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Watch that animal fat

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Kill That Cholesterol !

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What’s in a bill ?

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I Love The Word “Accidental”

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Hey are you not rich enough ? This is hurting everyday people !

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Calvin Coolidge

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It is a sad scenario !

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Something is fishy & turning heads !

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Hey its a holiday and I’m in a hurry

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Bless Our Country !

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Investors Don’t Get Trapped in the Next Asset Bubble

Gary North writes: I have identified the next bubble. It has already begun. It is in full swing.

Investors want to identify the next big bubble. Some investors want to buy in now, maybe using borrowed money (margin loans) to make a killing. They are confident that they will sell out near the top. They won’t. Other investors just want to avoid getting trapped. They prefer to let the first group bear the uncertainty of profiting from a bubble sector.

The trouble with investment bubbles is that nobody seems to recognize them when they are making investors rich. Alan Greenspan denied that it is possible for central bankers to identify a bubble. He gave a speech in 2002, before his easy money policies had created the final stage of the worldwide housing bubble. He insisted on the following:

We at the Federal Reserve considered a number of issues related to asset bubbles – that is, surges in prices of assets to unsustainable levels. As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact – that is, when its bursting confirmed its existence.Moreover, it was far from obvious that bubbles, even if identified early, could be preempted short of the central bank inducing a substantial contraction in economic activity – the very outcome we would be seeking to avoid.

First, he was blind to what the FED’s policies had done in the second half of the 1990’s to create the dot-com bubble. Second, he was equally blind to what these same expansionist policies were doing to the housing market – policies adopted in mid-2000, in response to the bursting of the dot-com bubble.

He was incorrect. Some of us did see that the dot-com bubble was a bubble. I told my subscribers in February and March of 2000 that the NASDAQ was a bubble at a price-earnings ratio of 206. The NASDAQ burst the week my second warning arrived in the mail.

With respect to the housing bubble, in late 2005, I wrote an article on “Surreal Estate on the San Andreas Fault,” which warned against the coming bursting of the real estate bubble. It was clear to me what Greenspan had done to the economy.

If you remember the S&L crisis of the mid-1980s, you have some indication of what is coming. The S&L crisis in Texas put a squeeze on the economy in Texas. Banks got nasty. They stopped making new loans. Yet the S&Ls were legally not banks. They were a second capital market. Today, the banks have become S&Ls. They have tied their loan portfolios to the housing market.

I think a squeeze is coming that will affect the entire banking system. The madness of bankers has become unprecedented. They have forgotten about loan diversification. They have been caught up in Greenspan’s counter-cyclical policy of lowering the federal funds rate. Now this policy is being reversed. Rates are climbing. This will contract the loan market. Banks will wind up sitting on top of bad loans of all kinds because the American economy is now housing-sale driven.

You may think that you are shielded. But your banker is not shielded. You may not deal with bankers. But your employer does.

If I saw it coming, why didn’t Greenspan? Why didn’t the pundits on CNBC? Why didn’t the entire investment community? The real estate market still boomed through the first half of 2006. Then it began to falter. We all know what happened next.

It is not that no one can perceive a bubble while it is in progress. The problem is that investors who do not understand Ludwig von Mises’ theory of the business cycle can’t. They don’t believe that central bank inflation causes the bubbles, and that these bubbles burst when the banks reverse their policies of monetary inflation. So, they and the advisors who cheer them on desperately want to believe the assurances by government officials and Federal Reserve Chairmen that no bubble is in progress, that there will be no regression to the mean.

The best way to identify a bubble is to look for investors who are rushing into an asset market and driving prices up to ludicrous ratios.

You can get 4.5% on a 30-year Treasury bond today. You pay $100 to get a guaranteed $4.50 a year in return: real money in your bank account (before income taxes). Meanwhile, the P/E ratio of the Standard & Poor’s 500 index is at 120, if as-reported earnings are used instead of expected earnings. See the chart here.

At a P/E of 120, you pay $120 to get a hoped-for dollar of earnings (profits) for the latest reporting period. These profits are not dividends, just corporate profits.

This is a replay of 1999.

TODAY’S BUBBLE

Two words: “consumer confidence.”

We are told that consumer confidence has bounced back from its February 2009 low. It moved from 22 in February to 55 in May. This was a big jump. A spokesperson for the Conference Board, one of the main sources for this monthly survey, put it this way:

After two months of significant improvements, the Consumer Confidence Index is now at its highest level in eight months (Sept. 2008, 61.4). Continued gains in the Present Situation Index indicate that current conditions have moderately improved, and growth in the second quarter is likely to be less negative than in the first. Looking ahead, consumers are considerably less pessimistic than they were earlier this year, and expectations are that business conditions, the labor market and incomes will improve in the coming months. While confidence is still weak by historical standards, as far as consumers are concerned, the worst is now behind us.

Consumers listen to news reports. News reports speak of green shoots, parroting Ben Bernanke’s pet phrase. That phrase has been picked up by the media, the same way that Greenspan’s “irrational exuberance” was picked up when Greenspan used it in late 1996. Note: We should not ignore the context of Greenspan’s remarks. It applies quite well to Bernanke’s green shoots. Greenspan said this:

But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.

Balance sheets are crucial, he said. The #1 balance sheet in the American economy is the Federal Reserve’s. It has doubled since last September. The Federal Reserve’s economists did not see in August 2008 what a few weeks later Bernanke and Treasury Secretary Paulson described to senior members of Congress as a looming collapse of America’s financial markets. They ignored the fact that the world’s capital markets had seized up a year earlier, in August 2007. They did not see that a recession had begun in December 2007. They were caught flat-footed.

Today, Bernanke faces what Greenspan called “the complexity of the interactions of asset markets and the economy.” His two-part policy has been to double the monetary base and to swap liquid Treasury debt for toxic assets held by the banks. He has allowed the banks to keep these borrowed assets on the banks’ books at face value, as if they belonged to the banks. He has not challenged the Financial Accounting Standards Board reversal of its mark-to-market rule (FAS 157) in the week it would have gone into effect: April 1, 2009.

Consumers have not understood this FED-sanctioned policy of keeping bad assets on the books at Treasury debt prices. Bernanke has said that banks must be more transparent. Meanwhile, the FED has covered the entire banking industry with a security blanket that keeps economic reality from intruding.

Consumers are therefore confident. For now.

UNDERMINING CONFIDENCE

California’s unemployment rate in May hit 11.5%. The state will go technically bankrupt on July 1. It is about to have its bonds downgraded to junk status. There are no green shoots in California. There is the equivalent of dead brush in forest fire season. No one seems to care.

The World Bank estimates that the world economy will sink by 2.9% in 2009. How scientific! Not 3% – exactly 2.9%. This, from an outfit that predicted with equal scientific rigor in March that the world economy would fall by 1.7%. Last November, it predicted that the world economy would grow by .9% – not 1%.

Regular gasoline is selling for about $2.70 around the country, up from $1.95 in February. The cost of getting from here to there is rising rapidly.

Yet the consumer says he is confident. “No problem!”

The summer will bring more news about rising unemployment. There will be more foreclosures. The real estate market will continue to decline. By how much? No one knows.

But aren’t there statistics on foreclosures? Yes, but nobody knows if they are accurate. The U.S. government relies on a private firm, RealtyTrac, for its information. States use different ways to assess foreclosures. In April, the number of foreclosures reported for Atlanta by the national press was half of what the published local legal notices said.

The Case-Shiller index of 20 cities will show that housing prices are still falling. Commercial real estate prices will fall as vacancies rise. There will be more closed banks. The FDIC’s assets will go below $12 billion. Then $11 billion. Then . . . ?

All of this is obvious. The public ignores it. This is why consumer confidence is a bubble. It keeps rising, yet it is not supported by the facts that count, which are data on the state of the real estate industry in relation to the solvency of the banks.

Doug French is a former banker. It was his warning at a conference in November 2005 that persuaded me that the real estate market and the banks were jointly entwined and headed for a disaster. His recent article, “Dead Banks Walking,” appeared on June 16. His assessment indicates that we are nowhere near the bottom for either real estate or the banking crisis.

Bankers, pressured to earn returns for shareholders and protected from bank runs by FDIC insurance, have over time lent not only more of their deposits but advanced the money for riskier projects. James Grant in a recent Grant’s Interest Rate Observer reminisced about National City Bank, which back in 1954 had only lent out 41 percent of its deposits, with less than one percent of the portfolio being real-estate loans.By the end of last year, the total loan-to-deposit ratio for all US banks and thrifts was 87 percent, and 60 percent of all loans were classified as real-estate secured.

The public has never heard of the loan-to-deposit ratio. That does not change the fact that the ratio is historically high, and way too much of it is tied up in real estate.

I keep thinking on Mr. T’s threat, 27 years ago: “You’re going down!” The question is this: Is Ben Bernanke Apollo Creed or Rocky Balboa?

CONCLUSION

Optimism is as optimism does.

The American consumer may be less pessimistic today than in March, but he has less money to spend. His outlook has not been confirmed by the labor market. Unemployment is rising.

Then which market will confirm his optimism? Housing? No. Auto sales? In the second half of the worst year in decades? People are going to rush out to buy a new car, when the new models are due in October? We’ll see in October. But the industry needs sales now.

Where will the hoped-for deliverance come from? Not from private industry. Private industry must compete for capital with the Federal government. Lenders must supply the Treasury with about $85 billion in loans each week to roll over the existing debt and pay for this year’s deficit. From China? China is spending money on commodities and domestic bailouts. From Japan? With trade down, its surplus is down. From Europe? It is in recession. Then where?

There is no economic recovery yet. There is only a reduction in the decline of the economy. Earnings are still falling. Mortgage rates have risen. There is no end in sight for the real estate contraction. The banks will be squeezed. State budgets are running large deficits. They do not have money to offer more unemployment benefits. They are facing over $120 billion in red ink in the fiscal year beginning on July 1.

Tax revenues are down. Expenditures are up. Debt is rising. Interest rates will follow. State and local bonds will be downgraded.

So, consumer confidence is a bubble market. Stay out of it.

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White house Economic Advisor Romer:

A second podcast from Jeff Ablin $60bn $ manager

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Payrolls Fall More Than Forecast, Unemployment Rises

By Shobhana Chandra

July 2 (Bloomberg) — Employers in the U.S. cut 467,000 jobs in June, the unemployment rate rose and hourly earnings stagnated, offering little evidence the Obama administration’s stimulus package is shoring up the labor market.

The payroll decline was more than forecast and followed a 322,000 drop in May, according to Labor Department figures released today in Washington. The jobless rate jumped to 9.5 percent, the highest since August 1983, from 9.4 percent.

Unemployment is projected to keep rising for the rest of the year just as the income boost from the stimulus package fades, undermining prospects for a sustained rebound in household purchases, analysts said. As companies from General Motors Corp. to Kimberly-Clark Corp. cut costs, the lack of jobs will limit any recovery.

“Payrolls will be going down the rest of the year and the unemployment rate will be rising,” John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said before the report. “The challenge for the Obama administration is that we’ll have positive economic growth but still no job growth. It’s going to be tough on them.”

Equity-index futures extended losses, with contracts on the Standard & Poor’s 500 Stock Index falling 1.3 percent to 907.00 at 8:36 a.m. in New York. Treasuries rose, sending yields on benchmark 10-year notes to 3.510 percent from 3.538 percent late yesterday.

Jobless Claims

The number of Americans filing claims for unemployment benefits last week fell in line with forecasts, Labor also said, indicating firings remain elevated. Initial jobless claims dropped by 16,000 to 614,000 in the week ended June 27, from a revised 630,000 the week before.

Revisions added 8,000 to payroll figures previously reported for May and April.

Payrolls were forecast to drop 365,000 after a 345,000 decrease initially reported for May, according to the median of 79 economists surveyed by Bloomberg News. Estimates ranged from declines of 150,000 to 500,000. Job losses peaked at 741,000 in January, the most since 1949.

The jobless rate was projected to climb to 9.6 percent from 9.4 percent. Forecasts ranged from 9.3 percent to 9.7 percent. By the end of the year, unemployment will reach 10 percent, according to the median forecast of economists surveyed last month.

The world’s largest economy has lost about 6.5 million jobs since the recession began in December 2007. That’s the biggest drop in any post-World War II economic slump.

Factory Payrolls

Today’s report showed factory payrolls fell by 136,000 after decreasing 156,000 the prior month. Economists forecast a drop of 150,000. The drop included a decline of 26,500 jobs in auto manufacturing and parts industries.

More firings are in the works following the bankruptcies of GM and Chrysler LLC as shutdowns ripple through auto-parts makers and car dealers.

Payrolls at builders fell 79,000 after decreasing 48,000.

Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 244,000 workers after falling 107,000. Retail payrolls decreased by 21,000 after a 17,600 drop. Financial firms reduced payrolls by 27,000, after a 30,000 drop the prior month.

Government payrolls decreased by 52,000, the biggest decline since July 2007, after dropping 10,000 the prior month.

The decrease reflects the layoff of workers hired on a temporary basis to prepare for the 2010 census. The U.S. Census Bureau has said it will hire more than 1.4 million people over the next year to conduct the population count that happens once every 10 years.

Yellen Comments

Unemployment will “remain painfully high for several more years,” Federal Reserve Bank of San Francisco President Janet Yellen said this week. “I expect that we will turn the growth corner sometime later this year, but I am not optimistic that the economy will spring back to normal any time soon.”

Tax cuts and Social Security payments under the stimulus plan propped up incomes last quarter, supporting household purchases. Consumer spending rose in May as earnings climbed 1.4 percent, the most in a year.

Still, the wealth destruction caused by the housing and stock-market slumps prompted Americans to rebuild nest eggs. The savings rate in May surged to a 15-year high.

Household purchases, which account for about 70 percent of the economy, dropped at a 0.6 percent annual rate last quarter before growing again in the second half of the year, according to the median forecast of economists surveyed by Bloomberg in early June. Purchases rose at a 1.4 percent pace in the first three months of 2009.

Job Cuts

The auto industry isn’t alone in trimming jobs. Kimberly- Clark, the maker of Huggies diapers and Kleenex tissues, plans to cut 1,600 jobs worldwide by year-end. About 800 salaried employees will leave Deere & Co., the world’s largest maker of agricultural equipment, under a voluntary program.

“These actions, while difficult, are necessary to help us emerge from this demanding economic environment,” Kimberly- Clark’s Chairman and Chief Executive Officer Tom Falk said in a June 25 statement. The company’s net income has declined for six straight quarters.

3M Co., the maker of Post-it Notes and Scotch Tape, reduced positions and offered early retirement to workers, while Dow Chemical Co., the largest U.S. chemical maker, is cutting jobs following the acquisition of Rohm & Haas Co.

Government, Services

Service providers and government agencies are also looking to lower costs. Gannett Co., the largest U.S. newspaper publisher, yesterday announced it will eliminate about 1,400 jobs by July 9. California Governor Arnold Schwarzenegger said he’ll force state workers to take a third unpaid day off every month to conserve cash and will order lawmakers into an emergency session to tackle the state’s growing budget deficit.

Today’s report also showed the average work week fell to 33 hours, the lowest level since records began in 1964, from 33.1 hours in May. Average weekly hours worked by production workers rose to 39.5 hours from 39.4 hours, while overtime held at 2.8 hours. That brought the average weekly earnings down to $611.49 from $613.34.

Workers’ average hourly wages held at $18.53 for a second month. Hourly earnings were 2.7 percent higher than June 2008, the smallest gain since September 2005. Economists surveyed by Bloomberg had forecast a 0.1 percent increase from the prior month and a 2.9 percent gain for the 12-month period.

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NYSE Extends Closing Bell by 15 minutes today, pay attention

Treasury Starts a $20bn  Distressed Debt Program

By Christopher Condon

July 2 (Bloomberg) — The Obama administration may start its program to spur purchases of mortgage-backed securities from banks with about $20 billion in public and private money, down from as much as $100 billion when the effort was announced in March, according to two people familiar with the matter.

The Treasury Department is set to provide about $1.1 billion in capital to eight to 10 money managers it will select for its Public-Private Investment Program, said the people, who asked not to be identified before the details are announced. Each firm will raise about $1.1 billion for funds to buy distressed mortgage securities, less than they had expected the government to support. The plan also will include about $10 billion in government-backed loans.

The Treasury Department developed the program when losses tied to home loans hobbled banks such as Citigroup Inc. and Bank of America Corp. and threatened to choke off lending needed to revive the economy. Since then, the 19 largest U.S. banks raised more than $100 billion by selling equity and assets, swapping preferred shares for common and offering debt, easing concern that the lenders couldn’t handle a deeper, longer recession.

“It wouldn’t shock me if the program never gets any bigger than this,” said Douglas Elliott, a fellow at the Brookings Institution in Washington and a former investment banker. “It would be nice see these assets moved off the balance sheets of banks, but I don’t think it’s critical anymore.”

A separate portion of PPIP, run by the Federal Deposit Insurance Corp. and designed to aid the sale of whole loans from banks to investors, was postponed indefinitely last month. Treasury Secretary Timothy Geithner said then that interest in such U.S. programs may be waning as market confidence improves.

Expansion Possible…

Nassim Taleb From CNBC This Morning

Stimulate This

Today’s disappointing jobs number is certain to trigger a serious push for a second stimulus bill.

The talk was already happening. Earlier this wek, John Judis at The New Republic argued that one was needed. Also this week, Obama responded to a question about a possible second stimulus by saying it was “too soon” to know whether one would be needed, suggesting that it’s certainly on the table. Of course, House Speaker Nancy Pelosi was in favor of a second stimulus before the ink even dried on the first one, so it shouldn’t be much of a stretch to get it through the Congress, especially with the Democrats newly-solidified supermajority in the Senate (welcome Sen. Franken!).

And now we’ve heard it at least 10 times this morning on CNBC. The market is looking for its hit.

Prediction: We’ll get it by the end of the year.

Question: Last month, when the layoffs came in light, Obama aides Christina Romer and Austan Goolsbee were all over the airwaves, playing up the green shoots stuff. Will they be taking an early 4th of July weekend today?

Update: Oops, we were too cynical; Romer will be on CNBC at 9:35 (sorry!). Looking forward to what she has to say.

Update 2: When asked about the second stimulus, Romer told Rebecca Jarvis: “Well do whatever it takes.”

A New Normal From El-Erian

What if the US unemployment rate rises above 10 per cent and stays there for an extended period? This is a question that is not being asked enough, even though it entails yet another historical anomaly that will further complicate policy formulation and open it up to greater political interference.

The unemployment rate is traditionally characterised as a lagging indicator and, as such, is viewed as having limited forward-looking information. After all, unemployment is a reflection of decisions taken earlier in the cycle so the rate always lags behind the realities on the ground – or so says conventional wisdom.

This conventional wisdom is valid most, but not all of the time. There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviours and outlooks.

Today’s broader interpretation is warranted by two factors: the speed and extent of the recent rise in the unemployment rate; and, the likelihood that it will persist at high levels for a prolonged period of time. As a result, the unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system.

In just 16 months, the US unemployment rate has doubled from 4.8 per cent to 9.5 per cent, a remarkable surge by virtually any modern-day metric. It is also likely that the 9.5 per cent rate understates the extent to which labour market conditions are deteriorating. Just witness the increasing number of companies asking employees to take unpaid leave. Meanwhile, after several years of decline, the labour participation rate has started to edge higher as people postpone their retirements and as challenging family finances force second earners to enter the job market….

MS May Post A Loss After Giving Back TARP

By Josh Fineman and Christine Harper

July 2 (Bloomberg) — Morgan Stanley may report a third straight loss because of charges related to an improvement in the company’s debt and the cost of repaying $10 billion in government bailout money.

The per-share loss is expected to be 32 cents for the second quarter, according to the average estimate of 19 analysts surveyed by Bloomberg. Morgan Stanley, based in New York, may report net income of $322 million, diverging from the per-share results because the firm issued stock during the quarter.

Morgan Stanley, led by Chief Executive Officer John Mack, cut back principal investing and proprietary trading after losing money on bad bets, focusing instead on building its business of advising individual investors. The firm’s reduced risk-taking backfired in the first quarter, leading to lower trading revenue than larger rival Goldman Sachs Group Inc.

“Management has taken the necessary steps to shore up the firm’s capital base,” Glenn Schorr, an analyst with UBS AG, said in a June 29 report. Still, “the steps have led to meaningful dilution to the common shareholder, which will water down future EPS,” said Schorr, who expects the firm to report a second- quarter loss of 50 cents a share.

Goldman Sachs is expected to report net income of $2.39 billion, up 14 percent from a year earlier, according to the average estimate of three analysts surveyed by Bloomberg. On a per-share basis, profit is likely to be $3.39, down 26 percent from a year earlier and unchanged from the first quarter, according to the average estimate of 22 analysts.

Credit Spreads….

Congress Can Not Stop Spending

By BRODY MULLINS and T.W. FARNAM

WASHINGTON — Spending by lawmakers on taxpayer-financed trips abroad has risen sharply in recent years, a Wall Street Journal analysis of travel records shows, involving everything from war-zone visits to trips to exotic spots such as the Galápagos Islands.

The spending on overseas travel is up almost tenfold since 1995, and has nearly tripled since 2001, according to the Journal analysis of 60,000 travel records. Hundreds of lawmakers traveled overseas in 2008 at a cost of about $13 million. That’s a 50% jump since Democrats took control of Congress two years ago.

The cost of so-called congressional delegations, known among lawmakers as “codels,” has risen nearly 70% since 2005, when an influence-peddling scandal led to a ban on travel funded by lobbyists, according to the data.

Lawmakers say that the trips are a good use of government funds because they allow members of Congress and their staff members to learn more about the world, inspect U.S. assets abroad and forge better working relationships with each other. The travel, for example, includes official visits to American troops in Iraq and Afghanistan.

The Journal analysis, based on information published in the Congressional Record, also shows that taxpayer-funded travel is a big and growing perk for lawmakers and their families. Some members of Congress have complained in recent months about chief executives of bailed-out banks, insurance companies and car makers who sponsored corporate trips to resorts or used corporate jets for their own travel….

China States They Want To Diversify Out of The Dollar

By Simon Rabinovitch

BEIJING (Reuters) – China hopes for diversification of the international currency system in the future and it would be “normal” for the issue to be raised at next week’s Group of Eight summit, Vice Foreign Minister He Yafei said on Thursday.

But He, who is in charge of China’s G8 preparation, told a news briefing he had not heard that Beijing had requested a discussion about reserve currencies at the meetings in Italy.

G8 sources told Reuters on Wednesday that China had asked for a debate on proposals for a new global reserve currency in Italy and the issue could be referred to briefly in the summit statement.

That news pushed the dollar down to a three week low. It is particularly sensitive to comments from China because bankers estimate the country holds perhaps 70 percent of its $1.95 trillion in official currency reserves in the dollar.

“I have not heard that China has this request,” He said in response to a reporter’s question about the matter. “I have not heard of China raising this for discussion.”

A Russian Finance Ministry source told Reuters on Thursday that Moscow had not seen any official requests from China regarding a debate on a global reserve currency.

“At the Finance Ministry level, at the level of financial sous-sherpas, at deputy ministers’ level we have not received such information. We also have not heard anything like this from our colleagues at the Foreign Ministry,” the source said.

The dollar ticked higher after the comments by He, who also said the dollar was the main global reserve currency and he hoped it would be stable.

But he flagged that Beijing expected the issue to come up at the three-day G8 meeting starting next Wednesday.

“This financial crisis has fully exposed some shortcomings in the international currency system,” He said. “Of course we hope that in the future, the international currency system can diversify.

“I think this is an objective that the international community naturally wants to realize, and as I just said, if in the meetings some leader raises this issue for discussion, that would be normal.”

China’s central bank last week renewed its call for the creation of a super-sovereign reserve currency to reduce the dollar’s global domination, which it said had worsened the financial crisis.

President Hu Jintao, who will be in Italy to attend the G8 summit, has yet to make any public statement about the idea for a new reserve currency.

The People’s Bank of China caused a stir with its suggestion, first made in March, that the International Monetary Fund’s Special Drawing Right (SDR) could eventually displace the dollar as the principal reserve currency.

The SDR is an international reserve asset allocated to IMF members and its exchange rate is determined by a basket of dollars, euros, sterling and yen.  Continued…

J&J Buys a $1bn Stake in ELN

LONDON (Reuters) – Johnson & Johnson is to take over most of Elan Corp’s Alzheimer’s research and invest $1 billion in new Elan equity in exchange for an 18.4 percent stake in the Irish drugmaker, the companies said on Thursday.

The deal marks the end of a strategic review by Elan and its adviser, Citigroup, following pressure from investors for change at the group, which has been burning through cash at a rapid rate.

J&J will initially commit up to $500 million to develop and commercialize bapineuzumab, Elan’s experimental Alzheimer’s treatment, and will continue Elan’s existing activities with Wyeth under their Alzheimer’s immunotherapy program.

Wyeth is in the process of being acquired by Pfizer.

In exchange, Elan will get a 49.9 percent equity interest in a newly formed J&J company that will acquire the Alzheimer’s program.

The program includes several experimental compounds, of which the most advanced is bapineuzumab, which is viewed by analysts as a risky but potentially lucrative product.

Researchers said last summer that a Phase II trial showed it helped some patients with a certain genetic profile, but raised the risk of potentially serious side effects in the brain.

J&J said the transaction would dilute its adjusted earnings in 2009 by between 2 and 3 cents a share. Shares in Elan leapt 30 percent in Dublin.

Eurozone  Unemployment Hits a 10 Year High

By PAN PYLAS

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Europe Keeps Interest Rates Steady

By GEORGE FREY

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European Markets Fall, Asia Reverses Early Upside Action, & U.S. Futures Go Negative b4 Unemployment Data

By Daniel Hauck

July 2 (Bloomberg) — European stocks and U.S. index futures fell while the yen and the dollar rose on speculation a report today will show that America’s unemployment rate climbed to the highest level since 1983.

The MSCI World Index of 23 developed countries slipped 0.6 percent at 12:21 p.m. in London, while Standard & Poor’s 500 Index futures slid 0.6 percent. The yen and the dollar strengthened 0.5 percent against the euro.

The U.S. jobless rate may have risen to 9.6 percent last month, economists surveyed by Bloomberg News said before today’s Labor Department report. That increase would suggest the $12.8 trillion pledged by the U.S. government and the Federal Reserve is doing little to shore up the labor market. The European Central Bank probably will keep borrowing costs at a record low to battle the recession, while Sweden’s Riksbank unexpectedly cut its benchmark rate to 0.25 percent today.

“People have become a little bit too optimistic,” Philippe Gijsels, a senior structured equity strategist at Fortis Global Markets in Brussels told Bloomberg Television. “People will be disappointed. Gradually over the summer and into the autumn we will move lower,” he said.

The Dow Jones Stoxx 600 Index of European shares slid 0.9 percent, trimming its rebound since March 9 to 31 percent. Moody’s Investors Service downgraded Ireland’s government bond ratings to Aa1 from Aaa with a negative outlook.

A gauge of automobile-related shares in the Stoxx 600 dropped 2.7 percent for the biggest retreat among 19 industry groups as European carmakers were downgraded to “market weight” by Zurich-based Credit Suisse Group AG.

Volkswagen, Daimler

Volkswagen AG, Europe’s largest carmaker, slid 4.1 percent. Sales at the Wolfsburg, Germany-based company’s American unit fell 18 percent last month. Stuttgart, Germany-based Daimler AG, the world’s second-biggest maker of luxury cars, sank 3.4 percent.

Porsche SE retreated 2.6 percent. The Stuttgart-based carmaker will probably fail to persuade German state lenders to increase funding as Porsche struggles to refinance 9 billion euros ($12.7 billion) in debt, according to a state parliamentary leader.

Paris-based Total SA, Europe’s third-biggest oil company, and Hague-based Royal Dutch Shell Plc both sank 1.7 percent. Oil dropped for a third day on speculation higher U.S. unemployment will curb fuel demand in the world’s largest economy.

U.S. futures also fell before the jobs report, which economists estimate will show that employers cut an additional 365,000 positions. The payroll projection for June would extend the employment slump since the recession began in December 2007 to 6.3 million, the biggest loss in the post-World War II era.

End to Recession?

The U.S. lost 345,000 jobs in May, less than the 520,000 forecast by economists.

The economy will return to growth this quarter with a 0.5 percent expansion, according to the median forecast of 64 economists surveyed by Bloomberg. Gross domestic product will increase 2 percent in the last three months of the year, the estimates show.

“We are a long way from sounding the all-clear,” said Paul Day, chief market analyst at MIG Investments SA in Neuchatel, Switzerland. “Let’s not forget, last month’s payrolls, though widely celebrated, was the worst number between 1980 and the collapse of Lehman Brothers.”

Lear Corp., the world’s second-largest maker of automotive seats, said yesterday it plans to file for Chapter 11 bankruptcy. The Southfield, Michigan-based supplier will seek protection after slumping auto production by customers such as Detroit-based General Motors Corp. reduced sales. More than 20 parts makers have filed for bankruptcy this year, according to the Original Equipment Suppliers Association trade group.

Emerging Markets, ECB

The MSCI Emerging Markets Index fell 0.2 percent, while Russia’s Micex Index retreated 2.1 percent as oil’s slump dragged down energy producers. Moscow-based OAO Rosneft, Russia’s biggest oil company, slid 1.9 percent.

The euro declined against the dollar and the yen before today’s ECB meeting, at which policy makers may leave the benchmark interest rate at a record low 1 percent. Sweden’s krona dropped versus all 16 major currencies, losing 0.8 percent against the euro, after the Riksbank unexpectedly cut its main rate. The Swiss franc declined 0.3 percent against the euro after Swiss National Bank Governing Board member Thomas Jordan said policy makers remain ready to sell the currency to prevent appreciation.

Stocks and credit markets have rebounded as signs increased that the global economy and corporate profits are recovering after the collapse of subprime mortgages spurred almost $1.5 trillion in losses and writedowns at financial firms….

GM Will Sell All

By Linda Sandler and Christopher Scinta

July 2 (Bloomberg) — As General Motors Corp. prepares to sell its best assets to a streamlined new entity, the worst of what it owns will be auctioned off in bankruptcy court, including contaminated factory sites, parking lots in Flint, Michigan, and a nine-hole golf course in New Jersey.

One property the carmaker is ditching is a foundry in Massena, New York, bordered on the east by the St. Regis Mohawk Indian Reservation and on the north by the St. Lawrence River. Built to make aluminum cylinder heads for the Chevrolet Corvair in the 1950s, it generated PCB sludge and waste from hydraulic fluids.

“It was created by GM dumping hazardous waste on the banks of the river, such that the waste oozed into the water and the land,” said John Privitera, a lawyer for the tribe at McNamee Lochner Titus & Williams PC in Albany, New York. “It was picked up by animals and moved up the food chain through fish and into Mohawk women — into their breast milk, into their babies.”

The largest U.S. automaker, following its smaller rival Chrysler LLC, is using the bankruptcy process to spin off a new entity with reduced costs and debt while leaving the old GM with unwanted property and obligations to creditors, dealers, retirees, accident victims and environmental agencies.

The discarded assets will be all that creditors have to satisfy their claims as GM starts to unwind liabilities of $172.8 billion — more than twice its reported assets….

Exelon Raises Its Bid For NRG

By KERRY GRACE BENN

Exelon Corp. increased its offer to acquire fellow nuclear-power provider NRG Energy Inc. by 12%, putting the current value at $7.73 billion, saying it has identified another $1.5 billion in synergies.

Exelon has been pursuing the hostile takeover since last year and is running a nine-person slate at NRG’s July 21 annual meeting while proposing the boost the board’s size to 19.

But Princeton, N.J.-based NRG has repeatedly said the old offer undervalued the company, and at recent stock prices the bid offered little if any premium. It showed investor sentiment that Exelon would likely need to boost its bid to cinch any deal.

“We listened to NRG investors and balanced their views with the best interests of Exelon shareholders,” said Exelon Chairman and Chief Executive John Rowe. The offer is also the company’s last one, Mr. Rowe added.

An NRG spokesman wasn’t immediately available for comment.

U.S. Bancorp Wants To Expand West

By Jonathan Stempel and Chavon Sutton

NEW YORK (Reuters) – U.S. Bancorp (USB.N), which last month repaid $6.6 billion of federal bailout money, is eyeing expansion in the western United States, as it prepares to soon extinguish the government warrants to buy its stock, Chief Executive Richard Davis said.

In an interview in New York, Davis also said the bank expects to build reserves for loan losses “for the rest of this year,” while the U.S. economy stays in recession through the middle of 2010, “with a transition to improvement” thereafter.

While first-quarter reserves nearly tripled from a year earlier, U.S. Bancorp has weathered the credit crisis better than most large rivals.

The Minneapolis-based lender was among 19 large banks that underwent “stress tests” of their ability to handle a recession, and was among nine found not to need more capital.

While 10 of the banks repaid their bailout money in June, warrants worth billions of dollars are outstanding. Davis said the disposal of those warrants will come soon.

“It’s definitely a third-quarter event,” he said. “A conclusion could mean a decision not to buy back the warrants. But you’ll definitely have clarity around the first 10 banks.”

U.S. Bancorp ended March with $263.6 billion of assets, and 2,847 branches in 24 U.S. states, mostly in the western two-thirds of the country. Warren Buffett’s Berkshire Hathaway Inc (BRKa.N) (BRKb.N) is one of its largest investors.

EXPANSION PLANS…

Steel Makers Bring Idle Capacity Bacl Online

By Humeyra Pamuk – Analysis

LONDON (Reuters) – Steel order books in Europe and the United States have improved over the past month, prompting producers to restart some idled capacity, but full recovery is some months away because real demand remains depressed.

Behind the uptick in orders is the fact that destocking in the United States has finished and in Europe is coming to an end, which analysts say is the reason for higher steel prices and resumption of output.

ArcelorMittal (ISPA.AS), the world’s largest steelmaker, last week said it was planning to restart some of its idled capacity in the United States and Brazil. U.S. Steel Corp (X.N) also signaled that it was about to bring back some capacity.

However, analysts and producers say the light at the end of the tunnel is still dim and although the worst seems to be over, the road to recovery is set to be rocky.

“Green shoots seems to be the phrase but it’s hard to believe that we’re really seeing a sustainable uptake in demand,” said John Lichtenstein, global leader of steel at consultancy firm Accenture.

“The risk is that increased production on the part of multiple producers will overwhelm the real demand increase, thereby putting renewed pressure on prices,” he said.

Germany’s top producer Thyssenkrupp (TKAG.DE) said this week that it raised its prices from July 1 while industry sources said Europe’s second biggest steelmaker Corus was about to increase its prices too.

Global steel prices have tumbled more than 70 percent in some regions since hitting a peak in mid-2008, as a global economic downturn depressed demand in key consuming industries such as construction and automotives.

Currently domestic hot-rolled coil (HRC) prices in Europe are at about 375 euros per tonne, with another 30 euros increase expected. It was 360 euros a month ago.

In long products, billet prices in the Black Sea region have risen to around $410-415 a tonne, compared with around $350 a tonne about a month ago.

PLATEAU…

Manhattan Real Estate Begins To Crash

The Case-Shiller numbers indicated that things are getting worse and worse for the New York region real estate market, and now we have Q2 data for Manhattan specifically, and it’s ugly.

According to the  2Q 2009 Prudential Douglas Elliman Manhattan Market Overview, put together by appraiser Miller Samuel, suggests the median price of a Manhattan home, whether it’s a condo or a co-op, fell by 25.6% in the quarter, with volume off 50%.

Here are their highlights:

Overview
The Manhattan market, as measured by the median sales price of re-sale apartments, fell 25.6% as compared to the same period last year.  The overall number of sales were 50.3% below the same period last year as a result of the tightening of credit, rising unemployment and a recessionary economy.  There was an uptick in the number of sales late in the quarter due to both seasonality and a release of some pent-up demand from the limited sales activity at the beginning of the year.  More sellers adjusted to the market price correction of the fall as evidenced by the decline in listing discount to 7.8% from 12.4% in the prior quarter.  Buyers took advantage of mortgage rates at historic lows and price declines were less pronounced at the lower end of the market where credit terms are less restrictive.  Market share of new development unit sales fell to 27% of all sales, their lowest level in 18 months and tend to lag market conditions by more than a year.  As a result, the influence of new development sales activity in skewing the overall market data was less pronounced in the current quarter than in the prior several years.

Key Trend Metrics
-Re-sale median sales price fell 25.6% to $725,000 from $975,000 in the prior year quarter.
-New development median sales price fell 6.7% to $1,069,162 from $1,145,531 in the prior year quarter.
-Market share by unit for new development sales fell to 27% from 35% in the same period last year.

-Number of sales declined 50.3% to 1,532 from 3,081 sales from the prior year quarter.
-Listing inventory expanded 8.7% to 9,378 units from 8,626 units at this time last year, but fell 10.2% from 10,445 units in the prior quarter.
-Days on market was 162 days, up from 135 days this time last year.
-Listing discount was 7.8%, up from 3.6% in the same period last year but down from 12.4% in the prior quarter.

And here’s the full report:

Oil Falls As Dollar Stengthens & Yesterday’s U.S. Inventories Build

Oil fell on Thursday as the market continued to digest US government data showing a large increase in gasoline stocks, increasing worries that consumer demand was flagging and the energy markets had been overbought.

Crude also sagged as investors across most asset classes adopted defensive stances ahead of closely-watched US non-farm payrolls data which is expected to show unemployment in the world’s leading economy to have hit 9.7 per cent – the highest level in over quarter of a century.

“Granted, a recovery in demand has taken place, but it certainly hasn’t been robust,” said Tom Pawlicki of MF Global. “Similarly, the recovery in the economy is expected to level off and could create support for the dollar on a safe-haven basis. The phrase “green shoots” has been used much less lately than was the case in April & May”.

Data on Wednesday from the Energy Information Agency, the statistical arm of the US Department of Energy showed crude inventories fell for the fourth consecutive week but this was overshadowed by the sharp rise in petroleum products.

Fitch Lowers Ratings On Comercia

NEW YORK – Fitch Ratings on Wednesday cut Comerica Inc.‘s investment-grade debt ratings, saying the bank’s profitability is increasingly threatened by higher credit costs and the recession.

Fitch lowered its issuer default ratings on Comerica and its lead bank Comerica Bank one notch to A from A+, keeping the rating within investment-grade range. The agency also cut its rating on Comerica’s preferred securities to BBB+ from A, and lowered the company’s senior debt to A from A+, among other ratings downgrades involving Dallas-based Comerica.

Fitch assigned a negative outlook to the ratings, signaling the possibility of a further downgrade if business conditions worsen.

Fitch said higher credit costs and a lower net interest margin will challenge Comerica’s profitability this year. The recession also could hurt Comerica’s commercial banking business, Fitch said.

While banks generally have been hurt by rising numbers of bad loans, Fitch said Comerica’s performance “has been relatively good to date” in part because of it focus on commercial loans….

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China Allows Trade Settlements To Move Away From The Dollar

By Bob Chen and David Yong

July 2 (Bloomberg) — China’s central bank allowed companies to undertake settlement of cross-border trade in the yuan and promised tax breaks, seeking to reduce the reliance of importers and exporters on the U.S. dollar.

The People’s Bank of China will encourage banks to offer yuan settlement services from today, the bank said in the regulations published on its Web site. Transactions inside China will take place in Shanghai and four cities in the southern Guangdong province, while those outside of China will occur in Hong Kong, Macau and the Association of Southeast Asian Nations, it said.

“Companies in China and neighboring countries are facing relatively huge risks of exchange-rate fluctuations because of big swings in the U.S. dollar, the euro and other major settlement currencies,” the central bank statement said.

China is promoting greater use of the yuan in international trade and finance after Premier Wen Jiabao in March expressed concern that a weakening dollar will cause losses on holdings of U.S. assets. A Chinese Foreign Ministry official said today he hoped the greenback would remain stable, while reiterating a call for diversification of the international monetary system.

“It’s China’s first step to make the yuan global,” said Shi Lei, an analyst in Beijing at Bank of China Ltd., the nation’s largest foreign-currency trader. “It will protect exporters from swings in exchange rates and boost the yuan’s role in the world currency system.”

Hong Kong Monetary Authority Chief Executive Joseph Yam said on June 29 he hopes the first yuan settlement transactions will start this month after signing an agreement with People’s Bank Governor Zhou Xiaochuan. Companies currently have to convert yuan into dollars or other currencies to settle international trade.

Tax Breaks….

Japan was led lower by banks, but most of Asia rose on commodities & tech

By Patrick Rial and Masaki Kondo

July 2 (Bloomberg) — Asian stocks climbed as commodity prices rose and on speculation stimulus measures are helping to bolster consumer demand.

Newcrest Mining Ltd., Australia’s largest gold producer, rose 3 percent as the precious metal halted a two-day slide. Nickel producer Pacific Metals Co. jumped 5.3 percent as Merrill Lynch & Co. boosted its share price target. Electronics retailer K’S Holdings Corp. gained 4.8 percent in Tokyo after the Nikkei newspaper said government policies helped profit rise about 40 percent last quarter. Shinsei Bank Ltd. and Aozora Bank Ltd. led declines by Japanese banks after the two agreed to a merger.

“Investors are feeling the global economy is getting better, but the hazy outlook means they can’t totally buy into this recovery story,” said Mitsushige Akino, who oversees the equivalent of $522 million at Ichiyoshi Investment Management Co. “We have no reason to sell but no definitive clue to buy.”

The MSCI Asia Pacific Index advanced 0.3 percent to 103.44 as of 10:24 a.m. in Tokyo. The benchmark rallied 15 percent in the first six months of this year, outpacing gains by benchmark indexes in the U.S. and Europe. Companies in Asia traded at 23.5 times their estimated net income yesterday.

Japan’s Nikkei 225 Stock Average slipped 0.2 percent to 9,919.88. Shares elsewhere in the region advanced, except in South Korea.

In New York, the Standard & Poor’s 500 Index advanced 0.4 percent. The Institute for Supply Management said yesterday its factory index rose in June for a sixth month to 44.8, still below the 50 threshold that divides expansion and contraction. Futures on the S&P 500 were little-changed in trading today.

Australia’s Trade Deficit Widens

By Victoria Batchelor

July 2 (Bloomberg) — Australia’s trade deficit widened in May by more than economists estimated as exports of coal, wheat and natural gas fell.

The shortfall was A$556 million ($448 million) compared with a revised A$282 million deficit in April, the Bureau of Statistics said in Sydney today. The median estimate in a Bloomberg News survey of 20 economists was for a A$125 million gap.

Prices for Australia’s commodity exports have declined amid the global recession, damping a mining boom that drove the nation’s 17-year economic expansion. BHP Billiton Ltd., the world’s biggest mining company, and Rio Tinto Group are among exporters that pared output, fired workers and cut capital expenditure in response to the slowdown in world demand.

“There may be some downside to export numbers in the near- term because of the bad news on the commodity-price front,” Michael Blythe, chief economist at Commonwealth Bank of Australia in Sydney, said ahead of the report. “That should be mitigated to some extent by higher export volumes. We have China picking up and there’s a better global economic backdrop.”

The Organization for Economic Cooperation and Development last week raised its combined forecast for gross domestic product of its 30 member nations for the first time in two years.

Reports this week show China’s manufacturing expanded for a fourth month, Japan’s business confidence improved and South Korea’s factory production climbed for a fifth month, adding to signs the global slowdown is easing.

Imports, Exports

Imports fell 4 percent to A$20.95 billion in May. Imports of capital goods, such as trucks and machinery, dropped 14 percent and imports of consumer goods slipped 1 percent.

Exports declined 5 percent from April to A$20.39 billion. Shipments of non-rural goods, which include metals and minerals, fell 5 percent. Agricultural shipments dropped 3 percent in April, the trade report showed. Coal slumped 15 percent and cereals declined 7 percent.

Dollar Strengthens On Rhetoric Games Out Of China

By Ron Harui

July 2 (Bloomberg) — The dollar rose against the euro and erased losses versus the yen after a Chinese official said he was “not aware” of a plan to discuss a new reserve currency at a Group of Eight meeting next week.

The dollar climbed to $1.4111 per euro as of 11:41 a.m. in Tokyo from $1.4142 in New York yesterday, when it declined to $1.4201, the lowest since June 5. The U.S. currency was at 96.68 yen from 96.65, after earlier falling to 96.38. The yen advanced to 136.44 per euro from 136.70.

The dollar declined beyond $1.42 versus the euro yesterday after Reuters, citing G-8 sources, reported that China asked to debate proposals for a new global reserve currency at next week’s summit in Italy.

Chinese officials have sought a greater role over time for the International Monetary Fund’s unit of account, known as Special Drawing Rights, or SDRs, in an effort to reduce the dollar’s dominance.

Rio Tinto Completes Share Offering of  $15.2 BN Avoiding China’s Aluminum Corp.s Bid

By Rebecca Keenan

July 2 (Bloomberg) — Rio Tinto Group, the world’s third- largest mining company, sold about 97 percent of the London listed shares on offer in a $15.2 billion sale to reduce debt.

The company sold 508.6 million shares at the close of the offer at 11:00 a.m. London time yesterday, Rio said today in a statement to the Australian stock exchange. It will announce the results of the sale of Sydney-traded shares tomorrow, it said.

Rio rejected a $19.5 billion investment proposal from its biggest shareholder Aluminum Corp. of China last month and instead opted for the share sale and an iron ore joint venture with BHP Billiton Ltd. Chinalco, as the state-owned company is known, confirmed today that took up its rights in the share sale.

“This was an economically rational decision as it prevented the dilution of our ownership in Rio,” Chinalco said in an e-mailed statement. “Chinalco will, as the company’s current largest single shareholder, continue to monitor developments at Rio.”

Rio gained 1.5 percent to A$52.38 at 12:03 p.m. Sydney time on the Australian stock exchange.

Japan’s Metal Companies Buck The Downside Trend

By Masaki Kondo

July 2 (Bloomberg) — Japanese metal producers gained in Tokyo trading as metals prices rose the most in a week. Shinsei Bank Ltd. and Aozora Bank Ltd. slid after saying they’ll merge.

Sumitomo Metal Mining Co., the nation’s largest nickel producer, leapt 4.8 percent. Pacific Metals Co. surged 5.9 percent after Merrill Lynch & Co. raised its price estimate for the stock. Hitachi Ltd. jumped 4.7 percent on a Nikkei newspaper report the electronics maker plans to expand its production capacity for lithium-ion batteries. Shinsei and Aozora dropped at least 2.6 percent.

“Investors are feeling the global economy is getting better, but the hazy outlook means they can’t totally buy into this recovery story,” said Mitsushige Akino, who oversees the equivalent of $522 million at Ichiyoshi Investment Management Co. “We have no reason to sell but no definitive clue to buy.”

The Topix index rose 2.05, or 0.2 percent, to 930.35, with two stocks climbing for each that declined. The Nikkei 225 Stock Average lost 7.76, or 0.1 percent, to 9,932.17 as of 10:01 a.m. in Tokyo.

A gauge of six metals in London jumped 2.9 percent yesterday, the most since June 24. Gold futures gained 1.5 percent in New York, halting a two-day decline.

Sumitomo Metal climbed 4.8 percent to 1,412 yen. Daiki Aluminium Industry Co. added 1.8 percent to 232 yen in Osaka trading. Pacific Metals rallied 5.9 percent to 774 yen after Merrill Lynch raised its price target by a fifth to 900 yen.

Hitachi jumped 4.7 percent to 312 yen. The company plans to expand its production capacity for lithium-ion batteries by more than 600 percent by “next autumn,” the Nikkei newspaper said.

Shinsei slipped 2.6 percent to 153 yen, while Aozora dropped 3.3 percent to 146 yen. They said yesterday they agreed to merge in October 2010, which will create Japan’s sixth- largest bank. A gauge of banks weighed the most on the Topix.

Rain Is Costing China 70 Million Yuan So Far

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The nation is bracing for additional bouts of extreme weather. Over the last few days rainstorms have wreaked havoc in the provinces of Guizhou, Anhui, Hubei and Hunan. Heavy rains have dramatically affected transport and agriculture.

A Chinese man pushes his bicycle in deep rainwater on a flooded street in Wuhan, capital city of central China’s Hubei Province, June 30, 2009. The city has been hit by seasonal summer rainfalls for days.(Xinhua/Zhou Chao)

In total, torrential rain has stricken 46 cities and counties in central China’s Hubei province. The provincial headquarters for flood control has declared a level four emergency response. Nearly 40 thousand people have been affected with water rising above the alert level at 95 reservoirs.

Central China’s Hunan province has also been hit by heavy rains with the Hunan Metrological Bureau issuing a red storm warning.

In Anhui province, rainfall in the city of Chizhou has reached 140 millimeters. The Chizhou observatory has also issued a red storm warning. Also in the province, a national oil reserve depot was hit by the torrential rains. Over 100 soldiers and working staff spent 7 hours draining the water that soaked the campus.

The headquarters for flood control in the country’s south-western Guizhou province says two people have died and another person is missing as a result of the heavy rains. Meanwhile, a total of 1,140 people in Guizhou have been evacuated from their homes, while hundreds of houses collapsed and crops on over 110,000 hectares have been damaged. Direct economic losses from the rains in the province have exceeded about 70 million yuan.

UBS Warns Investors That Taiwan stocks Are Rich

UBS tells investors to trim holdings as market overpriced

By Crystal Hsu
STAFF REPORTER
Thursday, Jul 02, 2009, Page 12

Investors should trim their holdings in Taiwan as local stocks have outpaced the economy and are relatively expensive compared with other Asian shares, UBS said yesterday.

The global investment bank said it was maintaining its forecast of a 4.5 percent contraction for the Taiwanese economy this year amid falling external demand and sluggish domestic consumption.

Kevin Hsiao (蕭正義), head of UBS Wealth Management Research Taiwan, said he was cautious about the short-term outlook of the local equity market but was upbeat about its long-term prospect.

“Investors should adjust their portfolio and cut down holdings in local shares that have rallied” ahead of an economic recovery, Hsiao told a media briefing.

Hsiao advised caution before the “world economy displays stronger signs of an improvement.”

The estimated price to earnings ratio for Taiwanese-listed firms has reached 40.2x — far higher than Hong Kong’s 18.2x, South Korea’s 14.7x and Singapore’s 15.5x.

Estimated price to earnings ratios for China and India — whose economies are predicted to post growth this year thanks to domestic demand — are also lower at 14.3x and 16.6x respectively, UBS data showed.

Pu Yong-hao (浦永灝), head of UBS Asian Research, said he was not surprised at the ongoing market corrections across Asia following the strong rebound in the first half of the year.

Pu advised investors to take profit and prospective entrants to stay on the sidelines.

“I recommend the strategy not because the global economy will suffer another decline but because it will not get significantly better anytime soon,” Pu said in a statement.

Both analysts expect Taiwan to benefit from warming cross-strait ties, which they said could spur a GDP growth of 2 percent next year.

While China’s stimulus package helps, true recovery hinges on a revival of demand in the US and Europe, Hsiao said.

Hsiao forecast that the local currency would trade at its current level against the greenback for the rest of the year.

Pu said slumping exports and market adjustments would also limit changes in the value of most Asian currencies.

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