Moody’s: U.S. gaming vulnerable to faltering recovery

Why don’t they just say they might cut MGM’s credit rating?

New York, June 28, 2011 — Any reduction in consumer spending on gambling could undermine recent, if modest improvement in the U.S. gaming industry and ultimately lead to some rating downgrades, says Moody’s Investors Service in a new report. Moody’s is concerned that a growing sense that the economic recovery is slowing could prompt such a pullback.

“We are concerned that consumers’ propensity to spend on gaming activities will not withstand another hit to their wallets, even a small one,” says Keith Foley, a Moody’s Senior Vice President. “Unfortunately, an extended period of consumer weariness—or any economic event that hurts consumer demand for gaming—could have a material negative effect on company earnings and lead to some downgrades.”

The Federal Reserve’s announcement last Wednesday that the U.S. economy was expanding less quickly than expected and unemployment will remain high gave consumers additional reasons to worry, says Moody’s.

Most vulnerable to a pullback in consumer spending on gambling in the U.S. would be highly levered gaming companies with low ratings. Unfortunately roughly 30% of Moody’s 50 rated U.S. gaming companies have corporate family ratings of Caa1 or below, and more than a majority—about 54%–have corporate family ratings of B3 or below. Many of these companies have been counting on the economic recovery to grow them out of capital structure issues such as high leverage and large debt maturities.

“Any blip on the road to recovery could force many to go back to lenders for covenant relief or possibly a renegotiation of their existing debt obligations,” says Foley.

Companies Moody’s perceives as reliant on continued economic improvement include Caesars Entertainment Corp. (Caa2) and MGM Resorts International (B3). While these and other companies including Boyd Gaming Corp. (B2), Isle of Capri Casinos Inc. (B2) and Pinnacle Entertainment Inc. (B2) have lowered their expenses and created breathing room in their covenants and debt maturity schedules, they are still considered highly leveraged and have company-specific, near-term issues that could be exacerbated if consumers curb their gambling budgets.

Best positioned to weather any retreat in gaming spending in the U.S. would be companies that have either expanded operations into high-growth overseas markets such as Las Vegas Sands Corp. (Ba3) and Wynn Resorts, Limited (Ba3), or are highly and effectively diversified across the U.S. such as Penn National Gaming, Inc.

CHICAGO — A jury has convicted Rod Blagojevich of nearly all the corruption charges against him, including trying to sell or trade President Obama’s old Senate seat.

Jurors delivered their verdicts Monday after deliberating nine days.

Blagojevich had faced 20 charges, including the Senate seat allegation and that he schemed to shake down executives for campaign donations. He was convicted on all charges regarding the Senate seat.

He testified for seven days, denying wrongdoing. Prosecutors said he lied and the proof was on FBI wiretaps. Those included a widely parodied clip in which Blagojevich calls the Senate opportunity “f—— golden.”

Jurors in his first trial deadlocked on all but one charge, convicting Blagojevich of lying to the FBI.

Blagojevich already faces up to five years for the lying conviction.

This study was commissioned by several agricultural companies.

Investment in agriculture must rise by $90 billion a year to meet the world’s growing food needs, according to a study sponsored by businesses including Monsanto Co. (MON), DuPont Co., Archer Daniels Midland Co. and Deere & Co. (DE)

The “investment gap” requires more private-sector involvement in agricultural and rural development, according to a report issued today by the Global Harvest Initiative, a collaboration between companies and nonprofits such as the World Wildlife Fund.

“There are simply not enough resources in either developed or developing nations to bridge this sizable gap, so enhanced private-sector involvement is the key to improving agricultural and rural development to ensure that the world’s future agricultural needs are met,” William Lesher, the executive director of the initiative, said in a news release.

The United Nations has said that by 2050, food production must increase by 70 percent to feed an estimated world population of 9 billion people, up from almost 7 billion this year. Global food prices have increased 37 percent in the past year, reaching a record in February, according to UN estimates.

The study is the last of five on hunger and agricultural development created by the initiative.

BERLIN (MarketWatch) — Two years ago, at a semi-official Anglo-German meeting with financial and business figures in London, I asked a well-known German bank chairman with whom I have a reasonable acquaintance how he would react if Greece one day asked to leave the euro. This was an open question-and-answer session in front of about 50 people “I would act like Clint Eastwood,” my banker friend said, with rollicking good humor. “I would say, ‘Go ahead, make my day.'”

Rather revealing.

That was back in the good old days. Spreads between Greek and German 10-year bonds had started to widen. But there was nothing like the same crisis-laden atmosphere as now. I relate the story fairly often to illustrate that, in truth, there’s not a great deal of love lost between the Germans at the core of the euro and the outlying states.

Highlighting the mood of growing dismay, an opinion poll in the Sunday edition of the Frankfurter Allgemeine newspaper indicated that 71% of Germans no longer trust the euro — up from 66% in April and less than 50% in 2008.

The Germans are happy enough to pool their currency with a bunch of homogenous states with which they have stable trading links and share similar economic and business characteristics. Countries that leave them alone, don’t make them feel guilty and don’t ask them for money. They are not too happy, though, about extending the relationship to countries which — for whatever reasons — are piling up debts owed to the Germans and other creditor nations that will never be repaid.

BEIJING (AP) — China’s local governments have piled up debts of $1.6 trillion, the national audit agency announced Monday, amid mounting concern Chinese banks might be hurt if borrowers cannot repay loans.

It was the first public accounting of massive borrowing by local governments to pay for construction and other spending. The announcement, following months of speculation about the scale of the debt, might help to mollify worries about possible risks facing banks that also lent heavily to help China ward off the 2008 global crisis.

Analysts say some local governments might be unable to repay loans but a banking crisis is unlikely because China’s state-owned lenders are flush with cash and avoided the mortgage-related turmoil that battered Western institutions.

Beijing has flexibility because economic growth is strong and its total government debt is well below that of the United States, Japan and some European economies, said Zuo Xiaolei, chief economist for Galaxy Securities in Beijing.

“But the government must bear the risks in mind and try to prevent the local debts expanding too fast,” she said.

The National Audit Office report gave no indication what portion of local government debt might not be repaid. Its total figure was in line with estimates by outside analysts but it was unclear whether that included all government debts.

The audit office said local governments owe 9 trillion yuan ($1.4 trillion) to banks and other lenders and might be responsible for an additional 1.6 trillion yuan ($200 billion) in debt. The disclosure came in a report to China’s legislature that was released on the agency website.

“Due to inadequate repayment ability, some local governments can only pay their debts by taking on still more debt,” the report said.

UBS economist Tao Wang, in a report this month, said local governments eventually might be unable to repay 2-3 trillion yuan ($300-$450 billion) in loans, equivalent to 4-5 percent of total lending by Chinese banks.

Many local Chinese governments created investment agencies over the past decade to invest in construction and other projects, financed by borrowing from state banks.

An American researcher, Victor Shih of Northwestern University, has estimated total local government borrowing in 2004-09 at 12 trillion ($1.6 trillion).

Bank lending was a key element of Beijing’s 4 trillion yuan ($586 billion) stimulus that helped China rebound from the global economic crisis. Beijing provided only about 25 percent of the total. The rest came from local governments, state companies and bank loans.

Regulators began to tighten controls early last year amid warnings local governments were borrowing too much.

A central bank deputy governor, Su Ning, said in March 2010 that banks might face risks if local governments defaulted. But the Finance Ministry and bank regulator later issued a statement saying risks were under control.

Many loans are likely to be repaid because they were invested in projects that will produce taxes and other revenues, analysts say. But they say some were given without required collateral, some borrowing was used for regular spending instead of investment and some governments committed the same future revenues to multiple projects.

China’s top state-owned banks are among the world’s biggest, with several having more than $1 trillion in assets.

Beijing injected tens of billions of dollars into China’s biggest banks over the past decade to clear away mountains of unpaid loans.

“It can’t be excluded that the government might remove bad debts from the banks again if there were debt defaults,” said Zuo. “But that would be no good for the development of the economy and the banks as well.”

AP researcher Yu Bing contributed.

If you’re looking for an underlying theme, it’s “China isn’t giving up nuclear power.”

Nuclear stocks are up on the news, amidst speculation that the nuclear spring may not have withered after all.

Read here.

The economist and housing index master Gary Schilling is calling for a new recession to begin next year.

You can read up on the issue here.

NEW YORK (AP) — The dollar is rising against the euro on slightly better U.S. economic reports.

The Commerce Department said that the economy grew at an annual rate of 1.9 percent in the first quarter, slightly higher than the 1.8 percent that was estimated a month ago.

Separately, the Commerce Department said businesses increased their orders for machinery, electronics products and airplanes last month. Durable goods orders increased 1.9 percent in May after a 2.7 percent decline in April.

In morning trading Friday in New York, the euro fell to $1.4165 from $1.4208 late Thursday. The British pound fell to $1.5969 from $1.5987. But the dollar fell to 0.8382 Swiss franc from 0.8388 Swiss franc and fell to 80.40 Japanese yen from 80.58 Japanese yen.

PITTSBURGH (AP) – President Barack Obama called on Friday for a “renaissance in American manufacturing” that would replace shuttered steel mills with plants producing robotics, nanotechnology and other high-tech advances.

The president said this resurgence is how the country will create new jobs and stay competitive in a global marketplace where other countries are making great strides.

Speaking at Carnegie Mellon University in Pittsburgh, a city that’s taken hits from the decline of traditional manufacturing sectors like steel, Obama called for a joint effort by industry, universities and the federal government to help reposition the United States as a leader in cutting-edge manufacturing.

“We have not run out of stuff to make, we’ve just got to reinvigorate our manufacturing sector so that it leads the world the way it always has, from paper and steel and cars to new products we haven’t even dreamed up yet,” Obama said at Carnegie Mellon’s National Robotics Engineering Center.

“That’s how we’re going to strengthen existing industries, that’s how we’re going spark new ones,” he said. “That’s how we’re going to create jobs, grow the middle class and secure our economic leadership.”

ATHENS, Greece (AP) – Greece’s finance minister presented details of harsh spending cuts and tax hikes to a parliamentary committee on Friday, after tough negotiations with the country’s international creditors.

The measures are to be voted on in parliament next week in two bills that must pass if Greece is to receive a critical installment of its international bailout loans next month, in time to prevent a potentially disastrous default that could drag down European banks and affect other financially troubled European countries.

“Yesterday was a very unpleasant day for me, because I had to tell bitter truths, and we had to agree on very tough measures, measures which also include the element of injustice and the element of overtaxation,” Finance Minister Evangelos Venizelos told the financial affairs committee.

He said he could not rule out having to impose even more measures during his tenure as finance minister, although he and his deputies would try to ensure that would not be necessary.

“We can’t keep coming back every so often and ask for corrective measures, but I won’t state that I will never introduce more measures while I am finance minister and am handling a crisis,” he said. “We … will make every humanly possible effort to execute the budget and the midterm program without new measures. But the result depends on the state as a whole, the public administration, the whole market, the tax compliance of all citizens.”

TOKYO (Reuters) – Asian nations moved to release emergency oil stockpiles on Friday as part of a rare global coordinated action by consumer countries to prevent high energy prices from stunting a stuttering economic recovery.

The move, led by Washington and criticized by the oil industry as an unnecessary distortion of markets, suggests a fundamental shift on the part of industrialized nations toward intervention in commodity markets as an economic policy tool.

Brent oil prices tumbled to a four-month closing low on Thursday and after rallying early on Friday, turned and fell again.

I missed this yesterday, but five federal agencies have extended open comments until July 11.

Five federal agencies have approved and will submit a Federal Register notice that extends the comment period on a proposed rule to establish margin and capital requirements for swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The comment period was extended to July 11, 2011, to allow interested persons more time to analyze the issues and prepare their comments. Originally, comments were due by June 24, 2011.

The proposal was issued by the Federal Reserve Board, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, and the Office of the Comptroller of the Currency.

Watch these developments closely; the potential impact from the Dodd-Frank bill, in all of its un-thought-out glory, is staggering.

NEW YORK (CNNMoney) — When snow starts falling in Afghanistan later this year, fewer U.S. soldiers will be on the ground, and fewer taxpayer dollars will be required to continue to finance the war.

President Obama is expected to announce Wednesday evening that a portion of the 30,000 surge troops he ordered to Afghanistan will be brought home later this year.

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But the savings in the first year — probably less than $10 billion — won’t be much to write home about, especially considering the U.S. has already run up a $443 billion tab in Afghanistan.

It’s not yet clear exactly how many troops will leave the country, or when. But according to an analysis conducted by the Center for a New American Security, if 15,000 troops were removed in fiscal year 2012, taxpayers would save $7 billion over the previous year’s spending levels.

That level of savings is hard to get excited about.

“Seven billion is really quite modest,” said Travis Sharp, a fellow at the Center for a New American Security. “If people think taking out surge troops is the answer to the Pentagon’s budget problems, they have another thing coming.”

In recent years, spending in Afghanistan has skyrocketed, right along with troop levels.

The United States spent $43 billion on the war in 2008, seven years after hostilities began, according to a Congressional Research Service report. This year, spending will hit $118 billion. There were 33,000 troops on the ground in 2009. Now there are 102,000.

Generally speaking, more troops mean higher costs for the military.

News out of Washington.

The debt reduction talks led by Vice President Joe Biden are in what insiders call “a make or break week,” as negotiators try to find $2 trillion or more in spending cuts as part of a deal to increase the debt ceiling.

Treasury Secretary Tim Geithner says the negotiators are getting closer.

“We need to make some progress this week to give everybody more confidence that there’s a framework that has the votes,” Geithner said. “You know, ultimately what matters is how do we get the votes to pass something in the House and the Senate.”

One of the negotiators, House Majority Leader Eric Cantor, R-Va., indicated the talks are at a critical moment. “It’s crunch time now in those meetings,” he said. “We are at some really tough stuff.”

Meanwhile, other Republicans have made clear what they see as essential elements in any agreement.

“Entitlements are the biggest drivers of our debt,” noted Senate Republican Leader Mitch McConnell, R-Ky. “By definition, they have to be a part of any plan to lower the debt. This is hardly a controversial view.”

To avoid attacks on that as a Republican assault on entitlements, McConnell notes he has plenty of Democratic company, including the Vice President and even President Obama himself.

“To preserve our long-term fiscal health, we must also address the growing costs in Medicare and Social Security,” Obama said to a joint session of Congress soon after he was inaugurated.

Washington (CNN) — President Barack Obama is expected to announce this week that 30,000 U.S. “surge” forces will be fully withdrawn from Afghanistan by the end of 2012, an administration official has told CNN.

Obama will deliver his highly anticipated speech on the troop drawdown on Wednesday.

The time-frame would give U.S. commanders another two “fighting” seasons with the bulk of U.S. forces still available for combat operations. Outgoing Defense Secretary Robert Gates has pushed for additional time to roll back Taliban gains in the country before starting any significant withdrawal — a position at odds with a majority of Americans, according to recent public opinion surveys.

New York, June 16, 2011 — Over the past year, the global banking system has modestly reduced its reliance on wholesale funding and lengthened the maturity of new debt securities, according to Moody’s Investors Service’s latest bank debt maturity profiles report. Nevertheless, the rating agency notes that the favorable market conditions supporting low-cost deposits and low-cost bank debt will not continue indefinitely, leaving the global banking system exposed to refinancing risk at a time when an usually large amount of debt is coming due. Of the $11 trillion of the long-term wholesale debt outstanding from Moody’s-rated banks globally, $3.4 trillion (33%) will mature by the end of 2012, and $4.9 trillion (45%) by the end of 2013.

By Knut Engelmann

NEW YORK (Reuters) – Traditionally fat expense accounts on Wall Street are about to get slashed as major banks set out to cut spending and staffing due to weaker markets and new regulation that will cut in to their profits.

Goldman Sachs plans to cut as much as $1 billion in non-compensation expenses — costs not directly linked to salaries, bonuses and benefits — over the next 12 months, a person familiar with the matter told Reuters on Thursday.

“We will turn over every rock,” the source said.

The bank, which currently employs some 35,400 staff around the world, will also review staffing levels, and job cuts are “certain” to come over the next months, the source added, though the bank has not set a specific target.

Goldman Sachs declined to comment.

$.23 from $.22.

LONDON (AP) — A violent protest against the Greek government’s latest austerity package hit stocks hard Wednesday and sent the euro sliding over a percent against the dollar.

With hundreds of protesters clashing with riot police and tear gas blanketing Athens’ main Syntagma Square, investors are fretful that Greece’s debt crisis is spiraling out of control. Reports that the Socialist government, which is led by George Papandreou, has launched power-sharing talks with the main opposition conservatives has only added to the uncertainty.

“Eurozone ministers continue to debate the details of a multi-billion euro bailout package amid a backdrop of protests, police clashes and a general strike,” said Will Hedden, a sales trader at IG Index.

In Europe, the FTSE 100 index of leading British shares was down 0.8 percent at 5,758 while Germany’s DAX fell 1.1 percent to 7,126. The CAC-40 in France was 1.3 percent lower at 3,816.

In the U.S., the Dow Jones industrial average was down 0.6 percent at 12,007 while the broader Standard & Poor’s 500 index fell a similar rate to 1,280.

Unsurprisingly, Greek shares took an even bigger battering, closing 1.9 percent lower at 1,243.

The euro was suffering badly, too. The fear is that the austerity measures won’t get passed in Parliament, meaning that the country will struggle to get the next tranche of its current bailout facility, without which it will probably default. They’re also necessary for the country to get a second bailout.

Read Here.

The housing bubble of the early 2000s was “unprecedented” and the “biggest in U.S. history,” according to Yale professor Robert Shiller.

As a result, he says “it’s very hard to forecast” where housing goes from here, now that it has officially fallen into double-dip territory, based on the S&P Case-Shiller Index.

Housing “might fall [another] 10-25% in the next few years,” but forecasting housing today is harder than predicting the weather, Shiller says. “I don’t see how anyone can quantify a forecast because it’s such an unusual event.”
In his latest books, The Subprime Solution and Reforming U.S. Financial Markets, Shiller argues the path to recovery is paved with financial innovation; 11 million homeowners under water is proof “they weren’t protected and need a way to hedge their housing risk.”

But “the economy is sick right now [and] I don’t have any miracle cure,” he admits.

Best known for his earlier works, Animal Spirits and Irrational Exuberance, Shiller is arguably the world’s foremost authority on financial bubbles. So if he can’t predict with any certainty where housing is going, what hope is there for the rest of the punditry?