Business News

Benchmark crude for September delivery was up $1.12 to $70.57 a barrel by late afternoon Singapore time in electronic trading on the New York Mercantile Exchange. On Friday, the contract rose $2.51 to settle at $69.45.

Oil prices seesawed last week before surging Thursday and Friday as investors bet that crude demand, which has been tepid this summer, will eventually pick up as the economy improves.

“Optimism for economic recovery is fighting the weak fundamentals, and right now the optimism is holding the upper hand,” said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

Crude also has followed gains in global stocks. Most Asian indexes rose Monday.

Prices may test an eight-month high of $73.23 a barrel in the coming days, but dismal consumer sentiment in the U.S. will likely weigh on demand and send prices back into the $60s, Shum said.

“It will be difficult for oil prices to sustain in the $70s given the weak fundamentals,” he said.

Mohammad Ali Khatibi, Iran’s governor to the Organization of Petroleum Exporting Countries, said Sunday he expects crude prices to reach $80 a barrel by January, the oil ministry said.

In other Nymex trading, gasoline for August delivery rose 1.84 cents to $2.03 a gallon and heating oil gained 2.72 cents to $1.86. Natural gas for August delivery fell 1.7 cents to $3.64 per 1,000 cubic feet.

In London, Brent prices rose 93 cents to $72.64 a barrel on the ICE Futures exchange.

Asian Markets Extend Rally on Commodities, Manufacturing, & Earnings

By Jonathan Burgos

Aug. 3 (Bloomberg) — Asian stocks rose for a third day after Mitsubishi UFJ Financial Group Inc. returned to profit, manufacturing in China and India expanded and Goldman Sachs Group Inc. lifted its rating for South Korean equities.

Mitsubishi UFJ gained 6 percent after Japan’s biggest bank by market value reported its first profit in nine months, and Mizuho Financial Group Inc. climbed 6.1 percent after Morgan Stanley boosted its rating. Nissan Motor Co., with 34 percent of sales from North America, rose 5.4 percent in Tokyo after the U.S. proposed to expand the “Cash for Clunkers” program. South Korea’s Kospi Index climbed to its highest in almost a year.

“Earnings have been quite good,” said Marco Wong, the Singapore-based chief investment officer for Asia excluding Japan at SG Asset Management, which has $351.6 billion in assets globally. “Potential earnings upgrades by analysts may provide a further leg up for the market.”

The MSCI Asia Pacific Index advanced 1.2 percent to 113.18 as of 7:30 p.m. in Tokyo. The gauge has gained 15 percent over the past three weeks as better-than-expected results from U.S. and Asian companies led to improved investor confidence.

Japan’s Nikkei 225 Stock Average was little changed at 10,352.47, and the broader Topix index climbed 0.8 percent in its 12th day of gains, the longest winning streak since 1988. Most Asian benchmarks rose. In China, the Shanghai Composite Index advanced 1.5 percent after reports by the Federation of Logistics & Purchasing and CLSA Asia Pacific Markets showed manufacturing continued to expand last month.

The Bombay Stock Exchange’s Sensitive Index added 1.6 percent to 15,924.23, its highest close since June 2008, after Markit Economics’ Purchasing Managers’ Index showed manufacturing expanded for the fourth month in July.

South Korea, U.S.

The Kospi Index climbed 0.5 percent to 1,564.98, its highest close since last August. Goldman raised South Korea’s stocks to “market weight” from “underweight, saying earnings appear more “resilient” than the brokerage expected. Hyundai Motor Co., the country’s largest carmaker, climbed 2.5 percent.

Futures on the Standard & Poor’s 500 Index gained 1.2 percent. The gauge rose 0.1 percent on July 31 as better-than- estimated gross domestic product spurred speculation the economy is recovering from the recession.

Asian makers of autos and car-parts rallied after the U.S. House approved an emergency measure to add $2 billion to the “Cash for Clunkers” vehicle purchase program, which provides credits to buy a new car when trading in an older one.

Toyota Motor Corp., the world’s biggest carmaker, added 2.5 percent to 4,090 yen. Hyundai Motor rose 2.5 percent to 90,300 won in Seoul. Bridgestone Corp., the world’s biggest tiremaker, advanced 5.2 percent to 1,729 yen.

Automakers Advance

Nissan Motor jumped 5.4 percent to 726 yen. Japan’s third- largest carmaker displayed its first electric model yesterday and Chief Executive Officer Carlos Ghosn said electric cars may account for at least 10 percent of global vehicle sales by 2020. Fuji Heavy Industries Ltd. rose 8.4 percent to 414 yen, the steepest climb in the Nikkei 225, after saying U.S. sales of its Subaru-brand cars gained about 30 percent last month.

Maruti Suzuki India Ltd., maker of half the cars sold in the country, added 4 percent to 1,471 rupees. The company said it sold 33 percent more cars last month, helped by higher overseas sales.

The MSCI Asia Pacific has surged about 60 percent since it sank to the lowest level in more than five years on March 9, outpacing gains of 46 percent by the S&P 500. Accelerating growth in China, rising industrial production in Japan and a rally in commodities have helped bolster equities. Stocks in the MSCI Asia Pacific are currently valued at 24.5 times estimated earnings, compared with 18 times at the start of the year.

Bank Earnings

Eighty-two companies in the MSCI Asia Pacific Index reported earnings on July 31, the busiest day of the season, according to data compiled by Bloomberg.

Mitsubishi UFJ rose 6 percent to 600 yen and was the biggest single contributor to gains in the MSCI Asia Pacific. The bank posted a 48 percent jump in net income for the three months to June 30, the first profit after two quarterly losses, because of rising lending income and a gain in stockholdings.

“Banks’ earnings are solid, given they set aside substantial reserves for bad loans,” said Tomochika Kitaoka, a senior strategist at Mizuho Securities Co. in Tokyo.

Aozora Bank Ltd., the Japanese lender controlled by Cerberus Capital Management LP, climbed 8.4 percent to 142 yen after profit in the latest quarter rose 86 percent. Mizuho Financial, Japan’s third-largest bank by market value, gained 6.1 percent to 228 yen after Morgan Stanley increased its investment rating to “overweight” from “underweight.”

Shares of shipping stocks climbed after China’s export orders rose last month, according to the country’s official Purchasing Managers’ Index.

Cosco Pacific Ltd., Asia’s third-largest operator of container terminals, surged 18 percent to HK$12.76, the steepest increase Hong Kong’s Hang Seng Index and in the MSCI Asia Pacific Index. China Cosco Holdings Co., the world’s largest operator of dry-bulk ships, jumped 10 percent to HK$12.34. China Shipping Container Lines Co., Hong Kong’s biggest container shipper, climbed 9.9 percent to HK$3.33.

European Stocks Rise on Greenspan & Geithner Comments

By Sarah Jones

Aug. 3 (Bloomberg) — Stocks rose in Europe and Asia and U.S. index futures advanced as former Federal Reserve Chairman Alan Greenspan said the recession may be ending, Chinese manufacturing expanded and earnings from HSBC Holdings Plc and Barclays Plc boosted banks.

Xstrata Plc and Rio Tinto Group advanced more than 4 percent as copper rallied to a 10-month high in London and Nouriel Roubini said commodity prices may extend their rally in 2010. HSBC climbed 6.3 percent as Europe’s biggest lender posted an unexpected profit. Barclays Plc jumped 6.8 percent after income increased 10 percent. Mitsubishi UFJ Financial Group Inc. gained 6 percent in Tokyo after Japan’s largest bank reported its first quarterly profit in nine months.

The MSCI World Index climbed 0.9 percent at 10:48 a.m. in London, a third day of gains. The gauge of 23 developed nations has surged 53 percent since March 9 as companies from Goldman Sachs Group Inc. to Roche Holding AG and Intel Corp. reported better-than-estimated results.

“Even after the gains we think this remains a positive environment for equity markets,” said London-based strategist Ian Richards at Royal Bank of Scotland Group Plc. “Improving earnings trends, coupled with undemanding valuations and a macro backdrop that should continue to drive hopes of recovery suggests we should stay buyers.”

Europe’s Dow Jones Stoxx 600 Index increased 1.6 percent, led by commodity producers and banks. The MSCI Asia Pacific Index rose 1.1 percent as reports by the Federation of Logistics & Purchasing and CLSA Asia Pacific Markets showed manufacturing continued to expand last month in China, while Goldman Sachs lifted its rating for South Korean equities.

U.S. Stocks

Futures on the Standard & Poor’s 500 Index gained 1.1 percent. Greenspan said in an interview yesterday on ABC’s “This Week” program that U.S. economic growth may resume at a rate faster than most economists forecast.

The Institute for Supply Management may report today that its manufacturing index climbed to 46.5 in July, the highest level in almost a year, according to a Bloomberg survey of economists. Readings below 50 signal contraction.

Xstrata climbed 4.2 percent to 842.5 pence as copper advanced for a third day on the London Metal Exchange. Roubini, the New York University economist who predicted the financial crisis, said at the Diggers and Dealers mining conference in Australia that commodity prices may extend their rally in 2010 as the global recession abates.

Roubini

“As the global economy goes toward growth as opposed to a recession, you are going to see further increases in commodity prices especially next year,” Roubini said today. “There is now potentially light at the end of the tunnel.”

Rio Tinto, the third-largest mining company, increased 4.8 percent to 2,609 pence, while Anglo American Plc rose 3.5 percent to 1,998 pence.

HSBC rallied 6.3 percent to 643.7 pence as Europe’s largest bank reported first-half net income of $3.35 billion after setting aside $13.9 billion to cover souring consumer loans. That beat the $600 million median loss estimated by seven analysts surveyed by Bloomberg.

Barclays soared 6.8 percent to 322.85 pence, the highest since October. The U.K.’s second-biggest bank said first-half net income rose 10 percent to 1.89 billion pounds ($3.16 billion) after profit from investment banking almost doubled. That still missed the 2.2 billion-pound average estimate of five analysts surveyed by Bloomberg.

Barclays and HSBC are the first of the five biggest U.K. banks to release earnings for the period. Lloyds Banking Group Plc will post earnings on Aug. 5, followed two days later by Royal Bank of Scotland.

‘Normal Earnings Season’

“We are beginning to see the emergence of a fairly normal earnings season when we think of it in context of a sharp cyclical downturn,” said Richard Jeffrey, chief investment officer of Cazenove Capital Management in London. “Consensus profits aren’t falling quite as much as people thought.”

Mitsubishi UFJ led a rally in Asian lenders, climbing 6 percent to 600 yen. Japan’s five largest banks reported improved results from the previous quarter last week, buoyed by rising stock markets and smaller bad-debt charges.

UBS AG added 5.5 percent to 16.46 Swiss francs on speculation the Switzerland’s biggest bank by assets is close to resolving to a U.S. tax probe that spurred defections by wealthy customers.

The U.S. and Switzerland “have reached an agreement in principle on the major issues,” U.S. Justice Department attorney Stuart Gibson said in a telephone conference call with U.S. District Judge Alan Gold on July 31. The remaining points will probably be settled in the next week, he said.

ING Groep NV upgraded the shares to “buy” from “hold,” citing the agreement.

Linde, Metro

Linde AG jumped 3.4 percent to 68.50 euros after the world’s second-biggest maker of industrial gases said business will improve in the second half. Second-quarter net income was 133 million euros ($189 million) on sales of 2.78 billion euros, the Munich-based company said today in a statement. Analysts estimated profit of 120 million euros.

European financial-services, basic-resources, chemical and industrial stocks were boosted to “overweight” by ING. The brokerage increased its fourth-quarter forecast for the Stoxx 600 to 230 from 210.

Metro AG slipped 1.8 percent to 39.91 euros after Germany’s largest retailer reported a second-quarter profit that was less than analysts estimated as shoppers hurt by unemployment curtailed spending.

Chinese Manufacturing Data Sparks Hopes a Recovery is Under Way

By Bloomberg News

Aug. 3 (Bloomberg) — China’s manufacturing expanded in July as record lending and a 4 trillion yuan ($585 billion) stimulus package stoked a recovery in the world’s fastest- growing major economy.

The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 52.8, the highest level in a year, from 51.8 in June, CLSA Asia-Pacific Markets said today in an e-mailed statement. An official index, released Aug. 1, also expanded.

In signs the global slump may be easing, reports today showed manufacturing expanded in the U.K. for the first time in more than a year, shrank less than initially estimated in Europe and declined at a slower pace in Australia. China’s rebound, driven by $1 trillion of new bank loans in the first half, may help the nation overtake the U.S. as the world’s largest manufacturer by 2015, according to forecaster IHS Global Insight.

“China is leading the way,” said Tomo Kinoshita, an economist at Nomura Holdings Inc. in Hong Kong. “We can expect global production to improve gradually in the months ahead.”

The Shanghai Composite Index closed 1.5 percent higher, taking this year’s gain to 90 percent. The yuan ended at 6.8308 against the dollar from 6.8311 before the data’s release.

Manufacturing in the U.S. probably shrank in July at the slowest pace in 11 months as the recession eased and factories moved closer to stabilization, according to the median forecast of 62 economists forecast ahead of a private report today.

Domestic Demand

In China, the CLSA survey indicated manufacturing grew for a fourth month. The official PMI topped 50, the borderline between expansion and contraction, for a fifth month.

Chinese manufacturing “continues to accelerate and, importantly, orders growth is being driven by the domestic economy,” said Eric Fishwick, head of economic research at CLSA in Hong Kong. Overseas demand “remained lackluster,” he said.

The nation’s stimulus and credit boom have countered a collapse in trade and aided businesses from Semiconductor Manufacturing International Corp. to General Motors Co. Airbus SAS rolled out in June the first aircraft assembled at its China factory as the planemaker seeks more business there.

The world’s third-biggest economy expanded 7.9 percent in the second quarter.

Output and new-order indexes climbed in the CLSA study, which also showed inflation pressures building as prices of inputs and outputs jumped. An export-order index stayed above 50 for a second month. An employment index rose for a second month.

‘Aggressive’ Policies

China’s “aggressive policy response” will fuel the nation’s growth for the rest of the year, said Wang Qing, chief Asia economist for Morgan Stanley in Hong Kong.

In the U.K., a gauge based on a survey of factories climbed to the highest since March 2008, the Chartered Institute of Purchasing and Supply and Markit said. An index of euro-area manufacturing rose more than initially estimated to an 11-month high, Markit Economics said.

Australian manufacturing contracted at the slowest pace since September, the Australian Industry Group and PricewaterhouseCoopers said. India’s factory output rose for a fourth month, according to Markit Economics’ Purchasing Managers’ Index.

Commodity prices may rise further in 2010 as the global recession abates, Nouriel Roubini, the New York University economist who predicted the financial crisis, said today at a conference in Kalgoorlie, Western Australia.

Bad Loans, Asset Bubbles

Chinese policy makers will take their cue from the U.S. on when to end economic rescue efforts, central bank Governor Zhou Xiaochuan said July 28 in Washington.

The explosion in credit is stoking concern that the nation’s recovery may come at the cost of bad loans, bubbles in stocks and property and resurgent inflation.

IHS Global Insight spokesman Jim Dorsey confirmed today the company’s forecast for China overtaking the U.S. as the world’s biggest manufacturer, which was published by the Wall Street Journal. Last year, the company’s estimate was for 2016 or 2017, the newspaper said.

China’s stimulus measures helped a 78 percent increase in General Motors’ vehicle sales in the nation in July from a year earlier. Semiconductor Manufacturing, China’s biggest chipmaker, said its factories will be more fully used this quarter than in the previous three months as demand improves.

U.K. Manufacturing Expands For the First Time in Over a Year

By Brian Swint and Charlie Duxbury

Aug. 3 (Bloomberg) — U.K. manufacturing expanded for the first time in more than a year in July, adding to signs that the economy is emerging from the worst recession in a generation.

A gauge based on a survey of factories climbed to 50.8, the highest since March 2008, from a revised 47.4 in June, the Chartered Institute of Purchasing and Supply and Markit said today in London. Economists predicted 47.8, the median of 25 forecasts in a Bloomberg News survey showed. Readings above 50 show expansion.

Manufacturers are rebuilding stockpiles of goods that were cut back after the global financial crisis plunged the economy into recession last year. Orders rose the most since November 2007, today’s report showed, as factories benefit from the lowest interest rates on record and a weaker pound.

“The U.K. economy is likely to record positive growth through the rest of this year and into next,” said James Knightley, an economist at ING Financial Markets in London. At the same time, “rising unemployment still suggests that the recovery will be fragile.”

The pound rose as much as 0.8 percent today against the dollar and traded at $1.6824 as of 10:06 a.m. in London.

Business Secretary Peter Mandelson said July 28 the currency’s decline over the past year is helping the economy return to growth. The currency has dropped 11 percent in the past 12 monthsagainst a basket of currencies from the U.K.’s major trading partners. The Bank of England will decide on Aug. 6 whether to pause its policy of buying bonds with newly created money to nurture recovery.

Jetliners

Rolls-Royce Group Plc, the world’s second-largest maker of aircraft engines, reported a 16 percent jump in first-half profit July 30, beating analyst estimates, as sales for jetliners increased.

Economies worldwide are showing signs of picking up. China’s manufacturing expanded at the highest level in a year in July, a report showed today. Factory output in the U.S. probably shrank at the slowest pace in 11 months, according to the median forecast in a Bloomberg News survey.

In the U.K., gross domestic product fell 0.8 percent in the second quarter after declining the most in five decades in the first three months of the year. Jobless claims rose to the highest in 12 years in June.

“Inventories are probably not being run-down to quite the degree that they once were,” said Peter Dixon, an economist at Commerzbank AG. “We have a competitive exchange rate that is hopefully going to provide the manufacturing sector with a springboard for the future.”

An index of U.K. new orders rose to 55.9, the highest since November 2007. The index for employment indicated the slowest rate of job cuts since June 2008, CIPS said in the report.

Roubini Expects Commodities To Rise In 2010 So Long As A Recovery Keeps a Foothold

By Rebecca Keenan and Jason Scott

Aug. 3 (Bloomberg) — Commodity prices may extend their rally in 2010 as the global recession abates, said Nouriel Roubini, the New York University economist who predicted the financial crisis.

“As the global economy goes toward growth as opposed to a recession, you are going to see further increases in commodity prices especially next year,” Roubini said today at the Diggers and Dealers mining conference in Kalgoorlie, Western Australia. “There is now potentially light at the end of the tunnel.”

Roubini, chairman of Roubini Global Economics and a professor at NYU’s Stern School of Business, joins former Federal Reserve Chairman Alan Greenspan in seeing signs of recovery. Commodity prices gained the most in more than four months on July 30 as investors speculated that the worst of the global recession has passed and consumption of crops, metals and fuel will rebound.

“The things he was saying provide good indicators for our business,” Martin McDermott, a manager for metals project development at SNC-Lavalin Group Inc., Canada’s biggest engineering and construction company, said at the conference. “The commodities that we’re involved with, being copper, nickel, gold, iron ore, all seem to have positive signs and we hope to take advantage of that.”

Greenspan said yesterday the most severe recession in the U.S. in at least five decades may be ending and growth may resume at a rate faster than most economists foresee. Oil has jumped 56 percent in 2009 and copper has surged 86 percent.

China Growth Target

Roubini predicted on July 23 that the global economy will begin recovering near the end of 2009, before possibly dropping back into a recession by late 2010 or 2011 because of rising government debt, higher oil prices and a lack of job growth.

Economic growth in China, the world’s biggest metals consumer, accelerated in the second quarter, gaining 7.9 percent from a year earlier. China, the biggest contributor to global growth, overtook Japan as the world’s second-largest stock market by value on July 16 after the nation’s 4 trillion yuan ($585 billion) stimulus package spurred record lending and boosted prices of shares and commodities.

China will meet its target of 8 percent growth in gross domestic product this year, Roubini said. Manufacturing in China climbed for a fifth month in July as stimulus spending and subsidies for consumer purchases countered a collapse in exports, and helped companies from chipmaker Semiconductor Manufacturing International Corp. to automaker General Motors Corp. as well as mining companies such as BHP Billiton Ltd. and Rio Tinto Group.

China’s official Purchasing Managers’ Index rose to a seasonally adjusted 53.3 in July from 53.2 in June. A reading above 50 indicates an expansion. The manufacturing index has climbed from a record low of 38.8 in November.

Aussie Dollar, Aluminum

A rise in commodity prices may help the Australian dollar, Roubini said today, adding he is “bullish” on the currency. Countries including Australia, New Zealand and Canada have so- called commodity currencies because raw materials generate more than 50 percent of their export revenues.

The Australian dollar today rose to the highest since September before retail sales and house price data tomorrow that may add to evidence the nation’s economy will rebound faster than the central bank forecast six months ago.

The price of aluminum, used in beverage cans and airplane parts, has declined by a third in the past year as the global recession crimped demand. A recovery in demand may be offset by the “huge amount of excess capacity,” which could be a risk to the price, Roubini said.

The Reuters/Jefferies CRB Index of 19 commodities has risen 12 percent this year. It jumped 3.9 percent on July 30 to 253.14, the biggest gain since March 19.

Slow Recovery

“That recovery will continue slowly, slowly over time,” Roubini said today. The global economy may contract 2 percent this year and swing to growth of 2.3 percent next year, he said.

Vale SA, the world’s biggest iron ore producer, said demand for metals is starting to recover and it will begin boosting output. Vale Chief Financial Officer Fabio Barbosa said on July 30 that “the worst is over”.

The price of oil may rise more than other commodities because of an expected rebound in demand, Roubini said separately in an interview with Bloomberg News. It may average between $70 and $75 a barrel next year, he said.

Oil Prices

Crude oil traded above $70 a barrel today for the first time in a month on speculation fuel demand will increase, amid signs the global economy is recovering from recession.

The U.S. economy, the world’s biggest, is likely to grow about 1 percent in the next two years, less than the 3 percent “trend,” Roubini said last month. President Barack Obama said on July 30 the U.S. may be seeing the beginning of the end of the recession.

In July 2006 Roubini predicted the financial crisis. In February of last year he forecast a “catastrophic” meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks with mortgage holdings and a “sharp drop” in equities. Since then, Bear Stearns Cos. was forced into a sale and Lehman Brothers Holdings Inc. went bankrupt, prompting banks to hoard cash and depriving businesses and households of access to capital.

A Hard Look Over The “Recovery”

Friday’s GDP report confirmed a trend that has been persistent across the entire economy: there are few signs of sustainable economic growth.  There’s no question that the economy has improved substantially since the 3rd quarter of 2008, but the quality of the recovery has grown increasingly questionable.  The GDP figure was largely driven by government spending as opposed to improvement in the economy’s primary driver – the U.S. consumer.  In addition to the GDP figure we continue to see conflicting signs in the real economy.   In particular, revenues continue to lag and the consumer data continues to be weak.  In order for a long-term recovery to develop these trends will need to change.

The most recent GDP results were boosted 3% from government spending.  Most of this did not come from the stimulus package, however:

most of that increase came from the defense sector, not the nondefense sectors targeted by the American Recovery and Reinvestment Act. Defense spending grew at a 13.3% annual rate, in part a rebound from a 4.3 first quarter contraction. Nondefense spending grew at a 6% annual rate, contributing 0.15 percentage points to overall growth. The economy can use all of the help it can get, but it’s too soon to declare that federal spending is effectively making its way into the system.

Clusterstock had an excellent chart showing the impact of the recent government spending on the GDP:

Government spending is by no means a bad sign, but an organic and sustainable recovery cannot develop without strength in other components of the economy.  Unfortunately, there are few signs of strength outside of government spending.  The real source of long-term economic growth, the U.S. consumer, continues to show signs of extreme weakness:

On the employment front the U.S. economy is expected to have lost another 300,000 jobs in July – a staggering statistic this deep into a recession.

Many of the same weak underlying fundamentals are apparent in the Chinese stimulus plan as well.  Many people have attributed the sharp global economic rebound to China’s stimulus, but the risks in the plan have become increasingly high.  Royal Bank of Scotland economist Ben Simpfendorfer said:

“The risk is that the government, in chasing in an 8 per cent growth target, is relying too heavily on public investment and private residential investment to spur growth, rather than pushing ahead with the type of late-1990s structural reforms that will put the economy back on a high-single digit and, more importantly, sustainable growth trajectory.”

In a recent Barrons article Arjun Divecha, portfolio manager at GMO also believes the Chinese stimulus is largely artificial:

“I believe a lot of the money is not going into productive investment. What we are hearing anecdotally is that a lot is being lent by the banks, which remember, are government-owned. Who are they lending to? For the most part, this money is going to state-owned enterprises, which are not particularly efficient companies.

We know they are buying real estate, and they are doing all kinds of things we don’t think in the long run is particularly productive investment.

Two things are likely to happen. First, longer term, if the banks don’t have a problem with bad loans now, they will almost certainly have a lot more bad loans two or three years from now. Second, from a short term point of view, at some point the government is going to get really worried about having too much credit-creation; that leads to a credit bubble, just like you had in this country and everywhere else. As a result, they will start to withdraw liquidity by tightening the gates on the money. I don’t know when that will be. But I worry that it is coming.

A fair amount of the stimulus money has found its way into the real estate and stock markets because China has a closed economy. So there is no way for money to leave the country. The stock market and real estate have had huge spikes. So when that liquidity is withdrawn, it seems inevitable that the stock market will take it badly.”

In May, Stratfor released a detailed report that says the long-term structural changes of the Chinese stimulus will be very beneficial, but also expresses some concerns:

1. This is not a stimulus program designed to restart the economy in the short run. Good stimulus packages are very front-loaded so that they can shock the system with immediate demand. China’s plan is in actuality a five-year plan designed to help develop the country’s poor interior provinces largely by building infrastructure.
2. It is not actually $586 billion in cash. Only $146 billion — about one-fourth — of the program will be funded by the national government, and this will take the form of construction bonds. The remaining $440 billion will be up to the regional governments to raise. This will be a neat trick since until very recently — and by this we mean that the idea was only even floated in March — regional governments had no authority (much less experience) in issuing their own bonds.
3. The Chinese government is not particularly convinced that the package will work. If Beijing were convinced, it would be tapping at least some of its roughly $2 trillion in currency reserves (its own money), rather than going through the more drawn-out process of dozens of bond issuances (getting access to other people’s money).

The Chinese government itself is growing increasingly concerned about the impact of the stimulus package:

But while investors expect the market — up more than 80 percent this year — to keep rising, Chinese leaders are alarmed. They worry that too much of the $1 trillion lending binge by state banks that paid for China’s nascent revival was diverted into stocks and real estate, raising the danger of a boom and bust cycle and higher inflation less than two years after an earlier stock market bubble burst.

Beijing is trying to tighten credit controls without derailing the economic revival or causing a market crash — a risky path at a time when Chinese leaders say a recovery is not firmly established.

“It’s a very serious threat. The Chinese government is walking a tightrope,” said Mark Williams, Asia economist for Capital Economics in London. “There is the question of what happens if they rein in lending, because there is really no strong evidence that private sector demand is picking up.”

Recent economic data and the stimulus driven recovery isn’t the only place where we’ve been seeing artificially driven signs of recovery.  This has been nowhere more apparent than in recent earnings reports.  We’ve recently detailed the significant cost cutting that has led to the “better than expected” earnings this quarter.   Despite the fact that 70% of all companies are beating earnings, revenues are still declining 15% year over year.  The underlying driver of real organic corporate growth is still extremely weak.  At some point in the next quarter or two we will need to see real underlying revenue growth or investors will likely grow increasingly concerned about the real underlying strength of the economic recovery.

One of the primary sources of optimism has been the housing market.  We have been seeing very strong seasonal strength in housing, however and Mark Hanson at Field Check Group is quick to point out that these are more than likely weeds as opposed to green shoots:

But the season ends now. Every year, organic sales fall off of a cliff beginning in August primarily because kids go back to school in Sept. If organic sales follow typical seasonality trends lower again this year and foreclosure-related resales stay the same or rise (no reason they shouldn’t), then the average and median prices will be pulled quickly back towards the distressed market price.

Mark Zandi at Moody’s reports that the stimulus driven economic recovery is not over yet:

The moment of truth is at hand for the U.S. fiscal stimulus plan. The stimulus that became law in February should reach its point of maximum economic benefit this summer. If the plan is working, retailing will improve soon, and businesses should respond by curtailing layoffs measurably. Early results suggest the stimulus is performing close to expectations, but policymakers should be prepared to provide more help to the economy if things don’t work as expected in coming months.

The government has only infused about $50B of the total they plan to spend:

Accounting for these lags, the maximum contribution from the stimulus should occur in the second and third quarters of this year, when it will add more than 3 percentage points to annualized real GDP. This suggests that if policymakers had not been able to pass a stimulus plan, real GDP would have declined nearly 6% in the second quarter and by more than 3% in the third. With the stimulus, GDP is expected to fall close to 3% in the second quarter and rise a bit in the third. The contribution of stimulus to growth fades quickly, adding just over 1 percentage point to annualized growth in the fourth quarter of this year and the first quarter of 2010 and actually detracting from GDP growth by the second half of 2010. The impact on jobs and unemployment is also significant, as the stimulus results in approximately 2.5 million more jobs by the end of 2010 than would have been the case without it, and leaves the unemployment rate almost 2 percentage points lower.

Despite the upcoming stimulus boost, Zandi is still skeptical of continued economic strength in 2010:

Risks to this sanguine script are skewed to the downside. Odds remain uncomfortably high that the economy will enjoy a bounce from the increased stimulus this summer but then fade with the waning stimulus by the summer of 2010. This scenario is more likely if the administration’s foreclosure mitigation efforts don’t quickly begin to reap benefits. Without a measurable increase in mortgage loan modifications, foreclosures will continue to surge, further undermining house prices, housing wealth, the financial system, and the economy’s prospects for a sustainable recovery.

Prepare for the worst

Policymakers should thus be quietly preparing another round of fiscal stimulus for early 2010. Effective additional stimulus might include more help to state and local governments, whose budget problems will probably be even worse next year; an expanded housing tax credit to address the foreclosure crisis; and a payroll tax holiday. Delaying increases in marginal personal tax rates, now legislated to occur at the start of 2011, would likely also make sense. Higher-income households may begin to rein in spending in 2010 as they prepare for the higher tax rates.

It is premature for policymakers to publicly consider all this now; the current stimulus should be given a chance, and the nation’s long-term fiscal challenges are daunting. But if the Great Recession has taught us anything, it is to prepare for the worst.

“Prepare for the worst” is good advice.  While the stimulus driven recovery is likely to continue into the end of the year there are mounting signs that the underlying quality of the recovery is poor and the sustainability of the poor fundamentals are unlikely to provide above trend growth any time soon.

Sovereign Wealth Funds Back @ the Table

Sovereign wealth funds are regaining their appetite for deals in western markets after making the lowest number of foreign investments during the first quarter since 2005, following a series of disastrous bets in high-profile public companies.

State-owned investment funds from oil-rich countries and Asian exporters made just 26 investments worth a total $6.8bn in the first three months of the year, according to Monitor Group, the advisory firm, and Fondazione Eni Enrico Mattei, an international research centre.

That represents a fall of more than 50 per cent on the number of investments made in the first quarter last year, highlighting their retreat from international markets.

Bill Maracky, partner at Monitor Group, said: “The volatile investment climate coupled with slowing income from plummeting oil prices and contracting global trade in 2008 caused SWFs to scale back their acquisitions to reflect their perception of increased market risk during the first [quarter]”.

Deutsche Bank analysts estimate that typical equity portfolios held by SWFs may have lost 45 per cent of their value between the end of 2007 and early 2009, reducing overall portfolios by about 18 per cent.

Since then equity markets have improved and, because the majority of SWFs have held on to their investments, these losses were not realised.

Stefan Kern, Deutsche Bank economist, said SWFs were still cautious but could be expected to start to increase investments if equities sustained a recovery.

He said: “This time around, political reservations in recipient countries such as the US and in the EU are likely to be much less pronounced as fresh capital is needed in most parts of these economies”.

In July, the Qatar Investment Authority said it was in talks to acquire options that convert into a stake in Volkswagen. China Investment Corporation, the $200bn sovereign wealth fund, acquired Goodman Group, the Australian property trust, and Teck, a Canadian miner.

Abu Dhabi’s four flagship funds – Abu Dhabi Investment Authority, Abu Dhabi Investment Company, Mubadala and International Petroleum Investment Company – were the most active investors in the first three months of the year.

Among them, the funds made 12 investments with a reported value of $4.9bn, almost three-quarters of the total expenditure for the quarter.

Industrials was the second-largest sector for investment after financials, with three deals representing about $3.3bn, including IPIC’s investment in Daimler and the Libyan Investment Authority’s joint venture with Yara, the Norwegian fertiliser manufacturer.

The Disappearing Jobs Market

By Emily Kaiser

WASHINGTON (Reuters) – Long after President Barack Obama‘s first term ends in 2013, millions of U.S. families will still be paying the price for the recession.

From auto workers in Detroit too old for retraining, to Hispanic migrants in Arizona with no homes to build, to new college graduates competing with experienced workers for scarce jobs, more and more people are facing long-lasting unemployment.

Since the recession began in December 2007, the jobless rate has climbed 4.6 percentage points to 9.5 percent, the biggest jump since the Great Depression. Worse, the mean duration of unemployment is now almost 6 months, the highest on record.

Although Obama frequently points out he inherited the recession from his predecessor, George W. Bush, the fallout will frame his legacy, presenting a quandary for a president elected on a slogan of “Yes We Can.”

Unless Obama figures out how to repair the job market, the can-do attitude sparked by his election may be replaced by despair, leaving deep economic and social scars that undermine his political goals.

GONE FOR GOOD

Joblessness typically rises during recessions as weak demand prompts companies to cut production and jobs. Normally those workers are rehired once the economy recovers.

For example, in the back-to-back recessions of the early 1980s, the jobless rate peaked at 10.8 percent. Thanks to a strong recovery, that receded to 8.3 percent one year after the downturn ended.

This pattern has changed in recent years and jobs lost in recessions are much slower to return, if they come back at all. In the 2001 slump, unemployment peaked 19 months after the recession ended, and it was another three years before the jobless rate came close to pre-recession levels.

In the current recession, economists say high unemployment is likely to persist at least another four years. In Michigan, home to the battered U.S. auto industry, nearly 13 percent of jobs may be wiped out, according to research firm IHS Global Insight, and the state’s labor market probably won’t return to its pre-recession strength until after 2015.

Alvin Gains, 56, a former worker at a Chrysler plant in the Detroit suburb of Sterling Heights, has given up on finding work in his home state and is leaving for Texas.

He left Michigan once before, when he was laid off by Chrysler in 1979. This time he doesn’t expect to come back. “This downturn is so much worse, there’s no work for people here,” he said.

The rise in long-term unemployment is a puzzle for economists. The Congressional Budget Office studied it in 2007 and concluded merely that the shift was “hard to explain.”

But what is clear is the longer people like Gains remain out of work, the worse their chances get. Skills become outdated, big resume gaps put employers off, and younger people step in.

LOWER LIVING STANDARDS  Continued…

Greenspan Says Recovery in Underway

Former Fed Chairman Alan Greenspan

Former U.S. central bank chairman Alan Greenspan said Sunday he believes the U.S. economic downturn is near its end. “There has been a significant improvement in the financial system,” said Greenspan. Appearing on U.S. television, the former Federal Reserve chairman acknowledged unemployment is still a problem, but added that job losses are slowing.

He predicted that the economy would resume growth in the third quarter of 2009. “It strikes me”, he says, “that we may very well have two and-a-half percent (economic growth) in the current quarter.” That compares with a 1% decline in the gross domestic product in the second quarter, 6.4% in this year’s first quarter and 5.4% in the fourth quarter of 2008.

Greenspan said the government’s purchase of hundreds of billions of dollars in troubled assets in the so-called TARP (Troubled Asset Relief) program was helpful in shoring up the capital stock of banks and other financial institutions. “And, not an insignificant event is the three and one-half trillion dollar increase in the stock market value of American corporations. Those are capital gains and they flow throughout the system and you could see their impact in the credit markets and equity markets.”

The former Fed chairman says he believes the economy began to improve in the middle of July. “And, the reason,” said Greenspan “is that there has been such an extraordinarily high rate of inventory liquidation that the production levels are well under consumption. And, as that slows down, production moves up and that could be quite significant.”

In order to prevent another crisis in the U.S. housing and credit markets, the nation’s central bank plans to introduce new regulations to protect consumers against unfair or deceptive lending practices

Greenspan said he sees short-term economic improvement, but “with caveats” including housing prices. “Unless home prices stabilize, maybe 5% down from here, it is possible, I don’t think it’s going to happen, but I do think it is possible that we could get a second wave down.” He warned that a further deterioration in housing prices, perhaps 10% or greater, would result in a second major round of foreclosures that could have a major impact on consumer spending.

The other caveat is government deficits. Greenspan agreed that health care reform is required as a long-term solution to government red ink. “There is no question, but that the core of the problem on the long-term deficit is (the government-run health insurance program) Medicare, specifically, and health care, more generally, in the sense that it affects revenue.” He said the government must also find additional sources of revenue to shore up Medicare and other government programs possibly including a value-added tax. Greenspan cautioned that the threat of inflation is very real and predicted the Federal Reserve will have to raise interest rates once the economic recovery is underway, perhaps in less than two years.