union, starting a process that may take three years or more.

EU foreign ministers called on the European Commission, the bloc’s executive arm, to prepare an assessment of the financially hobbled North Atlantic island’s readiness to join.

“There’s certainly no fast track,” Swedish Foreign Minister Carl Bildt told reporters at an EU meeting in Brussels today. Noting that Iceland’s fishing rules are at odds with the EU, he added “there could be substantial challenges yet to overcome.”

EU enlargement has stalled since Bulgaria and Romania were admitted in 2007, with Germany and France leading the opposition to bringing in more countries in southeastern Europe, especially Turkey.

As one of Europe’s richer countries, with gross domestic product per capita of $37,392 in 2007, Iceland has a head start. The country of about 300,000 already observes two-thirds of EU laws and allows passport-free travel to most EU countries.

Iceland’s parliament this month voted 33-28 to seek EU membership in a verdict that reflected the split view in the country over whether joining the EU is the answer to the island’s economic crisis. The failure of Iceland’s biggest banks in October led to an 80 percent slump in the krona against the euro from a year earlier in offshore trading.

The fastest opinion on a would-be member took 14 months. Sweden, current holder of the EU presidency, is pushing the commission to complete its assessment by December so entry talks can start in early 2010.

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Europe Gets Ready For Credit Card Default

Lenders in Europe bracing themselves for a rising wave of consumer debt defaults as the credit card crisis that has caused billions of dollars in losses among US banks spreads across the Atlantic.

The International Monetary Fund estimates that of US consumer debt totalling $1,914bn, about 14 per cent will turn sour.

It expects that 7 per cent of the $2,467bn of consumer debt in Europe will be lost, with much of that falling in the UK, the continent’s biggest nation of credit card borrowers.

National Debtline of the UK said that the number of calls it had received from UK consumers worried about loans, credit cards and mortgage arrears had reached 41,000 in May – double the 20,000 calls it had received in May 2008. It added that the number of calls showed no sign of abating.

In the US, credit card defaults have been rising for months as a spike in unemployment and the most severe economic downturn since the Great Depression took their toll on overstretched consumers.

Banks such as Citigroup, Bank of America, JPMorgan Chase and Wells Fargo and credit card issuers such as American Express have suffered billions of dollars in losses in their credit card portfolios and have warned of more to come.

The rate of US credit card losses has overtaken the rate of unemployment in recent months – a highly unusual occurrence that makes it more difficult for card issuers to forecast future losses.

In the UK, the latest credit card indices from Moody’s, the ratings agency, show that annualised charge-off rates have risen from 6.4 per cent of loans in May 2008 to 9.37 per cent in May 2009. In the US, that rate is above 10 per cent.

Analysts expect further defaults as UK unemployment rises and personal insolvencies, which reached 29,774 in the first quarter of the year, continue to increase.

The falling UK housing market and more stringent lending requirements by banks has also meant that indebted consumers can now no longer rely on withdrawing equity from their homes to pay off other debts such as credit cards or unsecured loans.

Jonathan Pierce, analyst at Credit Suisse, said in a recent note that UK credit card securitisation had suffered “a very sharp rise in arrears to a level well beyond the previous peak seen in 2006”.

UK banks, which begin reporting their first-half results next week, have already warned that they faced a sharp increase in credit card debts, although this is relatively small in the context of writedowns in other areas such as commercial lending.

Barclays, the UK’s biggest credit card lender with 11.7m UK customers through Barclaycard, said in May that UK credit card delinquencies had increased in the first quarter of the year, reflecting adverse economic conditions and rising unemployment.

As a result it had been reducing credit limits and tightening approval rates for new credit cards which were running at less than 50 per cent in March……

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AAPL Is A Busy Bee With Record Labels

Apple is working with the four largest record labels to stimulate digital sales of albums by bundling a new interactive booklet, sleeve notes and other interactive features with music downloads, in a move it hopes will change buying trends on its online iTunes store.

The talks come as Apple is separately racing to offer a portable, full-featured, tablet-sized computer in time for the Christmas shopping season, in what the entertainment industry hopes will be a new revolution. The device could be launched alongside the new content deals, including those aimed at stimulating sales of CD-length music, according to people briefed on the project.

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The End To The End Of The Recession From Zero Hedge

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