Upgrades and Downgrades This Morning

Upgrades – ALNY, ABC, AAPL, CTRX,

Downgrades – KGC, LULU, MCO, NAV, DIS, XNPT

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“The U.S. economy has escaped inflation despite the Federal Reserve’s massive liquidity infusion … so far.

The inflation-free economy won’t last forever, warns Allan Meltzer, a professor of political economy at Carnegie Mellon University, in an article for Project Syndicate.

The Fed has created enormous amounts money by purchasing bonds from banks in its quantitative easing (QE) program. 

Yet inflation is remained low, at about 2 percent, because banks are keeping the additional liquidity as excess reserves rather than lending it out, Meltzer contends, which not only holds down inflation, but also holds down job growth. That explains why the recovery has remained so slow and unemployment has stayed high, he notes.

In response, instead of changing its tactics, the Fed launched more QE.

Yet as in the earlier QE rounds, the bulk of the additional liquidity remained idle in bank excess reserves.

“While subdued liquidity and credit growth are delaying the inflationary impact of the Fed’s determination to expand banks’ already-massive reserves, America cannot escape inflation forever,” Meltzer writes. “The reserves that the Fed — and almost all other major central banks — are building will eventually be used.”

Because banks earn 0.25 percent interest on excess reserve accounts and pay interest rates near zero to their depositors, they chose to earn risk-free interest rather than circulate it into the economy, Meltzer says. Banks may lend to the government and large stable corporations, but not to riskier borrowers like start-up companies or first-time homebuyers.

“While speculators and bankers profit from the decline in interest rates that accompanies the Fed’s asset purchases,” he writes, “the intended monetary and credit stimulus is absent.”

The problem is not lack of liquidity but insufficient investment, Meltzer argues. He blames the increase in taxes on incomes over $250,000, President’s Obama’s proposal to cap retirement entitlements and uncertainty over new regulations for hurting investment. Plus, healthcare reform has hampered employment growth because businesses are reducing hiring and cutting hours over fears of higher labor costs. …”

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“Some investors make their biggest money in times of market volatility, but that wasn’t the case for currency hedge funds last month.

They suffered from the dollar’s moves up and down, The Wall Street Journal reports.

The Parker Global Currency Managers Index, which tracks the returns of 17 funds in which Parker Global Strategies invests, dipped 0.58 percent last month, according to preliminary data from the company.

That compares with a 2.1 percent gain for the Standard & Poor’s 500 Index.

The dollar index, which measures the currency against six major counterparts, moved up and down between 81 and 85 in May. That’s a trading band of 5 percent from bottom to top.

The volatility has come among uncertainty about when the Federal Reserve will begin tapering its quantitative easing policy….”

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“U.S. regulators are stepping up scrutiny of overdraft fees charged by banks, a big revenue stream that is helping the industry lessen the hit caused by low interest rates and the sluggish economy.

The Consumer Financial Protection Bureau, in a report set for release Tuesday, plans to criticize the U.S. banking industry for practices that it says range from confusing rules on overdraft fees to increasing the likelihood of multiple fees being charged to the same customer.

The agency, created by the Dodd-Frank financial-overhaul law in 2010 to be a powerful voice for consumers, said it has no immediate plans to issue or recommend new overdraft-fee rules.

But the report is the strongest signal yet that the CFPB is burrowing into the controversial fees, which generated about $32 billion in revenue in the U.S. last year, according to research firm Moebs Services Inc.

Since its creation, the CFPB has examined areas from mortgages to student loans to credit reports. The agency’s efforts come as banks and other financial institutions are struggling to regain profit momentum five years after the financial crisis erupted.

Fees are a huge revenue source for banks but have exposed them to ire from regulators and consumers.

In 2011, Bank of America Corp., BAC -0.60% the second-largest U.S. bank by assets, quickly abandoned plans for a monthly debit-card charge of $5 after it was denounced by lawmakers and mocked on “The Tonight Show.”

Richard Hunt, president and chief executive of the Consumer Bankers Association, a trade group of big and regional banks, said consumers “have the right to choose the products and features which best provide for their family’s daily needs.”

New rules by the CFPB could push some consumers to use “unregulated industries with riskier and costlier alternatives,” such as payday lenders, check cashers or pawn shops, he said….”

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“JUNE REPORT:
Small Business Optimism Edges Up in May 2013, Reaches May 2012 Level

For the second consecutive month, small-business owner confidence edged up, according to NFIB’s Index of Small Business Optimism, which increased by 2.3 points to a final reading of 94.4 in May.

While May’s reading is the second highest since the recession started December 2007, the Index does not signal strong economic growth for the sector. Eight of 10 Index components gained momentum, showing some moderation in pessimism about the economy and future sales, but planned job creation fell 1 point and reported job creation stalled after five months of gains.

“Small business confidence rising is always a good thing, but it’s tough to be excited by meager growth in an otherwise tepid economy. Washington remains in a state of policy paralysis, and while the stock market sets records, GDP posts mediocre growth. The unemployment rate remains in the mid-7s and it is departures from the labor force —- not job creation — that is contributing to its decline when it does fall. It’s nice to see confidence not shrinking, but there isn’t much to hang your hat on in this report. We are back to where we were in May 2012. Two good months don’t make a trend, but we can’t have a trend without them, so it’s a start.” – NFIB chief economist Bill Dunkelberg….”

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“NEW YORK (Reuters) – More employers in the United States plan to hire workers next quarter than in any period since the fourth quarter of 2008, according to a survey by Manpower Group, the global employment services giant.

Manpower’s quarterly survey released Tuesday found most employers around the globe were uncertain about hiring more workers in the July through September period given tepid consumer demand. There were certain bright spots, however, with employers in the United States and some parts of Europe feeling cautiously optimistic.

“If you look at it from a global perspective, the overall feeling is that there are definitely challenges,” said Manpower’s CEO Jeff Joerres. But he said employers are more optimistic than in past months about global economic prospects.

Manpower, which surveyed 42 economies, found that employers in 31 countries and territories planned to hire next quarter. Hiring intentions strengthened in 17 economies, including Spain, Greece and the United States, compared to the previous quarter.

Hiring intentions remained unchanged in four economies and weakened in 21, including France, China and India….”

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“…The company announced new products, features, and a drastically redesigned iPhone and iPad operating system called iOS 7.

Here’s a quick round up of everything you missed…”

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“The pitch arrived, as so many do, with a friendly cold call.

Bruno Koch, 83, told the telemarketer on the line that, yes, of course he would like to update his health insurance card. Then Mr. Koch, of Newport News, Va., slipped up: he divulged his bank account information.

What happened next is all too familiar. Money was withdrawn from Mr. Koch’s account for something that he now says he never authorized. The new health insurance card never arrived.

What is less familiar — and what federal authorities say occurs with alarming frequency — is that a reputable bank played a crucial role in parting Mr. Koch from his money. The bank was the 140-year-old Zions Bank of Salt Lake City. Despite spotting suspicious activity, Zions served as a gateway between dubious Internet merchants and their marks — and made money for itself in the process, according to newly unsealed court documents reviewed by The New York Times.

The Times reviewed hundreds of filings in connection with civil lawsuits brought by federal authorities and a consumer law firm against Zions and another regional bank that has drawn even more scrutiny, First Bank of Delaware. Last November, First Delaware reached a $15 million settlement with the Justice Department after the bank was accused of allowing merchants to illegally debit accounts more than two million times and siphon more than $100 million.

The documents, as well as interviews with state and federal officials, paint a troubling picture. They outline how banks profit handsomely by collecting fees while ignoring warnings of potential fraud and, in some instances, enabling dubious merchants to prey on consumers….”

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“Boeing Co. (BA) raised its 20-year forecast for commercial jet demand by 3.8 percent as air traffic outstrips global economic growth and airlines refresh their fleets with $4.8 trillion in new planes.

Airliner sales will total 35,280 new jets during the next two decades, compared with a 2012 projection of 34,000 planes, Boeing said today in Paris before next week’s Paris Air Show. All the gain will come from purchases of the single-aisle models that are the workhorses of carriers’ fleets, Boeing said.

Boeing is betting on the durability of that expansion as it considers boosting output beyond the record pace already set for narrow- and wide-body planes. There’s no sign of a bubble, Randy Tinseth, marketing vice president for commercial airplanes at Chicago-based Boeing, said in a briefing ahead of the forecast.

“Passenger traffic has been very resilient,” Tinseth said. “Every indicator that we see in the market says that demand is real and there’s a need to increase production.”

Boeing’s order estimate is more important than the projected gain in value — up 8.3 percent from last year’s estimate — because that tally is based on list prices typically subject to discounts. The planemaker’s rivalry with Airbus SAS will change over the coming decades with the arrival of new models such as Bombardier Inc. (BBD/B)’s CSeries and Commercial Aircraft Corp. of China’s C919….”

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“Citigroup Inc. (C) could lose as much as $7 billion on currency swings if Charles Peabody is right, putting the analyst at odds with peers who say the stock will be the best performer among big U.S. banks in the year ahead.

Peabody, who leads research at Portales Partners LLC, is among only four analysts out of 34 tracked by Bloomberg who recommend investors sell Citigroup shares. He estimates the bank may lose $5 billion to $7 billion in regulatory capital this year if the dollar gains against the yen, euro and currencies in emerging markets, which provide about half the firm’s profit. That would be its worst translation loss in five years, exceeding the $3.5 billion deficit in 2011.

Former Chief Executive Officer Vikram Pandit expanded Citigroup’s overseas businesses to help it recover from 2008’s U.S. credit crisis. Peabody, who predicted the mortgage market’s plunge as early as January 2005, said the firm’s reliance on revenue from abroad is now driving his concern that a global economic slowdown will hurt the bank more than U.S. rivals.

“Those currency risks are worth taking if the high-growth prospects are there,” said Peabody, 57. “But if global growth falters, then those risks get magnified and growth doesn’t offset the currency risks.”

Citigroup’s stock will climb about 7 percent to $55.67 within the next year, according to the average of 26 analyst estimates compiled by Bloomberg. While Peabody doesn’t disclose his price targets, he said the shares could fall 50 percent. The lender has been the best performer in the 24-company KBW Bank Index (BKX), jumping 87 percent in the 12 months through yesterday.

The other five largest U.S. banks will collectively gain 0.1 percent, led by JPMorgan Chase & Co.’s 4.7 percent advance, according to the analysts.

Citigroup’s Hedges…”

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“Dole Food Co. (DOLE) Chairman David Murdock offered to buy out other shareholders in the world’s biggest fresh fruit and vegetable producer in a bid he said amounts to an enterprise value of $1.5 billion.

Murdock offered $12 a share in cash for the 60 percent stake in Westlake Village, California-based Dole that’s not owned by him or his family, he said today in a statement. That’s 18 percent more than the stock’s $10.20 price at the close in New York yesterday.

The offer was made yesterday evening…”

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“Gold declined to the lowest price in more than two weeks in London on speculation the Federal Reserve will curb stimulus as the U.S. economy strengthens. Palladium retreated from a two-month high.

Standard & Poor’s lifted its outlook for the U.S.’s AA+ credit rating yesterday to stable from negative, citing receding fiscal risks. Federal Reserve Chairman Ben S. Bernanke said last month the central bank could curtail its $85 billion monthly bond purchases if the economy improves. Chinese markets remain closed today and tomorrow for holidays.

“Upbeat sentiment over the U.S. economic outlook continues to feed concerns of increasing U.S. yields and an easing pace to QE3,” Andrey Kryuchenkov, an analyst at VTB Capital in London, wrote in a report, referring to quantitative easing. “Volumes in Asia will be subdued due to holidays in China.”

Gold for immediate delivery slid 1.2 percent to $1,370.37 an ounce by 11:19 a.m. in London. Prices fell to $1,367.75, the lowest level since May 23. Bullion for August delivery was 1.2 percent lower at $1,369.40 on the Comex in New York. Futures trading volume was 7 percent below the average in the past 100 days for this time of day, according to data compiled by Bloomberg.

Morning Fixing

Bullion at the morning “fixing,” used by some mining companies to sell output, was at $1,369.50 in London, down from $1,383.25 yesterday afternoon….”

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“West Texas Intermediate declined for a second day before a report forecast to show crude stockpiles increased last week in the U.S., the world’s biggest consumer of the commodity.

Futures declined as much as 0.7 percent in New York. U.S. crude inventories probably rose by550,000 barrels to 391.8 million last week, and U.S. gasoline supplies by 500,000 barrels to 219.3 million, according to a Bloomberg News survey before the report tomorrow from the Energy Information Administration. The Organization of Petroleum Exporting Countries will release monthly estimates of supply and demand today.

“Fundamentals are still skewed towards over-supply, though there are some minor clouds on the horizon,” Michael Poulsen, an analyst at Global Risk Management in Middelfart, Denmark.

WTI for July delivery fell by as much as 65 cents to $95.12 a barrel and was at $95.15 in electronic trading on the New York Mercantile Exchange at 11:37 a.m. London time. The volume of all futures traded was 27 percent below the 100-day average. The contract settled at $95.77 yesterday, the lowest close since June 6.

Brent for July settlement decreased 91 cents to $103.04 a barrel on the London-based ICE Futures Europe exchange. The European benchmark grade’s premium to WTI shrank to as little as $7.87 a barrel today, the narrowest gap since May 22….”

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“June 11 (Bloomberg) — U.K. industrial production unexpectedly rose in April, boosted by increased output at oil and water companies. Manufacturing fell after gains in February and March.

Output at factories, utilities and mines rose 0.1 percent from March, the Office for National Statistics said today in London. The median forecast of 28 economists in a Bloomberg News survey was for no change. Manufacturing dropped 0.2 percent after gains averaging 0.9 percent in the previous two months.

Industrial output posted its strongest quarterly performance in almost three years through April, adding to signs the economy is gaining momentum after returning to growth in the first quarter. Surveys by Markit Economics published this month showed services and manufacturing were at the highest in 14 months in May. The euro area, Britain’s largest trading partner, is also showing signs of improvement, with European Central Bank President Mario Draghi saying last week the region’s economy will return to growth by the end of the year.

“The U.K. economy can and will get better,” said Rob Wood, an economist at Berenberg Bank in London. “Today’s industrial production data suggest the sector will contribute positively to growth in the second quarter.”

The pound fell after the data were published, and traded at $1.5553 at 10:43 a.m. in London, down 0.1 percent from yesterday.

Quarterly Growth

In the three months through April, industrial production gained 0.8 percent, the largest increase since July 2010, the ONS said. Manufacturing rose 0.5 percent, the most since September last year. From a year earlier, manufacturing fell 0.5 percent and industrial production declined 0.6 percent.

Out of 13 categories in manufacturing, 10 declined in April, while three increased. The fall on the month was led by transport equipment. There were also declines in the output of wood and paper products and basic metals and metal goods. The declines were largely offset by a 14 percent jump in pharmaceuticals production….”

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“European stocks slid to a seven-week low as the Bank of Japan refrained from expanding stimulus and Treasury yields climbed. U.S. index futures and Asian shares also declined.

Legrand SA retreated 4 percent after Wendel sold the remaining 14.4 million shares it holds in the world’s largest maker of switches, plugs and lighting controls. ICAP Plc dropped 3.6 percent after Credit Suisse Group AG recommended selling the shares. A gauge of European commodity producers retreated to the lowest since July 2009 as copper dropped for a fourth day in London trading.

The Stoxx Europe 600 Index fell 1.6 percent to 290.5 at 10:48 a.m. in London, the lowest since April 23. The gauge has retreated 6.4 percent since May 22 amid speculation the Federal Reserve will taper its bond-buying program as the U.S. economy strengthens. Standard & Poor’s 500 Index futures lost 0.8 percent, while the MSCI Asia Pacific Index dropped 0.2 percent.

“Uncertainty weighs on markets today,” said Eric Bernhardt, chief investment officer at Umblin AG in Zurich. “Investors are disappointed by the BOJ’s unchanged policy as they had hoped they would do more to solve the problems on the Japanese bond market.”

The benchmark 10-year U.S. Treasury yield climbed as much as five basis points to 2.26 percent, the highest level since April 2012.

The BOJ today refrained from expanding its tools to rekindle inflation and stoke growth, sticking with an April pledge to increase the monetary base by 60 trillion yen ($620 billion) to 70 trillion yen a year. Markets in China were closed for the Dragon Boat Festival.

Japan Focus…”

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“European Union regulators plan to request new powers to lower air-traffic charges and shorten flight routes in the bloc, challenging national controllers in a bid to offer relief for carriers.

The European Commission intends to present proposals today to tackle the national fragmentation of Europe’s airspace. The draft legislation would give the Brussels-based commission greater authority to enforce performance standards for air-traffic-control organizations and would open up their support services such as meteorology and data collection to competition…..”

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“Australia’s dollar fell to the lowest in almost three years versus the greenback after home-loan approvals grew at the slowest pace in three months, boosting the case for further cuts to borrowing costs.

Australia’s currency slid for a third day amid speculation the Federal Reserve will reduce stimulus this year, narrowing Australia’s interest-rate advantage. The Aussie and New Zealanddollars dropped against the yen after the Bank of Japan kept monetary policy unchanged, disappointing investors who had expected it to introduce measures to stem market volatility. The kiwi dollar was set for its lowest close in a year.

“Housing is the one area most likely to make up for the mining investment downturn, and it’s disappointed,” said Joseph Capurso, a Sydney-based foreign-exchange strategist atCommonwealth Bank of Australia. “You’ve got to say that the Aussie’s going to keep on falling.”

Australia’s dollar slid 1.1 percent to 93.61 U.S. cents as of 5:18 p.m. in Sydney after touching 93.54, the lowest since September 2010. New Zealand’s currency fell 0.9 percent to 78.34 U.S. cents, set for its weakest close since June 2012. The Aussie dropped 1.6 percent to 92.02 yen, while the kiwi tumbled 1.4 percent to 76.94 yen.

Australian home-loan approvals rose 0.8 percent in April from the month before, the smallest increase since January. Economists surveyed by Bloomberg News forecast a 2 percent rise. March’s gain was revised to 4.8 percent from 5.2 percent.

Reserve Bank of Australia Governor Glenn Stevens and his board reduced the overnight cash-rate target to a record 2.75 percent last month. A benign inflation outlook gave them scope to help industries including construction to rebalance growth away from resource investment….”

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“Emerging-market stocks retreated, sending the benchmark measure down 10 percent from this year’s peak, as disappointing Chinese data added to concern the global economy is faltering. India’s rupee slumped to a record.

PetroChina Co. (857) fell to the lowest price since 2010, while OAO Lukoil paced losses among Russian commodity stocks. Brazil’s Ibovespa extended a slump from this year’s high to 19 percent, as beef producer JBS SA slid. The rupee posted its largest drop in more than 20 months on bets the central bank will refrain from lowering borrowing costs. Mexico’s IPC index rose the most among major equity benchmarks in the Americas and Europe.

The MSCI Emerging Markets Index retreated 0.8 percent to 972.89, extending the decline from its Jan. 3 peak to 10 percent. China’s industrial production rose a less-than-forecast 9.2 percent last month, while export gains were at a 10-month low and imports dropped, data over the weekend showed. A government report on June 7 showed U.S. employers took on more workers than forecast last month.

“Investors are not seeking additional risk at this point,”Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees about $380 billion, said by phone. “The data from North Americacontinues to indicate recovery, but that’s not necessarily true for the rest of the world. The sun appears to be rising in the U.S. faster than in other geographies, and China is on the list.”

Consumer discretionary and commodity shares led losses in a measure of developing-nation stocks among 10 groups. The broad gauge extended this year’s drop to 7.8 percent, compared with a 10 percent jump in the MSCI World Index….”

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“SoftBank Corp. (9984), the Japanese mobile carrier controlled by Masayoshi Son, raised its offer for Sprint Nextel Corp (S). by 7.5 percent to $21.6 billion to counter a bid from billionaireCharlie Ergen’s Dish Network Corp (DISH).

SoftBank will pay $16.6 billion to Sprint shareholders and inject $5 billion of new capital into the target for a 78 percent stake, the Tokyo-based carrier said in a statement today. Dish has until June 18 to make its “best and final” offer as its current $25.5 billion proposal isn’t “actionable,” Sprint said separately.

Billionaire Son, who has the backing of Sprint’s board and second-largest investor Paulson & Co., raised the stakes to fulfill his ambition of expanding into North America with the third-largest U.S. carrier. Success for the Japanese company would thwart Ergen’s plan to break into wireless and offer a bundle of satellite TV, mobile and Internet services.

“If SoftBank can’t buy Sprint, it will mess up Son’s strategy for growth, so this is very positive,” said Masamitsu Ohki, a fund manager at Stats Investment Management Co., a Tokyo based hedge fund. “This would be the first step for his global strategy since he can’t expect growth from the Japanese domestic market.”

Shares (9984) of SoftBank fell 0.4 percent to 5,500 yen at the close of trade in Tokyo, trimming this year’s gain to 75 percent.Japan’s benchmark Nikkei 225 Stock Average fell 1.5 percent today. Sprint shares fell 0.8 percent to $7.18 yesterday in New York.

‘Tremendous Value’…”

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“Stocks, bonds and commodities fell around the world and the yen strengthened after Bank of Japan Governor Haruhiko Kuroda left his stimulus efforts unchanged, stoking speculation central banks will fail to keep the global recovery on track.

The MSCI All-Country World Index dropped 0.2 percent to 365.26 at 10:10 a.m. in London. The Standard & Poor’s 500 Index futures lost 0.4 percent. The S&P GSCI gauge of 24 raw materials retreated 0.4 percent. Japan’s currency strengthened at least 1 percent against all its 16 major peers. The Australian dollar sank to the lowest level in almost three years and Asian currencies declined. Greek, Portuguese and Irish bonds tumbled.

The BOJ left unaltered the one-year fixed-rate loan facility the bank has tapped seven times amid a surge in bond yields. At a press briefing in Tokyo, Kuroda said that the central bank will discuss longer funding operations if they become necessary. While global stocks have dropped 3.8 percent from this year’s peak on May 21 on speculation the Federal Reserve will taper bond purchases, they are still 7.5 percent higher in 2013.

“Investors are realizing that very low funding rates aren’t set in stone,” said Michael Leister, an interest-rate strategist at Commerzbank AG in London. “We are seeing a lot of volatility and the jury remains out on exactly what the BOJ will achieve.”

ICAP Downgrade

The Stoxx Europe 600 Index slid 1 percent, with more than six shares declining for every one that advanced. ICAP Plc slipped 4.1 percent, the most in two months, after Credit Suisse Group AG downgraded the world’s largest broker of transactions…”

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