Behold The Bloggers Time Has Come
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WASHINGTON — Public trust in the US media is eroding and increasing numbers of Americans believe news coverage is inaccurate and biased, according to a study released on Monday.
Just 29 percent of the 1,506 adults surveyed by the Pew Research Center for the People and the Press between July 22-26 said news organizations generally get the facts straight.
Sixty-three percent said news stories are often inaccurate, up from 34 percent in a 1985 study, Pew said.
Sixty percent of those polled said the press is biased, up from 45 percent in 1985. Just 26 percent in the latest survey said that news organizations are careful their reporting is not politically biased.
Seventy-four percent said news organizations tend to favor one side in dealing with political and social issues. Eighteen percent said they deal fairly with all sides.
Pew said Republicans tend to be more critical of the news media than Democrats although negative attitudes toward the news media were also increasing among Democrats.
Fifty-nine percent of those who identified themselves as Democrats said news organizations are often inaccurate, up from 43 percent just two years ago.
Two-thirds of the Democrats polled said the press tends to favor one side rather than to treat all sides fairly, up from 54 percent in 2007.
Just 20 percent of those polled said news organizations are independent of powerful people and organizations and only 21 percent said they are willing to admit their mistakes.
The poll found television remained the dominant news source for the public, with 71 percent saying they get most of their national and international news from television.
Forty-two percent said they get most of their news from the Internet compared with 33 percent who cited newspapers.
Fifty-nine percent rated news organizations as “highly professional,” down from 66 percent two years ago and 72 percent in 1985.
Sixty-two percent of those polled said news organizations are being fair to the Obama administration while 23 percent said media coverage has been unfair.
Forty percent said the major cable news outlets — CNN, Fox News and MSNBC — were their main source for national and international news with 22 percent saying they relied on CNN, 19 percent on Fox and six percent on MSNBC.
Seventy-two percent of Republicans view Fox News positively compared with just 43 percent of Democrats.
Those polled were starkly divided along party lines when it came to The New York Times.
Republicans viewed the Times negatively by a margin of 31 percent to 16 percent while Democrats viewed it positively by 39 percent to eight percent margin.
Sixty-eight percent of those polled said it would be a major loss if large national newspapers like the Times, USA Today and The Wall Street Journal were to stop publishing.
The survey had a margin of error of between plus or minus three percentage points.
Comments »A Podcast With Nouriel Roubini on “Death by A 1000 Cuts” … Plus Another Cheerful Outlook From Jim Rogers on Currency & Debt
Business Headlines For September 14, 2009
Courts Reject SEC Settlement with BAC
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A federal judge threw out a $33m settlement between the Securities and Exchange Commission and Bank of America over allegations that BofA made misleading statements to shareholders, setting the stage for a trial next year that could embarrass the bank’s top management.
In a blistering opinion, US District Judge Jed Rakoff described the settlement as a “cynical” agreement between the regulator and regulated that was “not only unfair but unreasonable”.
In its original case, the SEC claimed that BofA had made misleading statements to shareholders last year in the November prospectus describing the acquisition of Merrill Lynch when it said that no large bonuses would be paid to Merrill executives without BofA’s consent.
But there was a side agreement to the original merger document, struck in mid-September 2008, allowing Merrill to pay up to $5.8bn in bonuses. The SEC alleged that the side agreement, not included in the prospectus, amounted to a misleading statement on the part of BofA.
The Charlotte, North Carolina bank agreed to settle the action for $33m last month, without admitting any liability, which is a standard component of SEC settlements.
On August 10, Judge Rakoff held a hearing in which he refused to accept the original agreement. Instead, he asked the SEC for the names of the people responsible for the statements alleged to be misleading….
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How High Can AAPL Go ? Some Say a Moonshot is in Order
Apple accounts for many iPhone sales by spreading the revenue over two years on the theory that the phone is subsidized in exchange for a two-year contract because Apple provides free software updates over the life of the phone.*
At the same time, however, Apple gets all the iPhone cash upfront, which has produced extraordinary cash flow relative to reported earnings in recent years.
The full power of the iPhone’s success has long been visible to anyone who has looked at the company’s cash flow statement. In recent quarters, Apple has also begun publishing “non-GAAP” earnings that show what their reported EPS would have been had they accounted for the phones in a more typical way. The company’s GAAP earnings, however, have never fully reflected the awesome profitability of the iPhone.
But that may soon change.
In a report last week, Credit Suisse describes an accounting rule change that may eventually allow Apple to book most iPhone revenue upfront. Doing so would not change the company’s cash flow, so there would be no actual change in the theoretical value of the company or stock.
But the change would cause Wall Street analysts to jack up their earnings estimates, and it would significantly boost the company’s reported earnings. This would make Apple’s stock look much cheaper to unsophisticated investors. It might also, therefore, act as a catalyst for the stock.
(Silly? Yes. But stranger things have happened. Perception is reality…).
Credit Suisse analyst Bill Shope:
We have learned from our conversations with Credit Suisse’s Accounting and Tax
Research team (led by David Zion) that in a meeting yesterday, the EITF approved a
change to the rule that requires Apple to recognize the iPhone on a ratable basis (SOP 97-
2). While it’s a draft rule at this point, it should receive final approval in the next several
weeks. The following key takeaways are important for hardware investors:
* The rule change. SOP 97-2 is the accounting standard that requires Apple to
recognize iPhone revenues and profits over a 24-month period. The basic concept is
that because Apple offers free software updates on the device, it has to recognize the
revenues and costs over the life of the hardware. After intense lobbying by several
technology companies, however, FASB agreed to review the rule. The EITF
(Emerging Issues Task Force), which is part of FASB, effectively reversed the rule in a
meeting yesterday. At this point the new rule is a draft rule, but it should receive final
approval in the next few weeks. The new rule will allow Apple to recognize the iPhone
hardware revenue and profit at the point of sale, while an estimated value for the
software will be recognized over the life of the device.
* This impacts the iPhone and Apple TV businesses. While the ratable accounting
for the iPhone is the primary focus for investors, this accounting rule was also applied
to the Apple TV business.
* The difference in revenues and profits is substantial. Last quarter, Apple’s non-
GAAP (non-ratable) revenues were 16.9% higher than GAAP, while non-GAAP EPS
was 58% higher. For all of fiscal 2009, the differences are 16.3% and 48.5%,
respectively.
* There will still be some accounting puzzles to solve. The new rule proposes that
all future sales of products are impacted, but prior sales are not affected. In addition,
Apple will have to estimate the value of iPhone software updates, which is not easy for
investors to forecast.
* GAAP EPS may actually be higher than our current non-GAAP. Interestingly, by
recognizing historical iPhone sales on a deferred basis and new iPhone sales on a
period basis, Apple’s GAAP results under the new rule will now be inflated (they would
get credit for current iPhones AND devices sold over the prior two years). As a result,
we suspect pro-forma estimates will still be necessary. Either way, the artificial
compression of GAAP earnings will no longer be an issue under the new rule.
* It may take a while for Apple to implement. The new rule would not be mandatory
until Apple’s fiscal year 2011, but we suspect the company will choose to implement it
much earlier. Nevertheless, revenue and profit recognition changes can require
complex enterprise software and accounting overhauls, so this may take the company
a few quarters.
* In the end, true earnings power should be more apparent. Although Apple already
reports non-GAAP revenues and earnings, consensus and management guidance is
still GAAP. This new rule would change that, and it should make Apple’s true cash
earnings power more apparent to a broader base of investors.
Overall, while this does not change the cash dynamics at Apple, we believe the rule
change will make it easier for investors to understand the massive cash earnings power of
the iPhone. We believe this is a clear positive catalyst for Apple’s stock.
* Our Apple analyst, Dan Frommer, notes below that I was wrong about the reason Apple is currently recognizing iPhone revenue and costs over two years. I’ve corrected the error above. Here’s Apple’s explanation from a transcript at Seeking Alpha:
As we have discussed in the past, because we may provide new features and software applications to iPhone and Apple TV customers in the future free of charge, in accordance with GAAP we use subscription accounting to recognize revenue and cost of sales for these products on a straight line basis over their two-year estimated economic lives. This results in the deferral of almost all revenue and cost of sales related to iPhone and Apple TV during the quarter in which these products are sold to customers.
In contrast, we generally recognize revenue and cost of sales for our other hardware products, such as Macs and iPods, at the time of sales as we do not provide new features or software applications for those products free of charge.
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ATLANTA (Reuters) – Delta Air Lines, the world’s biggest airline, boosted its operating margin forecast for the third quarter, citing lower fuel costs, and said other financial measures were trending in line with or better than year-earlier and second-quarter levels.
In a federal filing on Monday, the company said it expects operating margin of 3 percent to 4 percent for the third quarter, and breakeven operating margin for the full year.
On July 22, Delta projected third-quarter operating margin of 1 percent to 3 percent.
The higher forecast is a positive, said Basili Alukos, a Morningstar analyst…..
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NEW YORK (Reuters) – Eli Lilly and Co said on Monday it plans to cut 5,500 jobs, or 13.5 percent of its workforce, as it girds for generic competition by 2011 on its Zyprexa schizophrenia drug and Gemzar cancer treatment.
The Indianapolis-based drugmaker, whose revenue outlook has also been dimmed by competition for its Byetta diabetes drug and safety concerns for its recently approved Effient blood clot preventer, said it aims to cut its annual costs by $1 billion by the end of 2011.
The company aims to streamline its structure and shrink its workforce to 35,000, from its current strength of 40,500, by the end of 2011. But the new headcount does not include any new sales force additions in fast-growing emerging markets and Japan, Lilly said.
Lilly’s biggest challenges are the slated U.S. patent expirations on Gemzar, Zyprexa and anti-depressant Cymbalta, slated for late 2010, late 2011 and 2014, respectively. Cheaper generics are expected to wrest away the vast majority of their U.S. sales.
That is a huge concern, given the fact that the trio are among Lilly’s biggest products, with combined global annual revenue of more than $9 billion — or about 43 percent of Lilly’s total current annual sales……
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By Caren Bohan
NEW YORK (Reuters) – U.S. President Barack Obama, marking a year since Lehman Brothers collapsed, urged financial firms on Monday not to fight regulatory reform and called on Congress to pass his proposals by the end of the year.
Obama said while the economy and the financial system were showing signs of recovery, he wanted to emphasize that “normalcy cannot lead to complacency.
“Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them,” Obama said at the historic Federal Hall in the heart of Wall Street.
“So I want them to hear my words: We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis.”
Obama’s speech also sought to show other countries his administration is serious about tackling weaknesses and excesses in the U.S. financial system blamed for setting off the global crisis after Lehman, a venerable investment bank, filed for bankruptcy on September 15, 2008.
Financial reform will be a key issue at a G20 summit of leading developed and developing nations in Pittsburgh next week but progress on Obama’s agenda has been slow.
Obama and other backers of a financial reform say new rules are crucial to heading off another catastrophe. But many of the provisions are bogged down in Congress, possibly delaying reforms until 2010 or resulting in a watered-down package.
The Treasury Department said on Monday the U.S. financial system remains fragile and that withdrawing stimulus measures must be done carefully to avoid disrupting a nascent recovery.
Obama said: “While there continues to be a need for government involvement to stabilize the financial system, that necessity is waning.”
Treasury Secretary Timothy Geithner said it was vital for Congress to approve a regulatory overhaul by the end of the year.
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Europe Closes Largely Unchanged While the U.S. Markets Fluctuate
By Lynn Thomasson
Sept. 14 (Bloomberg) — U.S. stocks fluctuated as gains in utilities and industrial companies helped the market overcome an early slump spurred by concern the recent rally outpaced prospects for earnings growth.
Avery Dennison Corp., the world’s largest label maker, and Sealed Air Corp., the producer of Bubble Wrap, rallied at least 4.8 percent after Bank of America Corp. advised buying the shares. AES Corp. led utilities higher on a Wall Street Journal report that China’s sovereign wealth fund may buy a stake. SLM Corp., the student lender known as Sallie Mae, tumbled 4.1 percent after Fitch Ratings cut its long-term debt rating.
The Standard & Poor’s 500 Index slipped less than 0.1 percent to 1,042.61 at 12:40 p.m. in New York after last week’s 2.6 percent rally. The Dow Jones Industrial Average fell 15.94 points, or 0.2 percent, to 9,589.47. American equities extended a global slide earlier as escalating trade tensions between the U.S. and China also weighed on benchmark indexes.
“Any companies that don’t sell a lot of goods to China are certainly on the buy list this morning,” said David Rolfe, who oversees $500 million as chief investment officer for Wedgewood Partners in St. Louis. “What we’re seeing is a relatively soft reach for defensive stocks given the trade war chatter.”
Fund managers at Rothschild & Cie Gestion, BlackRock Inc. and OppenheimerFunds Inc. are moving money out of stocks whose profits are more tied to economic growth and into so-called defensive shares including phone companies, drugmakers and food producers. The asset managers are betting that the economic recovery won’t be strong enough to support gains in so-called cyclical stocks.
‘Early Cycle’
Avery Dennison added 5.2 percent to $34.30. Sealed Air jumped 4.8 percent to $19.96. Bank of America analysts said they were bullish on packaging and paper companies because they tend to be “early cycle” companies, or among stocks that tend to benefit first from an economic recovery.
Sprint Nextel Corp. soared 11 percent to $4.19. Germany’s Deutsche Telekom AG has asked adviser Deutsche Bank AG to study a potential takeover bid for mobile-phone operator Sprint, the U.K.’s Sunday Telegraph reported, citing unidentified people.
Tenet Healthcare Corp. rallied 7.7 percent to $5.87, the most in the S&P 500 after Sprint. The hospital operator raised its 2009 earnings forecast, excluding some charges, to $900 million to $950 million, from $810 million to $875 million.
U.S. equities extended a global decline earlier, sending the MSCI World Index down for the first time in eight days, amid concern equities have gotten too expensive.
Valuation Watch
The S&P 500 has rebounded 54 percent from a 12-year low on March 9 amid signs the worst of the recession is past and as companies beat analysts’ earnings estimates. The rally pushed valuations in the U.S. benchmark index to about 19.3 times its companies’ reported earnings, the highest level since June 2004, according to weekly data compiled by Bloomberg.
The MSCI World of 23 developed nations trades at 27.3 times the earnings of its 1,659 companies after a 61 percent advance.
Stocks rallied the past six months as the Group of 20 countries committed $12 trillion to help end the global recession, according to the International Monetary Fund, while the Federal Reserve has held its target rate for overnight lending between banks at near zero to unlock credit markets after the bankruptcy of Lehman Brothers Holdings Inc.
Equities also retreated earlier today after China, the world’s fastest growing major economy, said it’s probing U.S. sales of chicken and auto products for “unfair trade practices,” two days after the U.S. imposed tariffs on Chinese tires.
Joseph Stiglitz, the Nobel Prize-winning economist, said governments around the world have failed to rein in the banking industry in the year since the collapse of Lehman roiled financial markets. The European Central Bank warned last week that protectionism risks hampering trade and undermining government efforts to resuscitate growth.
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Asian Markets Fall As The Yen Strengthens & Commodities Fall
By Shani Raja
Sept. 14 (Bloomberg) — Asian stocks fell, dragging the MSCI Asia Pacific Index from a one-year high, amid concern a six-month rally had overvalued prospects for an earnings recovery in the region.
Honda Motor Co., which gets 47 percent of its sales in North America, retreated 3 percent in Tokyo on concern the yen’s appreciation to a seven-month high against the dollar will reduce the value of overseas revenue. National Australian Bank Ltd., the nation’s biggest by assets, dropped 3.2 percent in Sydney after Treasurer Wayne Swan said unemployment will climb. Santos Ltd., Australia’s No. 3 oil producer, sank 3.7 percent as commodity prices declined.
“Expectations may be beginning to moderate regarding the ongoing strength of the recovery,” said Tim Schroeders, who helps manage about $1 billion at Pengana Capital Ltd. in Melbourne. “Investors will be concentrating on discerning real underlying growth in the global economy.”
The MSCI Asia Pacific Index sank 1.8 percent to 115.72 as of 5:53 p.m. in Tokyo after ending last week at its highest level since Sept. 9, 2008. The gauge has climbed 64 percent from a five-year low on March 9 as government stimulus measures worldwide pulled economies out of recession.
Japan’s Nikkei 225 Stock Average fell 2.3 percent. Real- estate investor K.K. DaVinci Holdings tumbled 14 percent in Tokyo after saying it wasn’t likely to reach agreement on a loan extension. Hong Kong’s Hang Seng Index dropped 1.1 percent, led by Li & Fung Ltd., which retreated for a second day from a 15- month high. Australia’s S&P/ASX 200 Index declined 1.4 percent……
European Markets Follow Asia on Bank Downgrades
By Adam Haigh
Sept. 14 (Bloomberg) — Stocks in Europe and Asia declined, ending a seven-day advance for the MSCI World Index, on concern the six-month rally in equities has outpaced the prospects for earnings and economic growth. U.S. index futures dropped.
Societe Generale SA and Deutsche Bank AG fell after Nomura Holdings Inc. downgraded the shares. BHP Billiton Ltd., the world’s biggest mining company, sank 2.3 percent in London as metals retreated. Honda Motor Co., which gets 47 percent of its sales in North America, slid 3 percent in Tokyo on concern the yen’s appreciation to a seven-month high against the dollar will reduce the value of overseas revenue.
The MSCI World slid 0.9 percent at 11:16 a.m. in London, as all 10 industry groups declined. The measure’s 61 percent surge since March 9 pushed valuations to 27.3 times the profits of its 1,659 companies at the end of last week, the most expensive level in more than six years, data compiled by Bloomberg show.
“There’s a lot of vulnerability still in the global economy,” said Michael Dicks, head of research and investment strategy at Barclays Wealth in London, which oversees about $203 billion. “There’s still a lot to do. Stocks are getting back to fair value and it requires the economy to keep going for them to keep going,” he said in a Bloomberg Television interview.
Europe’s Dow Jones Stoxx 600 Index dropped 1.2 percent today, while Standard & Poor’s 500 Index futures expiring in December slid 0.8 percent. The MSCI Asia Pacific Index sank 1.8 percent, led by Hankook Tire Co., as the U.S. imposed a 35 percent tariff on Chinese-made tires…..
Oil Drops Below $69 as The Greenback Firms
By ALEX KENNEDY p {margin:12px 0px 0px 0px;}
Benchmark crude for October delivery was down 77 cents at $68.52 a barrel at late afternoon Singapore time in electronic trading on the New York Mercantile Exchange. On Friday, the contract tumbled $2.65 to settle at $69.29.
Oil prices have fallen about $4 in the last two trading days as the dollar rebounded off its lows of the year last week. Oil is priced in dollars so it becomes more expensive when the U.S. currency gains.
The euro fell Monday in Asian trade to $1.4539 from $1.4597 on Friday and the dollar rose to 90.78 yen.
Oil traders are also eyeing stock markets for an overall read on investor confidence. Most Asian indexes fell Monday.
“Oil’s being driven down by the dollar and weakness in Asian stocks,” said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore. “There are also worries about oil demand.”
Crude has traded between $65 and $75 for the last few months as investors mull weak consumer demand amid a global economic recovery.
Shum said oil will likely remain in that range until there is a strong new catalyst.
“There are no clear forces to cause oil to break out of that range,” Shum said. “I don’t expect this pullback to be very significant.”
In other Nymex trading, gasoline for October delivery fell 2.67 cents to $1.73 a gallon, and heating oil dropped 2.09 cents to $1.71 a gallon. Natural gas rose 4.2 cents to $3.00 per 1,000 cubic feet.
In London, Brent crude was down 54 cents to $67.15.
Economists have been hotly debating the possibilities of a ‘V’ shaped recovery and a double-dip recession. It is still too early to take a stance, given the confounding signals generated by the economic reports we have received thus far. The employment market is still bleeding despite the positive tidings we have received from the housing and manufacturing fronts. There has been no evidence of firms attempting to hire even as retrenchments continue.Consumers are wary after they burnt their hands due to the excesses they indulged in. The extremely cautious stance of the consumer, who has been the pillar of strength for the economy, was clearly reflected by the consumer credit report for July, which showed a $21.6 billion drop in unsecured consumer loans. Going by recent economic evidence, it is less likely that consumer spending rebounds in the next several years.
According to FTN Financial, consumers are likely to remain passive participants in the economy this time around. The firm believes that the huge drop in consumer credit in July and anecdotal reports of another drop in mortgage debt in the second quarter suggest that consumers would take the savings rate even higher. Consequently, the economy may need more stimulus along with a prolonged low interest rate environment. …..
Sept. 14 (Bloomberg) — China announced dumping and subsidy probes of chicken and auto products from the U.S., two days after President Barack Obama imposed tariffs on tires from the Asian nation.
Chinese industries complain that they’re being hurt by “unfair trade practices,” the nation’s Ministry of Commerce said on its Web site yesterday. The dumping investigation relates to poultry alone, a spokesman said in Beijing today. The ministry didn’t specify the value of imports of the products.
Rising protectionism may hamper world trade and undermine the global economy’s recovery from recession, the European Central Bank said last week. The U.S. placed tariffs starting at 35 percent on $1.8 billion of tire imports from China, backing a United Steelworkers union complaint against the second-largest U.S. trading partner.
“While there’s friction, I suspect that the two nations will keep any disputes under control,” said David Cohen, an economist at Action Economics in Singapore. “They understand that they’re increasingly dependent as trading partners.”
Dumping is selling goods for less than the cost of producing them.
The state-run China Daily newspaper said in a front-page article today that the probe was “not revenge” for the decision on tires. The commerce ministry spokesman, who wouldn’t be identified by name, said the government was assessing whether the subsidy and dumping complaints had merit…..
Long Term Bond Yields Will Rise Amid Concerns of Deficit Spending
Sept. 14 (Bloomberg) — Longer-term bond yields are likely to rise amid investors’ concern about budget deficits built up by governments to fight the global recession, the Bank for International Settlements said.
“Fiscal sustainability concerns are likely to affect forward yields that span distant horizons, which are less influenced by near-term expectations about inflation, economic growth and monetary policy,” the Basel, Switzerland-based BIS said in a quarterly report yesterday. The BIS expects budget concern to put “upward pressure on “real forward rates.”
Governments from the Group of 20 nations have pumped more than $2 trillion into their economies, swelling their budget deficits. The U.S. fiscal shortfall is already around 11 percent of gross domestic product, the most since World War II, and the U.K. deficit will be around 12.4 percent this year.
The euro region’s five-year, five-year forward rate has risen to 2.67 percent from 2.51 percent at the end of March. Five-year, five-year forwards are a measure of investors’ expectations for inflation over a five-year period starting five years from now.
At the same time, the BIS said economists and investors expect the global economic slump to keep a lid on inflation.
“Long-term” price pressures “appear contained for now, despite surging fiscal deficits and record-low monetary policy rates,” the BIS said in its report for the period from the end of May to September. “This may reflect the belief that the current high level of economic slack will persist for some time.”
Goldman’s Stan O’Neil Calls Currency & Debt Fears a “Silly September” Trade
By Brian Swint and Rishaad Salamat
Sept. 14 (Bloomberg) — Foreign-exchange markets have embarked on a “silly September” as traders focus too much on government debt in the U.S. and U.K. while pushing up the value of the yen, said Goldman Sachs Group Inc.’s Jim O’Neill.
“There is a very popular notion that you’ve got to sell the pound and the dollar because of the rising government debt, whereas the one that everyone’s seemingly buying is the yen,” O’Neill, head of global economic research at Goldman, said in Bloomberg Television interview in London today. “It’s ridiculous” and “I think of it as ‘silly September.’”
Currency strategists are trying to calculate which economies will benefit most from signs of a global economic recovery. While the dollar has dropped 11 percent in the past months on a trade-weighted basis, the yen has appreciated 9 percent against the U.S. currency and 6 percent against the pound since April.
“If I look at the underlying fundamentals, virtually everything that drove the yen stronger in its floating exchange history isn’t there anymore,” O’Neill said. “The yen doesn’t deserve to be anywhere near this, and I don’t see it lasting.”
The Democratic Party of Japan, which won the election last month to oust the Liberal Democratic Party that had governed Asia’s biggest economy for all but 10 months since 1955, has pledged not to increase new bond sales to avoid expanding a debt burden that’s the largest in the industrialized world. The Japanese economy grew at an annual 2.3 percent in the second quarter.
The yen rose as high as 90.21 against the dollar today, the highest level since Feb. 12. The currency traded at 90.79 against the dollar as of 10:28 a.m. in London…..
Stiglitz States The Banking Crisis Has Not Been Fixed & We Suffer More Risk Than B4 LEH Collapse
By Mark Deen and David Tweed
Sept. 14 (Bloomberg) — Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.
“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview yesterday in Paris. “The problems are worse than they were in 2007 before the crisis.”
Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”
A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.
Obama’s Plan
While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure.
Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.
“We aren’t doing anything significant so far, and the banks are pushing back,” said Stiglitz, a Columbia University professor. “The leaders of the G-20 will make some small steps forward, given the power of the banks” and “any step forward is a move in the right direction.”
G-20 leaders gather Sept. 24-25 in Pittsburgh and will consider ways of improving regulation of financial markets and in particular how to set tighter limits on remuneration for market operators. Under pressure from France and Germany, G-20 finance ministers earlier this month reached a preliminary accord that included proposals to reduce bonuses and linking compensation more closely to long-term performance………
Economists View Of Recovery & Growth Back Up Stiglitz Malaise Comment
By Rich Miller
Sept. 14 (Bloomberg) — The U.S. recovery may be the slowest since World War II to regain all the ground lost during the recession, even if economists’ more optimistic forecasts for expansion turn out to be right.
The slump this time was so deep, said JPMorgan Chase & Co. chief economist Bruce Kasman, that the 3.5 percent average quarterly growth rate he sees in the next year won’t be enough to bring gross domestic product back to its $13.42 trillion pre- crisis peak. That’s in contrast with the last 10 recoveries, when GDP returned to its previous levels within 12 months.
The result: A year after the Lehman Brothers Holdings Inc. bankruptcy helped drive GDP down to an annualized $12.89 trillion in the second quarter, there’s still “plenty of malaise,” Kasman said. Unemployment may remain close to the current 26-year high of 9.7 percent through 2010, upsetting voters ahead of mid-term Congressional elections and forcing officials to keep interest rates near zero and the budget deficit around this year’s record $1.6 trillion.
“This will be the most disappointing recovery,” said Kasman, whose forecast compares with the median estimate of 2.5 percent growth in a Bloomberg News survey of economists.
The U.S. might not recover the 6.9 million jobs and the $13.9 trillion in wealth lost during the recession until about the middle of the decade, said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania. The unemployment rate may never get back down to the 4.4 percent low of 2007, he said.
Cyclical Revival….
Nortel To Sell Business Phone Division to Avaya
By BEN DUMMETT
TORONTO — Avaya Inc. agreed to acquire a Nortel Networks Corp. business that makes phone systems for businesses for $900 million, plus an additional $15 million for an employee-retention program, marking the end of a drawn-out auction for the operation.
Avaya, which is owned by private-equity firm Silver Lake Partners LP and TPG Capital LLP, beat out Siemens Enterprise Communications for the Toronto telecommunications-equipment vendor’s enterprise business. Siemens Enterprise is a joint venture between Germany’s Siemens AG and the venture’s majority owner and private-equity firm Gores Group LLC.
The deal will enable Nortel’s customers “to compete in new ways with greater scale and resources,” said Joel Hackney, head of Nortel’s enterprise business.
It will also make Avaya a more formidable competitor against rival and industry leader Cisco Systems Inc., potentially enhancing the ability of Avaya’s private-equity owners to ultimately sell the combined business at a higher value.
With the acquisition, Avaya’s market share will surpass Cisco’s in North America, giving it access to Nortel’s corporate customers, which include more than 80 of the Fortune 100 companies. Avaya will also be able to expand its distribution capability through Nortel’s network of reseller partners.
“It will also prevent a competitor like Siemens from getting stronger,” Ronald Gruia, a principal telecom analyst at consulting firm Frost & Sullivan, said ahead of the auction. Unlike its operations in Europe, Siemens Enterprises North American business is relatively small.
Cisco’s share of the total enterprise telecom-equipment market in North America is about 21%. Avaya’s share will jump to 27% from about 17%-18% as a result of the acquisition, according to Frost & Sullivan.
The transaction is conditional on approval from bankruptcy courts in both Canada and the U.S. A joint hearing on the transaction is scheduled for Tuesday. Courts in France and Israel also need to approve the transaction……
China Mulls Stake in Virginia’s AES
By DENNIS K. BERMAN and REBECCA SMITH
The Chinese government’s investment arm is in talks on taking a minority stake in Virginia-based power-plant developer AES Corp., according to people familiar with the matter.
The possible purchase is part of a wide-ranging discussion aimed at building an alliance between AES and China Investment Corp., the country’s sovereign wealth fund, with some $300 billion in assets.
The discussions could result in CIC taking a significant stake in AES, which has a market capitalization of about $9.5 billion.
A joint venture between the two parties also is under discussion, in which CIC would contribute capital to AES’s plans to develop power plants around the globe, said the people familiar with the matter. These people described the talks as being at a sensitive stage, and said they might not produce a deal.
An AES spokeswoman declined to comment. A spokeswoman for CIC also declined to comment.
CIC’s interest in AES reflects China’s growing appetite for diversifying its $2 trillion in foreign-currency reserves. Lately CIC and other Chinese state-controlled companies have been purchasing assets around the world, including oil-and-gas producers, stakes in U.S. financial companies Blackstone Group LP and Morgan Stanley and a large position in Canadian miner Teck Resources Ltd.
A deal with AES would demonstrate China’s increasing comfort with politically sensitive investments. Historically, the U.S. has been leery of any Chinese investments in American infrastructure companies, fearing potential espionage. While CIC and AES are discussing power projects outside the U.S., any agreement would have to withstand U.S. political scrutiny.
In 2005, China created an uproar in the U.S. when a state-owned oil company made a bid for California-based Unocal Corp. But fears in the U.S. and elsewhere about China taking control of major companies have subsided in recent years, largely because tight credit has made both companies and governments eager to gain access to Chinese capital…..
J&J Is Trying To Reduce Price of ELN Deal
BOSTON/NEW YORK (Reuters) – U.S. health-care firm Johnson & Johnson (JNJ.N) is in talks to cut the price of a $1.5 billion deal with Irish drugmaker Elan Corp (ELN.I), a source familiar with the negotiations said on Sunday.
J&J agreed in July to pay $1 billion for an 18.4 percent stake in Elan and $500 million for a majority stake in its pipeline of experimental Alzheimer’s drugs.
However, Elan and J&J had been widely expected to renegotiate the deal after a court ruled the agreement breached a partnership between Elan and Biogen Idec Inc (BIIB.O).
A U.S. judge earlier in September ruled that the deal — which has not yet closed — breaches Elan’s 50-50 partnership to sell multiple sclerosis drug Tysabri with Biogen, a Cambridge, Massachusetts-based biotech company whose shareholders include billionaire investor Carl Icahn.
The Wall Street Journal reported on Sunday that J&J is attempting to cut at least $100 million off the $1 billion in cash it agreed to pay as part of the deal and that the new terms could be announced in the coming days.
J&J was not immediately available for comment. Elan declined comment.
JAL Flies On American Airlines & Delta Stake
By Mariko Katsumura and Mayumi Negishi
TOKYO (Reuters) – Shares in Japan Airlines jumped 8 percent on Monday on news American Airlines and Delta Airlines are considering rival investments in the struggling carrier to secure partnership ties and boost revenue from Asia.
JAL, Asia’s largest airline by revenue, lost about $1 billion last quarter and is under growing pressure to raise money and slash costs after securing a 100 billion yen ($1.1 billion) government-backed credit line earlier this year.
American Airlines, a unit of AMR Corp, is in talks to invest in JAL and form a joint venture, a source with direct knowledge of the talks told Reuters on Sunday.
American Airlines, which like JAL is a member of the Oneworld air alliance, wants to increase its ties and block JAL from switching over to a rival airline network.
Delta, a member of the SkyTeam group along with Air France-KLM, Korean Air and Russia’s Aeroflot, has also made an offer to invest in JAL, a source said on Friday.
“American will be totally left out if JAL decides to join hands with Delta because ANA is already a Star Alliance member,” said Yoshihisa Miyamoto, analyst, Okasan Securities.
All Nippon Airways (ANA) is Japan’s No.2 carrier.
“Considering how desperate American is, it’s likely that they’ll offer more than what Delta has been reported as ready to spend,” Miyamoto said.
According to Japanese media, Delta would inject up to 50 billion yen into JAL and wants a tie-up that would include code-sharing on international flights.
Code-sharing with JAL would allow Delta to sell seats on JAL flights out of Japan directly to customers and expand its network in Asia. This would be at a time when the U.S. and Japan are discussing an “open skies” agreement which would allow closer cooperation on flight scheduling and profit sharing.
SHARES SOAR
JAL shares closed up 8 percent, their biggest single-day jump in 11 months and the top performing stock on the benchmark Nikkei average, which fell 2.3 percent.
The number of outbound flights from Japan is slated to grow at Haneda and Narita airports as they extend runways or flight brackets. The newly elected Democratic Party of Japan has also promised to lower airport fees, which could lift demand.
Delta, which became the world’s largest carrier when it bought Northwest Airlines last year, runs a hub at Narita airport but is without a Japanese partner.
But now that American Airlines has raised its hand, “teaming up with American would make more sense,” said Takahiko Kishi, a senior analyst at Mizuho Investors Securities. Continued…
Rumors Swirl in Europe On a DT Takeover of S
FRANKFURT (Reuters) – Shares in Sprint Nextel (S.N) soared in Frankfurt (S.F) on Monday, boosted by a newspaper report that Deutsche Telekom (DTEGn.DE) is mulling a bid for the company.
By 0724 GMT (3:24 a.m. EDT), Frankfurt-listed shares in Sprint Nextel jumped 14.2 percent, while shares in Deutsche Telekom dropped 1.7 percent. The pan-European DJ STOXX Telcom Index .SXKP was 1.8 percent lower.
“Even though strategically it would be the best move forward since quite some time for (Deutsche Telekom), it will weigh on the share price firstly because of that potential capital raising effort but secondly because of the time span needed to return the U.S. peer to profitability,” Heino Ruland, strategist at Ruland Research wrote in a note. (Reporting by Christoph Steitz)
Intuit Makes A Small Acquisition of Mint.com
Update: TechCrunch confirms the acquisition and pegs the price tag at $170 million.
Original post: A tipster tells us that Intuit (INTU), the giant maker of personal and small-business software, is buying red-hot Mint.com, which provides online money management tools. We have no idea if this is true, and we’re skeptical, though it certainly makes sense.
Intuit has a ton of cash and no growth. Mint is growing like crazy and would fit nicely with Intuit’s business.
Mint has raised $31 million since its founding in 2007. It raised another $14 million just back in August, which makes the timing of this rumor a bit suspect. The tipster says the buyout price is $150 million.
Standing @ The Crossroads of Economic History
We’re at a truly fascinating crossroads in modern economic times. Financial theory as we have come to know it will be changed forever based the recent actions of Ben Bernanke and global central bankers. Millions of textbooks will be rewritten in the coming 10 years and careers will either flourish or die on the back of the actions of these bankers. Those in favor of Bernanke’s legendary helicopter drop are celebrating a 6 month rally in equities, but a vital piece of the recovery puzzle remains missing. While Bernanke and Co. fire up the printing presses, and the banks sell the recovery hook line and sinker to the investing public, we continue to see very weak consumer trends.
As we sit on the one year anniversary of the demise of Lehman Brothers it’s most appropriate to ask what we have achieved over the last few months and years in regards to policy action. Many say we avoided the second great depression and praise Bernanke for his innovative and swift actions. Others (myself included) believe we have simply kicked the can down the road and foresee an end to Bernanke’s career that very much mirrors Mr. Greenspan’s. As we noted back in August, Bernanke’s real report card is less than impressive:
• 4 million lost jobs
• 4.6 percentage point surge in the unemployment rate
• 20% decline in the S&P 500
• 30% plunge in house values
• A 3.5% reduction in real GDP per capita
• 11% decline in the trade-weighed dollar
• 109 failed banks (almost matching the total from the prior 13 years combined)
If you think about the cause of the credit crisis (excessive debt, excessive leverage and a banking sector that is too large and too powerful) and what we have solved in the last year it’s actually quite apparent that we haven’t solved any of the structural problems that actually caused the crisis. The debt in this country is still extraordinary, leverage is making a comeback and the banks have grown larger in what has to be the most incredible power grab in modern economic times. Meanwhile, Bernanke is like the doctor who keeps the cancer patient on life support, but can’t for the life of him, figure out how to extract the cancer and create a healthy self sustaining life. The system still has the cancer, but the recent shot of Demerol has the patient feeling better. 50% better.
At the heart of this problem is the consumer. The bankers will tell you that our long-term structural problems reside in the banks (which is why they needed our help in the first place, remember?), but in reality this is a consumer driven problem. And the problems confronting the consumer are many. Unfortunately for Bernanke these are long-term structural problems that can’t be fixed with a printing press and a helicopter. The consumer continues to struggle under the weight of high debts, stagnant wages and massive job losses. The latest consumer credit report, however, showed that the deleveraging in the private sector is actually picking up steam:
Fresh data on consumer borrowing from the Federal Reserve released Tuesday provide further evidence that US consumers have turned over a new leaf. Consumer credit contracted a record $21.6bn in in July, and there has been a net reduction of $102bn in the nine months following the financial crisis of last fall. The details showed non-revolving debt outstanding, which is comprised largely of auto and other fixed consumer loans, was reduced by $15.4bn while revolving debt, made up mainly of credit cards, dropped $6.1bn. Part of the reduction in debt owes to bad loans being charged off, some is due to tighter standards and terms on borrowing, and bank officers are reporting a reduced taste for debt on the part of consumers.
Meanwhile, for the bankers, it is business as usual. We can be certain that Christmas 2009 will be disappointing for everyone’s children in the United States except for those whose parents are employees of Goldman Sachs and JP Morgan – record bonuses are coming.
Unfortunately for the Fed and Bernanke you can lead a horse to water but you can’t make it drink. Lending is a two sided coin and as consumers continue to tighten their purse strings they simply aren’t borrowing at a rate that the government would like to see. Much to Ben Bernanke’s dismay the velocity of money simply isn’t budging. You can drop money from a helicopter, but if there is no one to borrow it then your hopes for a credit driven recovery become very dim.
Even the incentives such as the cash for clunkers program prove to be having little positive impact on borrowing and overall retail sales as investors simply reallocate spending money. It will be interesting to see what sort of impact this program has on long-term spending. The early signs from the back to school season are nothing to cheer about. It looks like mom and dad bought a new car, but decided junior didn’t need the textbooks for school. The near-term positives of the government stimulus appear fine in theory, but are only compounding our long-term problems. The U.S. government is borrowing money to help debt-laden consumers borrow money to purchase an asset they likely don’t need. The sheer stupidity behind such a government program is literally mindboggling. Meanwhile, in return for their generous bailout money, the bankers continue to jam taxpayers with higher credit card rates and more stringent lending standards. BNP elaborates:
One reason consumers may not be responding expansionary Fed policy is that lending standards continue to tighten and terms are expensive. Spreads between the rates charged on auto loans and Treasuries remain elevated, although it is worth noting that auto loan rates are available only through May. However that is not likely the whole story, consumers have lost tremendous amounts of wealth and income and face continued uncertainty about job security. It is worth noting that amongst all of the green shoots in housing and manufacturing, consumer spending overall has remained very subdued. Unlike the labor market, consumer spending does not tend to lag the cycle, but help lead it so we continue to believe a subdued recovery seems likely.
Many have already crowned Bernanke as the next “Maestro” (sounds familiar, right?), but we will not know whether Bernanke succeeded for many years. Ignore the talking heads who tell you that Bernanke saved the global economy. The same mistake was made by many back in the 90’s when Greenspan tried to print his way out of trouble. Thus far, all we know is that Bernanke has whipped out the same exact cheap money playbook that Mr. Greenspan always turned to. The curse of cheap money has been felt by everyone over the course of the last 30 years as we promote an unstable and deeply harmful boom bust cycle:
David Rosenberg of Gluskin Sheff said it best:
All the growth we are seeing globally this year is due to fiscal stimulus; not just here in Canada and the U.S., but also in Korea, China, the U.K., and Continental Europe too. For 2010, the government’s share of global growth, by our estimates, will be 80%. In other words, there are still very few signs that organic private sector activity is stirring. For a Keynesian, government stimulus is necessary, but the question for an investor is the multiple one attaches to a global economy that is still relying on a defibrillator. The problem is that governments do not create income or wealth, and today’s stimulus is really a future tax liability. Curiously, that future tax liability is likely going to pose a roadblock for the return to a “normalized” $80 operating EPS estimate that strategists are now starting to pen in for 2011.
Albert Edwards of SocGen foresees a continuation of the deleveraging cycle that will be carried on the back of consumers:
The problem is that after the boom there will be a bust. The issue now is one of deleveraging and the deflation that is starting to unfold. The problem is that Bernanke is a slave to Milton Friedman’s view of the Great Depression (at Friedman’s 90th birthday Bernanke promised that the Fed would never allow another Great Depression to occur). The
Australian economist Steve Keen’s observation that “Bernanke’s dilemma is that he is living in a Minskian world while perceiving it though Friedmanite eyes explains his actions to date. It also explains why he will fail.
Will Bernanke succeed using the same cheap money game plan that Greenspan used? Perhaps in the short-term, but in the long-term it’s likely that Edwards is indeed correct. We are simply promoting a boom bust cycle that is built on no real organic strength as is evidenced in recent consumer trends. As Anna Schwartz said, we are fighting “the last war” and she is deeply concerned that we have lost it. The Fed has vowed to print our way out of this mess while allowing mistakes to go unpunished. The long-term bulls are dancing in the streets in recent weeks despite stock prices that are still 20% off their highs, 10% unemployment, a dead consumer and housing prices that are 30% off their highs. Don’t lose sight of the forest for the trees here. This isn’t a sprint we’re experiencing; it is likely to be a marathon. They say history has a way of repeating itself and this movie looks like one I’ve seen one too many times during the Greenspan era….The best thing that might result from all of this is that Ben and company actually are fighting the “last war”. Rather, the “last war” we allow them to so foolishly start….Unfortunately for the rest of us, that likely means we have more booms and more busts ahead of us.
* All information on this website is provided for general purposes and should not be misconstrued as financial advice. Always consult your financial advisor before acting on any of the information herein. You should always assume that the author(s) could have a vested interest in topics described and may or may not own securities and instruments discussed.