Citic Securities leads losses after revealing investigation
Industrial profits drop 4.6% in October as slowdown deepens
China’s stocks tumbled the most since the depths of a $5 trillion plunge in August as some of the nation’s largest brokerages disclosed regulatory probes, industrial profits fell and two more companies said they’re struggling to repay bonds.
The Shanghai Composite Index sank 5.5 percent, with a gauge of volatility surging from the lowest level since March. Citic Securities Co. and Guosen Securities Co. plunged by the daily limit in Shanghai after saying they were under investigation for alleged rule violations. Haitong Securities Co., whose shares were suspended from trading, is also being probed. Industrial profits slid 4.6 percent last month, data showed Friday, compared with a 0.1 percent drop in September.
The probe into the finance industry comes as the government widens an anti-corruption campaign and seeks to assign blame for the selloff earlier this year. Authorities are testing the strength of a nascent bull market by lifting a freeze on initial public offerings and scrapping a rule requiring brokerages to hold net-long positions, just as the earliest indicators for November signal a deterioration in economic growth. A Chinese fertilizer maker and a pig iron producer became the latest companies to flag debt troubles after at least six defaults this year.
Brokerages Plunge
“The sharp decline will raise questions whether the authorities’ confidence that we are seeing stability in the Chinese markets may be a tad premature,” said Bernard Aw, a strategist at IG Asia Pte. in Singapore. “The rally since the August collapse was not fundamentally supported. The removal of restrictions for large brokers to sell and the IPO resumptions may not have been announced at an opportune time.”
Friday’s losses pared the Shanghai Composite’s gain since its Aug. 26 low to 17 percent. The Hang Seng China Enterprises Index slid 2.5 percent in Hong Kong. The Hang Seng Index retreated 1.9 percent.
A gauge of financial shares on the CSI 300 slumped 5 percent. Citic Securities and Guosen Securities both dropped 10 percent. Haitong International Securities Group Ltd. slid 7.5 percent for the biggest decline since Aug. 24 in Hong Kong.
The finance crackdown has intensified in recent weeks and ensnared a prominent hedge-fund manager and a CSRC vice chairman. Citic Securities President Cheng Boming is among seven of the company’s executives named by Xinhua News Agency as being under investigation. Brokerage Guotai Junan International Holdings Ltd. said Monday it had lost contact with its chairman, spurring a 12 percent slump in the firm’s shares.
An industrial explosives maker will become the first IPO to be priced since the regulator lifted a five-month freeze on new share sales imposed during the height of the rout. Ten companies will market new shares next week. The final 28 IPOs under the existing online lottery system will probably tie up 3.4 trillion yuan ($532 billion), according to the median of six analyst estimates compiled by Bloomberg.
OPEC Gusher to Hit Weakest Players, From Wildcatters to Iran
The refusal of Saudi Arabia and its OPEC allies to curb crude oil output in the face of plummeting prices has set the energy world on a painful course that will leave the weakest behind, from governments to U.S. wildcatters.
A grand experiment has begun, one in which the cartel of producing nations — sometimes called the central bank of oil — is leaving the market to decide who is strongest and how to cut as much as 2 million barrels a day of surplus supply.
Oil patch executives including billionaire Harold Hamm have vowed to drill on, asserting they can profit well below $70 a barrel, with output unlikely to fall for at least a year. Marginal producers in less profitable U.S. shale areas, as well as countries from Iran to Russia and operations from Canada to Norway will see the knife sooner, according to analyses by Wells Fargo & Co., IHS Inc. and ITG Investment Research.
“We’re in a very nerve-wracking environment right now and will be for probably the next couple of years,” Jamie Webster, senior director for global crude markets at IHS said today in a phone interview. “This is a different game. This isn’t just about additional barrels, this is about barrels that are going to keep coming and keep coming.” Investors punished oil producers, as Hamm’s Continental Resources Inc. fell 20 percent, the most in six years, amid a swift fall in crude to below $70 for the first time since 2010. Exxon Mobil Corp. fell 4.2 percent to close at $90.54 in New York. Talisman Energy Inc., based in Calgary, was down 1.8 percent at 3:00 p.m. in Toronto after dropping 14 percent yesterday.
U.S. Supplies
A production cut by the 12-member Organization of Petroleum Exporting Countries would have been the quickest way to tighten the world’s oil supplies and boost prices. In the U.S., supply is expected either to remain flat or rise by almost 1 million barrels a day next year, according to the Paris-based International Energy Agency and ITG.
That’s because only about 4 percent of shale production needs $80 or more to be profitable. Most drilling in the Bakken formation, one of the main drivers of shale oil output, returns cash at or below $42 a barrel, the IEA estimates.
Many expect reductions to U.S. output to occur slowly because of a backlog of wells that have already been drilled and aren’t yet producing, and financial cushioning from the practice of hedging, in which producers locked in higher prices to protect against market volatility, according to an Oct. 20 analysis by Citigroup Inc.
Production Slowdown
With a sustained price drop to $60 a barrel, shale drilling would face significant challenges, according to Citigroup and ITG, especially in emerging fields in Ohio and Louisiana, where producers have less practice. ITG estimates it will take six months before lower prices slow production growth from U.S. shale, which is responsible for propelling the country’s production to the highest in more than three decades.
“It’s going to be very producer-specific,” said Judith Dwarkin, chief energy economist at ITG in Calgary. “Companies have to revise their budgets, then you see the laying down of rigs, then you see the fewer wells being drilled, then you see the natural decline rates starting to have more of an effect.”
Drilling in Western Canada may drop by 15 percent in 2015, according to a report today by Patricia Mohr, an economist at Bank of Nova Scotia in Toronto.
Different Strokes
The market pressure will hit shale companies in different ways. Many have spent years honing their operations to pull the most oil out of every well at the lowest cost, a process that can be as much art as science at the nexus of geology, engineering and infrastructure. That experience means some producers, such as EOG Resources Inc. and ConocoPhillips, can turn a profit at $50 a barrel.
Those companies will now capitalize on that expertise to keep drilling wells, and so far have even promised to boost production.
The idea that lower prices will pressure shale producers to produce less oil is “a fundamental error,” said Paul Stevens, a distinguished fellow at Chatham House in London. Such thinking has focused on how much it costs to drill new wells in new fields, ’’ he said. “But what really matters is the price at which it is no longer economic to produce from existing fields, and that is very much lower.”
Worst Pain
Some companies won’t be as fortunate, especially smaller operators that rely heavily on debt and are focused on new areas, where the most efficient production techniques are in the early stages of being understood. Such producers have for years outspent cash flow to develop properties that could pay off big in the future.
Goodrich Petroleum Corp. is one example. With a market capitalization of just $269 million, the upstart producer is developing a prospect in Louisiana and Mississippi that one rival called possibly one of the last great opportunities in North America. But drillers in the Tuscaloosa Marine Shale need oil prices at about $79.52 a barrel, according to Bloomberg New Energy Finance. Goodrich fell 34 percent to 6.05, the most ever.
Wells drilled by Hess Corp. in Ohio’s Utica formation, which has yet to produce significant volumes and is held in high esteem by many in the industry, also require nearly $80 a barrel for profitability, according to Citigroup.
Offshore, Too
The punishment wasn’t limited to shale. The day’s worst performing oil producer was offshore specialist Energy XXI Ltd., which has its principal office in Houston. It lost a record 37 percent of its value, falling to $4.01.
With cash flow shrinking from lower prices, the company may not be able to reduce debt until the market rebounds, Iberia Capital Partners analyst David Amoss, based in New Orleans, wrote today in a note cutting his rating to hold from buy. As of Sept. 30, Energy XXI reported net debt of $3.7 billion.
Plunging oil markets already have begun to pressure governments that rely on higher prices to finance their budgets, fuel subsidies to citizens and expand drilling. Venezuela’s oil income has fallen by 35 percent, President Nicolas Maduro said on state television Nov. 19.
Nigeria increased interest rates for the first time in three years on Nov. 26 and devalued its currency. The government is planning to cut spending by 6 percent next year, Finance Minister Ngozi Okonjo-Iweala said Nov. 16. Both Nigeria and Venezuela are part of OPEC.
‘Real Victims’
Saudi Arabia has enough cash stockpiled to finance its budget for more than 20 years at an oil price of $80 a barrel, according to an Oct. 16 analysis from CIBC World Markets Corp. Russia has about six years of financial reserves at that price, but Iraq, Nigeria and Iran all have less than two years. Venezuela has less than six months, based on the analysis.
Several countries within OPEC such as Iran, Iraq, Nigeria and Venezuela, as well as non-OPEC states such as Russia, Canada and Norway, “will end up being the real victims of lower oil prices in 2015 and beyond,” Roger Read, an analyst at Wells Fargo, said today in a note to investors. The countries “are unlikely to be able to maintain their production trends in the face of today’s oil price declines.”
“It’s pretty clear to me that the Saudis are no longer interested in being the world’s central banker for oil,” said John Stephenson, who manages C$50 million ($44 million) at Toronto-based Stephenson & Co. as chief executive officer. “It’s going to be ugly.”
I am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.
On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL, which dropped another 8% following Wednesday’s 23% plunge:
Have you avoided this sector – you would have been better off to follow our advice in 2014 and now you have to decide for 2015.
No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.
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YEAR END UPDATE AND FORECAST
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November 2014 – 40 % cash position
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A decade of increasing productive capacity has fattened supplies of commodities just as the world economy grows less commodity-intensive and investment demand wanes with traditional equity and bond markets performing well.
The idea that commodities were even a proper investment asset class for long-term investors was never fully demonstrated. Commodity prices tend to be mean reverting through successive cycles rather than instruments that produce cash income or build economic value.
Yet many in the financial industry promoted the idea of a “supercycle” fed by global industrialization and “peak oil” supply constraints. For sure, commodities look quite oversold in the short term and sentiment has turned severely against them, supporting the chances for a trading bounce or pause in the declines.
Yet even if the lows are in for oil or gold, the big picture is now looking decidedly less “super” for long-term commodity bulls. In one representative example of flagging investor interest in commodities, assets in the bellwether Pimco Commodity Real Return Strategy fund (PCRIX) have fallen below $13 billion – down by more than a third in two years.
Just as a Parti Quebecois candidate was forced to resign for an anti-Islam Facebook post, a Jewish group is accusing another PQ candidate of spreading an “anti-Semitic conspiracy theory” created by the KKK. 283 more words
The crux of the matter is that the House GOP is not inclined to pass a budget that doesn’t include some kind of delay or defunding to Obamacare. And obviously Democrats won’t agree to that. So, impasse.
Markets are already falling, it would seem, on the news.
But there are reasons to think this would be good.
Goldman explained why this could be helpful in a note to clients last Friday:
It would be a mistake to interpret a shutdown as implying a greater risk of a debt limit crisis, in our view. It would not be surprising to see a more negative market reaction to a shutdown than would be warranted by the modest macroeconomic effect it would have. We suspect that many market participants would interpret a shutdown as implying a greater risk of problems in raising the debt limit. This is not unreasonable, but we would see it differently. If a shutdown is avoided, it is likely to be because congressional Republicans have opted to wait and push for policy concessions on the debt limit instead. By contrast, if a shutdown occurs, we would be surprised if congressional Republicans would want to risk another difficult situation only a couple of weeks later. The upshot is that while a shutdown would be unnecessarily disruptive, it might actually ease passage of a debt limit increase.
This seems kind of vague, but there are three distinct reasons it could be a
positive.
The market is reacting now. It’s often said that politicians can’t act until they see the stock market crack up in some way. A government shutdown is a good way to precipitate a mini-fall without the kind of full-blown financial collapse we could see in a debt ceiling breach. With the debt ceiling likely to be hit in a few weeks, the pressure builds early.
The GOP will get blamed. Republicans can claim all they want that it’s the Democrats in the Senate or whoever that’s responsible for the shutdown, but everyone knows that if the government shuts down, and the polls ask which side is responsible, the majority will say the Republicans. This is a fact. So, having the party take a political hit now puts pressure on them to solve this before we hit the debt ceiling.
A shutdown will bring outsiders off the sidelines and start exerting pressure now. This is a point that Ezra Klein made this weekend. He writes: “One way a shutdown makes the passage of a debt limit increase easier is that it can persuade outside actors to come off the sidelines and begin pressuring the Republican Party to cut a deal. One problem in the politics of the fiscal fight so far is that business leaders, Wall Street, voters and even many pundits have been assuming that Republicans and Democrats will argue and carp and complain but work all this out before the government closes down or defaults. A shutdown will prove that comforting notion wrong, and those groups will begin exerting real political pressure to force a resolution before a default happens.”
Not everyone shares this view. Molly Ball writes persuasively in The Atlantic that there’s no reason to think a shutdown could “cool the fever,” so to speak. And indeed people have predicted many times (incorrectly) that the GOP fever had finally broken.
English: Brasilia – The president of the Syrian Arab Republic, Bashar Al-Assad during a visit to Congress Português do Brasil: Brasília – O presidente da República Árabe Síria, Bashar Al-Assad, em visita ao Congresso Nacional (Photo credit: Wikipedia)
The U.S. and its allies are under increasing pressure to take some action other than humanitarian aid ever since the chemical attack took place. However, overthrowing Syrian President Bashar al-Assad could create a vacuum that Al-Qaeda or some other hard line Islamist group would be happy to fill. Any military action could be a show of force to punish, rather than remove al-Assad. Nobody in the West wants the Syrian civil war to spill over into other countries, which could lead to a much larger conflict and cause oil prices to spike. This in turn would be a negative for the market and for corporate earnings.
Equity Returns Following Wars
I don’t mean to sound callous about any of this but my job is to look at it from an economic perspective. The historical performance of the market following the outbreak of both major and minor wars seems to indicate that, regardless of the actions taken by the U.S. or UN forces, there will likely not be a lasting effect on global equity markets.
For the moment, assume these recent developments drag the U.S. into the middle of another civil war in the region and ground forces are brought in to stop the killing of Syrian civilians. History teaches us that wars are not harbingers of bear markets. Certainly in the short run conflicts can cause the market to drop as people fear the worst and investors’ risk aversion tends to increase.
However, when you look at historical equity returns following the outbreak of a war, you’ll find the wars seem to have a slightly positive impact on the equity markets. There are many examples of this throughout history. One year after the start of WWI in 1914, the Dow Jones Industrial Average (the Dow) dropped 0.98%. Five years after the start of the war to end all wars, the Dow was up 25.54%. From the start of WWII on September 1, 1939, the Dow increased 11.95% after the first month and five years after the outbreak of WWII the Dow was up 8.81%.
These were the two biggest wars of the century and the market shrugged them off and continued higher, although at an annualized rate of appreciation that was lower than the historical average. If you look at some of the smaller wars, the return of the market following the start of fighting is more positive.
In a small conflict the increase in government spending likely helps push GDP growth and corporate earnings higher and is generally positive for the market.
After the start of the Korean War, which like the Vietnam War, was a proxy conflict between the United States and the U.S.S.R, the Dow was up 4.17% after 3 months, 7.36% after 6 months, 15.13% after one year and 110.30% after 5 years. The time period following the start of the Vietnam War in 1962 was not a particularly good time for stocks but not terrible either. Six months after it began, the Dow decreased by 17.56%, but after one year the market was down only 5.15%. Five years after the conflict began the Dow was up 20.11%.
Recent Conflicts
The results are similar for more recent wars. One year following the start of the first Gulf War on August 2, 1990, the Dow was up 4.95% and five years after the start it had increased 63.73%. One year after the start of the war in Afghanistan on October 8, 2001 the Dow had decreased 17.27%, but that had more to do with the tech-led bear market than the war. Five years after the start, it was up 30.77%. The start of the Iraq War in March, 2003 didn’t rattle the market at all as we were in the early stages of a five-year bull market. One year after the start, the Dow was up 23.24% and five years after the start it was up 43.46%.
Since a ground assault at this point seems unlikely, the most similar situation we can compare it to is the Yugoslavian Civil War. When I say similar, I am referring to the military action taken by the U.S., not the reason for the initial conflict. The Civil War started in 1991 but didn’t end until NATO forces ended the war with an air campaign designed to destroy the Yugoslav military infrastructure in 1999. If you’ll recall, 1999 was a great year to be invested in stocks with the Dow rising 25.22%. As I stated earlier, any military action taken against Syria will most likely be a targeted bombing campaign, and based on the historical data it appears that even when the conflict has the potential to drive oil prices higher as was the case in the Gulf Wars, the market does not necessarily perform poorly in the five years following the start of the conflict.
Putting it All Together
It is still unknown how world governments will respond to the tragedy happening in Syria. There is always the possibility that the conflict could lead to a large scale confrontation, with Russia and China intervening on behalf of their commercial ally Syria. Such an event would be a worst-case scenario and would cause the market to sell-off. I feel though that such a scenario is highly unlikely to occur as it is in no country’s best interest for the conflict to escalate. In the current globally interconnected world, no country benefits from the higher oil prices that result from instability in the Mid-East.
I do believe some form of military action will almost assuredly be taken against al-Assad’s regime. If the goal of such action is to punish Assad or just take out his chemical weapons facilities, it will most likely be a non-event as far as the stock market is concerned. I remain far more concerned about the lack of robust corporate earnings growth than the fallout from increased military actions in Syria.
CitiFX guru Steven Englander has a new note out this evening titled: No coin + temporary debt ceiling extension + sequester = USD negative.
In it he notes that the rejection of the trillion dollar coin idea to avert the debt ceiling is not alone a market moving event, but that the hard language taken by the White House that the choices boil down to clean lift or default raises the odds of a debt ceiling breach.
His take:
So it is possible that we will get a technical default for a few days, but more likely that Congress will give in, vote the debt ceiling up temporarily, and let the automatic sequesters kick in. Mounting risk of a technical default was USD positive in 2011 because it led to cutting of long-risk positions and the USD/Treasury market remained safe havens. However, it also occurred in an environment of slowing EM growth and intensifying euro zone sovereign risk pressure, so the USD support came from external forces as well. Given that investors are now somewhat long risk again, the position cutting is again likely to be USD positive, however, unattractive US assets were. As was the case in 2011, it is very unlikely that the Treasury will not pay its bills, although even a technical default could have very unforeseen consequences, given the multiple functions that Treasuries play in global financial markets. The more likely scenario of sequester plus grudging debt ceiling rise is USD negative.
It will put more pressure on the Fed to keep pumping liquidity into the US economy without giving any reassurance to investors that long-term fiscal issues are close to resolution.
That seems reasonable. A debt ceiling hike + a full sequester, which would equal a weaker economy and more pumping.
With Europe healing and China rebounding, USD would be the big loser.
English: Mohamed A. El-Erian, Managing Director of the Pacific Investment Management Company, speaking at the World Economic Forum Summit on the Global Agenda 2008 in Dubai, United Arab Emirates. (Photo credit: Wikipedia)
Three prominent bears — David Rosenberg, chief economist at Gluskin Sheff & Associates, Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., and David Levy, chairman of the Jerome Levy Forecasting Center — separately see some hopeful signs. These include a housing market that is healing, a more competitive manufacturing industry and technological breakthroughs that could boost productivity.
“More so than at any time in the past three years, I’m doing whatever I can to identify silver linings in the clouds,” Rosenberg said.
None of the three is ready to declare the all-clear. While the chances the economy could perform better than expected are “somewhat” higher than before, the downside risks are bigger, said El-Erian, who oversees $1.9 trillion at Pimco in Newport Beach, California. These include the so-called fiscal cliff, which all three agree would trigger a recession if nothing is done to avert its spending cuts and tax increases.
The continued caution of the three economists is reflected in advice they are giving investors. Rosenberg recommends gold- mining stocks and shares of utility companies, the latter as part of a strategy he’s dubbed “Safety and Income at a Reasonable Price.”
‘Be Defensive’
“This is a time to be defensive,” said Levy of the Mount Kisco, New York-based economic forecaster. “We are still in a rocky period.” He has been bullish on Treasury bonds for more than five years and eventually sees yields falling even further. The yield on the 30-year bond was 2.78 percent as of 5 p.m. yesterday in New York, according to Bloomberg Bond Trader data.
El-Erian suggests investors look outside the U.S. for economies that are growing faster and put money in companies and nations with strong balance sheets, includingBrazil’s and Mexico’s local bonds. He said investors also should “actively” manage their portfolios to protect against downside risks and take advantage of upside surprises that might materialize through the use of puts, calls and other trading strategies.
El-Erian and Rosenberg recommended a defensive stance on financial markets about a year ago in separate interviews on Bloomberg Television. Toronto-based Rosenberg said investors should look at dividend-paying health-care, utility and consumer-staples stocks, which are least-tied to changes in economic growth.
Worst Performance
Drugmakers in the Standard & Poor’s 500 Index are up 16 percent and producers of household goods have risen 9.7 percent in 2012. Utilities have fallen about 2 percent for the worst performance among the 10 major industries in the gauge.
El-Erian said Dec. 19 that the first part of 2012 would be “risk off” as Europe’s sovereign-debt crisis encouraged demand for safety. Yields on 10-year U.S. Treasuries rose to 2.21 percenton March 30 from 1.88 percent at the start of the year, while theStandard & Poor’s 500 Index (SPXL1) jumped 12 percent. For the year to date, the stock index also is up 12 percent.
The U.S. economy will grow 2 percent next year and 2.8 percent in 2014, the Paris-based Organization for Economic Cooperation and Development said last month. That is faster than the average for the OECD’s 34 members of 1.4 percent in 2013 and 2.3 percent in 2014.
Both Rosenberg and Levy foresaw the bursting of the housing bubble in 2007, the former when he was chief economist for North America at Merrill Lynch & Co. in New York. They’ve generally been more pessimistic than the consensus of economists since then, with Levy saying the U.S. is experiencing a “contained depression,” and Rosenberg incorrectly forecasting the U.S. would relapse into recession at the start of this year. The previous slump began in December 2007 and lasted 18 months.
More Downbeat
El-Erian and his colleagues at Pimco also have tended to be more downbeat. The 54-year-old former International Monetary Fund economist first used the term “new normal” in May 2009 to describe the probable medium-term path of the global economy. For the U.S., that meant annual growth of about 2 percent.
Since the recovery began in the middle of 2009, GDP has expanded by an average of 2.2 percent, in line with the Pimco forecast and short of repeated projections for faster growth by the Federal Reserve and the White House.
Pimco’s Total Return Fund, the world’s largest mutual fund, is up 10.3 percent this year, beating 95 percent of similarly run mutual funds, according to data compiled by Bloomberg.
‘A Stinker’
It has attracted about $17 billion in net new money in 2012, according to Chicago-based research firm Morningstar Inc., after losing $5 billion to withdrawals in 2011, when it suffered what William Gross, the company’s co-chief investment officer with El-Erian, called “a stinker.” It eliminated U.S. Treasuries early in the year and missed a rally when investors rushed to the safety of government-backed debt.
One reason Rosenberg, 52, is trying to look on the bright side is because many other economists have turned more bearish.
“That’s raised my contrarian antenna,” he said.
GDP probably will grow 2 percent in 2013, down from a projected 2.2 percent this year, according to the median forecast of 74 economists surveyed by Bloomberg last month.
Among the more hopeful signs, Rosenberg said, is the bottoming out of the housing market. New-home construction rose 3.6 percent to a four-year high in October, according to the Commerce Department.
‘Strong Phase’
“We’re in a strong phase of the recovery,” Martin Connor, chief financial officer of Toll Brothers Inc. (TOL), a Horsham, Pennsylvania-based luxury homebuilder, said during a conference presentation on Nov. 15. “It’s a function of five years of pent-up demand being released.” Affordability and rising prices also are “spurring people to buy.”
The banking industry also is on the mend, Rosenberg said. “The banks are certainly in better position and more willing to lend money than they have been for years,” after buttressing their balance sheets.
JPMorgan Chase & Co., the biggest U.S. bank by assets, provided $15 billion of credit for small businesses in the third quarter, up 21 percent from a year earlier, Chief Executive Officer Jamie Dimon said in an Oct. 12 press release.
Rosenberg also is encouraged by what he calls a “secular renaissance” of the U.S. manufacturing industry — with output rising 16 percent during the recovery, according to the Fed — and a surge in American energy production.
Net Exporter
U.S. oil output is poised to surpass Saudi Arabia’s in the next decade, making the world’s largest fuel consumer almost self-reliant and putting it on track to become a net exporter, the International Energy Agency said last month.
Even so, problems remain. Rosenberg said he is particularly worried about continued high unemployment — 7.9 percent in October, up from 4.7 percent five years ago — and its impact on worker earnings.
“This will go down as a wageless recovery,” the Canadian economist said.
Average hourly earnings for production workers rose 1.1 percent in the 12 months to October, the weakest since Labor Department records began in 1965.
The bottom line for Rosenberg: The economy still is “stuck in the mud.”
Pimco’s El-Erian predicts GDP probably will grow 1.5 percent to 2 percent during the next year as President Barack Obama and Congress strike a “mini-bargain” to avoid the fiscal cliff and moderately reduce the budget deficit.
‘Sputnik Moment’
The economy could do better if policy makers can pull off what El-Erian calls a “Sputnik moment” — a critical mass of reforms that restores corporate confidence and unleashes pent-up investment, hiring and demand. Such steps might include measures to tackle youth and long-term unemployment, as well as cutting the deficit.
“There’s tremendous cash on the sidelines,” he said.
David Cote, chief executive officer of Morris Township, New Jersey-based Honeywell International Inc. (HON), says a budget deal alone could do wonders for the U.S.
“There is a prospect for a robust recovery, something bigger than I think most economists are forecasting,” if the White House and Congress can reach a credible agreement to reduce the deficit by $4 trillion over 10 years, he told Bloomberg Television on Nov. 28.
El-Erian, who re-joined Pimco in 2007 after being in charge of managing Harvard University’s endowment, also sees a chance that technological breakthroughs could give the U.S. a productivity-driven boost. At the top of the list is digitalization: the conversion of pictures, sound and other information into a form computers can process.
Economic Impact
“The whole trend is having an impact on very many sectors of the economy,” he said.
The trouble is that while the potential for such pleasant surprises is bigger than before, it isn’t “meaningfully” bigger, according to El-Erian. And the downside dangers are greater, he said. Besides the fiscal cliff, they include the debt crisis in Europe, China’s challenge in overhauling its export-driven economy and the risk of continued instability in the Middle East.
Levy said the U.S. private sector is in the middle of a prolonged period of cleaning up its balance sheet after decades in which debt grew faster than income.
“We’ve been at this for five years,” he said. “If we’re lucky, it might take a tiny bit less than a decade.” He added he’d be surprised if the U.S. is able to avoid a recession in the next few years.
More Progress
America, though, has made more progress than Europe and Japan in dealing with its debts, Levy said.
“The U.S. will do generally better in this rocky period than much of the rest of the world, because the risks are higher and the problems are bigger in many places overseas,” the 57- year-old economist said. That includes China, where new leaders face decisions on how — and whether — to curb state enterprises, boost access to credit for private companies and raise consumption.
Levy, who served on the board of the Levy Economics Institute of Bard College in Annandale-on-Hudson, New York, from 1986 to 2001, said America also will benefit from a “secular improvement” in its trade balance. Driving that improvement: the manufacturing revival, boom in domestic energy output and increased demand for U.S. agricultural exports as developing nations grow richer.
“By the end of this decade, we might be looking at trade surpluses,” he said. The U.S. ran a$415.5 billion trade deficit through the first nine months of this year.
Future business investment also is being stored up as companies put off capital expenditures because of depressed demand for their products, he said. Eventually, such spending will surge, boosting productivity and profits.
“While the U.S. is going through a long-term, rough adjustment period,” Levy told Bloomberg Radio Nov. 13, “we are weathering it.
‘‘We are going to come out the other side,’’ he added. ‘‘And there is a very bright long-term.’
Business owners and investors are rapidly maneuvering to shield themselves from the prospect of higher taxes next year, a strategy that is sending ripples across Wall Street and broad areas of the economy.
Take Steve Wynn, the casino magnate, who has been a vocal critic of higher tax rates. He and his fellow shareholders in Wynn Resorts, the company announced, will collect a special dividend of $750 million on Tuesday, a payout timed to take advantage of current rates. Experts estimated that taking the payout this year instead of next could save Mr. Wynn, who owns a sizable stake in the company, more than $20 million.
For the wealthy like Mr. Wynn, the overriding goal is to record as much of their future income this year as they can. This includes moves as diverse as sales of businesses, one-time dividends and the sale of stocks that have been big winners.
“In my 30 years in practice, I’ve never seen such a flood of desire and action to transfer a business and cash out,” said Kenneth K. Bezozo, a partner in New York with the law firm Haynes and Boone. “We’re seeing a watershed event.”
Whether small business owners or individuals saving for retirement, investors are being urged by their advisers to reconsider their holdings. Along the way, many are shedding the very investments that have been the most popular over the last year, contributing to recent sell-offs in formerly high-flying shares like Apple and Amazon.
Investors typically take profits in their own portfolio at year-end, but the selling appears to be more targeted this year. Stocks with large dividends, for instance, are seen as less attractive because of the perceived likelihood of a sharp increase in the tax rate on dividends.
Dyke Messinger is holding back on hiring for his business. (Chris Keane/The New York Times)All this is weighing on the broader financial markets, as worries mount about the economic drag from the combination of higher tax rates and reduced government spending set for January if President Obama and Senate Republicans cannot reach a budget compromise before then.
Fears about the fiscal impasse in Washington, along with anxiety about fading corporate profits and weakening economies abroad, have pushed the benchmark Standard & Poor’s 500-stock index down about 5 percent since the election. On Friday, major stock indexes had their best showing of the week after President Obama and Republican leaders signaled that a compromise was possible.
Even if many of the tax breaks scheduled to expire survive a new budget deal, some business owners and investors are bracing for substantial increases in specific areas of the tax code.
The top rate on dividends, for example, could climb to 39.6 percent from 15 percent if no action is taken. Capital gains taxes, which now top out at 15 percent, could rise above 20 percent, many financial advisers say. Most investment income will also be subject to a 3.8 percent charge to help pay for President Obama’s health care law.
Stocks that pay big dividends have been popular in recent years among investors eager for an alternative to the meager returns on bank savings accounts and Treasury securities. Since October, though, the two sectors that provide the most generous dividend payments — utilities and telecommunication stocks — have been among the worst performers, hurt also in part by the devastation of Hurricane Sandy on the East Coast. Utility companies in the S.& P. 500 have fallen 9.4 percent from their highs in October. Telecommunication stocks in the index have dropped 11.3 percent from theirs, compared with the broader index’s 6.8 percent decline from its recent high.
John Moorin, the founder of a medical equipment company near Indianapolis, said he sold about $650,000 in dividend-paying stocks like McDonald’s and Coca-Cola a few days after the election, worried about the potential increase in taxes.
“I love these companies, but I’m so scared that now all of the sudden I’m going to get taxed at such a rate with them that they won’t be worth anything,” Mr. Moorin said.
Although Mr. Wynn has declared special dividends at the end of the year before — most recently in 2011 — in a call with analysts last month, he hinted that higher taxes would cause him and other chief executives to rethink big payouts in future years.
In the meantime, he added, it was “very difficult to do long-range planning with a government that moves as much as this does on so many issues.”
Leggett & Platt, a diversified manufacturer based in Carthage, Mo., decided to move up payment of its fourth-quarter dividend to December from January so shareholders could take advantage of the lower rate.
“If we can help our shareholders avoid taxes and keep more of their dividends, we’ll do it,” said David M. DeSonier, senior vice president for corporate strategy and investor relations.
While negotiators are trying to find ways to raise more revenue for the long term, some experts expect a substantial bump in tax collections in the short term as investors take a multitude of steps now that they would have taken in future years. After the top tax rate on capital gains rose to 28 percent from 20 percent at the end of 1986, federal receipts from such gains doubled to $52.9 billion in 1987, as sales surged at the end of the previous tax year.
The potential jump in tax rates has been telegraphed for months, but many investors say they did not respond sooner because they were waiting to see if Mitt Romney would defeat the president and move forward with his commitment to keep rates at current levels. President Obama, since defeating Mr. Romney, has continued his call for an increase in marginal tax rates on the wealthy. A growing number of Republican leaders have conceded that some increase is now likely.
Kristina Collins, a chiropractor in McLean, Va., said she and her husband planned to closely monitor the business income from their joint practice to avoid crossing the income threshold for higher taxes outlined by President Obama on earnings above $200,000 for individuals and $250,000 for couples.
Ms. Collins said she felt torn by being near the cutoff line and disappointed that federal tax policy was providing a disincentive to keep expanding a business she founded in 1998.
“If we’re really close and it’s near the end-year, maybe we’ll just close down for a while and go on vacation,” she said.
Of the potential changes in the tax code set to take place on Jan. 1, the scheduled increase in the tax rate on capital gains would hit a particularly broad range of investments.
Business owners, for instance, can lock in the current top rate of 15 percent on capital gains if they sell their company before the end of the year. The capital gains tax also applies to increases in the value of stocks and other securities, encouraging some investors to sell holdings that have done well. This is one of several factors cited in the recent plunge in the price of Apple shares. They have dropped 26 percent since mid-September after rising 73 percent earlier in the year.
The coming changes have not hurt all assets. Municipal bonds have become more attractive because they are exempt from most federal taxes, including the new surcharge related to President Obama’s health care law. Frank Fantozzi, a financial planner in Cleveland, is recommending that his wealthy clients increase their allocation to municipal bonds from around 30 percent to about 40 percent.
But the potential effect of the scheduled tax increases and government spending cuts has been mostly negative. Many market strategists have suggested trimming overall holdings of risky assets like stocks, and business executives are proceeding very cautiously.
Some business owners say they are holding off on hiring plans because they expect tax rates to rise. Dyke Messinger, chief executive of Power Curbers in Salisbury, N.C., said he would like to fill four slots at his construction equipment company but would only hire three people because he anticipated that his tax bill would rise by $100,000.
“It’s not a huge amount of money,” Mr. Messinger said. “But it’s enough money that you don’t want to make a misstep.”
The Snowball: Warren Buffett and the Business of Life (Photo credit: Wikipedia)
Nov 16
The CBO has issued a report that says the U.S. would go back into a recessionif it were to go over the fiscal cliff – over $600 billion in tax and spending provisions set to change on January 1, 2013.
“We need $1.6 trillion. We need to get our revenue up to about 19 percent of GDP, and we need to get our expenses down to 21 or 21.5 percent of GDP. Everyone knows that. So it’s going to take significant action on both sides. And $1.6 trillion happens to be 1 percent of GDP, we’ll need that much revenue, and we’ll need to cut expenditures significantly too.
…”If we go past January 1st, I don’t now if it will be January 10th, or February 1st, but we’re not going to permanently cripple ourselves because 535 people can’t get along.
…We had Hurricane Sandy which disrupted the economy for a period, we had Katrina many years ago, we have things that will disrupt the economy, I mean 9/11 was an extraordinary case but we have a very resilient economy. We’ve had one for hundreds of years and the fact that they can’t get along for a month of January is not something that’s going to torpedo the economy.”
When asked if he thought the U.S. would go over the fiscal cliff now that the elections are done and we know the make up of Congress, he said it depends on the Republicans:
“It really depends very much on the Republicans in Congress. It doesn’t take the whole group in Congress to avoid that. I mean if 25 Republicans decide that they’ll put country above party and sign up for something that makes sense then we don’t need to go over the fiscal cliff.”
The Coat of arms of Kenya (Photo credit: Wikipedia)
Nov 15
Africa Oil (AOI : TSX-V : $10.01) Kenya became the latest country to raise its country risk, announcing plans to boost profits from natural resources exploration.
According to a Reuters article, Kenya is seeking a 25% stake in the production activities of oil & gas companies operating in the east African nation. The proposal, announced by Kenya’s energy minister, i s one of several the government has put forward in the past month to increase the state’s take from oil and gas resources, including new capital gains tax rules, a more competitive licensing process and higher fees for petroleum explorers.
Currently, most of Kenya’s contracts with oil explorers give state-owned National Oil Corporation of Kenya (NOCK) a 10% stake in the production business once commercial quantities of oil or gas are found. Under the current structure, this means that NOCK contributes 10% of production costs and receives 10% of profit. However, according to the article, Energy Minister Kiraitu Murungi told reporters that the government now wants companies to give NOCK an initial 10% stake, increasing to 25% once production has started.
An oil & gas expert at PricewaterhouseCoopers, commented that it is unclear whether the rule would scare off potential producers because contracts are based on one-on-one negotiations with companies and the Ministry of Energy. He believes that “It depends on how it’s structured and how it’s sorted out” and that he thinks “people will get wary if it’s getting something for nothing. If there’s a fair share of whatever somebody has spent…I think people will be pragmatic and see it as something reasonable. Kenya’s oil and exploration boom has been fuelled by gas discoveries in Tanzania and Mozambique and oil discoveries in Uganda. Notably Tullow Oil and Africa Oil discovered oil in the Ngamia-1 well in Kenya in March. The Ngamia-1 exploration well in Kenya encountered an initial 20 metres of net oil pay, followed by another 80 meters in deeper zones.
Canaccord believes successful flow testing on Ngamia-1 may open up a “string of pearls” of look-a-like geological anomalies that could exceed the 2.5 billion barrels discovered in Uganda.
In October, Tullow and Africa Oil encountered oil in a wildcat well known as Twiga-1 on onshore Block 13T, about 30km west of the Ngamia-1 well. The commercial viability of both finds has yet to be ascertained. Also in Kenya, Tullow and Pancontinental Oil & Gas announced in September that their license consortium’s operator Apache (APC) had found gas in the shallow offshore well Mbawa-1.
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