By Dominic Lau
LONDON (Reuters) - The dollar rose on Friday after Federal Reserve Chairman Ben Bernanke indicated U.S. monetary policy could be tightened as a recovery takes hold, sending crude and metal prices lower.
World stocks <.MIWD00000PUS> were steady as retreating commodity prices hurt heavyweight miners, offsetting gains in Asia <.MIASJ0000PUS> and emerging markets.
Shares in emerging markets <.MSCIEF> advanced 0.4 percent, hitting a more than 13-month high for the fourth straight day, after better-than-expected U.S. corporate earnings and economic data soothed fears about the strength of the economic recovery.
In Europe, the FTSEurofirst 300 <.FTEU3> index was up 0.3 percent.
Bernanke said on Thursday that the Fed must continue to prop up the economy for an extended period but can't do so indefinitely for fear of triggering an inflationary surge.
His comments lifted the dollar <.DXY> off 14-month lows against a basket of currencies. The greenback was up 1.1 percent at 89.29 yen, while the euro fell 0.5 percent to $1.4723.
"Explanations by Fed officials have been helpful in clearing the air on what strategy will be taken as the economy recovers," said Ulrich Leuchtmann, currency strategist at Commerzbank in Frankfurt.
But Leuchtmann said that dollar gains on Bernanke's comments would be limited, as Fed was unlikely to raise rates until the second half of 2010.
"The market is not yet ready to jump on the rate rise outlook to aggressively buy the dollar," he said.
Gold prices pulled back to below $1,050 an ounce, snapping a rally that took prices of the precious metal to all-time highs for three days in a row, while oil fell to $71 a barrel.
Governments and central banks around the globe have injected trillions of dollars in the past year or so to pull the world out of a most severe recession since the 1930s Great Depression.
The flood of liquidity has helped boost all investment asset classes from equities to government bonds.
"The longer that the rally lasts -- and the higher that equity prices go -- the greater the likelihood that, in this new world, policymakers will see their new job description as being to take away the punch bowl before the party gets going, not just in the usual sense of the word ... but before asset price pick-ups can become booms," said Michael Dicks, head of research and investment strategy at Barclays Wealth, in a report
"For this reason, we remain circumspect concerning the longevity of any equities rally persisting through 2010."
In another sign that the economy is on the mend, Europe's largest telecom Telefonica
Yields on benchmark 10-year U.S. Treasuries were up 5 basis points at 3.301 percent, while the 10-year German bund yield, the euro zone's benchmark, was up 3 basis points at 3.171 percent.
(Additional reporting by Naomi Tajitsu in London; Editing by Toby Chopra)
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Oct 10, 2009
Bernanke boosts dollar, commodities down
A Neutral Net Means Battles
FCC chairman Julius Genachowski launched a new proceeding designed to fetter Internet service providers' ability to restrict content. And they would apply equally to wired and wireless connections.
FCC chairman Julius Genachowski made his pitch this morning for network neutrality, and he did it in the most business-friendly language he could muster. But that didn't stop him from arguing that an open Internet must be the rule no matter how one gets on it—wired and wireless connections should both be nondiscriminatory towards content and applications.
Genachowski delivered a major address this morning at the Brookings Institution in Washington, laying out his vision of an open Internet and rehashing the many ways that an open Internet is a spur to innovation of all kinds.
Today, Internet access suffers from three problems, he said. First is the limited competition among Internet service providers, which is "simply a fact about today's marketplace." Second is the perverse economic incentives faced by the major U.S. ISPs, which also sell separate phone and TV service to the same customers who buy Internet access (and can increasingly access such services over the Web). Finally, the growth of Internet traffic can put pressure on ISPs.
The resulting situation isn't about "bad guys" versus "good guys," but about the "inevitable tensions built into our system." That system has already led to ISP blocking of VoIP, degradation of P2P connections, and even a denial of access to certain political content (all examples cited by Genachoswki).
To preserve the Internet's unique innovation engine, where the intelligence exists at the edges and where entrepreneurs don't need permission to build the next Skype or Google, Genachowski promises a fair proceeding that is driven by data and that listens to everyone. But when it's over, he wants the FCC to add two new principles to its existing "four freedoms": nondiscrimination and transparency.
The nondiscrimination principle says that ISPs can't "discriminate against particular Internet content or applications," which means that traffic-throttling of particular apps and protocols would be forbidden, even in cases where an ISP does not block access entirely.
The transparency principle states that ISPs must inform subscribers about their network-management practices. "Why does the FCC need to adopt this principle?" Genachowski asked. "The Internet evolved through open standards. It was conceived as a tool whose user manual would be free and available to all. But new network-management practices and technologies challenge this original understanding. Today, broadband providers have the technical ability to change how the Internet works for millions of users—with profound consequences for those users and content, application, and service providers around the world."
The canonical example, of course, was Comcast's degradation of BitTorrent, which came to light in 2008. The cable ISP used TCP reset packets to disrupt certain P2P connections, changing the purpose and use of reset packets unilaterally.
But when that Comcast case was finally ruled on by the FCC and the company was told to stop its practice, a dispute erupted: Did the FCC even have the authority to act on its "four freedoms"? Those Internet freedoms were explicitly not rules, and Comcast has since gone to court over the issue. Genachowski wants to make all six of his proposed Internet principles into official agency rules to make clear to ISPs exactly what's required of them, and to make sure the FCC has the authority to act if problems arise.
As his speech neared its end, Genachowski turned to the most common criticisms of the plan—that it amounts to "government regulation of the Internet," that it's largely based on overheated conspiracy theories that exist only in the minds of groups like Free Press, and that it's antibusiness and therefore (in the long run) anticonsumer as well.
“This is not about government regulation of the Internet. It’s about fair rules of the road for companies that control access to the Internet. We will do as much as we need to do, and no more, to ensure that the Internet remains an unfettered platform for competition, creativity, and entrepreneurial activity.
“This is not about protecting the Internet against imaginary dangers. We’re seeing the breaks and cracks emerge, and they threaten to change the Internet’s fundamental architecture of openness. This would shrink opportunities for innovators, content creators, and small businesses around the country, and limit the full and free expression the Internet promises. This is about preserving and maintaining something profoundly successful and ensuring that it’s not distorted or undermined. If we wait too long to preserve a free and open Internet, it will be too late.
Defining Moments
Genachowski has picked his battle. The network neutrality fight will consume much of his energy as chairman and won't be resolved anytime soon, but if Genachowski gets his six broad rules and applies them to all forms of Internet access, he will leave a pretty serious stamp on the direction of the Internet in the U.S.
Google has come out in support of the idea, as have groups like Free Press. But Genachowski can't wave his magic "I was in business too!" wand and make resistance disappear. Wireless carriers, especially, despite a new commitment to openness on the part of Verizon Wireless and others, are worried.
Chris Guttman-McCabe, vice president of regulatory affairs for CTIA - The Wireless Association, expressed his concern "about the unintended consequences that Internet neutrality regulation would have on investments from the very industry that's helping to drive the U.S. economy. We believe that this kind of regulation is unnecessary in the competitive wireless space as it would prevent carriers from managing their networks—such as curtailing viruses and other harmful content—to the benefit of their consumers."
The Progress & Freedom Foundation upped the rhetorical ante with this pithy nugget from president Ken Ferree: "I find myself at a loss to understand why the administration wants to start meddling with a sector of the economy that, despite a challenging macroeconomic environment, is performing pretty well by any rational standard. What exactly is the problem they are trying to remedy? It's almost as if they are trying to turn a story of success into one of failure."
But, to Genachowski, the openness of the Internet has been the most crucial factor in its tremendous success, and he's ready to take on all comers in the battle that may define his time as head of the FCC.
Gold slips, taking breather as dollar rebounds
By Frank Tang and Jan Harvey
NEW YORK/LONDON (Reuters) - Gold slipped on Friday as the market took a breather on the dollar's rebound the day after this week's sharp rally pushed gold to a record high above $1,060 an ounce.
On Thursday, Federal Reserve Chairman Ben Bernanke said the U.S. central bank must keep propping up the economy but cannot do so indefinitely for fear of triggering inflation. His comments dampened gold's appeal as an inflation hedge.
Peter Buchanan, commodities analyst at CIBC, said policy makers would not allow the dollar to keep falling.
"We believe that the dollar has overshot to the downside, with a relief rally expected in the next two to three quarters," he said.
Most-active December gold futures settled down $7.70 at $1,048.60 an ounce on the COMEX division of the New York Mercantile Exchange.
Spot gold was at $1,045.60 an ounce at 2:10 p.m. EDT (1810 GMT), against $1,054.00 late in New York on Thursday, a session that saw bullion hit a record $1,061.20.
Gold ended 5 percent higher for the week as dollar weakness pushed gold to a series of record highs. Investors bought the metal as an alternative to paper currencies, and a weaker dollar also makes gold cheaper for non-U.S. investors.
The Bernanke statement lifted the dollar index .DXY, off 14-month lows. The index measures the greenback's performance against a basket of six major currencies.
"Everybody is watching the dollar. It was weak in the last few days but it has clawed back a few losses today after Bernanke spoke yesterday, so that has capped gold for the moment," said Calyon metals analyst Robin Bhar.
Many expect persistent fears over currency market instability will push gold to further records this year as funds buy the metal as an alternative asset.
"It seems people are beginning to realize the real effect of quantitative easing -- not only the threat to inflation, but the threat to fiat currencies," said Nick Bullman, managing partner of hedge fund Bullman Investment Management.
"If you carry on just printing money, eventually people will start to look for another store of value."
WEAK PHYSICAL DEMAND
Physical demand for gold remained weak as high prices deterred jewelers, traditionally the main buyers of gold. Buying in India, the world's largest bullion market last year, has been lackluster despite the onset of the festival season.
Among other precious metals, silver also retreated from the 14-month high at $17.92 an ounce it hit on Thursday. Spot silver was at $17.70 an ounce against $17.72.
Gold Hits Record High: Time to Sell or Time to Buy?
I'm standing at my office bookshelf rummaging in a small box of junk... I mean, treasures. There's a transistor radio I carried on my paper route at 14, a broken watch, some old photos...
Ah, here's what I'm looking for -- my high school ring, class of '69. I don't remember what I paid for it - around $100, I think. But this clunky heirloom that I wore for only a few months is worth its weight in gold. At half an ounce, according to the kitchen scale, that's around $500.
Gold tends to do well in troubled times, and economic worries and the falling dollar have pushed gold over $1,050 an ounce this week, the latest in a string of recent records. Gold's advocates point out it's been in demand throughout history - since before written history, in fact. Unlike currency, it doesn't rely on the full faith and credit of any government. It has value because it's rare, beautiful, eternal and useful.
So, is this troubled time a good time to invest in gold? Its promoters say "yes," though they say that in good times, too, arguing gold is a hedge against a coming crash.
Today, there are lots of ways to invest in gold other than going to the jewelry store or buying coins. Some purveyors will sell you gold but keep it in their vaults. A few exchange-traded funds keep hoards of gold and sell shares that rise and fall with gold prices, just as stock-owning ETFs rise and fall with stock prices. One especially popular approach is to invest in stocks of gold-mining companies.
Lipper, the market-data company, tracks 73 gold-oriented mutual funds, most of them bet on gold-mining stocks. And the results are none too shabby. From Jan. 1 through Oct 1, those funds returned nearly 35 percent, about double the return of the U.S. stock market, measured by the Standard & Poor's 500. And get this: Those gold funds have returned more than 14 percent a year for the past five years, while funds tracking the S&P 500 have returned almost exactly nothing - 0.01 percent a year. During those five years, gold funds have beaten all Lipper fund categories, save those specializing in stocks of China, emerging markets and Latin America.
If you're a speculator - someone willing to take big chances with money that you can afford to lose - I say, have at it. In fact, with an exchange-traded fund you can make money even if you think gold's run is over. You'd do that by "selling short" - selling borrowed shares at today's high price in hopes of someday paying back the loan with shares bought for less.
But what about the typical long-term investor who is preparing for things like college and retirement?
To you, I suggest treading with caution -- or avoiding this path altogether. It's always risky to jump on a bandwagon late in the parade. Most of the gold run-up may be over, and gold's long-term performance is nothing great.
In his bestselling book Stocks for the Long Run, Jeremy J. Siegel, a finance professor at the University of Pennsylvania's Wharton School, reports that from 1802 through 2006, the "real return" on gold -- its gains on top of inflation -- averaged just 0.3 percent a year, compared to 6.8 percent for a basket of stocks representing the entire market. Results are much the same in more recent periods, with gold's real return averaging 0.5 percent a year from 1946 through 2006, versus 6.9 percent for stocks.
There have been exceptions. Gold returned 8.8 percent a year from 1966 through 1981, while stocks lost an average of 0.4 percent a year. But that was a period of very high inflation - about 7 percent a year - and investors do turn to gold when inflation spikes, driving the price up. Today, inflation is extremely low.
So maybe this is a better time to sell gold than to buy it. On a purely financial basis, it might well pay to cash in some unneeded trinket like my high school ring and invest the proceeds on something with better prospects for compounding. You can sell gold at a jewelry store, or through any number of online dealers.
Me? I'm going to keep my ring, at least until my next reunion. I don't want to convert it to grocery money, and at the moment I can't think of anything to buy that would last like gold - forever. In the end, the sentimental value outweighs the monetary one.
Gold price hits new record high
THE price of gold has charged to a new high of nearly US$1,055 (S$1,466) an ounce amid speculation that it could hit US$2,000 in the next decade.
Local investors are joining a global gold rush by pouring cash into the precious metal owing to inflation fears and concern that major currencies such as the US dollar will keep falling in value.
They worry that spending sprees by the United States and other governments to tackle the global recession will undermine currency values and fuel inflation. Gold is regarded as a safe-haven investment, and a hedge against inflation or rising prices.
Mr Wong Weiyi, a research analyst at unit trust distributor Fundsupermart, said gold typically rises in price when the US dollar is falling and vice versa.
The price of gold has soared 19 per cent since the start of this year. At 5pm yesterday, it was 1.1 per cent higher than Wednesday's close of US$1,044.20. Yesterday was the third straight day it hit a record high.
Local investors are charging into gold investments. Fundsupermart's top three funds with gold exposure had averaged a 38 per cent return before fees so far this year, as of Monday. Sales of the three funds last month were 3.7 times that in August.
Gold slips, dollar rises
GOLD, silver and other precious metals, which have been riding high lately, slid back in price on Friday.
This was partly due to a stronger United States dollar. Also, some investors sold metals to lock in gains racked up in the recent surge.
The US dollar got a lift from comments by Federal Reserve chairman Ben Bernanke, who said the central bank was ready to raise interest rates.
'When the economic outlook has improved sufficiently, we will be prepared to tighten,' he said in Washington on Thursday.
Gold fell below US$1,050 an ounce yesterday, snapping a rally of three straight days of record highs. Gold is up about 19per cent so far this year.
Silver retreated from a 14-month high at US$17.92 an ounce on Thursday, as it tracked dollar and gold prices. Platinum inched down slightly to about US$1,336 an ounce.
The Week of the Record Gold Price
As investors in the gold market we have waited patiently for gold prices to break through the old record gold price of $1033.00/oz and set a new record gold price which it did when it briefly touched on $1060.00/oz this week. This record has been along time coming after the previous failed attempts this year to establish a new record gold price.
For the most part the gold producing stocks also took part in this rally as evidenced by the Gold Bugs Index, the HUI, which is currently sitting at 446. The HUI is important to us because it largely represents those precious metals producers that have not hedged their production and therefore offer an investor real exposure to gold prices.
As the inflation/deflation debate continues with much gusto we still lean strongly towards the inflationary scenario based on each and almost every governments action to run the printing presses relentlessly. In our humble opinion gold is a leading indicator for inflation and is telling us that inflation is now in the pipeline and it wont be too long before it raises its ugly head. Why else would Paul Volker have been added to Obama’s team of advisors, wasn’t he the very man who in the late seventies and early eighties was brought in to slay the inflation dragon which he did with a base rate of around 19% if my memory serves me well.
Another action worthy of note is that The Reserve Bank of Australia have actually raised interest rates this week, the first of the G20 to do so. This is one country that has an eye on inflation, acting early in an attempt to prevent it getting a grip of their economy. This move will influence others thinking and those with the stronger economies may well follow suit shortly. The countries with weaker economies will no doubt remain as is not daring to risk a fragile recovery at this stage by raising rates. For home owners now might be the time to lock in mortgage rates before they also head to higher ground, worth a discussion with your financial advisor.
Taking a quick look at the chart we can see that gold prices really took off to set a new record gold price with the MACD experiencing a golden crossover, a rising STO and the RSI breaking into the ‘70′ range. A move this far and this fast usually signals that its time for a breather and a bit of a pull back for gold.
The flip side to that rationale is that the dollar, along with many other currencies, is struggling to retain its value. We can only see paper money losing more and more of its value as debasement continues at a hectic pace, hence the next two months will be explosive for gold as it sets one record gold price after another record gold price.
Finally, a reminder that when we throw in the effects of inflation, gold should be trading at around $2300/oz to equal its historic high of the 1980s, so there is still a lot of ground to make up.
No Change: Bank Keeps Interest Rate On Hold
The Bank of England has once again opted to keep the interest rate unchanged at 0.5%.
had predicted the rate would stay at its current level amid fears a rise would kill hopes of a recovery.
The interest rate has now stayed unchanged since March.
The Bank also decided to leave its quantitative easing (QE) programme to boost the money supply unchanged at £175bn, despite calls from some business leaders to raise it to £200m.
The news comes as the economy continues to be boosted by positive surveys and reports.
GDP is expected to have returned to positive growth for the third quarter when data is released later this month.
But there are concerns over the strength and speed of recovery.
A 1.9% fall in manufacturing output during August after two months of growth surprised economists.
The Sky Money Panel, which consists of economists and business leaders, is urging a cautious approach to fiscal management.
Although the wider economy is expected to return to growth between July and September after five quarters of recession, the Bank's preferred measure of money supply showed sluggish growth during August - casting doubt on whether the QE policy was working.
The MPC will look again at the impact of its QE policy next month with the help of the Bank's latest inflation forecasts.
Alongside its call for a QE increase, the British Chambers of Commerce has pressed the MPC to cut the rate at which financial institutions leave money on deposit at the Bank, to encourage lending in the wider economy.
The MPC is worried that the lingering problems in the financial sector will hamstring a recovery while banks repair their damaged balance sheets.
The minutes of its September meeting said there could be "false dawns" for the
economy.
PM sets optimistic forecast for Britain
LONDON — Prime Minister Gordon Brown said the British economy would emerge from recession with stronger growth than expected as he drew the battle lines for the general election, in an interview out on Saturday.
Brown told The Daily Telegraph newspaper that Britain would return to growth next year, as he spelt out the differences between his governing Labour Party and the main opposition Conservatives, who are 14 percent ahead in the opinion polls with an election due by June.
Brown tried to portray himself as an optimist on the coming years in Britain, saying the Conservatives had painted a pessimistic view of tough times ahead that were "simply not true".
"Britain is capable of coming back to growth at a higher rate next year than people were expecting, and higher rates in the future," the 58-year-old said.
"We've said that the economy will grow by one-and-a-half per cent next year and more people are moving towards our position as a result of what they've seen in the economy over the last few months."
The Conservatives "are pessimists; they're for an age of austerity", he said.
"The choice is between people like me who are optimists for the future of this country and those who think the prospects of this generation are worse than the last."
He said the centre-right Conservatives had wanted a "small election" about "who had the best slogans and sound bites. It's now a big election".
The Scot added: "Do people want a party that has a strategy for getting out of the recession, or do they want a party that's so pessimistic about Britain, they tell you in advance they're going to give you an age of austerity?"
He said he would "of course" welcome support from his predecessor Tony Blair in the election campaign, reiterating that he would back the former premier should he try to become the first European Union president.
Britain has 9,150 troops in Afghanistan fighting Taliban insurgents and the rising British death toll has put the mission there and the resources available to troops in the spotlight.
The Daily Telegraph said Brown was expected to announce some extra troops next week, while the prime minister hinted at an even larger increase, saying he was "prepared to do more" to train Afghan forces.
Meanwhile on the scandal over lawmakers' expenses, which has seen many members of parliament (MPs) pledge to step down, he predicted some cases going before a judge.
"It's right to distinguish between what you might call corruption in some cases, which is for the courts to decide, and honest mistakes.
"Some cases will end up in the courts. Where somebody's done something very wrong, we've got a duty to deal with them most severely."
Blair and Brown listen as Archbishop of Canterbury condemns Iraq war decisions
Solemnity and ritual, ancient words and a mother whose grief at the loss of her son was “the worst pain ever”. As St Paul’s Cathedral filled with the sound of the choir as it sang the anthem — Bible verses honouring the dead; another age, another war — Tracey Hazel stepped forward to light the candle of remembrance, the candle that stood for her son, Ben Leaning, and all the other servicemen and women who lost their lives in the conflict in Iraq.
It was a symbolic moment, but in more ways than the organisers of the service of commemoration ever intended. The congregation may have been led by the Queen and Duke of Edinburgh, the front rows of the cathedral may have been dominated by the military top brass with their medals and braid, but for the bereaved families themselves, the ones who really pay the price of war, there is a respect and sympathy that was unheard of a generation ago.
“I wanted to be here for Ben and all the fallen. I feel so privileged,” said Ms Hazel, whose son was killed in 2007 when his Scimitar was blown up by a roadside bomb. “It was so nice they chose one of the parents to do it, as it’s them that are left suffering when a loved one dies.”
Next to the candle stood a marble plaque that had once been the centrepiece of the Memorial Wall in Basra and bears the biblical inscription: “Honourable age does not depend on length of days, nor is the true number of years a measure of life.”
Lance Corporal Carl Stevens, 23, one of the bricklayers who constructed the wall, told the congregation how they built it, how they took it down again when the Army left Iraq, and how it is being constructed once more at the National Memorial Arboretum in Staffordshire. He spoke in halting, unsure tones, the authentic voice of an ordinary soldier amid the grandeur and ceremony of St Paul’s.
He may not have been used to speaking amid such exalted surroundings, but the Archbishop of Canterbury is, and he chose to use the occasion to deliver a message that, for all that it was delivered in moderate and well-tempered language, carried a sharp critique of the way in which Britain went to war with Iraq.
On no fewer than three occasions in his address the Archbishop, who has previously described the decisions that led to the war as flawed, questioned the decision-making process that led to a conflict in which 179 Britons lost their lives.
And there, in the second row, was Tony Blair, who was reponsible for that decision, and his expression — gaunt, solemn, unchanging — gave no indication of what he felt.
If the Archbishop devoted most of his energy to questioning how Britain ended up at war in Iraq, he also praised the troops on the ground for their patient and consistent efforts, and thanked “those who have taught us through their sacrifice the sheer worth of justice and who have shouldered some of the responsibility”.
While the Archbishop chose to question the war, the rest of the congregation by their very presence emphasised the sense of national unity. As well as former heads of the Army, Sir Mike Jackson and Sir Richard Dannatt; the former Defence Secretary Geoff Hoon; and President Talalbani of Iraq, no fewer than 12 members of the Royal Family attended the service, including the Prince of Wales, the Duchess of Cornwall and Prince William.
But honouring the dead, and commemorating the efforts of the more than 100,000 members of the Armed Forces and civilian personnel who served in Iraq, does not mean refusing to admit that mistakes were made. After the service Sir Jock Stirrup, the Chief of the Defence Staff, said: “I think it is fair to say a lot of mistakes were made throughout the campaign by the coalition.”
Citigroup sidesteps pay row with Phibro sale
Citigroup has sold its Phibro oil trading business to Occidental Petroleum in a $250m deal that takes the heat out of controversial $100m bonus for trader Andrew Hall
Schloss Dernberg a 1,000 year old castle near hamburg owned by oil trader Andrew Hall. Photograph: Public Domain
A British-born star trader at Citigroup who caused a political furore by earning a bonus of almost $100m (£63m) is to leave the struggling bank as part of a sale of its oil and gas trading division, Phibro, to a Los Angeles-based energy firm, Occidental Petroleum.
Phibro is headed by Andrew Hall, an Oxford-educated modern art enthusiast whose stratospheric earnings have become a public relations fiasco for Citigroup. Hall made $98m in 2008 and is tipped to be due a nine-figure bonus this year following astute bets on the direction of commodity prices.
The division, based in a converted dairy farm in suburban Connecticut, has been highly profitable for Citigroup, generating average annual profits of $371m over the last five years to provide a useful contribution to the bank's battered finances. Occidental said its net investment in the acquisition was likely to be about $250m.
Citigroup described the sale as "the outcome of an evaluation of a variety of alternatives" and said it was "consistent with Citi's core strategy of a client-centered business model".
There have been rumours on Wall Street for months that Hall was seeking a 'quiet divorce' from Citigroup, alarmed by a deluge of criticism over his remuneration. Hall is understood to have examined the possibility of leading a buyout of Phibro and Citigroup reportedly sounded out the billionaire Warren Buffett as a possible buyer.
Experts on Wall Street say that Citigroup's sale of Phibro is largely to shake off the pay row, rather than for any commercial reason. Tom Bentz, a commodities analyst at BNP Paribas in New York, said: "I think most people expected it to happen at some point. Andy Hall is due a huge payout and with Citigroup under government scrutiny right now, it was going to be difficult to go forward with Phibro. I'm sure Phibro wanted out."
The US Treasury owns 34% of Citigroup, having pumped billions of dollars of taxpayers' funds into the bank to keep it afloat, and a so-called 'compensation czar' appointed by the White House, Kenneth Feinberg, has been reviewing the bank's pay arrangements. President Obama has repeatedly condemned runaway Wall Street bonuses, describing them as "the height of irresponsibility" and a White House spokesman has described Hall's pay as "out of whack".
Even Citigroup's chief executive, Vikram Pandit, has expressed unease about Hall's earnings. Pandit was asked at a speaker meeting in New York last month whether he believed $100m was an excessive amount to pay a single individual. He simply replied: "Yes".
Hall's defenders say that his division has been consistently successful and that, under a contract written well before the financial crisis, he is entitled to a slice of its profits.
Although born in the UK, Hall is a naturalised US citizen. A chemistry graduate, he worked for BP before joining Phibro, which was then owned by Salomon Brothers, in 1982. Hall lives in Connecticut but he also owns a 1,000-year-old castle near Hamburg called Schloss Dernberg. A keen collector of modern art, Hall has works by the likes of Andy Warhol, Bruce Nauman and Julian Schnabel.
Wall Street ends week on high
The Nasdaq Composite was up 15.35 points or 0.72% at 2,139.28.
U.S. stocks closed the week higher Friday with strong gainn across the board.
It was the best weekly performce for the American markets in three weeks, and the first week in three to finish the week in positive territory.
The Dow Jones Industrials index gained 78.07 points or 0.80% to 9,864.94, its highest level of the year.
The Nasdaq Composite was up 15.35 points or 0.72% at 2,139.28.
The Standard and Poor's 500 added 6.01 points or 0.56% to 1,071.49.
At its closing level the Dow was up 4% over the week, with the Nasdaq and Standard and Poor's 500 each adding 4.50%.
Gold at fresh record, equities buoyant
LONDON -- Gold hit a fresh record high on Thursday as the dollar struggled, while emerging market stocks climbed to their highest level this year.
European shares opened more than 1% higher ahead of interest rate decisions from the Bank of England and European Central Bank.
Neither was expected to change rates.
Market sentiment was also given a boost after aluminum giant Alcoa posted a surprise profit on Wednesday after three consecutive quarterly losses.
The company is the first major report in the U.S. third-quarter earnings season.
Spot gold topped US$1,058 per ounce to mark a record high for the third session in a row. It has primarily been driven higher by the weakening dollar, which makes the dollar-denominated metal more attractive to investors.
In some currencies -- the high-flying Australian dollar, for example -- gold has actually fallen in price this year.
"Investors are turning toward gold as a hedge in dollar weakness," said Adrian Koh, an analyst at Phillip Futures in Singapore.
The dollar was down 0.7% against a basket of major currencies, close to its year lows.
The currency has been hit by a combination of expectations that U.S. interest rates will stay low for some time and a belief that the global economy is on the mend, easing the motivation behind last year's flight to dollar safety.
The euro was up 0.6% at US$1.4773 and the dollar lost a third of a% to 88.32 yen.
The Australian dollar gained 1.4%, still benefiting from this week's rate hike. It has now gained nearly 28% against the U.S. dollar this year.
STOCKS BUOYANT
World stocks were putting in another positive performance, with MSCI's all-country world index up 0.8% on the day. Its emerging market counterpart was up the same amount at a new high for the year.
The two indexes have gained around 27% and 65%, respectively, this year.
The pan-European FTSEurofirst 300 was up 1.1%, boosted in part by commodity related stocks and bullish sentiment over the Alcoa earnings.
"Alcoa had better than anticipated results, which is good. It is now all about anticipating quarter-three earnings. There is a general sense that quarter-three earnings are going to be more positive than expectations," said Bernard McAlinden, market strategist at NCB Stockbrokers.
Read more: http://www.financialpost.com/news-sectors/story.html?id=2081227#ixzz0TWFBVJNS
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U.S. Markets Wrap: Stocks, Dollar, Oil Rise as Treasuries Fall
By Rita Nazareth and Mark Shenk
Oct. 9 (Bloomberg) -- U.S. stocks rose, sending the Dow Jones Industrial Average to a one-year high, as analyst recommendations spurred gains in technology and health-care shares. The dollar and oil rose, while gold and Treasuries fell.
International Business Machines Corp. led gains in the Dow after Barclays Plc upgraded computer hardware companies, saying server and storage demand is picking up. Google Inc. climbed as Credit Suisse Group AG lifted its price estimate and said the search business will benefit from a rebound in advertising. WellPoint Inc. and Humana Inc. rallied at least 3.6 percent after analysts said shares of health insurers are cheap.
“We’re going even higher,” said Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, which manages $214 billion. “We’ve got a replacement cycle for technology. Earnings comparisons with last year will be damn good. There are new funds coming into the market. We’ll trade above 1,200 on the S&P 500 by year-end.”
The Standard & Poor’s 500 Index added 0.6 percent to 1,071.49 at 4:06 p.m. in New York. The Dow climbed 78.07 points, or 0.8 percent, to 9,864.94, its highest close since Oct. 6, 2008. The Nasdaq Composite Index increased 0.7 percent to 2,139.28.
The S&P 500 rallied 4.5 percent this week, its steepest advance since July, as U.S. service industries grew after 11 months of contraction, jobless claims fell more than forecast and Alcoa Inc. kicked off the third-quarter earnings season with an unexpected profit.
Dollar Climbs
The dollar gained the most against the yen since August on speculation the Bank of Japan will trail other central banks in increasing interest rates as the recession comes to an end.
The six-currency Dollar Index recovered from a 14-month low after Federal Reserve Chairman Ben S. Bernanke said yesterday policy makers are ready to raise borrowing costs once the economy improves. Canada’s dollar was the biggest gainer versus the U.S. currency among major counterparts as employers added more jobs in September than economists forecast.
The U.S. currency climbed as much as 1.7 percent to 89.89 yen, the biggest advance since Aug. 7, before trading at 89.82 at 4:04 p.m. in New York, compared with 88.39 yesterday. The dollar strengthened 0.6 percent to $1.4712 per euro, from $1.4794, paring a decline for the week to 0.9 percent. The euro increased 1.1 percent to 132.14 yen, from 130.76.
Treasuries Decline
Treasuries fell, with two-year notes recording their first weekly loss since September, as Federal Reserve Chairman Ben S. Bernanke said the bank is ready to tighten monetary policy once the economic outlook improves.
Thirty-year bonds declined the most in four months after yesterday’s $12 billion auction of 30-year bonds, the last of four offerings this week totaling $78 billion, drew weaker-than- average demand. The yield on the 30-year bond closed below 4 percent last week for the first time since April as reports showed manufacturing declined and inflation remains subdued.
The yield on the two-year note rose eight basis points, or 0.08 percentage point, to 0.97 percent at 4:19 p.m. in New York, according BGCantor Market Data. The 1 percent security maturing in September 2011 fell 5/32, or $1.56 per $1,000 face amount, to 100 2/32. Yields have climbed 10 basis points since Oct. 2, the first weekly increase since Sept. 18.
Yields on 30-year bonds rose 14 basis points to 4.22 percent. The yield increased as much as 16 basis points, the most since it gained 18 basis points on June 10. For the week the yield has increased 23 basis points, the most since it rose 31 basis points the week ended Aug. 7.
Oil Rally
Crude oil climbed to the highest close in three weeks after the International Energy Agency increased its global consumption forecast for a third month.
Oil demand is likely to average 86.1 million barrels a day next year, 350,000 barrels a day more than the IEA estimated in September, a monthly report showed. Prices fell earlier as the dollar rose after Federal Reserve Chairman Ben S. Bernanke said monetary policy will be tightened once the economy improves.
Crude oil for November delivery gained 8 cents to $71.77 a barrel at 2:45 p.m. on the New York Mercantile Exchange, the highest settlement since Sept. 18. Prices climbed 2.6 percent this week. Futures rose as much as 55 cents and dropped as $1.07 during today’s session.
Natural gas futures fell almost 4 percent, the biggest drop in a week, on speculation supplies will be adequate to meet winter heating demand in the U.S.
U.S. gas stockpiles rose 69 billion cubic feet to 3.658 trillion cubic feet in the week ended Oct. 2, the highest total on record, the Energy Department said yesterday.
Natural gas for November delivery fell 19.3 cents, or 3.9 percent, to settle at $4.77 per million British thermal units at 2:46 p.m. on the New York Mercantile Exchange, the biggest drop since Oct. 1. Gas is down 15 percent this year, lagging behind heating oil, a competing fuel, which is up 32 percent.
Gold Decline
Gold prices dropped, paring the biggest weekly advance since April, as a stronger dollar cut demand and some investors sold the metal to lock in gains from its climb to a record. Gold futures, up 4.4 percent this week, capped the biggest such gain since April 24, while the dollar is down 0.7 percent.
Gold futures for December delivery slipped $7.70, or 0.7 percent, to $1,048.60 an ounce on the New York Mercantile Exchange’s Comex division. Yesterday, the metal climbed to an all-time high of $1,062.70, setting a record for a third straight day.
Orange Juice
Orange-juice prices soared the most in three years after the Department of Agriculture said Florida’s crop will decline 16 percent, more than analysts forecast.
Output will be 136 million boxes of oranges in the harvest that is just starting, down from a revised 162.4 million in the previous season, the USDA said today in its first estimate for the crop. Six analysts in a Bloomberg News survey projected an average 151.2 million. A cold spell and drought earlier this year reduced the amount of fruit on trees, the government said.
Orange juice for November delivery surged by the exchange limit of 10 cents, or 10 percent, to $1.0865 a pound on ICE U.S. Futures in New York, the highest level for a most-active contract since Aug. 14. The percentage gain was the biggest since Oct. 12, 2006. The commodity jumped 17 percent this week and is up 60 percent in 2009.
Citigroup dumps Phibro, avoids showdown with US
NEW YORK—Citigroup Inc. is removing one of the irritants in its relationship with the government, its Phibro commodities trading division that is paying one trader an estimated $100 million this year.
The deal announced Friday carries a tradeoff for Citigroup: While the $250 million sale to Occidental Petroleum Corp. means a bit less government scrutiny, it also means the bank is losing hundreds of millions of dollars in annual income that could help repay $49 billion in bailout money.
Phibro, which makes most of its money through oil and natural gas trades, earned an average $371 million annually during the past five years. Citigroup sold it for about $250 million, which means Occidental could recoup its investment in less than a year.
A Citigroup official with knowledge of the deal said the bank wanted to dispose of Phibro by the end of the year.
The official, who spoke on condition of anonymity because she wasn't authorized to discuss the deal publicly, said Citigroup considered Phibro a "political hot potato" that would hurt the company despite its financial success.
Occidental Petroleum spokesman Richard S. Kline said Citigroup approached Occidental about a month ago, seeking a buyer for Phibro.
"There obviously was some pressure from the government to do this," Kline said. Noting that Citigroup sold Phibro for a relatively small amount, he said, "if they had liquidated the business, they would get about what we're paying."
The income lost to the Phibro sale will have little effect on Citigroup's earnings because the company has bigger problems with losses from failed loans, said Gerard Cassidy, a banking analyst with RBC Capital Markets.
"They're going to miss those earnings," Cassidy said. "But the credit losses are much larger and will have a much bigger impact."
Officials at the Treasury Department declined to comment directly when asked whether the government had pressured Citigroup to dump Phibro, its huge pay packages and the volatility that goes along with trades in the energy market.
The government now has a 34 percent stake in Citigroup, putting the bank under close watch by federal officials. The company came under further scrutiny this year after it agreed to pay Phibro trader Andrew J. Hall an estimated $100 million.
Hall's pay will now be Occidental's responsibility. It's not known whether the Obama administration's pay czar, Kenneth Feinberg, will continue to review Hall's pay package following the sale to Occidental.
Treasury spokeswoman Meg Reilly said in a statement, "We are not going to provide a running commentary on that process, but it's clear that Mr. Feinberg has broad authority to make sure that compensation at those firms strikes an appropriate balance."
While the government has questioned banks' pay practices since the financial crisis that erupted a year ago, it has also taken issue with the companies' trading units. Many banks drove their profits higher by dealing in risky securities and commodities, and they turned to the government for help when they piled up billions of dollars in losses.
Oct 9, 2009
Success of Treasury's Foreclosure Prevention Program Questioned
A day after the Obama administration announced it had met the goal of modifying 500,000 mortgage loans three weeks before its self-imposed goal of Nov. 1, a congressional watchdog has raised numerous questions about the program's ultimate success.
The Congressional Oversight Panel found "there is reason to doubt" whether the $50 billion Treasury Department program aimed at modifying mortgages for three to four million homeowners in the next three years "will be possible due to problems with the program's scope, scale and permanence."
"The program is limited to certain mortgage configurations," the panel noted, saying that many adjustable-rate mortgages and interest-only loan resets will be excluded from eligibility. "The foreclosure crisis has moved beyond subprime mortgages and into the prime mortgage market. It increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now."
Citigroup Dumps Phibro, Avoids Showdown With US
Citigroup Inc. is removing one of the irritants in its relationship with the government, its Phibro commodities trading division that is paying one trader an estimated $100 million this year.
The deal announced Friday carries a tradeoff for Citigroup: While the $250 million sale to Occidental Petroleum Corp. means a bit less government scrutiny, it also means the bank is losing hundreds of millions of dollars in annual income that could help repay $49 billion in bailout money.
Phibro, which makes most of its money through oil and natural gas trades, earned an average $371 million annually during the past five years. Citigroup sold it for about $250 million, which means Occidental could recoup its investment in less than a year.
A Citigroup official with knowledge of the deal said the bank wanted to dispose of Phibro by the end of the year.
Wall St. rises on profit optimism
Stock markets in the United States rose yesterday amid signs the global economy was recovering and optimism that corporate earnings reports will beat expectations.
Expectations of a rebound in revenue and earnings for the recently ended third quarter fed the optimism. Quarterly earnings are due to kick off late today, with results from aluminum company Alcoa Inc.
The Dow Jones industrial average was up 131.50 points, or 1.4%, at 9731.25. The S&P 500 was up 14.26 points, or 1.4%, at 1054.72. The Nasdaq was up 35.42 points, or 1.7%, at 2103.57.
It was the market's second day of gains, after marking its second week of losses on Friday. The S&P 500 is now up about 56% since hitting 12-year lows in early March.
Duo of IBM, Intel Propels Dow's Run
he rise capped a 4% advance for the week as earnings from Alcoa fueled optimism that the third-quarter earnings season will be better than many had been expecting.
The new high came on the two-year anniversary of the Dow's October 2007 peak. The Dow closed Friday up 78.07 points, or 0.8%, at 9864.94 -- its highest in a year.
IBM was at the forefront, rising $3.64, or 3%, to $125.93 after bullish comments from a Barclays analyst. Intel (Nasdaq) climbed 29 cents, or 1.5%, to 20.17, and Advanced Micro Devices rose 37 cents, or 6.7%, to 5.88.
All three companies will be posting earnings reports in the coming week as third-quarter earnings season kicks into high gear. Investors have been betting technology companies will produce among the best earnings this quarter as they are benefiting from overseas demand.
In the period's first heavily watched report, Alcoa surprised Wall Street with a third-quarter profit. For the week, Alcoa rose 11%, though it pared some of that rise with a fall of 11 cents, or 0.8%, to 14.24, on Friday.
Investors have moved from a flight to safety to a flight to risk," said Rick Lake, portfolio manager of the Aston/Lake Partners Lasso Alternatives Fund. With money-market funds yielding close to zero, investors are moving into investments that are seen as slightly more risky -- like stocks and corporate bonds. Others are worried about missing out on the rally and are putting more money in stocks.
The Standard & Poor's 500 stock index tacked on 6.01 points, or 0.56%, to 1071.49, closing out the week up 46.28, or 4.51%, less than a point below its 2009 closing high. Despite the broad recent rally, the S&P remains 32% off its record set exactly two years ago. In the past two years, its weakest components were American International Group and MBIA.
On the other end, the more things change the more they stay the same. Its five best components since marking a record high in 2007 -- Southwestern Energy, Tenet Healthcare, Western Digital, DeVry and QLogic -- all finished Friday in the green.
Helped by the strong technology sector, the Nasdaq Composite Index rose 15.35, or 0.72%, on Friday to 2139.28, giving it a gain of 81.99, or 3.99%, for the week.
Newmont Mining fell 51 cents, or 1.1%, to 46.50 on Friday, but still ended up 10% on the week. The mining giant has risen on estimate raises from firms including Credit Suisse Group as metals prices have soared.
Cree (Nasdaq) climbed 1.99, or 5.4%, to 39.09. J.P. Morgan started coverage of the stock at overweight.
What Does a Nobel Do for U.S. Leaders?
The Nobel committee said it awarded the Peace Prize to President Obama for his “extraordinary efforts to strengthen international diplomacy and cooperation.” The surprising news drew mixed reactions around the world, with many applauding the choice and others saying the award seemed premature and based on intentions, not accomplishments.
What does the award mean for Mr. Obama? Will it help or hurt him in domestic politics and in international relations? What impact did the Peace Prize have on the standing of other American leaders who received it, starting with Theodore Roosevelt?
Taking the shape of Vietnam
Recent history is haunting America as it tries to find success in Afghanistan, writes Anne Davies.
Eight US soldiers dead and 30 Afghan police captured. The Taliban raid on an isolated US outpost in Nuristan a week ago seemed to represent all that is wrong with America's conduct of war in Afghanistan. It could not have come at a worse time for President Barack Obama.
Here was an under-resourced US army effort, a wily and brazen Taliban and a local population willing to conceal 300 insurgents until they were ready to charge. The planned closure of the base was delayed because the US army could not provide the transport needed to shift it.
All this week The Washington Post unpicked in detail a similar catastrophe that was excruciating to the government. The newspaper put a face to the human toll by exploring the life and death of Lieutenant Jonathan Brostrom, 24, in a similar Taliban raid in Wanat last year.
Brostrom's father, himself a military man, moved from sorrow to anger as he learnt his son might have died for nothing; a soldier in a poorly fortified outpost whose strategic purpose was unclear. Eight years into the Afghan war Obama faces a decision that could mark his presidency in the same way Vietnam defined Lyndon Johnson's.
Obama held long sessions in the past two weeks with civilian and military advisers to recalibrate tactics in a war he himself identified as "a war of necessity" in defence of US security. In late March he announced a new direction. "We have a clear and focused goal: to disrupt, dismantle, and defeat al-Qaeda in Pakistan and Afghanistan, and to prevent their return to either country in the future."
Obama said he would treat Afghanistan and Pakistan as a single theatre of war, a recognition that the al-Qaeda leadership had crossed into Pakistan's tribal areas and was fomenting the Taliban's rise in an unstable Pakistan. The emphasis would be on counter-insurgency, so Obama installed as commander General Stanley McChrystal, a specialist in the field.
The results have been disappointing. Taliban attacks have become ever more audacious. The coalition death toll this year has reached 400, compared with 131 in 2005. Air strikes using unmanned drones killed many civilians and outraged local populations.
In Iraq, Sunni tribesmen were bribed with money, aid and power to evict al-Qaeda from their midst. Political reconciliation has been slow, but Iraq has a functioning central government, with a degree of legitimacy.
It was hoped the Afghanistan Taliban, not a homogenous group, could be similarly induced to break with al-Qaeda. But no-one seems to have thought through how counter insurgency would fit in a country that has never known effective central government and which has an economy about the size of Hobart's.
When Obama told his military audience in August that Afghanistan was a ''war of necessity'', he told them the war would not be won with military power alone, but would require "diplomacy and development and good governance''.
Obama faces two new factors demanding a rethink of strategy and resources. The first is McChrystal's assessment that the US will probably fail unless there are more troops - 40,000 is talked about - and more effort at promoting good government. The second point involves claims of widespread fraud in the Afghan election in August. Jonathan Stevenson, a professor of strategic studies at the US Naval War College, says: "Counter-insurgency generally works only when the domestic government resisting the insurgents enjoys the respect and support of most of the domestic population."
George Will, a conservative columnist, warned of the difficulty of creating a stable state. Quoting a military historian, Max Hastings, he warned a month ago that ''our'' Afghans may prove no more legitimate than ''our'' Vietnamese.
Peter Galbraith, the UN envoy and election watcher, was sacked last week because he blew the whistle on rorting. The independent election commission is yet to rule on the allegations, but if the election stands, or even if a second round of voting is permitted, the legitimacy of the Government of Hamid Karzai is in tatters. Disillusionment with Karzai is perhaps one reason why the US Vice-President, Joe Biden, is loudly advocating a narrow counter-terrorism mission rather than McChrystal's broad counter-insurgency.
Biden, once a leading proponent of an expanded war effort in Afghanistan, now argues it may not be possible to defeat the Taliban and stabilise Afghanistan at a reasonable cost and leave a credible local government. For months he has argued that the US should narrow its military action to drone strikes and special forces strikes against al-Qaeda leaders.
Stevenson agrees with him. The Naval War College professor says the US has two strategic imperatives in the region. ''One is to contain and ultimately debilitate al-Qaeda; the other is to limit radicalisation in Pakistan … and [ensure] the country's nuclear arsenal stays out of jihadist hands.'' A broad counter-insurgency effort, Stevenson says, could undermine Pakistan. Obama spent Wednesday on this very issue.
Pakistan has had allegiances with the Taliban, even though it now appears to be co-operating with US efforts to drive the Taliban from its tribal border areas. Stevenson says Pakistan could again decide to support the Taliban as a counterweight to its perceived greater threat, India. And increased US presence in the region inflames Islamic tensions.
"A larger American footprint might have collateral damage by fuelling anti-American sentiment.''
If Pakistan is more important strategically, does it make sense that it gets about 3 per cent of the aid poured into Afghanistan?
The Secretary of State, Hillary Clinton, and the US special envoy to Afghanistan and Pakistan, Richard Holbrooke, support McChrystal's push for a robust counter-insurgency strategy as the best means of ensuring Afghanistan does not again become a safe haven for al-Qaeda.
But with US polls showing 57 per cent of Americans now oppose the war, there is strong domestic pressure to quickly and ably train an Afghan army and police force. The current plan funds a security force of 82,000. The vice-president of the International Crisis Group, Mark Schneider, says local security forces number about 56,000. Numbers must double to have any chance of a peaceful Afghanistan, he says.
So what is the Taliban objective?
A Carnegie Endowment for Peace visiting scholar, Gilles Dorronsoro, says the separation of the insurgency from population needs rethinking. The Taliban, after all, are Afghan natives and, unlike the insurgent fighters in Iraq, show some respect for locals, who then protect them.
Dorronsoro argues the Taliban cannot be defeated and that the US needs an Afghan partner that can fight for itself. "The Taliban do not threaten transnational attacks against Western countries and al-Qaeda is based in Pakistan," Dorronsoro says.
Others argue against any accommodation of the Taliban. The good news for the Obama Administration is that the Taliban do not yet control Afghanistan, although they are ascendant in areas. Schneider says the US holds about 60 per cent of the country. But he warns Coalition troops "are on a cusp" and that the next phase of war will determine whether Afghanistan can be secured.
U.S. Economy: Trade Gap Unexpectedly Shrank in August
Oct. 9 (Bloomberg) -- The U.S. trade deficit unexpectedly narrowed in August as exports climbed to the highest level of the year and oil imports plunged.
The gap fell 3.6 percent to $30.7 billion from a revised $31.9 billion in July, the Commerce Department said today in Washington. The 0.2 percent increase in demand for American- made goods abroad would have been larger excluding a drop in aircraft shipments, which tend to be volatile.
More than $2 trillion in government stimulus programs are reviving demand from Asia to Europe, ensuring American factories benefit from growing sales overseas as the dollar weakens. Gains in production and the need to replenish depleted inventories mean imports will probably also grow in coming months, preventing the deficit from narrowing further.
“Exports continue to hold up pretty well, as a recovery is occurring in many parts of the world, especially in Asia,” said Jay Bryson, global economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “The weakness of the dollar will improve the competitiveness of our products,” he said, and “imports will reflect the stabilization in the U.S.”
The trade gap was projected to widen to $33 billion from an initially reported $32 billion in July, according to the median forecast in a Bloomberg News survey of 76 economists. Deficit projections ranged from $29 billion to $35.3 billion.
Bernanke Comments
The dollar held earlier gains following the report, propelled by comments from Federal Reserve Chairman Ben S. Bernanke yesterday that the central bank is ready to raise interest rates once the economy improves.
The dollar rose the most against the Japanese yen in two months, bringing it to 89.64 yen at 12:01 p.m. in New York. Stocks rose, with the Standard & Poor’s 500 Index up 0.2 percent at 1,067.55 in New York. The dollar yesterday fell toward its lowest level since August 2008 against the currencies of six major U.S. trading partners.
A weaker dollar is likely to stimulate foreign demand in coming months as U.S.-made goods become cheaper for overseas buyers. Manufacturing expanded over the last two months, the first back-to-back gain since before the recession began in December 2007, according to the Institute for Supply Management. The Tempe, Arizona-based group’s export gauge in August reached the highest level in a year.
Exports increased to $128.2 billion, led by a $496 million gain in sales of cars and parts, today’s report showed. Exports to Canada reached the highest level since November, in part reflecting the cross-border trade in autos.
GDP Calculation
Imports fell 0.6 percent to $158.9 billion in August after jumping the prior month by the most in 16 years. Purchases of crude oil from overseas dropped as the U.S. imported 8.66 million barrels a day on average, down from 9.56 million in July. The average price per barrel rose to $64.75 from $62.48.
After eliminating the influence of prices, which are the numbers used to calculate gross domestic product, the trade deficit narrowed to $37.7 billion from $38.8 billion. Excluding petroleum, the trade deficit widened to $14.2 billion from $14 billion the prior month.
The trade gap with China was little changed in August as both exports and imports climbed. Group of Seven officials, in a statement this month, welcomed China’s “continued commitment” to a more flexible currency, which they said would promote balanced international expansion.
‘Good Sign’
“It’s very much in China’s interests, as its economy grows, to be less dependent on exports as the principal engine of economic growth,” White House economic adviser Lawrence Summers said in an interview yesterday.
Treasury Secretary Timothy Geithner, in a press conference during the Group of 20 summit in Pittsburgh last month, praised steps China already has taken to strengthen its economy.
“If you look at the composition of growth so far, their current-account surplus, their trade surplus is coming down, and domestic demand is getting stronger, and that’s a good sign of the shift,” Geithner said.
The U.S. economy likely saw a return to growth in the third quarter after contracting in the prior six months, according to economists surveyed by Bloomberg, as the Obama administration’s $787 billion stimulus package started to have some effect.
The euro area is stabilizing after governments injected billions in the 16-nation region’s economy through tax cuts and spending incentives. China is spending 4 trillion yuan ($590 billion) to stimulate the world’s third-largest economy.
Companies seeing a turnaround include Alcoa Inc., the largest U.S. aluminum producer. New York-based Alcoa reported an unexpected third-quarter profit, helped by improving metal prices, job cuts and lower raw-material costs. Chief Executive Officer Klaus Kleinfeld said the second half of the year is better in many industries and regions.
“We do clearly see growth, substantial growth, I might add, in China,” Kleinfeld said on an Oct. 7 conference call, adding that there also is “stabilization in North America.”
US trade gap narrowed in August
Official figures show that the US trade deficit narrowed surprisingly in August due to higher exports and lower imports.
The Commerce Department reported that the trade gap fell to $30.7 billion from a revised $31.9 billion in July. Most analysts had expected a $33 billion deficit.
In percentage terms, the dip was the largest recorded since May. August exports rose slightly to $128.2 billion while imports fell to $158.9 billion.
The trade deficit with Canada, the largest US trading partner, narrowed by 27.9% to $1.5 billion in August from July while the deficit with Mexico, the second largest export destination and third largest import destination, widened by 34.6% to $4 billion.
The politically sensitive trade deficit with China narrowed by less than 1% to $20.2 billion. The US dollar has weakened against the currencies of most of its major trading partners, making its exports more competitive.
Why Is the Price of Gold So High?
Question: Why is the price of gold at a record high? And how does that affect the dollar?
Paul Solman: Gold is denominated in dollars. So if gold goes up, it means the dollar has gone down, because it takes more dollars to buy the same amount of gold. Now why would ANYONE invest in gold, you might well ask? It doesn't pay interest. It's a pain to store and hold. I love this exchange, cut down some for clarity and space, with Oakland, CA gold dealer Charlie Mammoser, whom I interviewed a year ago:
Charlie Mammoser: I've had people come in, and they say, "I want to buy 10, 20, 40 ounces of gold." And they go get the money out of the bank, and they come, and we do the deal. And they take it away, and I tell 'em, don't tell anybody where you put it except one loved one. And don't think you can hide it in the freezer, because crooks know to look there. "Oh, no, I'm gonna go put it in my safe deposit box." [Mammoser laughed.]
If the bank goes belly-up, how do you get into your safe deposit box to get your gold that you bought to protect yourself from all this stuff?
So then I asked Mammoser: Where DO folks put their gold?
Mammoser: Well, a lot of people have safes in their own home, you know, buried into the ground, up in their attic. Or just hiding places in the house that are very unusual.
Solman: What's the most unusual one?
Mammoser: I had a customer, he had some thousand-ounce silver bars and what he did is, he spray-painted 'em black, and he would use 'em as doorstops in his house. You'd walk right by it.
Okay. If gold (and silver) are such a pain to store, I ask again: Why buy them? Here was Mammoser's answer:
Mammoser: It's a safety hedge, against unusual political turmoil, rioting in the streets. A Jewish lady I know is a goldbug; somebody who holds gold. Her family, before World War II, had about a hundred relatives that they considered close. After World War II, there were five of them. And those five all survived because they had gold to bribe the guards to get across the border to Switzerland.
Solman: I actually know somebody who did the same thing.
Mammoser: It's also a pure inflation hedge.
Ah, an INFLATION hedge. You think the dollar is going to lose value. Gold is denominated in dollars. So buy gold today, hold it, and sell it next year, when, if the dollar has lost value (inflation), gold's price will be a lot higher.
And why might there BE inflation? Because of all the dollars the Federal Reserve has been creating and pushing into the banking system, dollars currently back on deposit at the Fed. But for how long? See our recent piece on this subject. Not to mention all the dollars the Fed might continue to create in the near future.
As to how the buying of gold affects the dollar, well, if you're selling dollars to buy gold, there are more dollars on the market than there would otherwise be, right, all else equal? The greater the supply of something, all else equal, the lower the price. So buying gold with dollars to hedge against a drop in the dollar's value would tend to drive the value of the dollar down even further.
GM Agrees to Sell Hummer Brand to China’s Tengzhong
ct. 9 (Bloomberg) -- General Motors Co. agreed to sell its Hummer sport-utility vehicle brand to China’s Sichuan Tengzhong Heavy Industrial Machinery Co. and another investor, nine days after an accord to unload the Saturn unit collapsed.
Tengzhong intends to buy Hummer through an investment group in which it will hold 80 percent, and Suolang Duoji will hold the rest, the companies said in a statement on GM’s Web site. Duoji’s holdings include Hong Kong-based Lumena Resources Corp.
Disposing of Hummer is a victory for GM in its post- bankruptcy restructuring after the sale of the Saturn unit to Penske Automotive Group Inc. fell through last week. GM is shutting Saturn and Pontiac and is close to a deal with Sweden’s Koenigsegg Group to acquire the Saab brand. Hummer is being sold for $150 million, people familiar with the deal said yesterday.
“It’s important for GM to get some cash, without a doubt,” said Joseph Phillippi, president of AutoTrends Consulting Inc. in Short Hills, New Jersey. “Any appreciable amount they can get means more reserves, means keeping your powder dry until this economy improves.”
For Tengzhong, the deal propels the industrial manufacturer into the global auto market. It aims to expand Hummer’s reach beyond the core U.S. market, Tengzhong Chief Executive Officer Yang Yi said in an interview.
“We are really looking to expand our global reach to tackle some of the high-growth markets, particularly the China market, in which we expect to enjoy explosive growth,” Yang said through a translator.
Planning Next Week
Hummer will remain based in southeastern Michigan. It will begin operations with about 100 to 150 people, Taylor said. The next step would be to hire about 200 engineers, he said. The company plans to continue contracting with GM for vehicle production from Mishawaka, Indiana, and Shreveport, Louisiana, for two to three years, CEO Jim Taylor said in an interview.
Hummer aims to resume exports to Europe, the Middle East and Russia, Taylor said. It will probably take five or six months to adapt vehicles to Chinese regulations before Hummer can export significantly to that market, Taylor said.
Tengzhong and Hummer executives will meet in China next week to discuss the brand’s product, manufacturing and expansion plans, Taylor said.
Rising gasoline prices helped erase U.S. demand for the full-size SUVs made by Hummer, whose value GM had projected at $500 million in court documents this year. GM left Chapter 11 on July 10 and is keeping its Chevrolet, Cadillac, Buick and GMC brands in the U.S.
Protecting Jobs
Closely held Tengzhong and GM had said the accord would protect more than 3,000 U.S. corporate, manufacturing and dealership jobs. The sale agreement caps talks that Chengdu, China-based Tengzhong had disclosed in June.
Hummer’s dealer accords and senior management team will be taken over by Tengzhong, a maker of special-use vehicles, structural parts for highways and bridges, and construction machinery.
Credit Suisse is the financial adviser and Shearman & Sterling LLP is international legal counsel to Tengzhong. Citigroup Inc. is advising Detroit-based GM.
GM bought the license for the Hummer brand from AM General in 1999 and started selling the $140,000 H1, a 7,600-pound (3,400-kilogram) SUV patterned after the all-terrain military vehicle popularized for road use by actor Arnold Schwarzenegger, who is now California’s governor.
H1 production ended in 2006, when Hummer’s U.S. deliveries peaked at 71,524, according to Autodata Corp. U.S. sales of the SUVs fell 51 percent in 2008, when retail gasoline reached a record $4.11 a gallon, and 63 percent this year through September. The cheapest model, the H3, starts at about $31,000.
GM signs deal to sell Hummer to Chinese company
General Motors Co. has inked a deal to sell its premium off-road brand Hummer to a Chinese industrial company.
GM said on Friday that it has a definitive agreement with Sichuan Tengzhong Heavy Industrial Machinery Co. for 80 percent of Hummer. A private investor would buy the remaining stake.
Under the terms of the deal, GM would continue to build the H3 and the H3T until June 2011 on a contract basis. AM General would assemble the H2 for the Chinese owners for that time period as well. The deals have an option to be extended until June 2012.
Financial terms were not disclosed, but GM would reportedly get $150 million. It's still subject to closing conditions and regulatory approvals.
James Taylor, the CEO of Hummer, will stay on and lead the company under its new ownership. He previously was the Cadillac general manager and oversaw that brand's revival.
“Hummer is a strong global niche brand, and this agreement signifies another important milestone in writing the next chapter for both GM and Hummer,” GM CEO Fritz Henderson said in a statement. “For Hummer, the combination of its knowledgeable leadership team, vehicle-design expertise and the capital financing of Tengzhong portend a successful future.”
The deal could secure about 3,000 jobs in the United States, and Tengzhong would get access to the Hummer dealer network.
Hummer said it plans to add FlexFuel capability to the 2010 H3 and H3T and will sell a diesel H3 outside of North America. The brand also is looking at more options for fuel efficiency, including alternative powertrains and six-speed transmissions.
The agreement is another milestone for GM as it restructures in the wake of its historic bankruptcy. The automaker is shuttering Pontiac and Saturn and trying to sell Opel and Saab. That leaves GM with four core U.S. brands: Chevrolet, Cadillac, Buick and GMC.
Tengzhong will get an 80 percent stake in the company, while Hong Kong investor Suolang Duoji, who indirectly owns a big stake in Tengzhong through an investment company, will get 20 percent. The investors will also get Hummer's nationwide dealer network.
Financial terms were not disclosed, although a person briefed on the deal said the sale price was around $150 million. The person did not want to be identified because the terms were being kept private. GM's bankruptcy filing last summer said that the brand with military roots could bring in $500 million or more.
Suolang Duoji also is the controlling shareholder and chairman of Lumena Resources Corp., a Hong Kong listed mining company.
GM and Tengzhong said in a statement that the transaction still must be approved by the U.S. and Chinese governments. Chinese regulators initially expressed reservations about Tengzhong's ability to run such an enterprise.
Hummer's current management team will stay with the new company, which will be headquartered either in Detroit or suburban Auburn Hills, Mich.
James Taylor, the GM executive who has run Hummer recently, will remain as its chief executive officer.
Taylor said in an interview with The Associated Press that he knows resurrecting the brand will be difficult, but the key will be quickly rolling out more fuel efficient models that get over 20 mpg.
"I'm not in any kind of denial that we have a very steep uphill challenge in front of us," Taylor said.
Hummer, he said, has been in a state "suspended animation" since June 2008 when GM announced it would be reviewed for sale or closure. Since then, its future has been uncertain and it got no marketing support or new products. Financing for leases, a big part of its luxury market, also dried up, Taylor said.
Still, GM sold 1,000 Hummers in some months, proving that buyers are out there.
"There's still a loyal customer base underneath there that loves Hummer," he said.
Hummer hopes to keep buying fuel-efficient engines and transmissions from GM, but can seek them elsewhere, Taylor said.
He said the brand has been unfairly tagged as a symbol of the American gas guzzler, saying other vehicles get worse mileage.
He wants to make sure "at least we aren't a victim of misinformation that we stand alone as the ultimate bad guy in the space, which we aren't."
Hummer, whose smallest model gets 16 miles per gallon (14.7 liters per 100 kilometers) in combined city and highway driving, sold well until the middle part of this decade when fuel prices began to rise. Sales peaked at 71,524 in 2006.
But only 8,193 Hummers have been sold in the U.S. through the first nine months of the year. That's down 64 percent from a year earlier. And only 426 Hummers were sold nationwide last month, according to Autodata Corp.
GM, which spent 40 days in bankruptcy protection during the summer and has received about $50 billion in U.S. government aid, also plans to sell its Saab brand and scrap Pontiac and Saturn as it tries to streamline its operations.
The company wants to focus on four core brands: Chevrolet, Cadillac, Buick and GMC.
With backing from a well-capitalized company, Hummer will now focus on improved efficiency and performance and include alternative fuels, more efficient gas engines, six-speed transmissions and diesel engines.
GM said its assembly plant at Shreveport, La. would continue to assemble the commercial Hummer H3 and H3T pickup trucks on a contract basis until June 2011, with a one-year option until June 2012. The military H2 version will continue to be assembled by AM General in Mishawaka, Ind., under the same terms.
South Bend, Ind.-based AM General retains ownership of the military versions of the vehicles, which have been used frequently in Afghanistan and Iraq.
The Shreveport GM plant is currently slated to close by June 2012. For the time being, the plant also is assembling the Chevrolet Colorado and GMC Canyon pickup trucks.
The plant once employed about 3,000 workers, but layoff and buyouts have reduced that number to just over 700.
