phoenix

Commodities&rsquo Biggest Drop Since Lehman Is Bear Signal

June 1, 2010

By Millie Munshi and Elizabeth Campbell June 1 (Bloomberg) — The biggest slump in commodities since Lehman Brothers Holdings Inc. collapsed is undermining Wall Street forecasts for accelerating economic growth and higher prices for everything from copper to crude oil. The Journal of Commerce Industrial Price Commodity Smoothed Price Index that tracks the growth rate of steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth. Commodities extended their slump today, led by declines in industrial metals and energy prices, as separate reports showed manufacturing slowdowns last month in China, Europe and the U.S. “As risk-taking falls, expected growth is reduced,” said Colin P. Fenton , the chief executive officer of Curium Capital Advisors LLC in Boston, who was a commodity analyst at Goldman Sachs Group Inc. and Stanley Druckenmiller’s Duquesne Capital Management LLC hedge fund. “Demand for commodities is going to be softer than it might otherwise have been.” While the Organization for Economic Cooperation and Development raised its growth forecasts for this year and next on May 26, investors are dumping holdings at the fastest pace since February. Supply and Demand The Journal of Commerce Industrial Price Commodity Smoothed Price Index reflects clearer signs of supply and demand than futures markets because half the items it tracks don’t trade on exchanges used by speculators, said Lakshman Achuthan , the managing director at the New York-based Economic Cycle Research Institute. The gauge dropped to 25.97 on May 28 from 60.56 on April 30. In June 2008, a month after the index reached its peak, the Paris-based OECD said the U.S. would grow at a 1.1 percent rate the following year. Commodities continued to drop, and in October 2008, the index fell at a 56 percent annual rate, which was then the lowest level since 1949. Almost two months later, the National Bureau of Economic Research, the panel that dates American business cycles, said the U.S. was in a recession. The world’s largest economy shrank 2.4 percent, the worst contraction since 1946. Now, “the collapse in the commodity index is telling us that the peak in global industrial growth is imminent, it’s here right now,” Achuthan said. “Markets are going to have to deal with the reality of a slowdown.” Manufacturing Indexes Slide China’s Purchasing Managers’ Index slid to 53.9 from 55.7 in April, the Federation of Logistics and Purchasing said today. That was less than the median 54.5 estimate in a Bloomberg survey of 18 economists. A monthly gauge of manufacturing in the euro region fell to 55.8 from 57.6, Markit Economics said. The Institute for Supply Management said its U.S. factory index dropped to 59.7 in May from 60.4 in April. Europe’s debt crisis is only starting to weigh on global growth, said Michael Aronstein , a strategist at Oscar Gruss & Son Inc. who predicted the 2008 commodity plunge and is betting against a rally this year. The European Union announced an almost $1 trillion loan package last month to halt a slide in the euro and local bonds that threatened to shatter the currency union. Budget cuts across the region may curb demand for Chinese imports as well as commodities including gasoline, aluminum and steel. Sagging Demand Raw materials may drop another 10 percent because the economy is on the “cusp” of deflation, said Philip Gotthelf , the president of Equidex Brokerage Group Inc. in Closter, New Jersey. That would drive the Reuters/Jefferies CRB Index of 19 commodity futures down 22 percent from a Jan. 6 peak and into what investors consider a bear market. The gauge plunged 8.2 percent in May, the most in 18 months. Gotthelf correctly predicted in October 2008 that oil would fall below $40 a barrel and said he is now shorting most commodities and buying gold. The CRB index fell 0.9 percent to 252.39 today. Nickel tumbled 4 percent, and crude oil dropped almost 2 percent. Economic forecasts have been rising. As a group, the OECD’s 30 member nations will grow 2.7 percent this year, the organization said. The expansion will reach 3.2 percent in the U.S. and 10.1 percent in China, according to separate surveys of economists by Bloomberg last month. Fundamental Strength “The market is underestimating the strength of the fundamentals and overestimating the impact that the European sovereign-funding issues will have on growth,” Jeffrey Currie , a Goldman Sachs analyst, said in an interview from London. He says the decline is a “buying opportunity.” Freeport-McMoRan Copper & Gold Inc. Chief Executive Officer Richard C. Adkerson told analysts on a conference call May 11 that while “there is still a lot of uncertainty” about the world economy and its reliance on demand from China, the Phoenix-based mining company sees “some pockets of demand improvement” and is taking steps to ramp up copper production. “There are headwinds, concerns both in Europe and in Asia that are making investors rethink their decisions and maybe take some profits, but I believe that the longer-term growth story remains intact,” said Michael Cuggino , who manages about $6 billion at Permanent Portfolio Funds in San Francisco. “I don’t think it’s a broader slowdown. I think it’s a correction.” Lower Prices Inflation is almost non-existent. In April, U.S. consumer prices unexpectedly dropped 0.1 percent, the first decrease since March 2009, government data show. In the 12 months ended in April, the cost of living rose 2.2 percent, following a 2.3 percent year-over-year gain in March. Bank of America Merrill Lynch says prices will continue to deteriorate. On May 25, the Charlotte, North Carolina-based bank cut its oil forecast for the second half of the year to $78 from $92. Doane Agricultural Services Co. in St. Louis said May 18 that corn will drop 14 percent by October to $3.25 a bushel. Corn futures for December delivery dropped 1.3 percent today to $3.7525. Copper, a commodity former Federal Reserve Chairman Alan Greenspan saw as an economic indicator, declined 7.4 percent in May, the biggest monthly slide since January. Burlap, used for industrial packaging, is down 9.7 percent this year, almost matching its 9.9 percent drop in 2008. Manufacturing Risk “If commodity prices are coming down, there is some downside risk to the manufacturing sector,” said Chris Rupkey , the chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “It’s too early to see it in people’s numbers yet, but if I had to guess, people will shave their estimates” for growth this year, he said. Commodities last fell into a bear market in 2008, when the CRB plunged 56 percent in five months as the U.S. suffered the worst financial crisis since the Great Depression, growth contracted on a global basis for the first time since 1981 and the Journal of Commerce index was below zero. Now, a slowdown in Europe, the biggest destination for Chinese exports, will “badly hurt” the Asian country, said Lewis Wan , the chief investment officer for Pride Investments Group, which oversees $150 million in Hong Kong. The Shanghai Stock Exchange Composite Index has tumbled 22 percent this year as the government enacted measures to cool its property market. As of last month, the European Union’s economy was expected to grow 1.1 percent this year after contracting 4.1 percent in 2009, the biggest drop since 1992, according to 19 economists surveyed by Bloomberg. Euro Outlook A “wave of fiscal austerity” in Europe will depress the expansion in the region, in the U.S. and in China, according to Arnab Das , the head of global market research at Roubini Global Economics in London. Today, the euro touched $1.2111, the lowest level against the dollar since April 2006, as European unemployment climbed. Last month, Spain was forced to rescue banks and policy makers including Italian Prime Minister Silvio Berlusconi said they would cut spending to combat a financial “tsunami” in the region. Investors are getting less bullish, according to the U.S. Commodity Futures Trading Commission. Speculative net-long positions , or bets on rising prices, for 16 commodity futures have dropped 33 percent in the past three weeks, CFTC data show. That’s the lowest level since Feb. 9, after the net-longs plunged 58 percent from a 20-month high on Jan. 12. “It’s the uncertainty that’s the biggest problem,” said John Kinsey , who helps manage C$1 billion ($995 million) at Caldwell Investment Management Ltd. in Toronto. “Commodities are being attacked with these concerns about the debt situation in Europe and the steps that China has taken to tighten. People are afraid this is going to slow the economy. It’s hard to see a way out of it.” To contact the reporter on this story: Millie Munshi in New York at mmunshi@bloomberg.net ; Elizabeth Campbell in New York at ecampbell14@bloomberg.net .

Read the full article →

Commodities&rsquo Biggest Drop Since Lehman Bear Signal

June 1, 2010

By Millie Munshi and Elizabeth Campbell June 1 (Bloomberg) — The biggest slump in commodities since Lehman Brothers Holdings Inc. collapsed is undermining Wall Street forecasts for accelerating economic growth and higher prices for everything from copper to crude oil. The Journal of Commerce commodity index that includes steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth. Commodities extended their decline today, led by a 2.9 percent slump in crude oil and 3.8 percent drop in copper, as the rate of manufacturing expansion in China and Europe slowed. The pace of growth in a U.S. factory index is also expected to weaken, according to economists’ forecasts before a report scheduled for later today. “As risk-taking falls, expected growth is reduced,” said Colin P. Fenton , the chief executive officer of Curium Capital Advisors LLC in Boston, who was a commodity analyst at Goldman Sachs Group Inc. and at Stanley Druckenmiller’s Duquesne Capital Management LLC hedge fund. “Demand for commodities is going to be softer than it might otherwise have been.” While the Organization for Economic Cooperation and Development raised its growth forecasts for this year and next on May 26, investors are dumping holdings at the fastest pace since February. Supply and Demand The Journal of Commerce Industrial Price Commodity Smoothed Price Index reflects clearer signs of supply and demand than futures markets because half the items it tracks don’t trade on exchanges used by speculators, said Lakshman Achuthan , the managing director at the New York-based Economic Cycle Research Institute. The gauge dropped to 25.97 on May 28 from 60.56 on April 30. In June 2008, a month after the index reached its peak, the Paris-based OECD said the U.S. would grow at a 1.1 percent rate the following year. Commodities continued to drop, and in October 2008, the index fell at a 56 percent annual rate, which was then the lowest level since 1949. Almost two months later, the National Bureau of Economic Research, the panel that dates American business cycles, said the U.S. was in a recession. The world’s largest economy shrank 2.4 percent, the worst contraction since 1946. Now, “the collapse in the commodity index is telling us that the peak in global industrial growth is imminent, it’s here right now,” said Achuthan. “Markets are going to have to deal with the reality of a slowdown.” Manufacturing Indexes Slide China’s Purchasing Managers’ Index slid to 53.9 from 55.7 in April, the Federation of Logistics and Purchasing said today. That was less than the median 54.5 estimate in a Bloomberg survey of 18 economists. A gauge of manufacturing in the euro region fell to 55.8 in May from 57.6 the previous month, Markit Economics said. The Institute for Supply Management’s factory index in the U.S. dropped to 59 last month from 60.4 in April, according to the median estimate in a Bloomberg survey of 62 economists. The report is due at 10 a.m. New York time. Europe’s debt crisis is only starting to weigh on global growth, said Michael Aronstein , a strategist at Oscar Gruss & Son Inc. who predicted the 2008 commodity plunge and is betting against a rally this year. The European Union announced an almost $1 trillion loan package last month to halt a slide in the euro and local bonds that threatened to shatter the currency union. Budget cuts across the region may curb demand for Chinese imports as well as commodities including gasoline, aluminum and steel. Sagging Demand Raw materials may drop another 10 percent because the economy is on the “cusp” of deflation, said Philip Gotthelf , the president of Equidex Brokerage Group Inc. in Closter, New Jersey. That would drive the Reuters/Jefferies CRB Index of 19 commodity futures down 22 percent from a Jan. 6 peak and into what investors consider a bear market. The gauge plunged 8.2 percent in May, the most in 18 months. Gotthelf correctly predicted in October 2008 that oil would fall below $40 a barrel and said he is now shorting most commodities and buying gold. The S&P GSCI Total Return Index of 24 commodities declined 2.1 percent as of 10:17 a.m. in London, the most compared with closing prices since May 17. Economic forecasts have been rising. As a group, the OECD’s 30 member nations will grow 2.7 percent this year, the organization said. The expansion will reach 3.2 percent in the U.S. and 10.1 percent in China, according to separate surveys of economists by Bloomberg last month. Fundamental Strength “The market is underestimating the strength of the fundamentals and overestimating the impact that the European sovereign-funding issues will have on growth,” Jeffrey Currie , a Goldman Sachs analyst, said in an interview from London. He says the decline is a “buying opportunity.” Freeport-McMoRan Copper & Gold Inc. Chief Executive Officer Richard C. Adkerson told analysts on a conference call May 11 that while “there is still a lot of uncertainty” about the world economy and its reliance on demand from China, the Phoenix-based mining company sees “some pockets of demand improvement” and is taking steps to ramp up copper production. “There are headwinds, concerns both in Europe and in Asia that are making investors rethink their decisions and maybe take some profits, but I believe that the longer-term growth story remains intact,” said Michael Cuggino , who manages about $6 billion at Permanent Portfolio Funds in San Francisco. “I don’t think it’s a broader slowdown. I think it’s a correction.” Lower Prices Inflation is almost non-existent. In April, U.S. consumer prices unexpectedly dropped 0.1 percent, the first decrease since March 2009, government data show. In the 12 months ended in April, the cost of living rose 2.2 percent, following a 2.3 percent year-over-year gain in March. Bank of America Merrill Lynch says prices will continue to deteriorate. On May 25, the Charlotte, North Carolina-based bank cut its oil forecast for the second half of the year to $78 a barrel from $92. Doane Agricultural Services Co. in St. Louis said May 18 that corn will drop 14 percent by October to $3.25 a bushel. Corn for December was at $3.7625 today. Copper, a commodity former Federal Reserve Chairman Alan Greenspan saw as an economic indicator, declined 7.4 percent in May, the biggest monthly slide since January, and traded at $3.0295 a pound at 10:12 a.m. London time today. Burlap, used for industrial packaging, is down 9.7 percent this year, almost matching its 9.9 percent drop in 2008. Manufacturing Risk “If commodity prices are coming down, there is some downside risk to the manufacturing sector,” said Chris Rupkey , the chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “It’s too early to see it in people’s numbers yet, but if I had to guess, people will shave their estimates” for growth this year, he said. Commodities last fell into a bear market in 2008, when the CRB plunged 56 percent in five months as the U.S. suffered the worst financial crisis since the Great Depression, growth contracted on a global basis for the first time since 1981, and the Journal of Commerce index was below zero. Now, a slowdown in Europe, the biggest destination for Chinese exports, will “badly hurt” the Asian country, said Lewis Wan , the chief investment officer for Pride Investments Group, which oversees $150 million in Hong Kong. The Shanghai Stock Exchange Composite Index tumbled 21 percent this year as the government enacted measures to cool its property market. As of last month, the European Union’s economy was expected to grow 1.1 percent this year after contracting 4.1 percent in 2009, the biggest drop since 1992, according to 19 economists surveyed by Bloomberg. Euro Outlook A “wave of fiscal austerity” in Europe will depress the expansion in the region, in the U.S. and in China, according to Arnab Das , the head of global market research at Roubini Global Economics in London. The euro on May 19 dropped to $1.2144, its lowest level against the dollar since April 2006, as Spain was forced to rescue banks and policy makers including Italian Prime Minister Silvio Berlusconi said they would cut spending to combat a financial “tsunami” in the region. Investors are getting less bullish, according to the U.S. Commodity Futures Trading Commission. Speculative net-long positions , or bets on rising prices, for 16 commodity futures have dropped 33 percent in the past three weeks, CFTC data show. That’s the lowest level since Feb. 9, after the net-longs plunged 58 percent from a 20-month high on Jan. 12. “It’s the uncertainty that’s the biggest problem,” said John Kinsey , who helps manage C$1 billion ($995 million) at Caldwell Investment Management Ltd. in Toronto. “Commodities are being attacked with these concerns about the debt situation in Europe and the steps that China has taken to tighten. People are afraid this is going to slow the economy. It’s hard to see a way out of it.” To contact the reporter on this story: Millie Munshi in New York at mmunshi@bloomberg.net ; Elizabeth Campbell in New York at ecampbell14@bloomberg.net .

Read the full article →

Commodities’ Biggest Drop Since Lehman Seen as Bear Signal

June 1, 2010

By Millie Munshi and Elizabeth Campbell June 1 (Bloomberg) — The biggest slump in commodities since Lehman Brothers Holdings Inc. collapsed is undermining Wall Street forecasts for accelerating economic growth and higher prices for everything from copper to crude oil. The Journal of Commerce commodity index that includes steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth. While the Organization for Economic Cooperation and Development raised its growth forecasts for this year and next on May 26, investors who stocked up on oil and more than doubled copper prices last year are dumping holdings at the fastest pace since February. Freeport-McMoRan Copper & Gold Inc. said in April that copper sales will drop 7.6 percent this year and Chinese inventories may weaken demand later. “As risk-taking falls, expected growth is reduced,” said Colin P. Fenton , the chief executive officer of Curium Capital Advisors LLC in Boston who was a commodity analyst at Goldman Sachs Group Inc. and at Stanley Druckenmiller’s Duquesne Capital Management LLC hedge fund. “Demand for commodities is going to be softer than it might otherwise have been.” The Journal of Commerce Industrial Price Commodity Smoothed Price Index reflects clearer signs of supply and demand than futures markets because half the items it tracks don’t trade on exchanges used by speculators, said Lakshman Achuthan , the managing director at the New York-based Economic Cycle Research Institute. The gauge dropped to 25.97 on May 28 from 60.56 on April 30. Economic Indicator In June 2008, a month after the index reached its peak, the Paris-based OECD said the U.S. would grow at a 1.1 percent rate the following year. Commodities continued to drop, and in October 2008, the index fell at a 56 percent annual rate, which was then the lowest level since 1949. Almost two months later, the National Bureau of Economic Research, the panel that dates American business cycles, said the U.S. was in a recession. The world’s largest economy shrank 2.4 percent, the worst contraction since 1946. Now, “the collapse in the commodity index is telling us that the peak in global industrial growth is imminent, it’s here right now,” said Achuthan. “Markets are going to have to deal with the reality of a slowdown.” Europe’s debt crisis is only starting to weigh on global growth, said Michael Aronstein , a strategist at Oscar Gruss & Son Inc. who predicted the 2008 commodity plunge and is betting against a rally this year. Sagging Demand The European Union announced an almost $1 trillion loan package last month to halt a slide in the euro and local bonds that threatened to shatter the currency union. Budget cuts across the region may curb demand for Chinese imports as well as commodities including gasoline, aluminum and steel. Raw materials may drop another 10 percent because the economy is on the “cusp” of deflation, said Philip Gotthelf , the president of Equidex Brokerage Group Inc. in Closter, New Jersey. That would drive the Reuters/Jefferies CRB Index of 19 commodity futures down 22 percent from a Jan. 6 peak and into what investors consider a bear market. The gauge plunged 8.2 percent in May, the most in 18 months. Gotthelf correctly predicted in October 2008 that oil would fall below $40 a barrel and said he is now shorting most commodities and buying gold. Fundamental Strength Economic forecasts have been rising. As a group, the OECD’s 30 member nations will grow 2.7 percent this year, the organization said. The expansion will reach 3.2 percent in the U.S. and 10.1 percent in China, according to separate surveys of economists by Bloomberg last month. “The market is underestimating the strength of the fundamentals and overestimating the impact that the European sovereign-funding issues will have on growth,” Jeffrey Currie , a Goldman Sachs analyst, said in an interview from London. He says the decline is a “buying opportunity.” Freeport Chief Executive Officer Richard C. Adkerson told analysts on a conference call May 11 that while “there is still a lot of uncertainty” about the world economy and its reliance on demand from China, the Phoenix-based mining company sees “some pockets of demand improvement” and is taking steps to ramp up copper production. “There are headwinds, concerns both in Europe and in Asia that are making investors rethink their decisions and maybe take some profits, but I believe that the longer-term growth story remains intact,” said Michael Cuggino , who manages about $6 billion at Permanent Portfolio Funds in San Francisco. “I don’t think it’s a broader slowdown. I think it’s a correction.” Lower Prices Inflation is almost non-existent. In April, U.S. consumer prices unexpectedly dropped 0.1 percent, the first decrease since March 2009, government data show. In the 12 months ended in April, the cost of living rose 2.2 percent, following a 2.3 percent year-over-year gain in March. Bank of America Merrill Lynch says prices will continue to deteriorate. On May 25, the Charlotte, North Carolina-based bank cut its oil forecast for the second half of the year to $78 a barrel from $92. Doane Agricultural Services Co. in St. Louis said May 18 that corn will drop 14 percent by October to $3.25 a bushel. Copper, a commodity former Federal Reserve Chairman Alan Greenspan saw as an economic indicator, declined 7.4 percent in May, the biggest monthly slide since January, and traded at $3.07 a pound at 11:41 a.m. Singapore time today. Burlap, used for industrial packaging, is down 9.7 percent this year, almost matching its 9.9 percent drop in 2008. Manufacturing Risk “If commodity prices are coming down, there is some downside risk to the manufacturing sector,” said Chris Rupkey , the chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “It’s too early to see it in people’s numbers yet, but if I had to guess, people will shave their estimates” for growth this year, he said. Commodities last fell into a bear market in 2008, when the CRB plunged 56 percent in five months as the U.S. suffered the worst financial crisis since the Great Depression, growth contracted on a global basis for the first time since 1981, and the Journal of Commerce index was below zero. Now, a slowdown in Europe, the biggest destination for Chinese exports, will “badly hurt” the Asian country, said Lewis Wan , the chief investment officer for Pride Investments Group, which oversees $150 million in Hong Kong. The Shanghai Stock Exchange Composite Index tumbled 21 percent this year as the government enacted measures to cool its property market. Euro Outlook As of last month, the European Union’s economy was expected to grow 1.1 percent this year after contracting 4.1 percent in 2009, the biggest drop since 1992, according to 19 economists surveyed by Bloomberg. A “wave of fiscal austerity” in Europe will depress the expansion in the region, in the U.S. and in China, according to Arnab Das , the head of global market research at Roubini Global Economics in London. The euro on May 19 dropped to $1.2144, its lowest level against the dollar since April 2006, as Spain was forced to rescue banks and policy makers including Italian Prime Minister Silvio Berlusconi said they would cut spending to combat a financial “tsunami” in the region. Investors are getting less bullish, according to the U.S. Commodity Futures Trading Commission. Speculative net-long positions , or bets on rising prices, for 16 commodity futures have dropped 33 percent in the past three weeks, CFTC data show. That’s the lowest level since Feb. 9, after the net-longs plunged 58 percent from a 20-month high on Jan. 12. “It’s the uncertainty that’s the biggest problem,” said John Kinsey , who helps manage C$1 billion ($995 million) at Caldwell Investment Management Ltd. in Toronto. “Commodities are being attacked with these concerns about the debt situation in Europe and the steps that China has taken to tighten. People are afraid this is going to slow the economy. It’s hard to see a way out of it.” To contact the reporter on this story: Millie Munshi in New York at mmunshi@bloomberg.net ; Elizabeth Campbell in New York at ecampbell14@bloomberg.net .

Read the full article →

Steve Parker: Breaking – Formula 1 returns to America!

May 25, 2010

Purpose-built track in Austin, TX will host from 2012 through 2021; as we predicted, with Tony George out of the way of F1 and Indianapolis Motor Speedway, an agreement is finally signed. Courtesy FORMULA1.COM: Formula One World Championship Limited and Formula One Administration Limited (together, the F1 Commercial Rights Holder) and Full Throttle Productions, LP, promoter of the Formula 1 United States Grand Prix™, announce that a historic agreement has been reached for Austin, Texas to serve as the host city of the Formula 1 United States Grand Prix™ for years 2012 through 2021. Ferrari at speed at 2009′s Japan Grand Prix “We are extremely honoured and proud to reach an agreement with the F1 Commercial Rights Holder. We have been diligently working together for several years to bring this great event to Austin, the State of Texas and back to the United States. All parties involved have a great amount of trust and confidence in each other and are committed to establishing the Formula 1 United States Grand Prix™ in Austin, Texas as a prestigious global event,” stated Tavo Hellmund, Managing Partner of Full Throttle Productions, LP. Bernie Ecclestone, President and CEO of the Formula One Group stated: “For the first time in the history of Formula One in the United States, a world-class facility will be purpose-built to host the event. It was thirty years ago that the Formula 1 United States Grand Prix™ was last held on a purpose-built permanent road course circuit in Watkins Glen, NY (1961-1980), which enjoyed great success. Since then, Formula One has been hosted by Long Beach, Las Vegas, Detroit, Dallas and Phoenix all on temporary street circuits. Indianapolis joined the ranks of host cities in 2000 when they added a road course inside the famed oval. Lewis Hamilton won the last Formula 1 United States Grand Prix™ in 2007, signalling the end to eight years at Indianapolis Motor Speedway. This however, will be the first time a facility is constructed from the ground up specifically for Formula One in the US.” www.JamesAllenOnF1.com says: “There is a major push to bring the USA under the F1 umbrella. The failure of the USF1 team was an embarrassment, but now it seems that there are efforts to resurrect the idea of an American team and You Tube founder Chad Hurley is still linked with this. Ferrari president Luca di Montezemolo has a better idea, he believes. He said in an interview today that he dreams of a third Ferrari in the stars and stripes colors.” Comments?

Read the full article →

Swaps Indicators Soar to 10-Month Highs as Investors Cut Exposure to Risk

May 25, 2010

By Abigail Moses and Shannon D. Harrington May 25 (Bloomberg) — Corporate and sovereign credit risk indicators worldwide reached or approached the highest levels in 10 months as heightened military tension in the Korean peninsula and a drop in the euro fueled concern that a global recovery will be derailed. Credit-default swaps benchmarks in Europe and Asia climbed to or near their highest levels since July while a North American credit-swap index approached a 10-month high reached May 7, the day after the Dow Jones Industrial Average plunged almost 1,000 points. Investors are cutting holdings of risk assets after North Korean leader Kim Jong Il ordered the military to prepare for combat and the U.S. said it will hold anti-submarine exercises with South Korea following the March 26 torpedoing of a warship. The euro slumped to near a four-year low after the International Monetary Fund urged Spain to overhaul ailing banks as the nation’s financial sector “remains under pressure.” “Asia is perceived as the growth engine of the recovery,” said Andrea Cicione , a credit strategist at BNP Paribas SA in London. “People are starting to question whether we can have a global recovery if Asia stumbles, and anything pointing in the direction of Asia stumbling is a reason for concern.” Credit-default swaps on the Markit iTraxx Crossover Index of 50 European companies with mostly junk credit ratings climbed as much as 67.9 basis points to a mid-price of 652.1 basis points before falling to 636.7, according to prices from Markit Group Ltd. The index is trading at the highest levels since July 29, end-of-day prices from CMA DataVision show. Recent High The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose as much as 9.25 basis points to 134.5 basis points before dropping to 130.9 as of 9:53 a.m. in New York, according to Markit prices. The index approached the 10-month high of 137.4 basis points reached on May 7. The Markit iTraxx Asia index of credit-default swaps on 50 investment-grade borrowers outside Japan surged 21.5 basis points to 170 basis points, the highest since July 17, according to CMA. The credit swaps indexes typically rises as investor confidence deteriorates; a decline signals the opposite. The perception of credit worthiness is fading as global stocks slump, the euro drops to a more than four-year low against the dollar, benchmark German bund yields plunge to their lowest in at least two decades and the 10-year U.S. Treasury note fell to its lowest in more than a year. Stocks Fall The MSCI World Index of 23 developed nations’ stocks fell 1.6 percent to the lowest since August in London. The euro fell for a second day against the dollar, declining 1.2 percent to $1.2224 after earlier reaching the lowest level since April 2006. The yield on the German bund dropped to 2.59 percent while the yield on the 10-year U.S. Treasury note fell 7 basis points to 3.12 percent at 8:36 a.m. in New York. Swaps on Spanish lenders jumped as four of the nation’s savings banks with more than 135 billion euros ($164 billion) in assets plan to combine as regulators push ailing institutions to merge with stronger partners. Spain’s central bank seized CajaSur, a savings bank in Cordoba owned by the Catholic Church, after it refused a merger plan four days ago. Contracts on Banco Santander SA climbed 22 basis points to 211, according to CMA DataVision. Swaps on Banco Bilbao Vizcaya Argentaria SA increased 22.5 basis points to 226, Banco Sabadell rose 11.5 to 296 and Banco Popular Espanol SA was up 25 to 319. Swaps on Morgan Stanley jumped 31 basis points to 270 basis points, according to broker Phoenix Partners Group. That’s the highest since May 15, 2009, CMA prices show. U.S. Banks Contracts on Goldman Sachs Group Inc. , the bank facing fraud allegations from the U.S. Securities and Exchange Commission, rose 13 basis points to 210 basis points, according to Phoenix. Contracts on Citigroup Inc. jumped 18 to 215 and Bank of America Corp. swaps rose 13 to 180. The cost of insuring against losses on South Korean government debt rose 33 basis points to 176, helping push the Markit iTraxx SovX Asia Pacific Index 26 basis points higher to 174, according to CMA. “Deterioration of the political situation on the Korean peninsula” pushed swap prices higher, said Brayan Lai , a Hong Kong-based credit analyst at Credit Agricole CIB. “The Asian credit default-swap indices have many Korean constituents.” Kim put the nation’s military on alert in a May 20 broadcast, the North Korea Intellectuals Solidarity group said in a report on its website, citing a person in the communist country. ITraxx Financial Index Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. The Markit iTraxx Financial Index of swaps linked to 25 banks and insurers rose 14.5 basis points to 179.5 and the subordinated index increased 23.5 to 271, according to JPMorgan Chase & Co. A basis point on a credit-default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year. The Markit iTraxx SovX Western Europe Index climbed 19 basis points to 158 as contracts on Spain increased 54 basis points to 267, CMA prices show. Greece jumped 62.5 basis points to 758, Portugal climbed 45 to 373, Italy rose 33 to 201 and Ireland was up 20 basis points at 314. To contact the reporters on this story: Abigail Moses in London at Amoses5@bloomberg.net ; Shannon D. Harrington in New York at sharrington6@bloomberg.net

Read the full article →

Default Swaps Tumble After EU Goes `All In’ With Loan Plan: Credit Markets

May 10, 2010

By Abigail Moses and Shannon D. Harrington May 10 (Bloomberg) — Credit markets rallied around the world after the European Union agreed on an aid package worth almost $1 trillion to halt the sovereign debt crisis. “There has been a poker game going on between the markets and the EU,” said Gary Jenkins , head of credit strategy at Evolution Securities Ltd. in London. “This is probably reaching a climax as the EU has just gone ‘all in.’” Credit-default swaps on the Markit iTraxx Europe Index of 125 investment-grade companies tumbled 32 basis points to a mid- price of 101 as of 4:46 p.m. in London, with banks leading the biggest ever one-day decline, according to Markit Group Ltd. Swaps on Greece fell 358.5 basis points to 557, Portugal dropped 178 to 247 and Spain declined 82.5 to 156 basis points, according to CMA DataVision. Contracts on France, Germany and the U.K. also fell. European policy makers stepped up efforts to prevent a sovereign-debt collapse and muffle speculation the 11-year-old euro could break apart. The measures came after contagion from Greece drove the common currency to a 14-month low, infecting the bank-funding system and threatening to slow the global economic recovery as borrowing costs rose from the U.S. to Asia. The loan package offers as much as 750 billion euros ($970 billion), including International Monetary Fund backing, to countries facing instability, while the European Central Bank said it will buy government and private debt. The Federal Reserve authorized temporary currency swaps with other central banks in response to the “re-emergence of strains” in Europe. ‘Nuclear Option’ “Politicians and the ECB have now pressed the nuclear option,” said Padhraic Garvey , a strategist at ING Groep NV in Amsterdam. “The central question from here is whether the cumulative measures can manage to stabilize the system.” Stocks surged around the world, the euro strengthened and commodities gained today on speculation the EU’s aid fund will underpin economic growth and ease the crisis that on May 7 drove the interest rate banks charge each other for three-month loans in dollars to the highest since August. Yields on corporate debt climbed last week by the most relative to government securities since Lehman Brothers Holdings Inc.’s bankruptcy in September 2008, according to Bank of America Merrill Lynch indexes. The Markit CDX North America Investment Grade Index, an indicator of perceived credit risk linked to 125 companies in the U.S. and Canada, fell 17.3 basis points to a mid-price of 101.4 basis points as of 11:49 a.m. in New York, Markit prices show. Swaps on JPMorgan Chase & Co., the second-biggest U.S. bank by assets, fell about 10 basis points to 105, according to broker Phoenix Partners Group. Goldman Swaps Contracts on Goldman Sachs Group Inc., the bank facing fraud allegations from the U.S. Securities and Exchange Commission, fell 18 basis points to a mid-price of 195 basis points, Phoenix prices show. The Markit iTraxx Financial Index of credit-default swaps on 25 European banks and insurers fell 42 basis points to 135 basis points and earlier dropped to 119, the biggest one-day drop ever, JPMorgan prices show. That’s still only the lowest in a week and is higher than the 87 basis-point level on April 13. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A decline signals an improvement in investor perceptions of credit quality. Bond Issuance Global corporate bond issuance plummeted to $9.4 billion last week, the least this year, following $30.1 billion in the previous five-day period and $47.9 billion in the week ended April 23, according to data compiled by Bloomberg. JPMorgan said in a May 7 report it’s ending a recommendation that investors own a greater percentage of junk bonds than contained in benchmark indexes. The three-month London interbank offered rate in dollars, which is how much banks pay for loans, fell to 0.421 percent, from 0.428 percent on May 7. That’s after it jumped 8.2 basis points last week, the biggest increase since October 2008. “There were a lot of people who didn’t realize how fully interrelated and large” the problems caused by the sovereign fiscal crisis were, said Brian Yelvington , head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut. Libor-OIS Spread The difference between three-month dollar Libor and the overnight indexed swap rate, the so-called Libor-OIS spread that’s a barometer of the reluctance of banks to lend, jumped to 19.13 basis points today from 18.11 basis points on May 7. The spread, which earlier reached 20 basis points, is more than three times the 6 basis-point spread on March 15 and is at the highest levels since August. The rate at which Royal Bank of Scotland Group Plc told the British Bankers Association it could borrow for three months jumped 14 basis points last week to 0.5 percentage point. Barclays reported rates that increased 11 basis points to 0.45, while Societe Generale SA, France’s second-largest bank by market value, said its rates climbed 8 basis points to 0.45 percentage point. Rates being charged for short-term loans are still more than 90 percent below the record levels in 2008, as banks are in better shape to weather a market seizure than when the U.S. subprime mortgage market collapsed. The Libor-OIS spread reached a record 364 basis points in October 2008. ‘As Bad as ‘08’ “The price action is probably as bad as anything we saw in September ‘08,” James Palmisciano , chief investment officer of the $1.7 billion Gracie Credit Fund in New York, said before European policy makers announced the loan package. The extra yield investors demand to own corporate debt instead of government securities soared 28 basis points to 177 basis points, or 1.77 percentage point, as of May 7, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The index, which peaked at 511 basis points in March 2009, dropped to as low as 142 on April 21. Spreads on European bank bonds widened 48 basis points last week to 238, the highest since September, according to Bank of America Merrill Lynch’s EMU Financial Corporate index. The index’s 1 percent loss this month follows returns of 0.49 percent in April and 1.12 percent in March. Europe’s debt-ridden nations still have to raise almost 2 trillion euros within the next three years to refinance maturing bonds and fund deficits. Led by Italy’s $126 billion, Greece, Spain, Portugal, Ireland and Italy have a total of $215 billion of debt coming due in the next three months, according to JPMorgan. “Credit investors should not overlook that this is more of a sovereign bailout rather than a private-sector bailout,” Philip Gisdakis , the head of credit strategy at UniCredit SpA in Munich, wrote in a note to investors. “The austerity measures that will be part of the program will have a negative impact on corporate spreads.” To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net ; Abigail Moses in London at Amoses5@bloomberg.net

Read the full article →

The Best-Reviewed Hotels In America: Expedia Users’ Picks (PHOTOS)

May 8, 2010

Finding a great hotel — the kind of lodging you’ll return to time and again — can certainly be painstaking. For every white-gloved, four-star gem there’s a thousand anonymous, bland hotel rooms waiting for the next weary traveler to arrive. Hotel quality, thankfully, isn’t just about price. The travel website Expedia ranked the world’s best hotels based on more than 500,000 user reviews. The U.S. hotels in Expeida’s Insiders’ Select list include some quintessentially classy accommodations like Philadelphia’s stately Ritz-Carlton or Phoenix’s pristine Royal Palms Resort and Spa. But they also include some truly affordable hotels that you may want to check out if you happen to be in, say, Boise, Idaho. Check out Expedia’s full Insiders’ Select list here — and check out the best-reviewed hotels in the U.S. below:

Read the full article →

E*Trade Founder Porter Sees More Mergers, Rivals for Securities Exchanges

April 30, 2010

By Nina Mehta April 30 (Bloomberg) — E*Trade Financial Corp. founder William A. Porter said he expects more mergers among exchanges in coming years, and that he wouldn’t have a problem if hedge funds were “outlawed.” The 82-year-old entrepreneur who built E*Trade into a $3.33 billion discount broker with 2.6 million brokerage accounts is receiving the Sullivan Award today in Phoenix for his contributions to the options industry as a co-founder of the New York-based International Securities Exchange. Porter said new exchanges will keep cropping up, and that’s good for investors. “When more people are competing, that reduces the cost of trading,” Porter said in an interview. “Everyone benefits except market makers who have to trade a lot more to make up for the fact that the spreads shrink.” Market makers buy and sell continuously, usually making money on the difference between bid and offer prices. CBOE Holdings Inc., owner of the Chicago Board Options Exchange, plans to see shares in an initial public offering in June that analysts such as Equity Research Desk LLC’s Diego Perfumo say may be a prelude to a merger. Nymex Holdings Inc., CBOT Holdings Inc. and International Securities Exchange Holdings Inc. were bought within three years of their IPOs, bringing industry takeovers to $61 billion since 2007 after government regulations spurred new markets and squeezed profits, data compiled by Bloomberg show. Four or Five Competition has driven down commissions and also changed the businesses of exchanges by forcing them to gain volume through mergers. This trend will continue even as new rivals crop up, Porter said. “In the long haul there will be four or five of these exchange groups,” Porter said. “After we became a live exchange” at ISE, “it was clear to me that we had to join up with someone.” Eurex, owned by Deutsche Boerse AG and SIX Swiss Exchange AG, bought ISE in 2007. Hedge funds and computer traders provide a “great deal of liquidity that wouldn’t otherwise exist,” benefiting individuals, Porter said. “At same time, the money that hedge funds make generally comes from the little guy or other hedge funds, and I’d just as soon see the whole bunch of them outlawed.” A hedge fund came to the rescue when the broker Porter founded struggled following the collapse of the subprime- mortgage market. Citadel’s Rescue E*Trade, based in New York, hasn’t posted a quarterly profit since 2007, and Kenneth Griffin ’s hedge-fund operator Citadel Investment Group LLC injected $2.5 billion of cash into the company in November 2007 to prevent a collapse. E*Trade named Steven Freiberg as chief executive officer in March 2010, after initially failing to find a permanent replacement when Donald Layton retired in December and disclosing that its preferred candidate was no longer available. Previous winners of the Sullivan Award, which recognizes contributions to the options industry, include CBOE Chief Executive Officer William Brodsky , ISE Co-Founder David Krell , Interactive Brokers Group CEO Thomas Peterffy and Jeffrey Yass, founder of market maker Susquehanna International Group LLP. In the mid-1990s, Porter began to focus on why E*Trade could charge $9.95 per trade for stocks — “and actually make a lot of profit there,” he said — and had to charge $33 for options trades. Options Monopoly The reason was the “cozy monopolistic situation of the exchanges,” which discouraged exchanges from trading one another’s products, keeping investors’ costs high, Porter said. An option on International Business Machines Corp. at the time could change hands only in the trading pit on the Chicago Board Options Exchange. Now IBM options are traded on eight exchanges. Porter decided to create an electronic market to compete with the four floor-based U.S. exchanges because Europe had begun creating venues that used computers to match orders. He arranged for Stockholm-based OM AB, now part of Nasdaq OMX Group Inc., to create the trading platform for his company’s exclusive use in the U.S. Porter co-founded ISE with former NYSE employees David Krell and Gary Katz , who had started a consulting company after the Big Board sold its options business to CBOE in 1997, and Marty Averbuch , an E*Trade colleague. In 2004, ISE briefly became the largest options exchange, surpassing CBOE. In December and March ISE was the third-largest market, behind Nasdaq OMX PHLX, operated by Nasdaq OMX Group Inc. in New York. ISE now faces competition from venues that have transformed themselves to battle for share in a largely electronic marketplace. In March, ISE traded 19.4 percent of options volume, its lowest level since June 2002. Color TV Porter is also the inventor of an infrared horizon sensor that enables satellites to know which way is “down,” as he put it. He holds 14 patents for inventions in military and commercial technology. These include the first color low-light- level broadcast television camera, the first backpack broadcast color TV camera, which he said weighed 120 pounds, and the first exhaust sensors for automotive pollution control. Porter got into finance in the mid-1970s after Commercial Electronics Inc., a firm he founded in Palo Alto, California, shut down. Porter sold the company in 1975 to New York-based Warner Communications Inc. for $15,000, which he began investing. His interest money management pushed him to find a source of online stock quotes. That led in 1978 to his first business plan for Trade*Plus, the predecessor to E*Trade. “I put the asterisk there because Trade Plus is kind of blah, so to give it a little pizzazz,” Porter said. He said he trades about three times a week, either on E*Trade or Fidelity Investments, and his attention to electronics hasn’t waned. “I buy every new gadget that comes out — I’m a gadgeteer,” he said. “But in the same breath I have to say I don’t know how to run a computer anymore. The world has passed me by.” To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net .

Read the full article →

Goldman, JPMorgan Credit Risk Rises as Senate Weighs Bank Bill, Swaps Show

April 26, 2010

By Shannon D. Harrington April 26 (Bloomberg) — The cost to protect the debt of Goldman Sachs Group Inc. , Morgan Stanley , JPMorgan Chase & Co. and two other derivatives dealers jumped for the fourth day as the U.S. Senate considers a bill that may curb their trading revenue. Credit-default swaps on Goldman Sachs, the bank facing fraud allegations from the U.S. Securities and Exchange Commission, jumped to the highest in almost a year. Contracts on Morgan Stanley and Bank of America’s Merrill Lynch unit reached the highest since August, and JPMorgan swaps climbed the most in more than 11 weeks. The legislation would damp one of Wall Street’s most profitable businesses, in which Goldman, JPMorgan, Bank of America, Morgan Stanley and Citigroup Inc. earned an estimated $28 billion in revenue last year, according to filings with the Federal Reserve and people familiar with their income sources. The Senate is set to hold a test vote today on legislation that would force the most actively traded derivatives to exchanges or trading platforms that resemble exchanges, mandate banks to hold more capital on other derivatives trades and require commercial banks to wall off swaps trading desks. “You’re talking about a pretty significant contributor to earnings,” said Alexander Yavorsky , a senior analyst at Moody’s Investors Service in New York. “If they lost a material portion of that, it obviously wouldn’t be good. The problem with exchange trading for dealers is that they would be giving up profits without a concomitant decrease in risk to compensate for it.” Senator Richard Shelby , a lead negotiator on the financial- reform bill, said Republicans will block Democrats’ efforts to begin debate on the measure in a test vote today. Hearing Tomorrow Five-year credit-default swaps on Goldman jumped 22 basis points to 166 basis points as of 12:12 p.m., according to broker Phoenix Partners Group. That’s the highest since May 2009, CMA DataVision prices show. The Senate Permanent Subcommittee on Investigations is set to question Goldman Chairman and Chief Executive Officer Lloyd Blankfein and six current and former employees of the firm tomorrow. The SEC says Goldman Sachs and executive director Fabrice Tourre misled investors in a 2007 collateralized debt obligation about the role played by hedge fund Paulson & Co., which bet the CDO would collapse. Goldman swaps have jumped 75 basis points since April 15, the day before the SEC announced its fraud suit. Swaps on JPMorgan climbed 15 basis points to a mid-price of 87.5 basis points, the most since Feb. 4, CMA prices show. Morgan Stanley swaps jumped 32 to 182.5. Contracts on Merrill rose 34.5 to 190.5 and Bank of America swaps increased 35 to 160, CMA prices show. Markit CDX Index Swaps on Citigroup Inc. rose 22.5 basis points to a mid- price of 184.5, Phoenix prices show. A benchmark indicator of U.S. corporate credit risk rose to the highest in two months. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Credit-default swaps on the Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 1.1 basis point to a mid-price of 89.96 basis points as of 12:40 p.m. in New York, according to index administrator Markit Group Ltd. To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

Read the full article →

Goldman Sachs Credit Swaps Rise a Second Day After Fraud-Related SEC Suit

April 19, 2010

By Shannon D. Harrington, Kate Haywood and John Detrixhe April 19 (Bloomberg) — The cost to protect against losses on bank bonds jumped for the second day amid speculation that U.S. fraud charges against Goldman Sachs Group Inc. may trigger similar probes or lawsuits and embolden lawmakers’ efforts to crack down on financial firms. Credit-default swaps on Goldman reached the highest in two months as U.K. Prime Minister Gordon Brown yesterday called for the Financial Services Authority to follow the U.S. Securities Exchange Commission and start a probe, and German Chancellor Angela Merkel said her nation’s financial regulator asked the SEC for details on its Goldman suit. Swaps on banks including Citigroup Inc. and Deutsche Bank AG jumped. “If these charges are damning enough to actually cause some instability in the markets, nobody really believes Goldman is the only one that might be guilty here,” said Brian Yelvington , head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut. The SEC last week said New York-based Goldman sold collateralized debt obligations linked to subprime mortgages without disclosing that a hedge fund that was betting against the debt had helped select underlying securities. Goldman said in a statement last week that the charges are “completely unfounded.” CDOs pool bonds, loans and other fixed-income assets into securities of varying risk and return. Bank Swaps Credit swaps protecting Goldman debt for five years jumped 7 basis points to 134 basis points after earlier trading as high as 140 basis points, according to broker Phoenix Partners Group. It’s the biggest two-day increase in a year, CMA DataVision prices show. Contracts on Citigroup jumped 16 basis points to 138, Deutsche Bank rose 4.5 to 98, Morgan Stanley climbed 17 to 153 and Bank of America Corp.’s Merrill Lynch unit rose 18 to 159, CMA prices show. “The fear is that this will make regulations even tighter, increase the potential for fines and other judgments and push down bank profits in the near term,” said Jeffrey Burch , co- head of global credit at Investec Asset Management in London. A benchmark indicator of U.S. corporate credit risk climbed to the highest in four weeks. Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, jumped 1.8 basis point to a mid-price of 89.13 basis points as of 11:03 a.m. in New York, according to index administrator Markit Group Ltd. Legislative Outlook The Markit iTraxx Europe Index of 125 investment-grade companies rose 3 basis points to 82.9, Markit prices show. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. The Goldman Sachs suit may embolden lawmakers who want to hold Wall Street firms accountable for the financial crisis that sparked the worst recession since the Great Depression, said John Anderson , head of credit at Gartmore Investment Management in London. Senator Blanche Lincoln, an Arkansas Democrat, released a bill last week that would limit derivatives trading by commercial banks, barring dealers in swaps from taking advantage of the Federal Reserve’s discount lending window, emergency liquidity functions and the Federal Deposit Insurance Corp.’s insurance and guarantee functions. ‘Red Meat’ President Barack Obama said in his weekly address on radio and the Internet that his plan to overhaul U.S. financial regulation is the only way to prevent the “turmoil that ripped through our economy over the past two years.”     “The perception was that banks were returning to profitability and that everything in the garden was rosy,” Anderson said. “But Obama has set his sights on the banking community, and the regulators want some red meat.” Goldman’s 5.375 percent bonds due in 2020 are the most- traded U.S. corporate notes today, falling 1.03 cents on the dollar to 98.56 cents to yield 178 basis points more than similar-maturity Treasuries as of 10:51 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority data show. Citigroup said first-quarter profit more than doubled, beating analysts’ estimates as the global economic rebound trimmed costs for bad loans and boosted revenue from consumer banking. The bank’s 6.01 percent bonds due in 2015 fell 0.3 cent on the dollar to 106 cents, a spread of 209.2 basis points, Trace data show. Morgan Stanley’s 5.5 percent notes due in 2020 declined 1.4 cent to 97.42 cents, a spread of 206.9 basis points, Trace data show. To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net ; Kate Haywood in London at khaywood@bloomberg.net ; John Detrixhe in New York at jdetrixhe1@bloomberg.net ;

Read the full article →

Zero Hedge: What Life Is Like For The Median Earner

April 13, 2010

Over at Zero Hedge, guest blogger Graham Summers of Phoenix Capital Research has laid out what life is like for Americans earning the “median” income ($50,300, based on available data from 2008) — and quickly discovers that, even under optimal circumstances and monastic spending habits, it’s terribly hard for ordinary Americans to simply “get by” in today’s economy. In 2008, the median US household income was $50,300. Assuming that the person filing is the “head of household” and has two children (dependents), this means a 1040 tax bill of $4,100, which leaves about $45K in income after taxes (we’re not bothering with state taxes). I realize this is a simplistic calculation, but it’s a decent proxy for income in the US in 2008. Now, $45K in income spread out over 26 pay periods (every two weeks), means a bi-weekly paycheck of $1,730 and monthly income of $3,460. This is the money “Joe America” and his family to live off of in 2008. Now, in 2008, the median home value was roughly $225K. Assuming our “median” household put down 20% on their home (unlikely, but it used to be considered the norm), this means a $180K mortgage. Using a 5.5% fixed rate 30-year mortgage, this means Joe America’s 2008 monthly mortgage payments were roughly $1,022. So, right off the bat, Joe’s monthly income is cut to $2,438. Summers proceeds from there, ticking off typical expenses related to food, utilities, transportation costs and health insurance. If you allow the median earner expenses related to cell phones, cable television and Internet service, Summers figures they are left with about “$100-200 discretionary income left at the end of the month.” One can quibble at the margins of this analysis, certainly. Available public transportation can eliminate the need to maintain an automobile, there are strategies for reducing the cost of food and no one really needs cable television if it means starving to death. But I’d point out that there are plenty of median earners in expensive rental markets, a family medical crisis could easily blow this budget to shreds and I don’t see any line items for childcare expenses (or, indeed, clothing, which last time I checked is a necessity). Oh, and maybe we should drop the curtain on the economic cheerleading? This is why there simply cannot be a sustainable recovery in the US economy. Because we outsourced our jobs, incomes fell. Because incomes fell and savers were punished (thanks to abysmal returns on savings rates) we pulled future demand forward by splurging on credit. Because we splurged on credit, prices in every asset under the sun rose in value. Because prices rose while incomes fell, we had to use more credit to cover our costs, which in turn meant taking on more debt (a net drag on incomes). I’m reminded of Dale Maharidge, who told me that “we’re a nation of the working poor, and it’s something that people don’t want to acknowledge,” and that more journalists should get beyond the idea that economic realities can be adjudicated in a white paper or in a boardroom. Summers’s contribution is a rare one that works to reveal the nuts-and-bolts reality of what the average American is going through. And, naturally, that’s the median experience in America. There are people doing a lot worse. Many of 2008′s median earners, in fact, may be un- or underemployed in 2010. But, as David Brooks reminds us, these are all just losers who don’t work as hard as rich people , never mind them. MORE: It’s Impossible to “Get By” In the US [Zero Hedge] [h/t: CJR's The Audit ] [Would you like to follow me on Twitter ? Because why not? Also, please send tips to tv@huffingtonpost.com -- learn more about our media monitoring project here .]

Read the full article →

States Target Payday Lenders

April 8, 2010

PHOENIX — When Jeffrey Smith needed some quick cash to pay a medical bill, he turned to a payday loan store near his home outside Phoenix. He eventually took out a string of payday loans and fell into a vicious cycle in which he would call out sick from work so he could drive all over town to pay off loans and take out new ones. The experience left him in bankruptcy, lying to his wife and fighting thoughts of suicide. Stories like Smith’s and a growing backlash against payday lending practices have prompted legislatures around the country to crack down on the businesses. In the most severe case, Arizona lawmakers are on the verge of shutting down the entire industry in the state. A law took effect in Washington this year capping the amount of payday loans and the number that a borrower can take out in a year. And in Wisconsin, lawmakers are locked in a heated battle over whether to regulate the industry. Payday lenders say they are providing an important service, especially in a dreadful economy where people are short on cash. Detractors say the industry preys on desperate people with annual interest rates that routinely exceed 400 percent. “It’s sort of like a twisted person that’s standing on the street corner offering a child candy,” Smith said. “He’s not grabbing the child and throwing him into a van, but he’s offering something the child needs at that moment.” Payday loans are short-term, high-interest loans that are effectively advances on a borrower’s next paycheck. For example, a person who needs a quick $300 but doesn’t get paid for two weeks can get a loan to help pay the bills, writing a postdated check that the store agrees not to cash until payday. The borrower would have to pay $53 in finance charges for a $300, two-week loan in Arizona – an annual interest rate of 459 percent. Payday loan stores are ubiquitous in Arizona, especially in working-class neighborhoods of Phoenix where the businesses draw in customers with neon lights and around-the-clock hours. Payday lenders in Arizona several years ago were granted a temporary exemption from the state’s 36 percent cap on annual interest rates. The exemption expires June 30, and the industry says the interest cap is so restrictive that it will have to shut down entirely. Bills that would have kept the industry alive languished in the House and Senate, and the year’s third and final attempt was pulled Tuesday amid a lack of support. Consumers frustrated with the economy “look for a dog to kick” because they’re angry with the financial institutions they blame for the Great Recession, said Ted Saunders, chief executive of Dublin, Ohio-based Checksmart, a payday lender that operates in 11 states including Arizona. “They want to find a villain,” Saunders said. And opponents “have done a good job of painting a big X on my back.” Payday lending opponents say the industry depends on trapping some borrowers in a cycle of debt where they continually renew their loan or take out new ones because they can’t afford to pay the debt while still covering their daily expenses. Eventually, the fees can surpass the value of the initial loan so the lender profits even if the borrower defaults. Industry proponents say the market has shown a need for short-term, small-dollar loans that aren’t generally available from banks or credit unions, especially with traditional lenders being more conservative in the down economy. They say the industry supports working families that otherwise wouldn’t have access to credit in an emergency. Supporters also say taking a payday loan is cheaper than paying a late fee or bouncing a check to cover emergency costs like fixing a car or keeping the electricity turned on. The voting public doesn’t seem to be buying the argument. In 2008, voters in Arizona and Ohio soundly rejected industry-backed measures that would have allowed payday lenders to continue charging high annual interest rates. A group in Montana is collecting signatures for an initiative asking voters to decide whether to cap interest rates at a level that would doom the industry. “It’s just a fairness issue,” said state Sen. Debbie McCune Davis, a Phoenix Democrat who led the fight at the Legislature against payday loans. “I think when people work for a living they’re entitled to have financial instruments that are ethical in the way that they operate.” Industry backers say the election results aren’t a good guide because many voters have no experience with payday loan services. “Our customers, they don’t have much of a voice in these fights,” said Steven Schlein, a spokesman for the industry lobbying group Consumer Financial Services Association of America. Arizona wouldn’t be the first state to kick out payday lenders. North Carolina let lapse a temporary law authorizing payday loans, and the District of Columbia repealed its law allowing them. Ohio tried to cap interest rates at 28 percent, but some payday lenders have survived by using a state law allowing them to charge loan origination fees. The payday loan industry has succeeded in fighting back attempts in Congress to crack down on their business thanks to an expensive lobbying effort. When Arizona’s law expires, executives have said they’ll try to keep open some of their 650 stores in the state by stepping up their other lines of business, including car title loans, check cashing and prepaid debit cards. “The payday statutes will evaporate out of the books, (but) the demand doesn’t go away,” industry lobbyist Lee Miller said. “Capitalism abhors a vacuum. Entrepreneurs will come forward and try to find a profitable way to meet that demand.” ___ Associated Press Writer Paul Davenport in Phoenix contributed.

Read the full article →

Apartment Rents Decline in U.S. as Vacancies Increase to Record, Reis Says

April 6, 2010

By Oshrat Carmiel April 6 (Bloomberg) — U.S. apartment rents dropped in the first quarter and the vacancy rate remained at a record as unemployment near a 26-year high limited tenant demand. Actual rents paid by tenants, known as effective rents, declined 1.5 percent from a year earlier, Reis Inc . said in a report today. Asking rents fell 1.6 percent, according to the New York-based property research firm. Vacancies were unchanged at 8 percent, the highest level since 1980, when Reis began tracking the number, said Victor Calanog , director of research. U.S. rental demand has slumped as employers cut 8.4 million jobs since the start of the recession in December 2007. The bigger drop in asking rents than effective rents in the first quarter signals that landlords are pricing their properties lower at the outset and minimizing concessions, Calanog said. “Landlords are saying: ‘Even before we talk about the free month off, and even before we talk about the free gym, we want to lower the asking rents to get you through the door,’” he said in a telephone interview. The U.S. unemployment rate was 9.7 percent for the third straight month in March, the Labor Department said April 2. The economy added 162,000 jobs in the month, a sign the labor market may be recovering. Actual rents fell year over year to an average of $967 in the first quarter, Reis said. Asking rents dropped to $1,027. Sequential Growth Rent rates rose less than half a percent from the previous quarter, the first sequential growth since the three-month period when Lehman Brothers Holdings Inc . filed for bankruptcy. The net change in occupied space, a measure of leasing known as absorption, grew by 20,424 units, the most for the first quarter since 2000, according to Calanog. “The perception that labor markets are stabilizing is probably enough to tip the demand for apartments,” he said. Effective rents fell the most, year over year, in Las Vegas; San Jose, California; Phoenix; Seattle; and San Francisco, according to Reis. Rents paid by tenants climbed the most in Colorado Springs, Colorado; Washington, D.C.; San Antonio; and Dayton, Ohio. To contact the reporter on this story: Oshrat Carmiel in New York at ocarmiel1@bloomberg.net .

Read the full article →

Amar’e Stoudemire: Top 5 Financial Tips for Teens

April 5, 2010

Today, I am visiting Washington High School in Phoenix to present “The Fundamentals of Finance” seminar, in partnership with Plastyc, to encourage responsible money management skills. In conjunction with the seminar, we’re posting these financial tips for teens: Earn money Besides gift-money or money you get from your parents, earn some more from a summer or part-time job that does not interfere with your school work. If you are creative, come up with your own things to sell. I (Amar’e) used to shovel snow in the winters in New York and babysit neighborhood kids to earn some extra dollars. Save most You are going to work really hard cleaning up an office, babysitting or helping a family friend to make the money you earn, so save what you can. We know money is tight right now and it may seem like you should spend it while you have it. We suggest saving most of it so that you can have money for something you want in the future. Money used to burn through my hands as a teenager until I (Amar’e) realized that I liked the feeling of having money in my bank account in case I needed it. Spend some Buy what you need. Look around for the best deals, look online, decide which options are best for you. As I (Patrice) tell my son, don’t buy something just because everyone else has it. Be different and creative when making purchases. Don’t borrow You may have no choice later, but avoid going into debt for as long as you can. There is no benefit for you in owing your parents or your friends money, unless it’s for something important such as college or starting your own business as I (Patrice) did. Watch out Most check cashing services charge too much, and bank accounts and cards can be loaded with fees. There are plenty of comparison sites that can tell you what the lowest cost accounts and cards are, without having to read all the fine print. One example we can both recommend is www.bankrate.com .

Read the full article →

Amar’e Stoudemire: Top 5 Financial Tips for Teens

April 5, 2010

Today, I am visiting Washington High School in Phoenix to present “The Fundamentals of Finance” seminar, in partnership with Plastyc, to encourage responsible money management skills. In conjunction with the seminar, we’re posting these financial tips for teens: Earn money Besides gift-money or money you get from your parents, earn some more from a summer or part-time job that does not interfere with your school work. If you are creative, come up with your own things to sell. I (Amar’e) used to shovel snow in the winters in New York and babysit neighborhood kids to earn some extra dollars. Save most You are going to work really hard cleaning up an office, babysitting or helping a family friend to make the money you earn, so save what you can. We know money is tight right now and it may seem like you should spend it while you have it. We suggest saving most of it so that you can have money for something you want in the future. Money used to burn through my hands as a teenager until I (Amar’e) realized that I liked the feeling of having money in my bank account in case I needed it. Spend some Buy what you need. Look around for the best deals, look online, decide which options are best for you. As I (Patrice) tell my son, don’t buy something just because everyone else has it. Be different and creative when making purchases. Don’t borrow You may have no choice later, but avoid going into debt for as long as you can. There is no benefit for you in owing your parents or your friends money, unless it’s for something important such as college or starting your own business as I (Patrice) did. Watch out Most check cashing services charge too much, and bank accounts and cards can be loaded with fees. There are plenty of comparison sites that can tell you what the lowest cost accounts and cards are, without having to read all the fine print. One example we can both recommend is www.bankrate.com .

Read the full article →

House Flippers in U.S. Rush Bums Off Courthouse Steps in Pursuit of Deals

March 31, 2010

By Prashant Gopal March 31 (Bloomberg) — During the U.S. housing boom , even amateur investors could buy and sell a property within a couple of months and turn a profit. Today there’s nothing amateur about house flipping. Homes with punctured walls and missing appliances draw multiple offers from professional investors at auctions in foreclosure-ridden states such as Arizona, California, Florida and Nevada. Competition is so stiff that experienced flippers such as Sergio Rodriguez and Brian Bogenn look back with nostalgia at last year, when they turned over 48 residences in the Phoenix area. “A year ago, bums outnumbered bidders at the courthouse steps,” where many foreclosure auctions take place, Rodriguez said. “Now the bums are way outnumbered.” In Phoenix, 4,661 foreclosed homes changed hands within six months of being purchased in 2009, an increase of 81 percent from the year earlier, according to RealtyTrac Inc., which sells foreclosure data. Flips in the California counties of Riverside and San Bernardino rose 45 percent to 17,203. In Las Vegas, which has the highest foreclosure rate in the country, they climbed 38 percent to 8,042. Nationally, flipped homes gained 19 percent to 197,784 in 2009. Final figures may rise because some homes bought in the fourth quarter may get flipped this year, said Daren Blomquist , a spokesman at Irvine, California-based RealtyTrac. FHA Waiver Sales could get a lift from the Federal Housing Authority’s one-year waiver of anti-flipping rules that took effect Feb. 1, allowing FHA borrowers to acquire foreclosed homes from owners who have held title for less than 90 days. That gives first-time buyers a shot at investor-renovated homes, said Vicki Bott, a deputy assistant secretary at the Department of Housing and Urban Development in Washington. The change also may help clear properties from markets such as Phoenix, where one in 124 homes in the metropolitan area received a foreclosure notice in February, the ninth-highest rate in the nation, according to RealtyTrac . Real estate values usually fall in neighborhoods littered with vacant homes. The steps in front of the Maricopa County courthouse in downtown Phoenix are crowded most afternoons as dozens of people wearing sunglasses and ear buds plugged into their cell phones gather around auctioneers. The bidders speak in hushed voices by phone to the investors they represent — both flippers and those who plan to rent out the properties — as they work out their “number,” or maximum offer. High-Stakes Poker “It’s like a high-stakes poker game out here,” said Frank Gerola, 34, who represents buyers for PostedProperties.com , one of many companies that have sprouted up in Phoenix to serve flippers. “They want to know what you’re bidding on. You’ll have one guy bidding and another guy around him seeing if he can peek at his number,” said Gerola, who competes against representatives of companies such InvestAZHouses.com and TopPriorityInvestments.com. Some investors try to cheat. Hours before the foreclosure auction for 7848 East Pampa Avenue in Mesa, Arizona, visitors were greeted with a handwritten sign pasted to the inside of the front window: “OCCUPIED. NO TRESPASSING,” read the note on the 12-year- old beige stucco house. “Needs carpet, paint. Tile is cracked.” It also warned of missing appliances and fissures in the pool and foundation. New Paint, Carpet It was a ruse, said Rodriguez and Bogenn, who checked out the house on March 18, the day after their $181,200 offer beat out a handful of bidders. An investor probably was trying to ward off competitors, Bogenn said. The house, which was vacant for months, only needed new paint, carpet, fixtures and a pool cleaning, they said. They planned to put it on the market this week for about $230,000. Rodriguez, 31, and Bogenn, 47, didn’t see the house before making an offer. Like many investors, they subscribe to a service that checks titles and sends drivers to properties before the auction to relay photos and descriptions by mobile phone. As the median existing price of U.S. homes climbed an average of 8.1 percent a year from 2000 to 2005, amateurs by the thousands jumped into flipping. Buying and selling homes with the aim of a quick profit was such an American obsession that it spawned two cable-television series — “Flip This House” on A&E and “Flip That House” on TLC — that debuted in 2005 as the market peaked. The reality shows, now in re-runs, tracked people as they tried to flip a home. Back to Flipping “Amateur hour is over,” said Richard C. Davis, who created “Flip This House” and appeared in its first season. Davis, now chief executive officer of Charleston, South Carolina-based Trademark Properties, said he has fixed and sold 25 properties since returning to the business in October and is filming a new series about multimillion-dollar homes built during the boom that he is buying, repairing and selling for half their original price. “The professionals will make more money in a down market than they ever made during the boom,” Davis said. In job markets decimated by the housing crash, flipping is also putting carpenters, construction workers and home inspectors back to work and attracting a new generation of real estate professionals. Josip Eljuga, 25, left a $9-an-hour job as a lot attendant at a car dealership nine months ago to work as a driver, or runner, as he is sometimes called. The pay is better — about $14 per house — and the days are unpredictable. Tell-Tale Signs Sometimes occupants scream at him, other times he comforts them, he said. Most often, his knocks go unanswered, and it’s his job to find signs of occupancy — water flowing from the hose bib, a car in the garage, a container of coffee creamer left on the kitchen table. A rotting pumpkin mixed in with scattered toys in the backyard of a house on South 30th Avenue in Phoenix one recent afternoon suggested the four-year-old home had been vacant since some time after Halloween. Eljuga wants to get into the flipping business and has already discussed pooling money with friends. “It seems like there can be good money if you do it right,” he said. “Based on what I have seen, I think I have enough knowledge to do fairly well.” Brandon Hunt, 28, said he and his business partner flipped 46 homes in the Phoenix area last year and made $1 million in profits. Hunt, who became a real estate agent during the housing boom, said he doesn’t have much in common with many of the flippers who jumped in at the top of the market . For one thing, he said, he buys low. “There was no buying at the courthouse steps in 2005 and 2004, because there was no foreclosure,” Hunt said. Helping Home Values Another important difference, said 42-year-old Phoenix investor Harry D’Elia, is that flippers in 2010 are stabilizing neighborhoods. “We’re the good guys because what’s happening is that the government doesn’t have enough money to fix these homes up,” said D’Elia, who also flipped properties during the boom. The FHA has given investors such as D’Elia a new stream of potential customers with the flipping waiver. “We do believe investors will play an important role in today’s marketplace because they tend to be more liquid than first-time homebuyers,” said Bott of Housing and Urban Development. Hunt said the FHA waiver might take time to have an impact because cash buyers are easy to find. Selling to an FHA borrower requires added paperwork and two appraisals when a property is sold for more than 20 percent of the seller’s acquisition cost. International Buyers Investors expect to be busy for years to come as continued weakness in home sales fuels foreclosures, which will climb to more than 4.5 million this year from 3.96 million in 2009, according to an estimate by RealtyTrac. In February, sales of new homes in the U.S. fell 2.2 percent to a record low annual pace of 308,000, the Commerce Department reported March 24. Sales of existing homes dropped 0.6 percent last month to a 5.02 million annual level, the lowest in eight months, the National Association of Realtors said March 23. U.S. median home prices dropped 28 percent to $165,100 in February from the peak in July 2006, according to the Washington-based trade group. In Florida, which along with Arizona has the second-highest foreclosure rate in the U.S. after Nevada, international buyers are scooping up blocks of rehabbed houses, said real estate agent Brad Cozza. Foreign Connections “The investors are re-emerging,” said Cozza, who flips foreclosed homes in the Cape Coral area on the west coast of Florida to Israeli, German and Spanish investors and vacation- home buyers. “These are wealthy people who have considerable amounts of savings.” In Lee County, Florida, which includes Cape Coral, flips almost tripled to 2,617 last year. Cozza said his business got a boost after he gave a presentation to 925 Israeli investors last month in Tel Aviv. The conference was organized by America Israel Investments LLC, which buys foreclosed homes in Lee County and sells them to Israeli buyers. Edmon Mamane, the company’s owner, said he pays $48,000 to $60,000 for residences, some of which have never been lived in, and flips them for about $80,000. Israeli real estate investor Dror Shlomi, 50, bought a 2,200-square-foot duplex from America Israel Investments a few weeks ago for $79,000; the two families occupying the four-year- old property pay a combined $1,300 a month in rent. Shlomi said he’s in the process of selling his 10 investment properties in Israel and shifting his focus to Florida. “Last year, prices in Israel went up and in the states they went down, so we decided this is the right timing to try to find interesting things in the U.S.,” he said. Grind It Out Robert Fahn, 50, who along with a partner has bought and sold 10 homes in the Sacramento area since last February, said he’s pleased with his 10 percent to 15 percent profit margin. But the window for house flipping is closing as newcomers are bidding up prices, he said. “If someone is thinking about quitting their day job, they should think twice because the market is going to go away at some point and margins are getting squeezed,” said Fahn, who is investigating opportunities in Florida and Phoenix. “This is not a get-rich-quick business,” he said. “This is a grind-it-out business. But once you know how to do it, you only have to commit resources when the price is right.” To contact the reporter on this story: Prashant Gopal in New York at pgopal2@bloomberg.net .

Read the full article →

Covered Bonds Rise Most Since ’06 Signaling Europe Rebound: Credit Markets

March 23, 2010

By Kate Haywood and Bryan Keogh March 23 (Bloomberg) — Europe’s banks are selling covered bonds at the fastest pace in four years in a sign that debt investors are betting Europe’s economy is strong enough to weather the budget crisis in Greece. Caja Ahorros Barcelona, Spain’s largest savings bank, and Westdeutsche Immobilienbank AG, a unit of Germany’s third- biggest state-owned lender, are among the mainly European financial companies that issued 87.5 billion euros ($118 billion) of the notes this year, according to data compiled by Bloomberg. That’s the most since 95.4 billion euros of the bonds were sold in the same period of 2006. Sales of securities backed by mortgages and public-sector loans are rising as euro-region ministers agree to a framework to bail out Greece. A day after European Central Bank President Jean-Claude Trichet said recent data points to a “moderate recovery,” Germany and France agreed that the International Monetary Fund should be involved in any package for the Mediterranean nation, a German Finance Ministry official said. “This is about a healing in all markets” and banks “are benefiting,” said Daniel Shane , a banker in the debt capital markets group at Morgan Stanley in London. “People are more comfortable holding bank paper and the covered bond market is one of the recipients of that.” The extra yield investors demand to own euro-denominated covered bonds relative to government debt is the lowest in almost two months at 89 basis points, or 0.89 percentage point, from a high for the year of 100 basis points on Feb. 8, Bank of America Merrill Lynch index data show. The spread narrowed with the euro-region economy poised to grow 1.2 percent this year, after falling 4.1 percent in 2009, according to the median forecast of 16 economists surveyed by Bloomberg. Philip Morris International Elsewhere in credit markets, HSBC Holdings Plc , Deutsche Bank AG and Wells Fargo & Co. tapped debt markets today to sell unsecured bonds, according to data compiled by Bloomberg. Philip Morris International Inc. sold $1 billion of 10-year notes in its first dollar-denominated bond sale since November 2008. The 4.5 percent notes pay a spread of 98 basis points more than similar-maturity Treasuries, Bloomberg data show. In a sale of $2.5 billion of 10-year debt in May 2008, New York-based Philip Morris paid a spread of 177 basis points. Houston-based chemical maker Lyondell Chemical Co. boosted the size of a planned bond sale by $500 million while cutting a proposed term loan by the same amount as it prepares to emerge from bankruptcy, according to people familiar with the discussions. The company is marketing $2.75 billion of notes denominated in euros and dollars, said one of the people, who declined to be identified because the terms aren’t set. The dollar-denominated portion may yield an interest rate of about 8 percent to 8.25 percent, while the euro-denominated bonds may pay about 8.125 percent to 8.375 percent. Poised for Upgrade The number of borrowers that are in line for upgrades to their credit ratings increased by 17 this month to 218 globally, Standard & Poor’s said. European leveraged loan defaults declined to a nine-month low in February, S&P said in a separate report. The rate of non-payment for issuers in the ratings company’s European Leveraged Loan Index fell to 7.7 percent from 8.2 percent in January. Defaults peaked at 10.5 percent at the end of 2009. Enel SpA , Italy’s biggest utility, is planning to raise 8 billion euros from five-year loans to refinance existing credit lines, according to people familiar with the matter. Proceeds of the revolving credit will replace a 5 billion-euro facility due in November, the people said. Chief Executive Officer Fulvio Conti is seeking to lower obligations after the power company borrowed 12 billion euros in February 2009 to raise its stake in Spain’s Endesa SA, becoming Europe’s most indebted utility. Credit Risk Decline U.S. corporate credit risk fell, with the Markit CDX North America Investment Grade Index Series 14 declining 3.5 basis points to a mid-price of 86.1 basis points as of 4:04 p.m. in New York, according to Markit Group Ltd. The index opened yesterday at 93.5 basis points in its first day of trading, prices from broker Phoenix Partners Group show. New versions of the indexes are created every six months to replace companies that are no longer investment grade, aren’t among the most actively traded in the $25 trillion credit swaps market or fail to meet other index criteria. The Markit iTraxx Europe Index Series 13, linked to credit- default swaps on 125 companies with investment-grade ratings, declined 2.6 basis points to 79.7, according to Markit’s composite data. European Union Summit Swaps on Greece fell 21 basis points to 322, according to CMA DataVision. Germany and France agreed to back International Monetary Fund aid for the most indebted European nation, a German Finance Ministry official said, signaling an agreement may be near on resolving a budget crisis that threatened to spill over to other countries in Europe. Conflicting signals before a European Union summit, due to start in Brussels on March 25, pushed credit-default swaps on Greece to as high as 343 basis points on March 22, CMA prices show. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or country fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. An increase indicates deterioration in the perception of credit quality; a decline, the opposite. Negative Swap Spread The 10-year U.S. swap spread turned negative for the first time on record amid rising demand for higher-yielding assets such as corporate and emerging market securities. The gap between the rate to exchange floating- for fixed-interest payments and comparable maturity Treasury yields for 10 years, known as the swap spread, narrowed to as low as negative 2.5 basis points, the lowest since at least 1988, when Bloomberg began collecting the data. Covered bond spreads have tightened at a slower pace than those on other senior corporate debt. Typically carrying top ratings, they also widened less at the onset of the deepest financial crisis since the Great Depression. The extra yield on the mortgage- and public sector-backed securities is still more than double the 36 basis-point average for the past 12 years, according to Bank of America Merrill Lynch’s EMU Covered Bonds Index. Investment-grade corporate bond spreads narrowed to 148 basis points as of March 22, compared with an average 92 basis points since 1997, index data show. Credit Market Seizure Covered bond sales fell as the credit market seized up, when investors shunned hard-to-value securities such as those backed by real estate. Issuance tumbled to 228.4 billion euros in 2008, from a record-high 347.8 billion euros in 2007, according to data compiled by Bloomberg. The tightening of spreads and pick-up in issuance since then are “reaffirming confidence in the covered bond asset class and that covered bonds are vital to the economic recovery in the eurozone,” said Ted Lord , head of covered bonds at Barclays Capital in Frankfurt. “Economic recovery can only really happen if you have well-functioning refinancing mechanisms for mortgages and public-sector infrastructure,” he said. Europe’s economy is improving after emerging from the worst slump in more than six decades in the third quarter of 2009, according to the EU’s statistics office in Luxembourg. The default rate on speculative-grade bonds in Europe will drop to 1.7 percent by December, from 9.7 percent last month, according to Moody’s Investors Service. New York-based Moody’s expects the rate to climb to 2 percent by February 2011. “Confidence has improved and people are happier to buy bank debt and take exposure to the real estate sector,” said Frank Will , a covered bond analyst at Royal Bank of Scotland Group Plc in London. La Caixa Caja Ahorros Barcelona, also known as La Caixa, raised 1 billion euros from its sale of six-year covered bonds on March 22, Bloomberg data show. The notes were priced to yield 90 basis points more than the benchmark mid-swap rate. Westdeutsche Immobilienbank, a unit of WestLB, sold 500 million euros of the bonds at a spread of 18 basis points over swaps yesterday. Banco Popular Espanol SA , Spain’s third-biggest lender, sold 1 billion euros of eight-year covered bonds today, according to Bloomberg data. Swedish Covered Bond Corp., a subsidiary of Stockholm-based mortgage lender SBAB that was incorporated to issue the securities, raised 1 billion euros today from a sale of seven-year notes. Deutsche Postbank AG , the German retail lender, plans to sell 1 billion euros of 10-year covered bonds this week that may be yield in the low-20s basis points over swaps, according to a banker with knowledge of the matter. To contact the reporters on this story: Kate Haywood in London at khaywood@bloomberg.net ; Bryan Keogh in London at bkeogh4@bloomberg.net

Read the full article →

Covered Bonds Rise Most Since ’06 Signaling Europe Rebound: Credit Markets

March 23, 2010

By Kate Haywood and Bryan Keogh March 23 (Bloomberg) — Europe’s banks are selling covered bonds at the fastest pace in four years in a sign that debt investors are betting Europe’s economy is strong enough to weather the budget crisis in Greece. Caja Ahorros Barcelona, Spain’s largest savings bank, and Westdeutsche Immobilienbank AG, a unit of Germany’s third- biggest state-owned lender, are among the mainly European financial companies that issued 87.5 billion euros ($118 billion) of the notes this year, according to data compiled by Bloomberg. That’s the most since 95.4 billion euros of the bonds were sold in the same period of 2006. Sales of securities backed by mortgages and public-sector loans are rising as euro-region ministers agree to a framework to bail out Greece. A day after European Central Bank President Jean-Claude Trichet said recent data points to a “moderate recovery,” Germany and France agreed that the International Monetary Fund should be involved in any package for the Mediterranean nation, a German Finance Ministry official said. “This is about a healing in all markets” and banks “are benefiting,” said Daniel Shane , a banker in the debt capital markets group at Morgan Stanley in London. “People are more comfortable holding bank paper and the covered bond market is one of the recipients of that.” The extra yield investors demand to own euro-denominated covered bonds relative to government debt is the lowest in almost two months at 89 basis points, or 0.89 percentage point, from a high for the year of 100 basis points on Feb. 8, Bank of America Merrill Lynch index data show. The spread narrowed with the euro-region economy poised to grow 1.2 percent this year, after falling 4.1 percent in 2009, according to the median forecast of 16 economists surveyed by Bloomberg. Philip Morris International Elsewhere in credit markets, HSBC Holdings Plc , Deutsche Bank AG and Wells Fargo & Co. tapped debt markets today to sell unsecured bonds, according to data compiled by Bloomberg. Philip Morris International Inc. sold $1 billion of 10-year notes in its first dollar-denominated bond sale since November 2008. The 4.5 percent notes pay a spread of 98 basis points more than similar-maturity Treasuries, Bloomberg data show. In a sale of $2.5 billion of 10-year debt in May 2008, New York-based Philip Morris paid a spread of 177 basis points. Houston-based chemical maker Lyondell Chemical Co. boosted the size of a planned bond sale by $500 million while cutting a proposed term loan by the same amount as it prepares to emerge from bankruptcy, according to people familiar with the discussions. The company is marketing $2.75 billion of notes denominated in euros and dollars, said one of the people, who declined to be identified because the terms aren’t set. The dollar-denominated portion may yield an interest rate of about 8 percent to 8.25 percent, while the euro-denominated bonds may pay about 8.125 percent to 8.375 percent. Poised for Upgrade The number of borrowers that are in line for upgrades to their credit ratings increased by 17 this month to 218 globally, Standard & Poor’s said. European leveraged loan defaults declined to a nine-month low in February, S&P said in a separate report. The rate of non-payment for issuers in the ratings company’s European Leveraged Loan Index fell to 7.7 percent from 8.2 percent in January. Defaults peaked at 10.5 percent at the end of 2009. Enel SpA , Italy’s biggest utility, is planning to raise 8 billion euros from five-year loans to refinance existing credit lines, according to people familiar with the matter. Proceeds of the revolving credit will replace a 5 billion-euro facility due in November, the people said. Chief Executive Officer Fulvio Conti is seeking to lower obligations after the power company borrowed 12 billion euros in February 2009 to raise its stake in Spain’s Endesa SA, becoming Europe’s most indebted utility. Credit Risk Decline U.S. corporate credit risk fell, with the Markit CDX North America Investment Grade Index Series 14 declining 3.5 basis points to a mid-price of 86.1 basis points as of 4:04 p.m. in New York, according to Markit Group Ltd. The index opened yesterday at 93.5 basis points in its first day of trading, prices from broker Phoenix Partners Group show. New versions of the indexes are created every six months to replace companies that are no longer investment grade, aren’t among the most actively traded in the $25 trillion credit swaps market or fail to meet other index criteria. The Markit iTraxx Europe Index Series 13, linked to credit- default swaps on 125 companies with investment-grade ratings, declined 2.6 basis points to 79.7, according to Markit’s composite data. European Union Summit Swaps on Greece fell 21 basis points to 322, according to CMA DataVision. Germany and France agreed to back International Monetary Fund aid for the most indebted European nation, a German Finance Ministry official said, signaling an agreement may be near on resolving a budget crisis that threatened to spill over to other countries in Europe. Conflicting signals before a European Union summit, due to start in Brussels on March 25, pushed credit-default swaps on Greece to as high as 343 basis points on March 22, CMA prices show. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or country fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. An increase indicates deterioration in the perception of credit quality; a decline, the opposite. Negative Swap Spread The 10-year U.S. swap spread turned negative for the first time on record amid rising demand for higher-yielding assets such as corporate and emerging market securities. The gap between the rate to exchange floating- for fixed-interest payments and comparable maturity Treasury yields for 10 years, known as the swap spread, narrowed to as low as negative 2.5 basis points, the lowest since at least 1988, when Bloomberg began collecting the data. Covered bond spreads have tightened at a slower pace than those on other senior corporate debt. Typically carrying top ratings, they also widened less at the onset of the deepest financial crisis since the Great Depression. The extra yield on the mortgage- and public sector-backed securities is still more than double the 36 basis-point average for the past 12 years, according to Bank of America Merrill Lynch’s EMU Covered Bonds Index. Investment-grade corporate bond spreads narrowed to 148 basis points as of March 22, compared with an average 92 basis points since 1997, index data show. Credit Market Seizure Covered bond sales fell as the credit market seized up, when investors shunned hard-to-value securities such as those backed by real estate. Issuance tumbled to 228.4 billion euros in 2008, from a record-high 347.8 billion euros in 2007, according to data compiled by Bloomberg. The tightening of spreads and pick-up in issuance since then are “reaffirming confidence in the covered bond asset class and that covered bonds are vital to the economic recovery in the eurozone,” said Ted Lord , head of covered bonds at Barclays Capital in Frankfurt. “Economic recovery can only really happen if you have well-functioning refinancing mechanisms for mortgages and public-sector infrastructure,” he said. Europe’s economy is improving after emerging from the worst slump in more than six decades in the third quarter of 2009, according to the EU’s statistics office in Luxembourg. The default rate on speculative-grade bonds in Europe will drop to 1.7 percent by December, from 9.7 percent last month, according to Moody’s Investors Service. New York-based Moody’s expects the rate to climb to 2 percent by February 2011. “Confidence has improved and people are happier to buy bank debt and take exposure to the real estate sector,” said Frank Will , a covered bond analyst at Royal Bank of Scotland Group Plc in London. La Caixa Caja Ahorros Barcelona, also known as La Caixa, raised 1 billion euros from its sale of six-year covered bonds on March 22, Bloomberg data show. The notes were priced to yield 90 basis points more than the benchmark mid-swap rate. Westdeutsche Immobilienbank, a unit of WestLB, sold 500 million euros of the bonds at a spread of 18 basis points over swaps yesterday. Banco Popular Espanol SA , Spain’s third-biggest lender, sold 1 billion euros of eight-year covered bonds today, according to Bloomberg data. Swedish Covered Bond Corp., a subsidiary of Stockholm-based mortgage lender SBAB that was incorporated to issue the securities, raised 1 billion euros today from a sale of seven-year notes. Deutsche Postbank AG , the German retail lender, plans to sell 1 billion euros of 10-year covered bonds this week that may be yield in the low-20s basis points over swaps, according to a banker with knowledge of the matter. To contact the reporters on this story: Kate Haywood in London at khaywood@bloomberg.net ; Bryan Keogh in London at bkeogh4@bloomberg.net

Read the full article →

Computer Sciences, Lubrizol Swaps Jump on LBO Speculation: Credit Markets

March 22, 2010

By Shannon D. Harrington March 22 (Bloomberg) — Credit-default swaps tied to the debt of buyout candidates from Computer Sciences Corp. to Lubrizol Corp. are rising as private-equity firms Blackstone Group LP and KKR & Co. predict the pace of deals will accelerate. Contracts on Falls Church, Virginia-based Computer Sciences jumped by almost half last week and the volume of bids and offers doubled as Barclays Capital analysts listed the company among a group of potential buyout targets. Swaps on Lubrizol, the largest maker of lubricant additives, rose to the highest in eight months as Bank of America Corp. strategists included the company on a list of LBO candidates. “Private-equity shops do have quite a bit of money on the sidelines,” said Mikhail Foux , a New York-based credit strategist at Citigroup Inc. Some companies’ default swaps were “trading very tight,” he said. Firms led by Blackstone and KKR, the largest publicly traded private-equity companies, announced $87.6 billion in deals over the past 12 months, and are sitting on an estimated $503 billion in unspent money, according to data compiled by Bloomberg. Prospects for an LBO wave, following a record debt market rally last year, are prompting investors to revisit trades last used during the buyout boom that ended in 2007, when $1.74 trillion in new borrowings decimated credit ratings of acquisition targets. Private-equity firms historically borrowed two-thirds or more of the acquisition prices in their deals. Commercial Real Estate Credit swaps on Computer Sciences have jumped 21 basis points to 70 basis points since March 16, reaching the highest level in a year, according to CMA DataVision. Contracts on Wickliffe, Ohio-based Lubrizol have climbed 22 basis points to 75 during the same period, reaching the highest since July 14. Computer Sciences spokesman Chris Grandis and Lubrizol spokeswoman Julie Young declined to comment. Elsewhere in credit markets, top-rated bonds backed by commercial real estate loans and most protected from losses are rallying as investors snap up the safest debt amid climbing delinquencies. Yields on top-ranked securities backed by skyscraper, hotel and shopping-mall loans fell 0.31 percentage point to 3.5 percentage points more than benchmark swap rates last week, the lowest in six months, according to Barclays Capital. Build America Bonds About 53 percent of more than 150 residential mortgage-bond investors holding $1.7 trillion of the assets surveyed during the final three days of last week had less of the securities than found in benchmark indexes, according to JPMorgan Chase & Co. That was 7 percentage points less than in a survey a month earlier, as the Federal Reserve ends its unprecedented purchases of the debt, though up from 20 percent in July. The Chicago Transit Authority plans to sell $502.7 million of taxable Build America Bonds with maturities of as long as 30 years as soon as tomorrow, according to a person familiar with the offering. Proceeds will be used for transportation system capital improvements, said the person, who declined to be identified because terms aren’t set. Leveraged-loan new issuance has been “strong” during early 2010, “with volumes tracking more than double last year’s pace,” according to JPMorgan. Syndicated loans totaling $7.3 billion have closed this month, following $11.1 billion of issuance in all of February, the highest monthly total since July 2008, New York-based analysts led by Peter Acciavatti wrote in a March 19 report. The loan pipeline has climbed to 31 new issues for $11.8 billion, according to the report. Debt Costs Rise U.S. banks and their holding companies may see debt costs rise under a provision of Senator Christopher Dodd ’s financial reform legislation, according to Moody’s Investor Service. “We would expect fixed-income investors’ concerns regarding potential losses under the new resolution powers to trump any comfort from improved stand-alone financial strength,” analysts led by Sean Jones wrote in a note today. “This could make wholesale funding more difficult and expensive to obtain for U.S. bank holding companies and banks.” Dodd, Democrat of Connecticut, is proposing that taxpayer money not be used to bail out a financial firm that enters receivership and that unsecured creditors take the first losses. A benchmark indicator of U.S. corporate credit risk rose as banks, hedge funds and other money managers started moving trades into a new series of the index. Markit CDX Index Series 14 of the Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt, was trading at 90 basis points as of 3:46 p.m. in New York, 5 basis points wider than Series 13, according to broker Phoenix Partners Group. New versions of the index are created every six months to replace companies that are no longer investment grade, aren’t among the most actively traded in the $25 trillion credit swaps market or fail to meet other index criteria. A new version of the Markit iTraxx Europe index, linked to 125 companies with investment-grade ratings, traded at 82.4 basis points, 3.25 higher than the old index, CMA prices show. German lawmakers dashed Greek hopes for the European Union summit this week in Brussels to result in a rescue plan. German leader Angela Merkel said EU leaders must not create “illusions” for markets by building expectations for Greek aid. Greece is struggling to contain a budget deficit that is more than four times the EU limit of 3 percent of gross domestic product. Swaps on Greece jumped 11.5 basis points to 341.5, the highest since Feb. 26, according to CMA. Blackstone, KKR Credit swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and equals $1,000 a year on a contract protecting $10 million of debt. A rise indicates deterioration in the perception of credit quality; a decline, the opposite. Blackstone and KKR, both of New York, have told investors they see a pick-up in the pace of buyouts. Between the second quarter and the fourth quarter of last year, the value of deals doubled to $31.9 billion. Still, deals announced in the past three months, at $23.9 billion, remain below the $25.3 billion in the same period a year earlier, data compiled by Bloomberg show. Strategists at Bank of America, Barclays and Citigroup last week advised investors seeking to hedge against or profit from LBOs to either buy credit swaps outright on companies that may become targets or employ arbitrage trades in conjunction with other swaps that can often fund the cost of premiums. Credit Steepeners That includes so-called credit steepeners in which investors may buy protection on a company for seven years or more and then sell protection for five years or less, betting that the gap between the two will widen. “Credit curves generally steepen after an LBO because short-dated debt is taken out and significant longer-term debt is issued,” Barclays Capital strategists led by Ashish Shah in New York wrote in a March 19 note to investors. Analysts including Foux, part of a team that recommended investors buy protection on Computer Sciences in February, are cautioning investors that speculation on buyouts may be premature and that the volume or size of deals will come nowhere close to the three years before August 2007, when credit markets seized up and sent debt prices tumbling. The volume of credit swap quotes on Computer Sciences jumped 96 percent last week, according to CMA DataVision. High-yield, high-risk debt returned a record 57.5 percent in 2009, and another 4.3 percent this year, according to Bank of America Merrill Lynch index data. Speculative-grade debt is rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s. Companies raised more than $1.45 trillion of leveraged loans in the two years before August 2007 and deals reached as large as the $43 billion that KKR, TPG Inc. and Goldman Sachs Group Inc. paid for the Texas power utility Energy Future Holdings Corp., then known as TXU Corp. “By no means are we going back to 2007,” Foux said. “If deals are done, they will be relatively small deals, at least initially.” To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

Read the full article →

Stocks Climb, Sending Dow Average to 17-Month High, on Inflation Outlook

March 17, 2010

By Rita Nazareth and David Merritt March 17 (Bloomberg) — Stocks rose, sending the Dow Jones Industrial Average to a 17-month high, and commodities rallied as a drop in U.S. producer prices underscored the Federal Reserve’s assessment that inflation is not a threat to low interest rates. The yen and the dollar weakened. The Dow average increased 52.15 points, or 0.5 percent, to 10,738.13 at 2:55 p.m. in New York. The Standard & Poor’s 500 Index and the Stoxx Europe 600 Index also climbed to their highest levels since autumn of 2008. Copper and crude oil increased for a second day. The dollar fell against 13 of its 16 most-traded counterparts and the yen dropped against 12. A benchmark indicator of corporate credit risk in the U.S. fell to the lowest in two months, led by American International Group Inc. as the insurer sought to improve liquidity. The Fed yesterday signaled the U.S. recovery isn’t strong enough to stoke inflation or justify higher borrowing costs, an assessment reinforced today by a bigger-than-estimated 0.6 percent decrease in producer prices. The Bank of Japan doubled a lending program aimed at stoking credit growth to $222 billion, while investor confidence was boosted in Europe as earnings from UniCredit SpA and Inditex SA exceeded predictions. “The news on U.S. inflation is positive as it adds up to the Fed yesterday reiterating that it’s going to keep rates low for an extended period of time,” said James Dunigan , chief investment officer at PNC Wealth Management in Philadelphia, which oversees $104 billion. “The recovery is in place and by all evidence looks to be sustainable and at the end of the rainbow, that all filters down to corporate profits.” 17-Month Highs The S&P 500 climbed for a third straight day and extended its rally from a 12-year low last March to 73 percent. The benchmark index for U.S. equities traded at the highest intraday level since Sept. 29, 2008, when the U.S. House of Representatives rejected an early version of the $700 billion financial rescue package. The index plunged 8.8 percent that day, its biggest slide since the market crash of 1987. The Dow advanced for a seventh day, its longest streak since August. Financials and energy producers led the rally, with JPMorgan Chase & Co. and Exxon Mobil Corp. climbing 1.5 percent. The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt, declined 0.5 basis point to 82.5 basis points as of 8:14 a.m. in New York, according to broker Phoenix Partners Group. That matches a two-month low reached on March 8. The index typically falls as confidence in debt markets improves. UniCredit, Inditex The MSCI World Index of 23 developed nations’ stocks rose 0.9 percent. Rio Tinto Group, the world’s third-largest mining company, led basic-resource producers higher, gaining 1.8 percent in London. UniCredit, Italy’s biggest bank, surged 6.3 percent. In Asian trading, LG Electronics Inc., the world’s third-largest mobile-phone maker, gained 2.9 percent in Seoul. The MSCI Emerging Markets Index gained 1.6 percent to a two-month high. Indonesia’s Jakarta Composite Index surged 3.3 percent, the most since July, and South Korea’s Kospi Index climbed 2.1 percent, erasing this year’s losses. Qatar’s DSM 20 Index advanced 3.8 percent to the highest in more than four months after the government said domestic banks will be allowed to trade shares. Brazil’s benchmark Bovespa index underperformed most major markets, increasing 0.1 percent to add to yesterday’s 1.3 percent rally. OSX Brasil SA, the oil-services and shipbuilding company controlled by billionaire Eike Batista , cut the size of the biggest planned initial public offering in emerging markets this year by as much as 67 percent, deepening the slump in Brazilian share sales. Commodities Rally Copper for delivery in three months surged 1.9 percent to $7,544 a metric ton on the London Metal Exchange and zinc rallied 2.1 percent to lead gains in industrial metals. Crude oil advanced 1.4 percent to $82.82 a barrel in New York trading, extending yesterday’s 2.4 percent jump. Goldman Sachs Group Inc. raised its 12-month outlook for returns from commodities to 17.6 percent and said the biggest gains probably will be in crude, copper, corn and platinum. The Dollar Index, which gauges the currency against six major trading partners, slipped 0.2 percent to 79.61, the lowest level on a closing basis since Feb. 3. The yen dropped most against higher-yielding currencies, depreciating 0.8 percent against the South African rand and 0.2 percent versus the South Korean won. Canada’s dollar rose as much as 0.7 percent to trade near parity against its U.S. counterpart, the strongest level in almost two years. The pound strengthened as much as 0.9 percent to $1.5382 after U.K. jobless claims unexpectedly fell in February at the fastest pace since 1997 and minutes of the Bank of England’s March 4 meeting showed policy makers voted unanimously to maintain interest rates at a record low and keep bond purchases on hold. Yield Curve Narrows The difference between 2- and 10-year Treasury yields narrowed to the least in almost two weeks after today’s U.S. producer prices report. The yield curve narrowed as much as 0.02 percentage points to 2.72 basis points, the lowest level since March 5. Two-year note yields rose one basis point to 0.92 percent. Yields on 10-year notes traded at 3.65 percent. Greek bonds rose after Standard & Poor’s said yesterday it isn’t reviewing the nation’s BBB+ rating for a downgrade as the government pushes ahead with efforts to narrow its budget deficit, the biggest in Europe. The yield on the two-year note dropped 7 basis points to 4.47 percent. The cost of insuring against losses on European corporate bonds using credit-default swaps fell, with the Markit iTraxx Crossover Index of 50 mostly high-yield borrowers declining 10 basis points to 409, according to JPMorgan Chase & Co. The drop signals an improvement in investor perceptions of credit quality and sent the index close to the lowest level since Jan. 18. To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net ; David Merritt in London on dmerritt1@bloomberg.net .

Read the full article →

Junk Bonds Beating Investment Grade as TXU, Freescale Soar: Credit Markets

March 11, 2010

By Caroline Salas and Pierre Paulden March 11 (Bloomberg) — High-yield, high-risk bonds are beating investment-grade debt for the first time this year as confidence in the U.S. economic recovery gains strength. Speculative-grade securities have returned 1.93 percent this month, bringing year-to-date gains to 3.63 percent, according to Bank of America Merrill Lynch index data. That compares with a 0.07 percent loss this month for investment- grade bonds and a 2.32 percent return in 2010. The junk-bond index is being led higher by companies including Freescale Semiconductor Inc. and Energy Future Holdings Corp., formerly known as TXU Corp. Lenders to the neediest borrowers are willing to accept the lowest relative yields since January as confidence in the global economy spurs Morgan Stanley to boost its growth estimate for 2010 to 4.4 percent from 4 percent. Speculative-grade credit rating upgrades by Moody’s Investors Service are poised to outpace downgrades for the second consecutive quarter, the first time that’s happened since 2006, according to data compiled by Bloomberg. “It’s a yield grab,” said Jack Iles , an investment manager at MFC Global Investment Management in Boston who helps oversee $4 billion in fixed-income assets. The extra yield investors demand to own high-yield bonds instead of Treasuries has narrowed for nine straight days to 6.15 percentage points, the longest streak of spread tightening since August, Bank of America Merrill Lynch data show. The spread had widened to 7.03 percentage points on Feb. 12 from 6.39 percentage points in December on concern that Greece’s budget deficit, Europe’s biggest in terms of gross domestic product, would slow the global economy. ‘Bit of a Stumble’ “Risky assets took a little bit of a stumble from January to mid-February and that was by and large wrapped up with concerns over sovereign debt,” said Christopher Garman , president of Orinda, California-based Garman Research LLC. “Those concerns seem to have more or less faded.” Elsewhere in credit markets, Fannie Mae sold $6 billion of debt, its biggest offering of benchmark notes since last April, as the company boosts borrowing and cuts holdings to fund about $130 billion of planned purchases of delinquent loans from the mortgage securities it guarantees. The 3-year debt from the mortgage company under government control yields 1.803 percent, or 31 basis points more than similar-maturity Treasuries, Washington-based Fannie Mae said in a statement. Commercial Paper U.S. commercial paper outstanding rose $11.2 billion to $1.14 trillion in the week ended March 10, after declining by $20.4 billion in the previous period, the Federal Reserve said on its Web site. Commercial paper, which typically matures in 270 days or less, is used to finance everyday activities such as payroll and rent. Central clearing of derivatives including credit-default swaps will come under scrutiny as part of efforts to safeguard the European Union’s financial system. At a meeting on March 22, EU nations and the European Commission will examine ways to cut the risk in the event that one of the parties to a derivatives contract can’t meet its obligations, according to a document obtained by Bloomberg News. Clearinghouses for swaps transactions should be open to any firm that wants to process trades in the $300 trillion U.S. market, according to Commodity Futures Trading Commission Chairman Gary Gensler . “Clearinghouses should not be allowed to discriminate between or amongst the trades coming from one trading venue or another,” the chairman said in prepared remarks at the Futures Industry Association conference in Boca Raton, Florida. Bondholder Protection The cost to protect against corporate bond defaults in the U.S. rose as the Markit CDX North America Investment Grade Index, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, climbed 0.5 basis point to a mid-price of 83.5 basis points, according to broker Phoenix Partners Group. The gauge typically increases as investor confidence deteriorates. In London, the Markit iTraxx Europe index of swaps on 125 companies with investment-grade ratings, rose 1.5 basis point today to 75.75 basis points, the highest since March 5, JPMorgan Chase & Co. prices show. Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and equals $1,000 a year on a contract protecting against default on $10 million of debt for five years. Signs that the U.S. economy is improving are bolstering demand for speculative-grade securities, according to Martin Fridson , chief executive officer of money manager Fridson Investment Advisors. ‘Healthy Appetite’ “There is a healthy appetite for risk,” Fridson said. “There is a fading of concern over Greece and more upbeat economic numbers.” Morgan Stanley expects “above-consensus global GDP growth,” raising the projection from December, “despite growth downgrades in Europe,” a weaker first quarter in the U.S. and “recent softening” in a China manufacturing index, the firm’s economists said March 10. The Organization for Economic Corporation and Development said March 5 its leading indicator, which signals the direction of the economy, reached the highest in almost 31 years in January. The measure increased by 0.8 point to 103.6 from 102.8 in December, the Paris-based organization said. January’s reading was the highest since May 1979. Gains on the month were led by Japan, the U.S., Canada and Germany, the OECD said. Spreads to Narrow High-yield spreads will narrow to 4 percentage points by yearend as defaults plunge, according to Garman. Moody’s predicts the speculative-grade default rate will decline to 2.9 percent by the end of 2010 from 11.6 percent in February. The rate fell from 12.5 percent in January. The worst-rated bonds are performing the best this month. Securities ranked CCC and lower have gained 2.77 percent while BB rated notes, the highest junk tier, have returned 1.81 percent, Bank of America Merrill Lynch data show. High-yield securities are rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s. Bonds of Freescale, the computer chipmaker bought by firms led by Blackstone Group LP, have climbed 5.36 percent on average and debt of Energy Future, the power producer taken private by KKR & Co. and TPG, has returned 4.27 percent, Bank of America Merrill Lynch data show. Austin, Texas-based Freescale is rated Caa2 by Moody’s and B- by S&P . Dallas-based Energy Future is rated Caa3 and B-, respectively. Issuance Rises The bonds are rallying in part because the unthawing of the new issue market has given the riskiest companies the ability to refinance their debt, said MFC Global’s Iles. Speculative-grade companies have issued $42.5 billion of bonds in 2010, already a record first quarter, Bloomberg data show. Junk bond sales totaled $11.8 billion in the first three months of 2009. “The reopening of the new issue market was huge for these guys,” Iles said. “The ability for companies like TXU to restructure even part of their balance sheet is much better than it was even six months ago.” Lisa Singleton , a spokeswoman for Energy Future and Freescale spokesman Robert Hatley declined to comment. Among high-yield borrowers selling debt this week were GMAC Inc., which sold $1.5 billion of 8 percent, 10-year bonds, and McLean, Virginia-based Alion Science & Technology Corp., which issued $310 million of 12 percent payment-in-kind notes that can pay interest in the form of added debt. Insurance companies were the best performing industry in the Bank of America Merrill Lynch U.S. High Yield Master II Index with gains of 6.63 percent this month. Bonds of American International Group Inc., once the world’s largest insurer, have risen to the highest levels in 18 months after the New York- based company said March 1 it was selling AIA Group Ltd. to Prudential Plc for $35.5 billion. Financial service company debt, the second-best performing sector, gained 3.64 percent and restaurant company bonds followed with returns of 3.13 percent, index data show. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Caroline Salas in New York at csalas1@bloomberg.net

Read the full article →

Foreclosures in U.S. Rise at Slowest Pace in Four Years on Obama Efforts

March 11, 2010

By Dan Levy March 11 (Bloomberg) — U.S. foreclosure filings rose at the slowest pace in four years in February as the government sought to reduce record bank seizures, RealtyTrac Inc. said. A total of 308,524 properties received a notice of default, auction or seizure last month, or one in 418 households, the Irvine, California-based seller of default data said today in a statement. Filings rose 6 percent from a year earlier, the smallest increase since RealtyTrac began tracking annual changes in January 2006. They declined 2 percent from January. The Obama administration’s main effort to keep people in their homes resulted in more than 830,000 trial loan modifications for delinquent borrowers through January, according to the Treasury Department. Still, filings were up for the 50th straight month in February on an annual basis and topped 300,000 for the 12th consecutive month, RealtyTrac said. “This leveling of the foreclosure trend is not necessarily evidence that fewer homeowners are in distress and at risk for foreclosure, but rather that foreclosure prevention programs, legislation and other processing delays are in effect capping monthly foreclosure activity,” RealtyTrac Chief Executive Officer James J. Saccacio said in a statement. About 116,000 mortgages have been permanently modified under the government’s program, compared with as many as 4 million targeted by December 2012. New data will be released March 15, Meg Reilly , a Treasury spokeswoman, said in an e-mail. Bank Repossessions Bank seizures are increasing the number of homes for sale. Lenders took back 78,683 properties last month, up 6 percent from February 2009 and down 15 percent from a peak in December, RealtyTrac said. More than 2 million empty homes were on the market in the fourth quarter, according to the Census Bureau. “Government programs are helping to keep more supply from coming out,” Brian Bethune , chief financial economist at IHS Global Insight in Lexington, Massachusetts, said in an interview. “We’ve got a disjointed market where most of the housing supply is coming from foreclosures rather than building new homes.” Bethune predicted a “high” rate of foreclosures for at least the next 12 months. RealtyTrac expects record bank seizures this year, said Rick Sharga, executive vice president for marketing. Default notices totaled 106,208 in February, down 3 percent from a year earlier and up 3 percent from January, RealtyTrac said. Defaults peaked at more than 142,000 in April. Scheduled auctions totaled 123,633 last month, up 16 percent from February 2009 and down 1 percent from January. The peak was more than 144,000 in August. Nevada, California Nevada had the highest foreclosure rate for the 38th straight month in February, with one in 102 households receiving a filing. Arizona and Florida tied for second at one in 163 households. California ranked fourth at one in 195 households, followed by Michigan at one in 226. Utah, Idaho, Illinois, Georgia and Maryland rounded out the 10 highest foreclosure rates. The most filings were in California , with 68,562, down 15 percent from a year earlier. Florida was second with 54,032, up 16 percent, and Michigan was third at 20,028, a 59 percent rise. Illinois had the fourth-highest total filings with 17,312, Arizona had 16,718 and Texas had 12,638. The six states accounted for 61 percent of the U.S. total, RealtyTrac said. Georgia, Ohio, Nevada and Maryland rounded out the top 10. New York Area Filings rose 14 percent from a year earlier to 3,750 in New Jersey. They climbed 3.3 percent to 2,294 in Connecticut, and dropped 20 percent to 3,237 in New York. Las Vegas had the highest foreclosure rate for cities with a population of more than 200,000. One in 90 households there got a filing. Cape Coral-Fort Myers, Florida, was second at one in 92. Six metro areas in California or Arizona had decreases in filings from January, with Phoenix showing the biggest drop at almost 18 percent. Port St. Lucie, Florida, showed a 66 percent increase, said RealtyTrac, which sells default data collected from more than 2,200 counties representing 90 percent of the U.S. population. To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net .

Read the full article →

Stocks Climb, Treasuries Fall as Job Report Bolsters Recovery Confidence

March 5, 2010

By Michael P. Regan and Michael Patterson March 5 (Bloomberg) — Stocks and commodities climbed while Treasuries retreated and the dollar erased gains after a smaller-than-estimated decrease in U.S. jobs added to evidence the global economic recovery is accelerating. The Standard & Poor’s 500 Index climbed 1.1 percent to 1,134.86 at 1:51 p.m. for a sixth straight advance, its longest rally since the start of the year. The MSCI Emerging Markets Index rose 1.3 percent to extend its biggest weekly increase since the beginning of December. Russia’s Micex Index jumped for a seventh day, the longest streak since July 2006. Oil and copper surged, while Treasury two-year note yields climbed six basis points to a two-week high of 0.92 percent. The Dollar Index slipped 0.1 percent after gaining as much as 0.4 percent. Global stocks extended their advance after a U.S. government report showed the country’s unemployment rate held at 9.7 percent in February as the nation lost 36,000 jobs. Economists on average had forecast a decrease of 68,000 jobs and a gain in the unemployment rate to 9.8 percent, according to a Bloomberg survey. “Today’s employment report was a real win-win,” said Dan Greenhaus , chief economic strategist at Miller Tabak & Co. in New York, in a note to clients. “If it was considerably negative, it would be dismissed as snow-induced and a snapback in March was all but assured,” he wrote. ” On the other hand, if the report was better than expected, and it was, then it demonstrates a strong jobs market in spite of weather related factors.” Yearlong Rally The S&P 500 has rallied 68 percent from a 12-year low almost a year ago as the economy returned to growth following a yearlong contraction. The gains have been led by a 140 percent rally in financial shares through yesterday, while consumer- discretionary and industrial companies have almost doubled. The advance trimmed the S&P 500’s drop from a 2007 record to 28 percent as of yesterday’s close. European stocks capped the biggest weekly gain since July as investors speculated that the European Union will assist Greece with its finances if required. The Stoxx Europe 600 Index rallied 1.6 percent today and 4.6 percent this week, erasing its loss for the year. The cost to protect against defaults on U.S. corporate bonds declined to the lowest in more than six weeks. Credit- default swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies, fell 2.5 basis points to a mid-price of 86.25 basis points as of 11:08 a.m. in New York, according to broker Phoenix Partners Group. Asian Gains The MSCI Asia Pacific Index increased 0.5 percent as Japan’s Nikkei 225 Stock Average completed its biggest weekly gain this year, rising 2.4 percent over the past five days. Taiwan’s Taiex Index rallied 1.3 percent, leading gains in Asian stocks after a report yesterday showed a drop in jobless claims in the U.S. and two Federal Reserve Bank presidents said they believe the central bank should keep rates low until the recovery picks up. The MSCI emerging markets gauge has rebounded to the highest level in six weeks after a selloff sent it down as much as 13 percent from its 2010 peak on Jan. 11. It’s still 1.5 percent lower for the year. Siegel Is Bullish “Equity returns around the world are going to be good but they’re going to be particularly good in emerging markets,” Jeremy Siegel , a finance professor at the University of Pennsylvania’s Wharton School of Business, said in an interview on Bloomberg Television in Hong Kong. Emerging-market equity funds attracted $240 million in the week ended March 3, the third straight week of inflows, EPFR Global said, citing easing concerns about a contagion from the Greece debt crisis and a recovery in exports. Greece sold 10- year bonds yesterday with investors bidding for more than three times the 5 billion euros ($6.8 billion) it sought to raise. Greek bonds rose, sending the yield on the nation’s 10-year debt down three basis points to 6.07 percent. The extra yield investors demand to own developing-nation debt over U.S. Treasuries declined 13 basis points to 2.72 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index. China’s Shanghai Composite Index rose 0.3 percent after fluctuating earlier today as Premier Wen Jiabao warned of “latent risk” in the nation’s banks and pledged to crack down on property speculation in a speech to the National People’s Congress. The premier also affirmed an 8 percent economic-growth target, saying that the government will continue its moderately loose monetary policy and proactive fiscal stance. China’s “government will boost expenditure on increasing the reserves of grain, edible oil, non-ferrous metals, petroleum and other important materials,” the Ministry of Finance said in a 2010 budget plan issued today during the National People’s Congress in Beijing. Oil rose as much as 2.3 percent while gasoline climbed as high as $2.2831 a gallon in New York, the highest since Oct. 3, 2008, on a closing basis. Copper for May delivery gained 5 cents, or 1.5 percent, to $3.425 a pound on the New York Mercantile Exchange’s Comex unit. The contract advanced 4.3 percent this week. To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net ; Michael Patterson in London at mpatterson10@bloomberg.net .

Read the full article →

End of TALF Spawns $7 Billion ABS Sales Led by CIT, Sallie: Credit Markets

March 2, 2010

By Jody Shenn March 3 (Bloomberg) — CIT Group Inc. , the commercial lender that emerged from bankruptcy, and SLM Corp. , the student lender, are leading the most asset-backed bond sales in six months under an expiring U.S. program that helped unlock credit markets. CIT is selling $667 million of bonds backed by equipment leases this week, its first since exiting Chapter 11 in December, said a person familiar with the offering who declined to be identified because terms aren’t public. SLM, known as Sallie Mae, is selling $1.55 billion of securities backed by loans without government guarantees, another person said. Total sales this week may reach almost $7 billion. The Federal Reserve’s Term Asset-Backed Securities Loan Facility, which provides low-cost loans to bond buyers, helped spur $178 billion of issuance last year, according to Bank of America Merrill Lynch. Infrequent issuers or those selling “unusual” debt are unsure if they’ll get yields as low relative to benchmark rates after the program ends tomorrow for non-mortgage debt, said Reed Auerbach of law firm Bingham McCutchen LLP. “People are taking advantage of the final round because there is some uncertainty as to how the markets will react when TALF goes away,” said Auerbach, chairman of the structured transactions group in New York at Bingham, the top lawyer for asset- and mortgage-backed bond underwriters last year based on the number of transactions. Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of government debt yesterday fell 2 basis points to 166 basis points, or 1.66 percentage point, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Average yields were 4.04 percent. HCA, Kexim HCA Inc. , taken private in a leveraged buyout in November 2006, sold $1.4 billion of notes due in 2020, 40 percent more than planned, according to data compiled by Bloomberg. The Nashville, Tennessee-based hospital chain tapped the corporate bond market for the fourth time since February 2009 to repay a portion of its $25.7 billion of long-term debt. Issuers sold $9.25 billion of bonds in the U.S. corporate market yesterday, the most since Feb. 4 when volume reached $18.85 billion including $9.5 billion from Kraft Foods Inc. and $8 billion from Warren Buffett ’s Berkshire Hathaway Inc., Bloomberg data show. Export-Import Bank of Korea, the state-run lender known as Kexim, sold $1 billion of notes due in September 2015, Bloomberg data show. The Seoul-based lender’s notes priced to yield 195 basis points more than similar-maturity Treasuries, 5 basis points narrower than planned. AIG Default Risk The cost to protect against a default by American International Group Inc. declined to the lowest since before the company’s government bailout after a $35.5 billion sale of an Asian insurance unit bolstered creditor optimism. Credit-default swaps on New York-based AIG fell 45 basis points to a mid-price of 405 basis points yesterday, according to broker Phoenix Partners Group. The contracts, which typically decline as perceived creditworthiness improves, were trading at the lowest since Sept. 3, 2008, after dropping 146 basis points this week, CMA DataVision prices show. The Markit CDX North America Investment Grade Index, a benchmark that investors use to hedge against losses on corporate debt, rose 1.25 basis point to 89.7 basis points, according to CMA. European corporate credit risk, as measured by the Markit iTraxx Europe index of credit-default swaps on 125 investment- grade companies, fell 1.5 basis point to 81.75 basis points, the lowest since Feb. 3, according to JPMorgan Chase & Co. prices. Deadline Tomorrow Credit-default swaps linked to Greek government bonds fell 24.5 basis points to 320, the lowest since Jan. 19, according to CMA. The Greek government will announce as much as 4.8 billion euros ($6.5 billion) of additional deficit cuts today, bowing to pressure from the European Union and investors to do more to tame the region’s biggest shortfall, a person familiar with the plan said. Credit swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point equals $1,000 a year on a contract protecting $10 million of debt. The last monthly deadline to obtain TALF funding for non- mortgage securities is March 4, as the Fed seeks to unwind the unprecedented aid to markets that the central bank used amid the worst financial crisis since the Great Depression. The Fed began TALF in March 2009 to revive the market for bonds tied to consumer and small-business loans. Sales of the debt plummeted 42 percent in 2008, choking off funding to lenders, according to Bloomberg data. TALF provides low-cost Fed loans toward the purchase of top-rated securities. It lets buyers boost returns with borrowed cash and provides issuers with lower funding costs. ‘Low-Rate Environment’ The $4.8 billion of eligible debt sold in the first two months of this year also included less-common securities such as those backed by lending to auto dealerships, subprime auto loans and mortgage-servicing payments. Yield spreads on more-traditional asset-backed securities such as credit-card or auto-loan bonds are less likely to widen, said John McElravey , an analyst at Wells Fargo Securities in Charlotte, North Carolina. Spreads on less popular bonds won’t grow much as investors seek extra yield in a “low-rate environment,” he said. Issuers including Chrysler Financial Corp. , which sold $2 billion of auto-lease bonds, are offering classes rated below AAA after a slower thawing of demand for junior-ranked debt, he said. “The spreads could widen out, but if that happens I think you would see investors get back into those sectors and those names at the wider spreads,” McElravey said. CIT, Sallie Mae Top-rated bonds backed by auto loans are yielding about 0.59 percentage point more than Treasuries compared with 5.7 percentage points a year ago, according to Bank of America Merrill Lynch index data. New York-based CIT is seeking yields 1.40 percentage point more than the benchmark euro-dollar synthetic forward rate on a portion of its AAA rated bonds, a person familiar with the offering said. The company said March 1 it expects to report a loss of about $900 million for the fourth quarter of 2009 and $4 billion for the year before the effects of its reorganization. Sallie Mae, which “faces uncertainty regarding the future of its business model due to legislation that could eliminate the company’s ability to originate federal student loans,” adjusted its private-loan practices to require that students make interest payments while still in school after delinquencies on older loans soared, Standard & Poor’s said in a Feb. 26 report. Mortgage Bonds Frozen Martha Holler , a spokeswoman for Reston, Virginia-based Sallie Mae, and Curt Ritter , a CIT spokesman, didn’t immediately return telephone calls seeking comment. Limited issuance in certain portions of the securitization market will add demand to those that have revived, McElravey said. Even amid a separate TALF program for new commercial- mortgage bonds that will run through June, only $3.04 billion of that debt was sold last year, down from a record $237 billion in 2007, Bloomberg data show. Sales of home-loan bonds without government-backed guarantees have been frozen for two years amid record defaults, after peaking at almost $1.2 trillion in both 2005 and 2006. The Fed has also held yield spreads on so-called agency mortgage securities near the lowest on record with its program to purchase $1.25 trillion of the debt, which also ends this month. Demand for traditional asset-backed securities is great enough that some offerings sell out in 30 minutes, leaving investors little time to scour the underlying loans and deal documents, said Jeffery A. Elswick of Frost Investment Advisors. “People are definitely moving in the direction of being more complacent than we’d like to see,” said Elswick, the director of fixed income at the San Antonio, Texas-based asset manager, which oversees $6.5 billion. To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

Read the full article →

Stocks, Dollar Gain as U.S. Consumer Spending, AIG Deal Bolster Confidence

March 1, 2010

By Rita Nazareth and Stuart Wallace March 1 (Bloomberg) — Stocks and the dollar rose as growth in U.S. consumer spending, a possible European rescue of Greece and American International Group Inc. ’s $35.5 billion sale of an Asian unit bolstered confidence in the economic recovery. The Standard & Poor’s 500 Index gained 0.9 percent at 11:37 a.m. in New York, while Europe’s Stoxx 600 Index rallied 1.1 percent. The Dollar Index climbed 0.8 percent to 80.968, near its highest level since June. Copper rose the most in 11 months after the earthquake in Chile, the biggest producer of the metal, while the nation’s benchmark stock index tumbled. Greek equities and bonds rallied. U.S. personal spending grew 0.5 percent in January for a fourth consecutive increase, while another report showed American manufacturing expanded for a seventh month. AIG’s sale of a life-insurance unit to Prudential Plc is its largest since the company received a government bailout in 2008. In a separate deal, Merck KGaA agreed to buy Millipore Corp. for $6 billion. “AIG/Prudential is a pretty big deal,” said John Carey , a Boston-based money manager at Pioneer Investment Management, which oversees more than $200 billion. “That indicates M&A is alive and well, stimulating people’s interest in the stock market. On top of that, we had the spending number this morning and any sign that consumer confidence is improving has to be positive for the market.” S&P 500 Leaders The S&P 500 rose after dropping 1.8 percent last week, its biggest decline in three weeks. Gains were led by technology and consumer companies, with Apple Inc. and Ford Motor Co. each climbing more than 2 percent. AIG rallied 7.4 percent, while Prudential Plc fell 12 percent in London. All 12 shares in a gauge of U.S. homebuilders advanced, paced by D.R. Horton Inc., after billionaire investor Warren Buffett said in a Feb. 27 letter to investors that the U.S. residential real estate slump will end by about 2011. Estonian stocks rose the most among equity markets worldwide on better-than-expected earnings reports and a buyout bid for seatbelt maker AS Norma . The OMX Tallinn Index rose as much as 6 percent. The rise was the biggest among 93 benchmark indexes tracked by Bloomberg. The British pound dropped 1.8 percent to $1.4969 after sliding to $1.4784, the lowest level since May 1. The U.K. currency fell against all 16 of its most-traded counterparts, weakening 1.4 percent to 90.228 pence per euro. The declines in the pound came after a YouGov Plc poll indicated an election due by June 10 would leave neither Gordon Brown ’s ruling Labour party nor the opposition Conservatives with a majority of seats in Parliament, hampering efforts to cut the record deficit. European Union officials may demand deeper budget cuts from Greece in meetings today. Pound ‘Suffering’ “Sterling is really suffering and leading the way,” said Ian Stannard , a senior currency strategist at BNP Paribas SA in London. “And in the eurozone, problems are going to continue and the euro is going to continue to suffer as a result.” U.K. and German bonds declined. The yield on the 10-year British gilt rose five basis points to 4.07 percent, and the similar maturity German bund yield climbed one basis points to 3.11 percent. Copper rose as high as $3.487 a pound in New York trading, erasing this year’s decline. Mines in Chile, which exports 36 percent of the world’s copper ores and concentrate, were closed by the magnitude-8.8 earthquake Feb. 27. Lead, zinc and nickel also rose in London. Chile Earthquake Chilean stocks plunged after the earthquake killed at least 700 people, severed the country’s main highway and damaged 1.5 million homes. Empresa Nacional de Electricidad SA, the nation’s biggest power generator, and Lan Airlines SA , the country’s largest carrier, dropped following electricity outages and airport closures. The Ipsa Index slid 2 percent to 3,752.38 and lost 2.9 percent earlier, the most intraday since Dec. 1, 2008. Chile’s peso pared a decline of as much as 1.5 percent, losing 0.1 percent to 525.20 per U.S. dollar, on speculation the government will repatriate savings held overseas to finance reconstruction. Greek bonds and stocks rallied as European Union governments crafted a possible rescue package. The yield on the two-year Greek note slid 38 basis points to 5.761 percent. The cost of insuring Greek bonds against default fell, with credit- default swaps tied to the nation’s debt dropping 28.5 basis points to 335.5, according to CMA DataVision. Greece’s ASE Index of equities rose for a second day, advancing 2.9 percent. Default Swaps Gauges of corporate credit risk in the U.S. and Europe fell amid speculation that euro-area nations will agree on a bailout package for Greece. The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark, declined 0.5 basis point to 91 basis points as of 7:58 a.m. in New York, according to broker Phoenix Partners Group. The Markit iTraxx Europe index of 125 companies with investment-grade ratings dropped 1 basis point to 84 basis points, JPMorgan Chase & Co. prices show. The MSCI Emerging Markets Index rose, extended its two-day rally to 2.7 percent, as gains by commodity producers lifted Russia’s Micex Index 1.8 percent. Turkey’s ISE National 100 Index jumped 3 percent on speculation tension between the military and the government is easing after the release of eight officers questioned in an investigation into allegations of a 2003 coup plot against Prime Minister Recep Tayyip Erdogan ’s government. To contact the reporters for this story: Stuart Wallace in London at swallace6@bloomberg.net ; Rita Nazareth in New York at rnazareth@bloomberg.net .

Read the full article →

AIG Extends Support to ILFC, Consumer Lender for Third Time, Until 2011

February 26, 2010

By Jamie McGee and Susanna Ray Feb. 26 (Bloomberg) — American International Group Inc. extended for the third time the period in which it is committed to supporting plane-leasing and consumer-lending units. AIG said in its annual report today it “intends to provide support” to International Lease Finance Corp. and American General Finance Corp. through Feb. 28, 2011, if needed, more than three months later than the date the company gave in its third-quarter filing in November. AIG, which is selling businesses to help repay bailout loans, previously announced three-month extensions in both August and November of last year. ILFC and American General lost access to their usual financing sources, including commercial paper and unsecured debt, after downgrades of New York-based AIG, which needed a $182.3 billion U.S. rescue after losing bets on home loans. The units had been downgraded in the past three months on the prospect AIG would decline to extend support past November. “At some point, the reality is that it has to stand on its own,” Howard Rubel , an aerospace analyst at Jefferies & Co. in New York, said of ILFC before today’s announcement. The Los Angeles-based plane unit is among the biggest customers for both Boeing Co. and Airbus SAS . ILFC said this week it was seeking a bank loan of as much as $750 million secured against its fleet. AIG used bailout funds to prop up ILFC with a $1.7 billion credit line in March and $2 billion in October. ‘Restructuring Opportunities’ “We continue to address the funding needs and are exploring strategic restructuring opportunities for International Lease Finance Corporation and American General Finance,” AIG Chief Executive Officer Robert Benmosche said today in a statement. Credit-default swaps on ILFC rose 0.5 percentage point to 9.5 percent upfront, according to broker Phoenix Partners Group. That means it would cost $950,000 upfront and $500,000 a year to protect $10 million of ILFC obligations from default for five years, up from $900,000 yesterday. Swaps on AIG were unchanged at 2 percent upfront. The plane unit may sell aircraft, Benmosche said this month in announcing the departure of ILFC CEO Steve Udvar-Hazy , who founded the company 37 years ago and then sold it to the insurer. Private-equity groups had backed Udvar-Hazy in an attempt to buy as much as a $4.5 billion chunk of ILFC’s fleet to start a firm, people with knowledge of the matter said in October. “ILFC does have a lot of unencumbered assets, aircraft, so that’s one possible way they could raise funds,” said Craig Fraser , aerospace analyst at Fitch Ratings, before today’s announcement. “Aircraft are still attractive assets to support financing.” Ratings Downgrades Standard & Poor’s downgraded ILFC last month on concern AIG may take “several years” to sell the business. AIG has struck deals to divest more than 20 businesses including a U.S. auto insurer and Canadian mortgage guarantor. ILFC had more than $6.7 billion of debt maturing in 2010, AIG said in the filing. For Evansville, Indiana-based American General, the figure was more than $6.5 billion. “We would not hang our hat on support, and we would approach American General as a standalone entity at this point,” said Adam Steer , an analyst at CreditSights Inc. in New York, in an interview before today’s announcement. The consumer lender cut more than 1,000 jobs last year, scaled back lending, closed branches and sold mortgage-backed certificates to Credit Suisse Group AG. AIG made a $600 million capital contribution to American General last year. ‘Confident in the Future’ AIG posted a fourth-quarter net loss of $8.87 billion today on charges tied to paying down its bailout debt and boosting commercial insurance reserves. ILFC’s operating profit rose 66 percent to $344 million after the unit expanded its fleet and borrowing costs fell. American General had an operating loss of $309 million on a drop in finance-charge revenue and higher provisions for loan losses. ILFC had more than $26 billion in borrowing through bonds and bank debt as of Dec. 31, AIG said today. American General had more than $20 billion in outstanding debt. “We also remain confident in the future of the International Lease Finance Corporation as a leader in its market segment,” Benmosche said in a separate statement posted on the insurer’s Web site. American General “is a well run business and we continue to explore a variety of options to protect its value and meet its obligations.” To contact the reporters on this story: Jamie McGee in New York at jmcgee8@bloomberg.net ; Susanna Ray in Seattle at sray7@bloomberg.net .

Read the full article →

Emerging Market Stocks, U.S. Financial Shares Advance, Treasuries Retreat

February 22, 2010

By Rita Nazareth and Justin Carrigan Feb. 22 (Bloomberg) — Emerging market stocks and U.S. financial shares rose on signs the economic rebound is gaining momentum and speculation the Federal Reserve will keep interest rates at a record low to protect the recovery. Crude oil fluctuated near $80 a barrel. The MSCI Emerging Markets Index gained 1.2 percent at 2:56 p.m. in New York as equity benchmarks for South Korea, Russia and Taiwan advanced more than 1 percent. The Standard & Poor’s 500 Index swung between gains and losses as lower natural gas and industrial metal prices weighed on commodity producers. Treasury 10-year note yields approached a six-week high after the first of four note and bond auctions totaling a record $126 billion this week. Bernanke may tell Congress Feb. 24 that last week’s increase in the discount rate isn’t intended to drive up borrowing costs amid a weak jobs market. Taiwan and Thailand exited recessions in the fourth quarter, expanding 9.2 percent and 5.8 percent respectively, government reports showed today. “The news on the global economy is generally better,” said Alan Gayle , a money manager at RidgeWorth Investments in Richmond, Virginia, which oversees $63 billion. “The Fed is gradually unwinding its emergency measures. But as inflation remains lower than we thought, there’s very little pressure for the Fed to raise interest rates in the near-term. Low interest rates are great for equities.” Bank of America Corp. and JPMorgan Chase & Co. led financial shares to the top gain among 10 industries in the S&P 500, while Chevron Corp. and Newmont Mining Corp. paced a retreat in commodity producers. Awaiting Bernanke Bernanke will probably assure Congress that the Fed is mindful of the lack of job growth in the U.S. and an increase in the benchmark interest rate isn’t imminent. The central bank chief will deliver his semi-annual report on the economy to House and Senate panels Feb. 24-25. Greek stocks and bonds climbed on optimism the nation will be able to find funding as it struggles to narrow a budget deficit that is more than four times the European Union limit. The ASE Index advanced for a third day, gaining 1.5 percent, and the yield on the government two-year note declined 16 basis points to 5.42 percent. The South Korean won rose the most against the dollar in almost seven weeks as sales at South Korea’s largest department stores increased in January for an 11th month. Korea’s Kospi stock index climbed 2.1 percent and Taiwan’s Taiex Index gained 1.6 percent, helping drive the rally in the MSCI Emerging Markets Index . Hungary’s BUX Index rose 0.6 percent after an economic-sentiment gauge advanced to the highest level in 17 months. Real-Estate Developers The MSCI Asia Pacific Index advanced 2.6 percent, its biggest gain since November. Suruga Bank Ltd. rallied 7.4 percent in Tokyo on stock-buyback plans. Hong Kong’s Hang Seng Index jumped 2.4 percent, led by real-estate developers after Sun Hung Kai Properties Ltd. won the city’s first land auction for the year. The Shanghai Composite Index fell 0.5 percent on the first day of trading after a weeklong break. Treasuries fell, with the yield on the 10-year note rising two basis points to 3.8 percent. This week’s sales of U.S. government securities started with $8 billion of 30-year inflation-protected bonds today. The Treasury Inflation Protected Securities, or TIPS, drew a yield of 2.229 percent in the first sale of the maturity in more than eight years. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of bonds offered, was 2.45. Copper, Oil Copper for delivery in three months fell 1.5 percent to $3.3295 a pound in New York. Nickel, lead and zinc also retreated. Crude oil for March delivery, which expires later today, added 0.4 percent to $80.16 a barrel on the New York Mercantile Exchange. Natural gas slid 2.9 percent, falling below $5 per million British thermal units for the first time in more than 10 weeks, as milder weather signaled reduced demand for the heating fuel. The cost to protect against defaults on U.S. corporate bonds fell to the lowest in a month amid better-than-estimated company earnings, spurring investors to wager that the economic recovery will be sustainable. Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, dropped 0.8 basis point to a mid-price of 90.25 basis points as of 11:03 a.m. in New York, according to broker Phoenix Partners Group. The gauge typically falls as investor confidence improves. The Markit index has fallen five straight days as signs of a sustained U.S. recovery overshadowed investor concern that risks stemming from Greek and other sovereign European deficits could spread to other assets. To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net ; Justin Carrigan in London at jcarrigan@bloomberg.net .

Read the full article →

Stocks in U.S. Gain as Price Report Eases Concern Over Fed Rate Increases

February 19, 2010

By Elizabeth Stanton Feb. 19 (Bloomberg) — U.S. stocks rose, erasing an earlier drop, as a lower-than-projected increase in the cost of living eased concern that the Federal Reserve will raise its benchmark interest rate to fight inflation. Boeing Co., United Technologies Corp. and Chevron Corp. led gains in the Dow Jones Industrial Average. Nine of the 10 industry groups in the Standard & Poor’s 500 Index advanced, led by banks and industrial companies. Schlumberger Ltd. declined 3 percent on a report it may buy Smith International Inc. “There’s no inflation for the Fed to fight,” Dan Greenhaus , chief economic strategist at Miller Tabak & Co. in New York. “If easy monetary policy and supportive fiscal policy have helped boost equities thus far, data such as today’s CPI argues for a continuation of supportive policies.” The Standard & Poor’s 500 Index increased 0.4 percent to 1,111.36 at 12:33 p.m. in New York. The Dow Jones Industrial Average climbed 32.88 points, or 0.3 percent, to 10,425.78, trimming its decline for 2010 to less than 0.1 percent. The Nasdaq Composite Index gained 0.3 percent to 2,248.14. Stock-index futures fell in pre-market trading after the Fed raised the discount rate it charges on loans to banks, a decision announced after exchanges closed yesterday. Futures pared their losses today after the consumer price index, a gauge of consumer inflation, rose less than forecast. Excluding food and fuel, the CPI fell 0.1 percent, its first drop since 1982. The CPI rose 0.2 percent overall. Tiger Volume Trading on all U.S. exchanges slowed at 11 a.m., when Tiger Woods , the winner of 14 major golf tournaments, apologized for his marital infidelity in a televised news conference. Volume fell to 456 million shares during the conference from an average of 576.8 million during the day’s five previous 15-minute segments, data compiled by Bloomberg shows. The S&P 500 is up 3.3 percent on the week , its biggest advance since October. The main benchmark for American equities, while still up 64 percent from a 12-year low last March, is down 3.4 percent since Jan. 19 amid concern that widening budget gaps in Greece, Portugal and Spain threaten the European economy. The Fed raised the discount rate by a quarter point to 0.75 percent, signaling a retreat from its unprecedented actions to halt the deepest financial crisis since the Great Depression. The central bank, which has provided hundreds of billions of dollars in credit to banks, bond dealers, commercial paper borrowers and troubled financial institutions, said the increase will encourage financial institutions to rely more on money markets for short-term loans. ‘On the Sidelines’ “As you go through a tightening cycle it constricts growth,” said Burt White , chief investment officer at LPL Financial in Boston, which oversees $246 billion. “That impacts future earnings, future profits, future margins. What the market’s doing now is trying to evaluate how quickly and strongly will the tightening be.” The inflation reading “lets the market know the Fed is going to be on the sidelines for a while,” he said. Boeing, the world’s second-largest commercial-plane maker, rose 2 percent to $64.17 for the biggest gain in the Dow average. United Technologies, the maker of Pratt & Whitney jet engines and Otis elevators, gained 0.9 percent to $68.73. Chevron, the second-biggest U.S. energy company, increased 0.8 percent to $74.20. Schlumberger fell 3 percent to $63.84. The Wall Street Journal on its Web site reported that the world’s largest oilfield services provider is in advanced talks to buy Smith International, one of the largest drilling-fluids providers. Smith International rose 12 percent to $37.30. Intuit, J.C. Penney Intuit Inc. rallied 8.5 percent to $32.91. The world’s biggest maker of tax-preparation software reported second- quarter profit that beat analysts’ estimates as U.S. taxpayers began filing returns and more small companies bought finance software. J.C. Penney Co. rose 7.2 percent to $27.83. The third- largest U.S. department-store chain posted profit that fell less than analysts predicted. The combined per-share earnings for the S&P 500 are $17.43 based on fourth-quarter reports by 423 companies, according to Bloomberg data, compared with a per-share loss of 9 cents in the year-earlier period, according to Standard & Poor’s. Per-share profit declined from the year-earlier figure in each of the past nine quarters, a record slump. Dell Inc. tumbled 6.7 percent to $13.46 after the personal- computer maker said holiday sales of low-priced PCs and higher component costs crimped earnings. Gross margin, the percentage of sales that remain after deducting production costs, was 17.4 percent, below the 18 percent projected on average by analysts. Apollo Group Inc. fell 6.7 percent to $57.31. The operator of the for-profit University of Phoenix forecast second-quarter earnings excluding some items of 79 cents to 84 cents a share, compared with an average estimate of 93 cents in a Bloomberg survey of 20 analysts. First Solar Inc. dropped 7 percent to $117.50, the most in the S&P 500, after the world’s largest maker of thin-film solar power modules reiterated its prior 2010 sales and profit forecasts, disappointing investors who had expected an increase. To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net .

Read the full article →

LBO Debt Lags Behind Junk as Stock Investors Reject IPOs: Credit Markets

February 17, 2010

By Bryan Keogh and Patricia Kuo Feb. 18 (Bloomberg) — Debt used to fund buyouts is lagging behind the rest of the high-yield market as a slump in demand for initial public offerings thwarts efforts by private-equity firms to pare borrowings. Bonds issued by Blackstone Group LP’s Travelport Ltd. fell 3.1 percent on Feb. 11 after the world’s largest LBO-fund manager postponed a share sale for the provider of travel- reservation systems. New Look Group Ltd. loans declined after the fashion retailer owned by Permira Advisers LLP and Apax Partners Worldwide LLP put a $1 billion stock sale on hold. At least 15 IPOs were postponed or withdrawn this year, bolstering concern private-equity firms won’t be able to raise equity and slash debt from some of the $2 trillion of deals made since 2004. Junk-rated companies face “huge uncertainties” as they try to refinance more than $800 billion of borrowings in the next five years, according to Moody’s Investors Service. “The IPO cancellations are a significant negative for debt investors,” said Andrew Wilmont , who helps oversee $5 billion of speculative-grade debt as a London-based investment manager with Axa Investment Managers U.K. Ltd. Loans of companies rated below investment grade and owned by private-equity sponsors have returned 1.83 percent this year through Feb. 16, below the 2.34 percent gain for similarly-rated debt of borrowers without ties to buyout firms, according to Standard & Poor’s LCD data. Leveraged loans and junk bonds are rated below Baa3 by Moody’s and less than BBB- by S&P. Yield Spreads The extra yield investors demand to own company bonds instead of government debt held at 171 basis points yesterday, or 1.71 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. While that’s 10 basis points more than a month ago, the so-called spread compares with 449 basis points a year ago. The difference on U.S. junk-rated debt narrowed 22 basis points to 680 basis points yesterday, the biggest drop since Sept. 16, when spreads tightened 26 basis points. Elsewhere in credit markets, loans from Six Flags Inc. and IMS Health Inc. rose in their first day of trading, said investors familiar with the transactions. The Federal Reserve said its top officials last month debated how and when to shrink the central bank’s $2.26 trillion balance sheet, with some pushing to start selling assets in the “near future.” Duane Reade Holdings Inc.’s $300 million of 11.75 percent bonds due in 2015 soared 17.1 cents to 124.1 cents on the dollar yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Walgreen Co., the biggest U.S. drugstore chain, agreed to buy Duane Reade from affiliates of Oak Hill Capital Partners for $618 million to expand in metropolitan New York. Dubai World Credit-default swaps on Dubai tumbled 29 basis points to 610 basis points yesterday, according to CMA DataVision. A basis point equals $1,000 a year on a contract protecting $10 million of debt. Dubai World will present a proposal to creditors in March to restructure about $22 billion of debt after its advisers complete valuing the assets of the state-owned company, a person close to the Dubai government said. Dubai World, one of three main state-owned business groups, said in November it would seek to delay repaying debt until at least May 30. The Markit CDX North America Investment Grade Index fell 2 basis points to 96 basis points yesterday, according to broker Phoenix Partners Group. In London, the Markit iTraxx Crossover Index, which is linked to the debt of 50 European companies with mostly high-yield credit ratings, dropped 11 basis points to 495 basis points, according to JPMorgan Chase & Co. prices. A decrease signals improving perceptions of credit quality. Greece Fiscal Crisis Debt used in LBOs weakened amid a wider credit-market pullback, prompted by concern that European governments including Greece and Spain won’t be able to trim their budget deficits, slowing economic growth. Spreads for companies ranked CCC and below, the lowest tier, have widened 1.18 percentage points since Jan. 11, adding an extra $1.18 million of annual interest on every $100 million of bonds sold, according to Bank of America Merrill Lynch index data. Credit markets began sliding Jan. 11 when Olli Rehn , the European Union’s commissioner-designate for economic and monetary affairs, said Greece’s fiscal crisis is very serious and has a “potential spillover effect” for the euro area. Greece, representing 2.7 percent of the euro region’s $13 trillion economy, had a budget deficit of 12.7 percent of gross domestic product in 2009, the highest in the euro’s 11-year history and more than four times the EU’s 3 percent limit. ‘Not as Robust’ In a leveraged buyout, private-equity firms typically take over a company by putting up one third of the purchase price in cash and borrowing the rest. The firms considered IPOs earlier this year as rebounding stock markets gave them an opportunity to sell assets and distribute profits to their investors. The companies generally use proceeds from an IPO to retire about one-third of the debt, Wilmont said. The IPO market “is clearly not as robust as it was expected to be,” said Georg Grodzki , head of credit research at Legal & General Investment Management in London. Travelport’s 9.875 percent notes due in 2014 declined 3.2 cents to 102 cents on the dollar on Feb. 11, Trace data show. A day earlier, the Dublin-based company postponed an IPO and canceled a related debt tender offer, saying it will consider a share sale when equity market conditions are “more favorable.” New Look’s Offering After New Look postponed its equity offering on Feb. 12, its pay-in-kind loan fell to a bid price as low as 91 pence on the pound from 94 pence a day earlier and 98 pence the prior week, according to London-based credit broker Guy Butler Ltd. The U.K. fashion retailer delayed plans for a $1 billion offering “in light of an unfavorable market backdrop.” Speculative-grade bonds have returned 0.69 percent since Feb. 11, according to the Bank of America Merrill Lynch U.S. High Yield Master II Index. The debt has gained 0.38 percent this year, index data show. The S&P/LSTA U.S. Leveraged Loan 100 Index, containing the most actively traded high-yield loans, lost 0.71 percent this month, the first monthly drop since October. A $730 million loan raised by Six Flags and sold at a discount of 99 cents on the dollar, began trading at 99.375 cents, said the people, who declined to be identified because the transactions are private. IMS Health’s $1.25 billion term loan, which was also sold at 99 cents on the dollar, started at 100.25 cents. Buyout firms are seeking to reduce debt at the companies they own as $550 billion of leveraged loans and $250 billion of high-yield bonds come due during the next five years, Moody’s analysts led by Kevin Cassidy wrote in a Feb. 2 report. “With equity investors pushing back on current IPOs on offer, private equity firms will need to focus more on trying to extend the LBO debt, buying time for company cash flows and the market to pick up,” said Mike Nawas , a London-based partner of the European structured finance adviser Bishopsfield Capital Partners. To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net ; Patricia Kuo in London at pkuo2@bloomberg.net

Read the full article →

River Cafe, Chez Bruce to Open Pop-Up Eateries for Haiti Relief: Food Buzz

February 9, 2010

By Richard Vines Feb. 9 (Bloomberg) — The River Cafe, Chez Bruce and other leading London restaurants are planning to create a series of one-day, pop-up eateries next month to raise money for Haiti. Behind the project is restaurateur Rebecca Mascarenhas, who will host the dinners at her Putney venue, the Phoenix, which is closed for refurbishment. Diners will pay 60 pounds ($94) for three courses and may bring wines at 10 pounds corkage or buy bottles from suppliers at near cost price. “We’re doing this for Action Against Hunger because they support indigenous farmers, which is key for the long-term recovery of the country,” Mascarenhas said yesterday in an interview. “You can’t rely on aid for long-term stability.” Mascarenhas is hoping to get a dozen or so restaurants on board. Restaurateurs who have committed include her business partner Phil Howard of the Square and Rowley Leigh of Le Cafe Anglais. Restaurant staff will work without payment, and at least one well-known television chef is close to committing, said Mascarenhas, whose London venues include Kitchen W8. Details of the event will appear on the site http://www.putneypopup.co.uk/ when it’s up and running. Fans of Colin Firth get the chance to meet the actor at the inaugural event of Le Cafe Anglais’s cinema club, on Feb. 23. He’ll take part in a discussion of “A Month in the Country,” along with director Pat O’Connor. The scriptwriter on the movie was the late Simon Gray, who was a regular at the restaurant, where he held a party for the third volume of his “The Smoking Diaries.” Tickets for Le Cine Anglais cost 50 pounds and include dinner with wine. For tickets or information, call Nicky Lynskey on +44-20-7221-1415 or e-mail nicky@lecafeanglais.co.uk . Tristan Welch at Launceston Place has introduced a two- person chef’s table in his kitchen. He’s not publicizing it — well, apart from here — so if you are interested, you need to call the restaurant and ask nicely. Tel. +44-20-7937-6912. Gordon Ramsay has found an unlikely guide as he explores the etiquette of Twitter : restaurant critic Giles Coren. The shouty chef, who signed up on Feb. 1, gained more than 8,500 followers within days. Coren — known for his own expletive- packed Tweets — has advised Ramsay to follow a few people so as not to appear narcissistic. Heaven forbid. Ramsay took the advice and now looks at the Tweets of just four people: Jamie Oliver , Jonathan Ross , Chris Moyles … and Coren. Ramsay is roasted in an interview in the Australian newspaper with chef Michel Roux Sr ., who says Ramsay spent more than two years with the Roux family at Le Gavroche. What does he make of the TV chef? “I find (Ramsay’s behaviour) appalling; totally out of place and totally unacceptable,” the paper quotes Roux as saying. Does he rate Ramsay as a chef? “That guy is not better than anyone else.” And Marco Pierre White ? “He is a good cook, one of the best I’ve seen; he’s got palate, he’s got flair; {he is on} another scale to Gordon Ramsay.” I went along to Starbucks Coffee College, in Chiswick, west London, to learn about ethical sourcing and — more important for me — how to get that thick froth on top of my latte. The key is to froth the milk gently, allow a little air in by pulling away from the wand and not overheat. The last person who taught me said I should bang the jug up and down, so now I am confused, but the latest way appears to work. Freggo, the Argentine ice cream and coffee bar on Swallow Street, will be giving away a Dulce de Leche pancake with every coffee on Pancake Day, Feb. 16. Pierre Herme conducted a tasting of his macaroons and chocolates at Pied a Terre last week and was asked about wine matches. It can’t be done, he said, rejecting sweet wines as confusing and Champagne with a simple, “Non.” Having tried his creations — on sale at Selfridges — I’m almost inclined to agree. But I’m not sure if a gift of a box with a bottle of mineral water will quite do the trick on Valentine’s Day. ( Richard Vines is the chief food critic for Bloomberg News. Opinions expressed are his own.) To contact the writer on the story: Richard Vines in London at rvines@bloomberg.net .

Read the full article →

Small Businesses Still NOT Hiring — And Recovery Is Stalled As A Result

February 8, 2010

Companies with fewer than 500 employees, such as Phoenix Technologies Ltd. and Sonic Corp., helped lead the economy out of the four recessions since 1980. This time, they continue to cut capital spending and dismiss workers, eliminating 3,000 jobs in January, according to Roseland, New Jersey-based Automatic Data Processing Inc., the world’s largest payroll processor.

Read the full article →

Kraft Joins Warren Buffett Wager in Bonds to Fund Buyouts: Credit Markets

February 4, 2010

By Bryan Keogh Feb. 5 (Bloomberg) — Companies in the U.S. are spending the highest portion of bond-sale proceeds in more than a decade for acquisitions and expansions, joining Warren Buffett’s “all- in wager” on a recovery and taking advantage of the lowest borrowing costs since 2004. Kraft Foods Inc. , the maker of Oreo cookies, raised $9.5 billion yesterday for its takeover of Cadbury Plc, while Buffett’s Berkshire Hathaway Inc. sold $8 billion of notes for its buyout of railroad company Burlington Northern Santa Fe Corp. that he called an “all-in wager” on the U.S. economy. About 70 percent of debt issued this year by non-financial companies is financing mergers and acquisitions or related business investments, the most of any five-week period since 1998, according to data compiled by Bloomberg. Companies boosted inventories last quarter as the U.S. expanded at the fastest pace in six years, government reports showed. “It’s the resumption of business sales growth that has improved the backdrop for M&A,” said John Lonski , chief economist at Moody’s Capital Markets Group. “Financing costs are relatively cheap if you can access credit.” The extra yield investors demand to own corporate bonds rather than government debt ended yesterday at 166 basis points, up from 164 basis points a day earlier, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Overall yields fell to an average 4.07 percent, from 4.12 percent a day earlier. Default Protection Elsewhere in credit markets, the cost to protect company debt in North America and Europe from default jumped to the highest in about nine weeks as concern rose that governments will fail to close budget deficits. Lloyds Banking Group Plc’s 2.1 billion pounds ($3.3 billion) of mortgage-backed bonds issued last week declined in secondary market trading, and firms including BlueMountain Capital Management LLC say they are liquidating funds raised during the recession to buy debt at depressed prices because they see gains moderating. “We’ve captured most of the big opportunity,” BlueMountain co-founder Stephen Siderow , 42, said. “It isn’t going to happen again anytime soon and that’s why we urged our clients to move on.” They’re reinvesting in other credit funds of the $4 billion money manager that aren’t dependent on markets rising, he said. Borrowing Trends Borrowers have raised $27.8 billion this year for acquisitions, capital expenditures and project financing, 70 percent of the $39.6 billion in non-financial investment-grade debt sold, compared with an average of 23 percent in all of 2009, Bloomberg data show. Last year’s peak was 36 percent in March, when new York-based Pfizer Inc. sold $13.5 billion of bonds to finance its takeover of Wyeth. Northfield, Illinois-based Kraft , the world’s second- largest food company, boosted the size of its offering from $4 billion as demand increased, making it the biggest bond issue in almost a year, to finance the cash portion of its takeover of Cadbury. It sold $1 billion of 3.25-year notes, $1.75 billion of 6-year debt, $3.75 billion of 10-year bonds and $3 billion of 30-year debt. The biggest portion was priced to yield 205 basis points more than Treasuries. Berkshire Hathaway raised $8 billion of notes for its Burlington Northern purchase. The sale included $2 billion of one-year floating rate debt that pays 2 basis points less than the three-month London interbank offered rate , according to Bloomberg data. AAA Lost Buffett is using the debt, equity and Berkshire’s cash to finance the biggest purchase of his four-decade career as chief executive officer. The 79-year-old billionaire offered $26 billion for the 77.4 percent of Fort Worth, Texas-based Burlington Northern that Berkshire doesn’t already own. Standard & Poor’s responded to the debt sale by stripping Omaha, Nebraska-based Berkshire of its AAA rating, lowering it to AA+. It had already lost its top rating at Moody’s Investors Service, which cut it in April 2009 to Aa2 from Aaa. “The railroad acquisition will reduce what historically has been extremely strong capital adequacy and liquidity,” S&P said. PepsiCo Inc., the world’s second-largest soft-drink maker, raised $4.25 billion on Jan. 11 to help finance its $7.8 billion purchase of two bottling companies. Williams Partners LP sold $3.5 billion of bonds this week to finance the purchase of gas pipeline assets from parent Williams Cos. Business Investment Business investment in the U.S. is rising, jumping 8.2 percent in the fourth quarter, the biggest increase in 14 years and the first in more than two as factories cranked up assembly lines and companies invested more in equipment and software, according to Federal Reserve data. Gross domestic product expanded 5.7 percent, the best performance since the three months ended September 2003. Efforts to rebuild depleted inventories contributed 3.4 percentage points to GDP, the most in two decades. Payrolls probably rose by 15,000 last month, according to the median forecast of 50 economists surveyed by Bloomberg News before the Labor Department’s report today. “Signs that companies are rebuilding inventories would be a major signal of an upturn on the way,” said Toby Nangle , director of asset allocation at Baring Investment Services Ltd. in London. Risk Rising Credit derivatives traders are not as bullish on the economic outlook. Benchmark gauges of bond risk in North America and Europe jumped yesterday on concern debt strains in Greece, Portugal and Spain may spread into markets for corporate borrowing. “If you want to point to the one thing in the market that has people on edge, it’s definitely sovereign risk,” said Jason Quinn , co-head of high-grade and high-yield flow trading at Barclays Capital in New York. “The level of uncertainty surrounding the sovereign situation continues to increase. It feels like it’s moving faster than people expected, so risk in general is repricing.” The Markit CDX North America Investment-Grade Index, which banks and money managers use to speculate on creditworthiness or to hedge against losses, climbed the most in four months, jumping 7.25 basis points to 99.5 basis points in New York, according to broker Phoenix Partners Group. The index, which typically rises as debt-market confidence deteriorates, was last at that level on Dec. 4, CMA DataVision prices show. London Swaps In London, the Markit iTraxx Europe of 125 companies with investment-grade ratings rose 5 basis points to 86.5 basis points, the highest since Nov. 30, JPMorgan Chase & Co. prices show. The Markit iTraxx SovX Western Europe Index of credit- default swaps on the debt of 15 governments rose 13 basis points to 107 basis points, according to CMA. A swaps index tied to Western European government debt traded at the highest since it was introduced in September. Credit-default swaps are derivatives — contracts with values derived from assets or events, including stocks, bonds, commodities, currencies, interest rates or the weather. Banks, hedge funds and insurance companies use the swaps to insure bonds and loans against default or to speculate on the creditworthiness of countries and companies. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. Lloyds Banking Group issued notes in dollars, euros and pounds from its Permanent Master Issuer 2010-1 on Jan. 29. The $1 billion of bonds, the first European mortgage-backed securities denominated in the U.S. currency sold since July 2007, are quoted at 99.90 percent of face value, Bank of America bid prices show. “This doesn’t send a positive message to dollar-based asset managers that were starting to return to European markets after three years away,” said Shammi Malik, head of asset- backed securities trading at London-based broker Brains Inc. “It demonstrates that the recovery of the securitization market is still very fragile.” To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

Read the full article →

U.S., European Stocks Retreat as Dollar, Emerging-Market Equities Advance

February 3, 2010

By Rita Nazareth Feb. 3 (Bloomberg) — Stocks in the U.S. and Europe fell, commodities slipped and the dollar rose following disappointing results at companies from Pfizer Inc. to Ryder Systems Inc. and slower-than-estimated growth in U.S. service industries. The Standard & Poor’s 500 Index slipped 0.6 percent to 1,097.28 at 4 p.m. in New York after surging 2.7 percent over the previous two days, its biggest jump since October. The Dollar Index climbed 0.5 percent in its first gain this week. The yield on the 10-year Treasury note increased to 3.71 percent, the highest since Jan. 19. Copper, lead and zinc each lost more than 3 percent in London to lead industrial metals lower as the rising dollar curbed demand for commodities. Ryder, the largest U.S. truck-leasing company, tumbled after last year’s recession caused a slump in cargo shipments. MetLife and Pfizer also led U.S shares lower as the life insurer’s yearend book value trailed its forecast and the drugmaker’s results were hurt by costs from its Wyeth acquisition. The Institute for Supply Management’s service- industry index rose to 50.5, signaling growth yet still trailing economist estimates. “Investors are in a show-me-mentality right now,” said Michael Mullaney , who manages $9.5 billion at Fiduciary Trust Co. in Boston. “There are still some clouds out there. We saw two blue chip companies disappointing.” Materials and industrial companies in Asia followed yesterday’s rally in U.S. equities after pending home sales rose 1 percent, adding to signs of growth in the world’s biggest economy. The MSCI Emerging Markets Index added 1.2 percent. China’s Shanghai Composite Index rose 2.4 percent and India’s Sensex Index advanced 2.1 percent, the biggest gains in six weeks for both. Asian Rally The MSCI Asia Pacific Index advanced 0.8 percent, posting its first back-to-back advance in three weeks. Esprit Holdings Ltd., the biggest Hong Kong-listed clothier, gained 7.9 percent after posting better-than-estimated profit. Losses in the U.S. were limited as companies including News Corp. rallied on higher-than-estimated earnings. “The stock market is in a little bit of limbo after a strong bounce from oversold levels,” said Burt White , chief investment officer at Boston-based LPL Financial Corp., which manages $280 billion. “All eyes are on corporate profits and given that expectations are pretty high, we’re going to see some disappointments. Emerging markets are doing better. Perhaps people are beginning to realize that the pessimism around China was a little bit steep. Emerging markets are really the growth engine of this recovery.” Earnings Season A record nine-quarter profit slump for S&P 500 companies is projected to have ended in the final three months of 2009, and about 79 percent of earnings since Jan. 11 beat the average of Wall Street estimates, according to data compiled by Bloomberg. U.S. joblessness threatens to undermine stocks, according to Mohamed A. El-Erian , Chief Executive Officer of Pacific Investment Management Co. U.S. Companies cut an estimated 22,000 jobs in January, in line with forecasts, according to an ADP Employer Services report today. Economists surveyed by Bloomberg News anticipate the government’s report Feb. 5 will show the U.S. created jobs in January for the second time in the past three months. “I sense quite a gap between consensus market expectations and key political and economic realities, especially in the U.S.,” El-Erian wrote in a Bloomberg News column. “If the gap isn’t bridged by the validation of the more optimistic expectations, investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes.” The S&P 500 slumped 3.7 percent in January, its biggest loss in 11 months. IPO Postponed Imperial Capital Group Inc. postponed its $113 million initial public offering, becoming the second U.S. company to shelve an IPO in 2010. The investment bank that specializes in high-yield and distressed debt planned to sell 6.67 million shares at $15 to $17 each in its scheduled IPO yesterday, according to Bloomberg data. The initial offering would have been the first by an investment bank in two years. Europe’s Dow Jones Stoxx 600 Index slipped 0.6 percent today. Electrolux AB , the world’s second-biggest appliance maker, plunged 12 percent in Stockholm, the biggest drop in three years, after earnings missed estimates. A benchmark gauge of corporate credit risk in North America declined for the third day, reaching an almost two-week low. Credit-default swaps on the Markit CDX North America Investment- Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, declined 1.25 basis point to 91.25 basis points as of 8 a.m. in New York, according to broker Phoenix Partners Group. Bond Sales Kraft Foods Inc. is planning to sell at least $4 billion of debt due in 3.25, 6, 10 and 30 years to pay for its acquisition of Cadbury Plc, according to a person familiar with the offering. The bonds may be sold today or tomorrow, said the person, who declined to be identified because terms aren’t set. Kraft plans to issue a minimum of $1 billion of securities of each maturity, the person said. McClatchy Co.’s $875 million of senior secured notes due in 2017 may yield about 11.75 percent, according to a person familiar with the offering. The publisher may sell the debt as soon as tomorrow, said the person, who declined to be identified because the terms aren’t yet set. Crude oil for March delivery fell 0.3 percent to $76.99 a barrel after an Energy Department report showed a bigger-than- forecast increase in stockpiles as refineries idled units and imports climbed. The dollar strengthened against 14 of 16 major currencies, adding 0.5 percent against the euro and 0.7 percent compared with the Japanese yen. To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

Read the full article →

European, U.S. Stocks Retreat as Dollar, Emerging-Market Equities Advance

February 3, 2010

By Rita Nazareth Feb. 3 (Bloomberg) — Stocks in the U.S. and Europe fell, commodities slipped and the dollar rose following disappointing results at companies from Pfizer Inc. to Ryder Systems Inc. and slower-than-estimated growth in U.S. service industries. The Standard & Poor’s 500 Index slipped 0.4 percent to 1,099.23 at 11:16 a.m. in New York after surging 2.7 percent over the previous two days, its biggest jump since October. The Dollar Index climbed 0.4 percent in its first gain this week. The yield on the 10-year Treasury note increased four basis points to 3.68 percent. Copper, lead and zinc each lost at least 2 percent to lead declines in industrial metals. Ryder, the largest U.S. truck-leasing company, tumbled after last year’s recession caused a slump in cargo shipments. MetLife and Pfizer also led U.S shares lower as the life insurer’s yearend book value trailed its forecast and the drugmaker’s results were hurt by costs from its Wyeth acquisition. The Institute for Supply Management’s service- industry index rose to 50.5, signaling growth yet still trailing economist estimates. “Investors are in a show-me-mentality right now,” said Michael Mullaney , who manages $9.5 billion at Fiduciary Trust Co. in Boston. “There are still some clouds out there. We saw two blue chip companies disappointing.” Materials and industrial companies in Asia followed yesterday’s rally in U.S. equities after pending home sales rose 1 percent, adding to signs of growth in the world’s biggest economy. The MSCI Emerging Markets Index added 1.3 percent, its biggest gain in a month. China’s Shanghai Composite Index rose 2.4 percent and India’s Sensex Index advanced 2.1 percent, the biggest gains in six weeks for both. Asian Rally The MSCI Asia Pacific Index advanced 1.1 percent, posting its first back-to-back advance in three weeks. Esprit, the biggest Hong Kong-listed clothier, gained 7.9 percent after posting better-than-estimated profit. Losses in the U.S. were limited as companies including News Corp. rallied on higher-than-estimated earnings. A record nine-quarter profit slump for S&P 500 companies is projected to have ended in the final three months of 2009, and about 81 percent of earnings since Jan. 11 beat the average of Wall Street estimates, according to data compiled by Bloomberg. “While investors have been a bit cautious over the course of the past two weeks, they should continue to focus on the corporate profitability picture that is rebounding fast,” said Henk Potts at Barclays Stockbrokers Ltd. in London, which oversees about $218 billion. “Monetary tightening may drive the market into a bumpier road in the second half, but it should not be a matter of concern for at least the first half.” Jobless Concern U.S. joblessness threatens to undermine stocks, according to Mohamed A. El-Erian , Chief Executive Officer of Pacific Investment Management Co. U.S. Companies cut an estimated 22,000 jobs in January, in line with forecasts, according to an ADP Employer Services report today. Economists surveyed by Bloomberg News anticipate the government’s report Feb. 5 will show the U.S. created jobs in January for the second time in the past three months. “I sense quite a gap between consensus market expectations and key political and economic realities, especially in the U.S.,” El-Erian wrote in a Bloomberg News column. “If the gap isn’t bridged by the validation of the more optimistic expectations, investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes.” The S&P 500 slumped 3.7 percent in January, its biggest loss in 11 months. IPO Postponed Imperial Capital Group Inc. postponed its $113 million initial public offering, becoming the second U.S. company to shelve an IPO in 2010. The investment bank that specializes in high-yield and distressed debt planned to sell 6.67 million shares at $15 to $17 each in its scheduled IPO yesterday, according to Bloomberg data. The initial offering would have been the first by an investment bank in two years. Europe’s Dow Jones Stoxx 600 Index slipped 0.5 percent today. Electrolux AB , the world’s second-biggest appliance maker, plunged 13 percent in Stockholm, the biggest drop in three years, after earnings missed estimates. A benchmark gauge of corporate credit risk in North America declined for the third day, reaching an almost two-week low. Credit-default swaps on the Markit CDX North America Investment- Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, declined 1.25 basis point to 91.25 basis points as of 8 a.m. in New York, according to broker Phoenix Partners Group. Bond Sales Kraft Foods Inc. is planning to sell at least $4 billion of debt due in 3.25, 6, 10 and 30 years to pay for its acquisition of Cadbury Plc, according to a person familiar with the offering. The bonds may be sold today or tomorrow, said the person, who declined to be identified because terms aren’t set. Kraft plans to issue a minimum of $1 billion of securities of each maturity, the person said. McClatchy Co.’s $875 million of senior secured notes due in 2017 may yield about 11.75 percent, according to a person familiar with the offering. The publisher may sell the debt as soon as tomorrow, said the person, who declined to be identified because the terms aren’t yet set. Crude oil for March delivery in New York fluctuated after yesterday’s 3.8 percent jump. Copper for delivery in three months lost 2 percent to $6,676.25 a metric ton on the London Metal Exchange. Gold for immediate delivery fluctuated. The dollar added 0.3 percent against the euro and rose 0.6 percent compared with the yen. To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

Read the full article →

Bank Bonds Lure TCW After Stock Decline, P&G Spreads Widen: Credit Markets

February 2, 2010

By Pierre Paulden and Caroline Salas Feb. 2 (Bloomberg) — President Barack Obama’s proposals to limit the size of U.S. banks helped wipe out $430 billion of financial companies’ stock market value and also made their bonds irresistible to some of the nation’s biggest investors. Banks in the MSCI World Index fell 7 percent since Jan. 12 while the extra yield investors demand to own their bonds instead of Treasuries widened to 238 basis points, from a low of 224 basis points, or 2.24 percentage points, on the same day, according to the Bank of America Merrill Lynch U.S. Corporates, Banks Index. That compares with a median spread of 119 basis points during the last five years. Now, TCW Group Inc., AllianceBernstein LP and Advantus Capital Management say bank bonds are attractive. The government won’t tolerate another failure like the bankruptcy of Lehman Brothers Holdings Inc. in September 2008, which led to a seizure in credit markets, investors said. “It’s understood now that decisions such as letting Lehman Brothers file for bankruptcy are so dangerous and detrimental to an economy,” said Tad Rivelle , chief investment officer for Metropolitan West Asset Management LLC and a manager of TCW funds, where he helps oversee $55 billion. He’s buying senior and subordinated debt securities of the largest financial firms because a failure is “unlikely to be repeated.” Elsewhere in credit markets, the yield spread on company bonds overall expanded 2 basis points yesterday to 166 basis points, Bank of America Merrill Lynch’s Global Broad Market Corporate Index showed. The spread has widened from this year’s low of 160 basis points on Jan. 14. The average yield ended yesterday at 4.1 percent. P&G Bonds The cost to protect bonds of North American companies from default fell for the first time in four days. Consumer products company Procter & Gamble Co. sold $1.25 billion of notes at a bigger spread than its last offering. Bonds of movie-rental chain Blockbuster Inc. fell for the fifth time in eight days. Fewer banks demanded stricter standards for loans to consumers and companies last quarter, a Federal Reserve report showed, as the economy grew at the fastest pace in six years. Banks continued to tighten the terms of loans they did make, and demand for both business and household loans weakened over the past three months, the Fed said yesterday in its quarterly survey of senior loan officers. Obama asked Congress on Jan. 21 to limit the size of banks, curb proprietary trading and prohibit them from investing in hedge and private equity funds to prevent a repeat of the worst credit crisis since the Great Depression. While the rules would hurt shareholders by restricting growth, they may make the bonds more appealing by reducing the risks the firms are taking, said Tom Houghton , a vice president and portfolio manager at Advantus in St. Paul, Minnesota. ‘A Better Idea’ “I understand from the equity standpoint why you’d be concerned, because you’re taking some of the growth story off,” said Houghton, who manages $2 billion. “If you’re a creditor, you’d be less concerned about a Goldman Sachs or a Morgan Stanley . You’d have a better idea of what they’re doing.” Houghton is “overweight” bank bonds, meaning he owns a higher percentage than is contained in benchmark indexes. Banks deserve wider yield spreads because government involvement may increase volatility in the debt, said Marilyn Cohen , president of Envision Capital Management in Los Angeles, who manages $250 million in fixed-income assets. “Investors thought ‘Uh, oh, here they come again with their sticky fingers and who knows what else they’ll have up their sleeve,” she said. “Clearly this whole ‘Government is better and can do it much better’ idea isn’t going away.” Wider Spreads Citigroup Inc.’s $4 billion of 6.125 percent senior unsecured notes maturing in 2017 have fallen to 100.5 cents on the dollar to yield 6 percent, from 102 cents on Jan. 20, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt dropped 0.5 cent yesterday on speculation the New York-based lender will sell or split its $10 billion Citi Private Equity unit. Citigroup, 27 percent owned by the government following a bailout in 2008, is selling almost a third of its $1.86 trillion of assets under regulatory pressure to shrink, said people familiar with the matter, who declined to be identified because the sale talks are private. JPMorgan Chase & Co. analysts led by Eric Beinstein in New York said in a Jan. 29 report that banks are becoming more creditworthy and spreads will tighten. Morgan Stanley credit strategist Viktor Hjort in Hong Kong recommended on Jan. 25 that investors buy the bonds because lenders are increasingly profitable after selling shares to replenish capital eroded by the global financial crisis. Losses and Writedowns Financial institutions have raised $1.5 trillion to help cope with more than $1.7 trillion of losses and writedowns since the credit freeze began in 2007. The U.S. government has also backed debt and injected capital to prevent further failures. “Just as with 2009, it will be hard to outperform in credit without having exposure to financials,” said J.J. McKoan , head of global credit at AllianceBernstein in New York, who started buying financial securities early last year. The sector is the only one in investment-grade credit that trades at a “meaningful dispersion” to the benchmark index, he said. Credit-default swaps on the Markit iTraxx Crossover Index of 50 European companies with mostly high-yield credit ratings fell 11 basis points to 449, according to JPMorgan Chase & Co. prices at 11:23 a.m. in London. The Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies, slipped 2.5 basis points to 94.5 yesterday, prices from broker Phoenix Partners Group show. Both indexes are used to speculate on creditworthiness or to hedge against losses and a drop signals an improvement in investor confidence. The declines in default-default swap prices came after the Institute for Supply Management said its manufacturing index expanded faster in January that economists forecast. Toyota Recall Swaps on Toyota Motor Corp. rose to the highest since July in Asia as the automaker recalled 2.3 million U.S. cars because of sticking accelerator pedals. The contracts surged about 12 basis points to 92, CMA DataVision prices show. Procter & Gamble’s 1.375 notes were priced to yield 55 basis points more than two-year Treasuries, Bloomberg data show. In August, Cincinnati-based P&G sold $1 billion of two-year notes at a spread of 38 basis points. The yield compares with 1.225 percent on 5.98 percent debt due in April 2012 sold by competitor Colgate-Palmolive Co. Both companies have similar ratings from Moody’s Investors Service and Standard & Poor’s. Proceeds will be used for refinancing, B. Craig Hutson , a bond analyst for Gimme Credit in Chicago, wrote in a research note yesterday. Blockbuster Falls Dallas-based Blockbuster’s $300 million of 9 percent notes due in 2012 fell 3.5 cents yesterday to 22.5 cents on the dollar, according to Trace. The securities tumbled from 61.875 cents on Jan. 20, when the company said its cash flow for the year ended Jan. 3 was lower than analyst estimates. Junk-rated companies face “huge uncertainties” as they try to refinance more than $800 billion of borrowings in the next five years, Moody’s said in a report yesterday. More than $700 billion of the debt that will need to be refunded in the speculative-grade market is maturing between 2012 and 2014, the New York-based rating company said. Junk, or non-investment grade borrowers, are those rated below Baa3 by Moody’s and BBB- by S&P. In the market for asset-backed bonds, U.S. political and regulatory “uncertainty” contributed to higher yields on debt tied to hotel, shopping center and skyscraper loans relative to benchmarks, according to JPMorgan analysts led by Alan Todd in New York. The spread on top-ranked commercial-mortgage backed securities increased 0.3 percentage point to 4.8 percentage points more than a benchmark swap rate last week, JPMorgan data show. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Caroline Salas in New York at csalas1@bloomberg.net

Read the full article →

Bank Bonds Lure TCW as Stocks Fall, P&G Debt Spreads Widen: Credit Markets

February 1, 2010

By Pierre Paulden and Caroline Salas Feb. 2 (Bloomberg) — President Barack Obama’s proposals to limit the size of U.S. banks helped wipe out $430 billion of financial companies’ stock market value and also made their bonds irresistible to some of the nation’s biggest investors. Banks in the MSCI World Index fell 5.1 percent while the extra yield investors demand to own their bonds instead of Treasuries widened to 238 basis points yesterday from a low of 224 basis points, or 2.24 percentage points, on Jan. 12, according to the Bank of America Merrill Lynch U.S. Corporates, Banks Index. That compares with a median spread of 119 basis points during the last five years. Now, TCW Group Inc., AllianceBernstein LP and Advantus Capital Management say bank bonds are attractive. The government won’t tolerate another failure like the bankruptcy of Lehman Brothers Holdings Inc. in September 2008, which led to a seizure in credit markets, investors said. “It’s understood now that decisions such as letting Lehman Brothers file for bankruptcy are so dangerous and detrimental to an economy,” said Tad Rivelle , chief investment officer for Metropolitan West Asset Management LLC and a manager of TCW funds, where he helps oversee $55 billion. He’s buying senior and subordinated debt securities of the largest financial firms because a failure is “unlikely to be repeated.” Elsewhere in credit markets, the yield spread on company bonds overall expanded 2 basis points yesterday to 166 basis points, Bank of America Merrill Lynch’s Global Broad Market Corporate Index showed. The spread has widened from this year’s low of 160 basis points on Jan. 14. The average yield ended yesterday at 4.1 percent. P&G Bonds The cost to protect bonds of North American companies from default fell for the first time in four days. Consumer products company Procter & Gamble Co. sold $1.25 billion of notes at a bigger spread than its last offering. Bonds of movie-rental chain Blockbuster Inc. fell for the fifth time in eight days. Fewer banks demanded stricter standards for loans to consumers and companies last quarter, a Federal Reserve report showed, as the economy grew at the fastest pace in six years. Banks continued to tighten the terms of loans they did make, and demand for both business and household loans weakened over the past three months, the Fed said yesterday in its quarterly survey of senior loan officers. Obama asked Congress on Jan. 21 to limit the size of banks, curb proprietary trading and prohibit them from investing in hedge and private equity funds to prevent a repeat of the worst credit crisis since the Great Depression. While the rules would hurt shareholders by restricting growth, they may make the bonds more appealing by reducing the risks the firms are taking, said Tom Houghton , a vice president and portfolio manager at Advantus in St. Paul, Minnesota. ‘A Better Idea’ “I understand from the equity standpoint why you’d be concerned, because you’re taking some of the growth story off,” said Houghton, who manages $2 billion. “If you’re a creditor, you’d be less concerned about a Goldman Sachs or a Morgan Stanley . You’d have a better idea of what they’re doing.” Houghton is “overweight” bank bonds, meaning he owns a higher percentage than is contained in benchmark indexes. Banks deserve wider yield spreads because government involvement may increase volatility in the debt, said Marilyn Cohen , president of Envision Capital Management in Los Angeles, who manages $250 million in fixed-income assets. “Investors thought ‘Uh, oh, here they come again with their sticky fingers and who knows what else they’ll have up their sleeve,” she said. “Clearly this whole ‘Government is better and can do it much better’ idea isn’t going away.” Wider Spreads Citigroup Inc.’s $4 billion of 6.125 percent senior unsecured notes maturing in 2017 have fallen to 100.5 cents on the dollar to yield 6 percent, from 102 cents on Jan. 20, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt dropped 0.5 cent yesterday on speculation the New York-based lender will sell or split its $10 billion Citi Private Equity unit. Citigroup, 27 percent owned by the government following a bailout in 2008, is selling almost a third of its $1.86 trillion of assets under regulatory pressure to shrink, said people familiar with the matter, who declined to be identified because the sale talks are private. JPMorgan Chase & Co. analysts led by Eric Beinstein in New York said in a Jan. 29 report that banks are becoming more creditworthy and spreads will tighten. Morgan Stanley credit strategist Viktor Hjort in Hong Kong recommended on Jan. 25 that investors buy the bonds because lenders are increasingly profitable after selling shares to replenish capital eroded by the global financial crisis. Losses and Writedowns Financial institutions have raised $1.5 trillion to help cope with more than $1.7 trillion of losses and writedowns since the credit freeze began in 2007. The U.S. government has also backed debt and injected capital to prevent further failures. “Just as with 2009, it will be hard to outperform in credit without having exposure to financials,” said J.J. McKoan , head of global credit at AllianceBernstein in New York, who started buying financial securities early last year. The sector is the only one in investment-grade credit that trades at a “meaningful dispersion” to the benchmark index, he said. Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, fell 2.5 basis points 94.5 basis points, according to broker Phoenix Partners Group. A drop in the index signals a rise in investor confidence. The drop came as the Institute for Supply Management said its manufacturing index expanded faster in January that economists forecast. Toyota Recall The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was unchanged at 83 basis points, JPMorgan prices show. Swaps on Toyota Motor Corp. rose to the highest since July in Asia as the automaker recalled 2.3 million U.S. cars because of sticking accelerator pedals. The contracts surged about 12 basis points to 92 basis points, CMA DataVision prices show. Procter & Gamble’s 1.375 notes were priced to yield 55 basis points more than two-year Treasuries, Bloomberg data show. In August, Cincinnati-based P&G sold $1 billion of two-year notes at a spread of 38 basis points. The yield compares with 1.225 percent on 5.98 percent debt due in April 2012 sold by competitor Colgate-Palmolive Co. Both companies have similar ratings from Moody’s Investors Service and Standard & Poor’s. Proceeds will be used for refinancing, B. Craig Hutson , a bond analyst for Gimme Credit in Chicago, wrote in a research note yesterday. Blockbuster Falls Dallas-based Blockbuster’s $300 million of 9 percent notes due in 2012 fell 3.5 cents yesterday to 22.5 cents on the dollar, according to Trace. The securities tumbled from 61.875 cents on Jan. 20, when the company said its cash flow for the year ended Jan. 3 was lower than analyst estimates. In the market for asset-backed bonds, U.S. political and regulatory “uncertainty” contributed to higher yields on debt tied to hotel, shopping center and skyscraper loans relative to benchmarks, according to JPMorgan analysts led by Alan Todd in New York. The spread on top-ranked commercial-mortgage backed securities increased 0.3 percentage point to 4.8 percentage points more than a benchmark swap rate last week, JPMorgan data show. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Caroline Salas in New York at csalas1@bloomberg.net

Read the full article →

Corporate Bonds Beat Stock Returns by Most Since February: Credit Markets

January 28, 2010

By Pierre Paulden and Caroline Salas Jan. 29 (Bloomberg) — Corporate bonds are beating stocks by the biggest margin since February as investors seek the shelter of fixed income amid concern the global recovery is flagging. While the MSCI World Index of stocks in 23 developed countries has lost 3.36 percent including reinvested dividends this month, the Bank of America Merrill Lynch Global Broad Market Corporate index gained 1.64 percentage points. Last month, stocks outperformed bonds by 2.4 percentage points. Corporate borrowing costs fell this month as investors sought securities that offered some protection against a slowing economy and traders pushed back estimates for when central banks would increase interest rates. The extra yield investors demand to own company bonds instead of Treasuries has dropped to 165 basis points, or 1.65 percentage points, from 176 at the end of December, according to the Bank of America index. “Some of the economic data has missed expectations, which has been disconcerting for the equity market,” said Eric Green , director of research at Penn Capital Management in Philadelphia, whose firm manages $4.5 billion. “It’s a short-term panicky mode that people are in.” Elsewhere in credit markets, benchmark gauges of corporate credit risk in the U.S. and Europe reached seven-weeks highs yesterday, as Greece’s prime minister sought to quell speculation his country is seeking loans from other nations to trim its deficit. The rise suggests the rally in company bonds may falter. Corporate bond spreads were unchanged yesterday. Corporate Sales Sales of corporate bonds globally totaled $267.9 billion this month, compared with $332.5 billion in the same period last year, according to data compiled by Bloomberg. Financial company commercial paper outstanding rose this week by the most since the Federal Reserve started its program to buy the debt during the credit crisis in October 2008. Rating upgrades exceeded cuts in the fourth quarter for the first time since the second quarter of 2007 and are outpacing downgrades this month, according to Standard & Poor’s. While credit measures are improving, company sales are growing slowly, said Arthur Tetyevsky , the chief fixed-income strategist at Broadpoint Gleacher Securities Inc. in New York. “If you’re an equity investor, you’re looking at the income statements and if you’re a bond investor, you’re looking at balance sheets,” he said. “You could see why equity investors would be a little bit disappointed on these results but corporate bond guys should be more or less OK.” Revenue growth hasn’t been fast enough to extend the Standard & Poor’s 500 Index’s 60 percent rally since March. While profits among the 188 companies that have reported quarterly results since Jan. 11 beat analysts’ estimates by 13 percent, sales have exceeded forecasts by 1.4 percent, according to data compiled by Bloomberg. Falling Stocks After gaining 3.4 percent through Jan. 14, the MSCI stock index fell 6.6 percent through yesterday. Corporate bonds were bolstered by a 1.3 percent return this month in Treasuries, according to Bank of America Merrill data. Investors remain skittish about the economy’s recovery with the U.S. unemployment rate at 10 percent. Greek bonds fell 4.19 percent in local currency terms this month, the biggest decline in the world. President Barack Obama asked Congress last week to limit the size of banks, curb proprietary trading and prohibit them from investing in hedge and private equity funds to prevent a repeat of the worst credit crisis since the Great Depression. Traders see 49 percent odds that the Fed will leave its target rate unchanged at a range of zero to 0.25 percent through June, according to futures on the Chicago Board of Trade. A month ago, a majority was betting on an increase. ‘Perfect Setup’ “There’s been the introduction of uncertainty in several different ways, including fears of sovereign risk and factors stemming from Washington,” said Stephen Antczak , managing director and the head of corporate strategy for Cantor Fitzgerald & Co. in New York. “Everyone was on the same side of the trade. Boom! Perfect setup for risk premiums to widen across the capital structure.” While corporate bond spreads have narrowed, they are up from the low this month of 160 basis points on Jan. 14. Bonds of real estate companies and insurers led the rally, with gains of 3.26 percent and 2.94 percent, while automaker and telecommunications company debt lagged behind at 0.88 percent and 1.15 percent. Of the top 50 borrowers, debt issued by Paris-based Societe Generale , France’s second-largest bank, rose 3.48 percent and bonds of Edinburgh-based lender Royal Bank of Scotland Group Plc gained 3.24 percent, the month’s leading performers. Financials, Industrials Financial bonds returned 1.82 percent, compared with 1.53 percent for debt sold by industrial companies, Bank of America index data show. Financials have outperformed industrials for all but one of the past seven months. Blackstone Group LP Chief Executive Officer Stephen Schwarzman said yesterday that banks may start to rein in lending, putting the economic recovery at risk, if politicians keep attacking them and regulatory uncertainty persists. “Financial institutions will feel under siege and they will retreat,” Schwarzman said in a Bloomberg Television interview at the World Economic Forum in Davos, Switzerland. “Their entire world is being shaken and they’re being attacked personally,” he said. “We don’t need those financial institutions insecure.” Issuance of financial commercial paper increased 10.5 percent to $601.2 billion for the week ended Jan. 27, the Fed said yesterday on its Web site . It was the biggest percentage jump since the period ended Oct. 29, 2008, when sales rose 12.4 percent, according to data compiled by Bloomberg. Fed Measures Borrowing rose while the Fed steps back from some of its programs to provide liquidity and as borrowers seek new sources of lending, said Adolfo Laurenti , a deputy chief economist at Mesirow Financial Inc. The Federal Open Market Committee repeated this week that it would close four programs supporting money markets and bond dealers in February and will hold its final Term Auction Facility auction on March 8. “I wouldn’t jump to a conclusion about the recovery of the commercial market yet,” Laurenti said in a telephone interview from Chicago. “It will come back when the economy gains steam.” Overall borrowing in commercial paper rose $54.8 billion to $1.15 trillion in the week ended Jan. 27, a 5 percent increase and the biggest jump since the period ended Oct. 7 when it climbed 5.5 percent, Fed data show. Commercial Paper Companies use commercial paper to finance daily expenses such as payroll and rent. The market seized up in September 2008, when Lehman Brothers Holdings Inc. filed for bankruptcy. The Fed started buying 30-day dollar-denominated debt through its Commercial Paper Funding Facility on Oct. 27, 2008, and has said it will stop on Feb. 1. Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 13 rose 0.5 basis point to 96, according to broker Phoenix Partners Group. In London, the Markit iTraxx Europe index climbed 1.5 basis points to 82.75, according to JPMorgan Chase & Co. The indexes typically rise when investor confidence deteriorates. The Markit CDX investment-grade index has jumped 10 basis points this month and is on track for the first monthly increase since October. Credit swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and is equal to $1,000 a year on a contract protecting $10 million of debt. Greek Costs Costs to protect against a default by Greece for five years surged for a second day yesterday, climbing 46 basis points to a record 420 basis points, according to CMA DataVision. Swaps on the Markit iTraxx SovX Western Europe Index, which is linked to 15 governments including Greece, rose 3.5 basis points to a record 90.75, CMA prices show. Rising sovereign risk is spilling over into corporate credit markets as investors speculate on the impact a government funding crisis may have on companies, said Tim Backshall , chief strategist at Credit Derivatives Research in Walnut Creek, California. “If investors are unnerved” by Greece, he said, “then systemic risk should rise across all risky assets.” To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Caroline Salas in New York at csalas1@bloomberg.net

Read the full article →

Home Prices in 20 U.S. Cities Gain a Sixth Month, Case-Shiller Index Shows

January 26, 2010

By Bob Willis Jan. 26 (Bloomberg) — Home prices in 20 U.S. cities rose in November for the sixth consecutive month, signaling the industry that precipitated the worst recession since the 1930s is stabilizing. The S&P/Case-Shiller home-price index increased 0.2 percent from the prior month on a seasonally adjusted basis, after a 0.3 percent rise in October, the group said today in New York. The gauge was down 5.3 percent from November 2008, exceeding expectations and the smallest year-over-year decline in two years. A government tax credit for first-time home buyers due to expire in November helped boost home sales, contributing to higher prices in some markets. A projected increase in foreclosures this year as unemployment is slow to drop is a reminder that property values may not firm much more. “We’re seeing what looks to be a bottoming out in prices,” said Michelle Meyer , an economist at Barclays Capital Inc. in New York. “There is a risk we see further downside, given the large amount of foreclosures set to enter the market and the uncertainty of the effects of the homebuyer tax credit on prices.” Another report showed consumer confidence this month increased more than anticipated as the job market improved. The Conference Board’s index increased to 55.9, the highest level since September 2008, the New York-based private research group said. Stocks Fall Stocks reversed earlier declines following the confidence report. The Standard & Poor’s 500 Index was up 0.1 percent to 1,098.21 at 10:17 a.m. in New York. Treasury securities rose. Economists surveyed by Bloomberg News anticipated prices would drop 5 percent in the 12 months to November, based on the median estimate of 27 projections. Estimates ranged from declines of 4.5 percent to 6 percent. From the July 2006 peak, the 20-city index was down 29 percent. Compared with the prior month, 14 of the 20 areas covered showed an increase on a seasonally adjusted basis while six had a decline. The biggest month-to-month gain was in Phoenix, which increased 1.6 percent. New York showed the biggest drop at 0.9 percent. California Rebound San Francisco posted the second-biggest increase, at 1.5 percent, followed by 1 percent gains each in Los Angeles and San Diego, and a 0.9 percent gain in Portland, Oregon. “Some of the boom-to-bust markets in California are starting to see home prices appreciate as demand returns,” said Meyer. All of the 20 cities in the S&P/Case-Shiller index showed a smaller year-over-year decline in November. Four cities posted year-over-year gains in prices, led by Dallas, which saw a 1.4 percent gain from November 2008. San Francisco, Denver and San Diego rounded out the gainers. A report today from the Federal Housing Finance Agency showed home prices rose 0.7 percent nationally in November from the prior month. The index tracks only loans that conform to Fannie Mae and Freddie Mac limits. As home values firmed and stocks climbed in the second and third quarters of 2009, households recovered almost $5 trillion of the record $17.5 trillion in wealth lost since 2007, showing there remained much ground to make up. The monthly price increases have diminished since the index climbed an average 1 percent in July and August, indicating foreclosures may again be hurting property values. Record Foreclosures A record 3 million U.S. homes will be repossessed by lenders this year as high unemployment and depressed home values leave borrowers unable to make mortgage payments or sell, according to a RealtyTrac Inc. forecast on Jan. 14. Last year there were 2.82 million foreclosures, the most since RealtyTrac began compiling data in 2005. KB Home , the Los Angeles-based homebuilder that sells to first-time buyers, is among homebuilders struggling. The company Jan. 12 reported a pretax loss of $91 million on declining revenue for the fiscal fourth quarter that ended Nov. 30. KB Home is “not going to make money in the first quarter” and plans to “restore profitability” in the second half of 2010, Chief Executive Officer Jeffrey Mezger said Jan. 12 in a conference call with analysts and investors. The end of Federal Reserve purchases of mortgage-backed securities aimed at keeping borrowing costs low represents another challenge for the industry. The program is scheduled to expire by March 31. Fed Meeting Policy makers meet today and tomorrow to discuss the direction of the benchmark lending rate between banks. The emergency programs were being wound down “in light of ongoing improvements in the functioning of financial markets,” central bankers said in their Dec. 16 statement. Karl Case , a former economist professor at Wellesley College, and Robert Shiller , chief economist at MacroMarkets LLC and a professor at Yale University, created the home-price index based on research from the 1980s. To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Read the full article →

Corporate Bond Sales Cut in Half as Yield Spreads Widen: Credit Markets

January 25, 2010

By Bryan Keogh, Emre Peker and Caroline Hyde Jan. 25 (Bloomberg) — Corporate bond sales are falling and borrowing costs are increasing for the first time in eight weeks amid investor concerns about the pace of the economic recovery. Bond sales worldwide fell 52 percent last week to $48 billion from $99.8 billion in the previous period, according to data compiled by Bloomberg. So-called yield spreads widened for the first time since the five days ended Nov. 27, based on Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Reports showed U.S. retail sales and housing starts unexpectedly declined in December, while German investor confidence dropped more than economists estimated this month. President Barack Obama’s plan to limit the size of banks raised investor concerns that earnings growth may be curbed. Dallas- based Energy Transfer Equity LP , which controls the third- largest U.S. pipeline partnership, pulled a $1.75 billion high- yield offering and Vietnam delayed a sale to this week. “The market feels as though it had lost sight of reality, with the indiscriminate buying of risk while ignoring the economic fundamentals,” said Simon Ballard , the head of European credit strategy at RBC Capital Markets in London. “The wider macroeconomic picture and a couple of recent events have made investors sit back a bit and take stock.” Swaps, Mortgages Elsewhere in credit markets, the cost to protect U.S. investment-grade bonds from default has climbed eight straight days, the longest stretch since June 2008. Interest-rate swap spreads are the widest this year and sales of floating-rate notes are plunging. The U.S. Treasury Department is asking bond dealers about the potential market impact from the end of the Federal Reserve’s mortgage-backed securities purchase program. The extra interest investors demand to own corporate bonds widened 3 basis points last week to 164 basis points, or 1.64 percentage points, after shrinking almost 30 basis points in the previous six weeks, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Spreads on emerging-market debt widened 15 basis points last week to 2.99 percentage points, after expanding 19 basis points in the previous five-day period, according to JPMorgan Chase & Co.’s Emerging Markets Bond Index. Vietnam’s government delayed a $1 billion bond sale because of volatility in global markets, three people briefed by bankers arranging the offering said. Markets ‘Stuttering’ “The primary markets are stuttering with new issues failing to gain any momentum,” Suki Mann , a credit strategist in London at Societe Generale, said in a Jan. 22 report. New York-based Morgan Stanley , the world’s biggest brokerage, sold $4 billion of 5-year and 10-year notes on Jan. 21 after boosting spreads by 10 basis points, amounting to about $4 million a year in extra interest costs. The spread on the 10- year security widened about 1 basis point after the debt traded in the public market, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Yields on two-year Treasury notes fell to a one-month low of 0.79 percent on Jan. 22 as investors shunned riskier assets. Futures traders pared bets on the odds of a Fed rate increase by June to 18 percent, the lowest in at least six months. Obama proposed limits on risk-taking by financial companies last week, including banning banks from proprietary trading, as part of an effort to prevent another financial crisis. China’s central bank may raise rates after May to cool an economy that expanded 10.7 percent in the latest quarter, Zhu Baoliang , an economist at the government’s State Information Center, said in Beijing on Jan. 22, according to the text of his speech on the hexun.com Web site. Rally ‘Derailed’ Expectations that the rally in credit markets would continue “have been derailed over the last couple of weeks,” Citigroup Inc. strategists led by Mikhail Foux in New York said in a Jan. 22 report. “Increasingly, markets have been wobbling from one bad headline to the next — sovereign risk in Europe, policy tightening in China, new regulation of banks, and a relatively uninspiring start to the earnings season.” Floating-rate debt, which jumped to 18 percent of the total in the first two weeks of the year, dropped to 5.3 percent last week as investors saw little need for protection against rising benchmark rates, Bloomberg data show. Seat Pagine Gialle SpA , the Italian telephone directories publisher, cut the size of a bond offering by 100 million euros ($142 million) from 550 million euros and dropped a plan to sell a portion with a floating rate, according to a banker involved in the transaction. ‘Natural Correction’ “We saw the primary market come out of the box incredibly quickly at the beginning of the year, with plenty of demand for new issues and spread tightening in the secondary market,” said Mark Lewellen , the London-based head of corporate origination at Barclays Capital. “We’re now seeing a natural correction as investors pause amid some volatility in the market, but we don’t expect this to be prolonged.” Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, increased 12.7 basis points last week to 96.2 basis points, according to broker Phoenix Partners Group. The rising streak is the longest in more than 18 months. The Markit iTraxx Crossover Index of credit-default swaps on 50 European companies with mostly high-yield credit ratings climbed 35 basis points last week to 448, JPMorgan prices show. That’s the biggest weekly rise since the index series started in September, according to CMA. In Asia, the Markit iTraxx Asia Ex-Japan IG index rose 4 basis points to 110.5 basis points today, Deutsche Bank AG prices show. That’s the highest since Dec. 1, according to CMA prices. Treasury Watching Treasury is watching for market disruptions as the government prepares for a second consecutive year of record borrowing to fund $1 trillion-plus budget deficits. “The Federal Reserve has frequently stated that its purchases of agency mortgage-backed securities and agency debt will be executed by the end of the first quarter of 2010,” the Treasury told the dealers in a Jan. 22 survey. “Going forward, what impact, if any, will this have on fixed-income markets, and financial markets more broadly?” the Treasury asked. The difference between yields on Washington-based Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds and 10- year Treasuries widened about 0.05 percentage point last week to 0.74 percentage point, according to data compiled by Bloomberg. That’s up from a 17-year low of 0.66 percentage point on Jan. 6. ‘Still Positive’ “The technicals in the credit market are still positive: balance sheets are strong, liquidity is good, the markets are open and there’s a lot of new money looking for good assets and good stories,” said Jason Quinn , the co-head of high-grade and high-yield flow trading at Barclays Capital in New York. “We just have to get through this repricing. The market has deleveraged substantially, so the probability that we get a massive repricing is low.” Investor concern is showing up in the market for interest- rate swaps. Five-year swap spreads have increased to the most this year, with the difference between interest-rate swap rates and five-year Treasuries at 33 basis points. Swap rates are typically higher than sovereign yields to reflect the extra risk of trading with a bank instead of the government. To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net ; Emre Peker in New York at epeker2@bloomberg.net ; Caroline Hyde in London chyde3@bloomberg.net

Read the full article →

Corporate Bond Sales Cut in Half by Widening Yield Spreads: Credit Markets

January 24, 2010

By Bryan Keogh, Emre Peker and Caroline Hyde Jan. 25 (Bloomberg) — Corporate bond sales are falling and borrowing costs are increasing for the first time in eight weeks amid investor concerns about the pace of the economic recovery. Bond sales worldwide fell 52 percent last week to $48 billion from $99.8 billion in the previous period, according to data compiled by Bloomberg. So-called yield spreads widened for the first time since the five days ended Nov. 27, based on Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Reports showed U.S. retail sales and housing starts unexpectedly declined in December, while German investor confidence dropped more than economists estimated this month. President Barack Obama’s plan to limit the size of banks raised investor concerns that earnings growth may be curbed. Dallas- based Energy Transfer Equity LP , which controls the third- largest U.S. pipeline partnership, pulled a $1.75 billion high- yield offering and Vietnam delayed a sale to this week. “The market feels as though it had lost sight of reality, with the indiscriminate buying of risk while ignoring the economic fundamentals,” said Simon Ballard , the head of European credit strategy at RBC Capital Markets in London. “The wider macroeconomic picture and a couple of recent events have made investors sit back a bit and take stock.” Swaps, Mortgages Elsewhere in credit markets, the cost to protect U.S. investment-grade bonds from default has climbed eight straight days, the longest stretch since June 2008. Interest-rate swap spreads are the widest this year and sales of floating-rate notes are plunging. The U.S. Treasury Department is asking bond dealers about the potential market impact from the end of the Federal Reserve’s mortgage-backed securities purchase program. The extra interest investors demand to own corporate bonds widened 3 basis points last week to 164 basis points, or 1.64 percentage points, after shrinking almost 30 basis points in the previous six weeks, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Spreads on emerging-market debt widened 15 basis points last week to 2.99 percentage points, after expanding 19 basis points in the previous five-day period, according to JPMorgan Chase & Co.’s Emerging Markets Bond Index. Vietnam’s government delayed a $1 billion bond sale because of volatility in global markets, three people briefed by bankers arranging the offering said. Markets ‘Stuttering’ “The primary markets are stuttering with new issues failing to gain any momentum,” Suki Mann , a credit strategist in London at Societe Generale, said in a Jan. 22 report. New York-based Morgan Stanley , the world’s biggest brokerage, sold $4 billion of 5-year and 10-year notes on Jan. 21 after boosting spreads by 10 basis points, amounting to about $4 million a year in extra interest costs. The spread on the 10- year security widened about 1 basis point after the debt traded in the public market, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Yields on two-year Treasury notes fell to a one-month low of 0.79 percent on Jan. 22 as investors shunned riskier assets. Futures traders pared bets on the odds of a Fed rate increase by June to 18 percent, the lowest in at least six months. Obama proposed limits on risk-taking by financial companies last week, including banning banks from proprietary trading, as part of an effort to prevent another financial crisis. China’s central bank may raise rates after May to cool an economy that expanded 10.7 percent in the latest quarter, Zhu Baoliang , an economist at the government’s State Information Center, said in Beijing on Jan. 22, according to the text of his speech on the hexun.com Web site. Rally ‘Derailed’ Expectations that the rally in credit markets would continue “have been derailed over the last couple of weeks,” Citigroup Inc. strategists led by Mikhail Foux in New York said in a Jan. 22 report. “Increasingly, markets have been wobbling from one bad headline to the next — sovereign risk in Europe, policy tightening in China, new regulation of banks, and a relatively uninspiring start to the earnings season.” Floating-rate debt, which jumped to 18 percent of the total in the first two weeks of the year, dropped to 5.3 percent last week as investors saw little need for protection against rising benchmark rates, Bloomberg data show. Seat Pagine Gialle SpA , the Italian telephone directories publisher, cut the size of a bond offering by 100 million euros ($142 million) from 550 million euros and dropped a plan to sell a portion with a floating rate, according to a banker involved in the transaction. ‘Natural Correction’ “We saw the primary market come out of the box incredibly quickly at the beginning of the year, with plenty of demand for new issues and spread tightening in the secondary market,” said Mark Lewellen , the London-based head of corporate origination at Barclays Capital. “We’re now seeing a natural correction as investors pause amid some volatility in the market, but we don’t expect this to be prolonged.” Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, increased 12.7 basis points last week to 96.2 basis points, according to broker Phoenix Partners Group. The rising streak is the longest in more than 18 months. The Markit iTraxx Crossover Index of credit-default swaps on 50 European companies with mostly high-yield credit ratings climbed 35 basis points last week to 448, JPMorgan prices show. That’s the biggest weekly rise since the index series started in September, according to CMA. In Asia, the Markit iTraxx Asia Ex-Japan IG index rose 4 basis points to 110.5 basis points today, Deutsche Bank AG prices show. That’s the highest since Dec. 1, according to CMA prices. Treasury Watching Treasury is watching for market disruptions as the government prepares for a second consecutive year of record borrowing to fund $1 trillion-plus budget deficits. “The Federal Reserve has frequently stated that its purchases of agency mortgage-backed securities and agency debt will be executed by the end of the first quarter of 2010,” the Treasury told the dealers in a Jan. 22 survey. “Going forward, what impact, if any, will this have on fixed-income markets, and financial markets more broadly?” the Treasury asked. The difference between yields on Washington-based Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds and 10- year Treasuries widened about 0.05 percentage point last week to 0.74 percentage point, according to data compiled by Bloomberg. That’s up from a 17-year low of 0.66 percentage point on Jan. 6. ‘Still Positive’ “The technicals in the credit market are still positive: balance sheets are strong, liquidity is good, the markets are open and there’s a lot of new money looking for good assets and good stories,” said Jason Quinn , the co-head of high-grade and high-yield flow trading at Barclays Capital in New York. “We just have to get through this repricing. The market has deleveraged substantially, so the probability that we get a massive repricing is low.” Investor concern is showing up in the market for interest- rate swaps. Five-year swap spreads have increased to the most this year, with the difference between interest-rate swap rates and five-year Treasuries at 33 basis points. Swap rates are typically higher than sovereign yields to reflect the extra risk of trading with a bank instead of the government. To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net ; Emre Peker in New York at epeker2@bloomberg.net ; Caroline Hyde in London chyde3@bloomberg.net

Read the full article →

Trish Kinney: US Airways vs Southwest Airlines: A Clear Winner

January 23, 2010

It was a stormy day in the Phoenix metropolitan area and it had already been raining for a while. The city was bracing for high winds and more rain, torrential at times, with a tornado watch in place. Wouldn’t you know that it also happened to be the day my husband and I were traveling to Las Vegas for a quick getaway to see a show and enjoy what has become a favorite annual ritual. We kept a close eye on the weather throughout the morning and checked in on the airport sites for reports of delays or closures. We finally decided to head to Sky Harbor and make a decision then. When we arrived, we passed the new Southwest terminal and saw on the board that nearly all of their flights had been cancelled. Assuming the same would be true of our US Airways flight, we were surprised to see that it was showing on time. I admit it was unnerving to know that one airline was willing to take off to the same destination at the same time and the other wasn’t. But we went through security and proceeded to the gate anyway. The plane was already there and right on time, they made the first boarding announcement. My husband, who was trying to be a trooper and not a party pooper, has a real fear, maybe even in the category of terror, that they are going to put him on a plane and then not take off for some reason, leaving him trapped on the tarmac, his worst nightmare. He is Dutch, stoic, and from Iowa, not exactly the hotbed of technology. We surprised him with a Blackberry for Christmas and he had grudgingly been learning to use it. He pulled it out and said “how do you get to the internet on this thing?” I showed him how to click on the globe icon and he painstakingly pecked in a Google search, his big fingers attached to his 6’4″ frame struggling to limit their strokes to a single key at a time. Then quietly he approached the gentleman from the airline who was boarding the first group of passengers. I saw him show the man his Blackberry and engage in a brief conversation. The man then stopped the boarding process, asked the passengers for their patience and headed down the jetway, locking the big metal door behind him. After a few minutes, he returned, got on the mike and announced that the Las Vegas airport was experiencing delays in landing planes and that our flight would take off an hour late. If, however, Vegas changed their status, we may leave earlier so we should stay around the gate area. It was my husband and his brand new Blackberry who had informed US Airways of the delay in Vegas, causing boarding to come to a halt. With the combination of Southwest canceling their flights and US Airways apparently neglecting to check with the destination airport for weather status, our confidence was waning in a big hurry. In the meantime, our grown sons each called to ask if we were going to get out. When I told them the nearly unbelievable story of their dad stirring it up with US Airways, one of them said “hey, look at Dad using his Blackberry” and the other said “I have never been more proud of a man in my life!” Then the announcer came back to say that when the boarding resumed, the crew had already informed him that there would be no service during the one hour flight due to expected turbulence. A few minutes later, he got back on the mike to tell us that he was certain we were probably aware that many of the other airlines had already canceled their flights and there was always the possibility that the airport would close followed by a big shrug of his shoulders and no definitive conclusion. It seemed that US Airways just couldn’t make up their mind and was kinda sorta leaving the decision to us. We turned around and walked away. Out of curiosity, we tracked the flight well into the evening. It left the gate two hours late and another two hours later was still in “delay” status and not in the air. It finally arrived in Vegas six hours late as we sat in front of a roaring fire at home listening to the rain fall as my husband declared for the first time ever that he could see how that Blackberry could come in handy in certain situations. As for me, I think I will book my next flight using accumulated Dividend Miles and then start flying Southwest Airlines. I really respect their decision to cancel those flights and besides, you gotta love those cool ads with the ground crew rapping about bags flying free. US Airways could learn a thing or two about a lot of things from their closest competitor.

Read the full article →

Apollo Shares Suffering New York Snub Amid SEC Probe of For-Profit Phoenix

January 19, 2010

By Daniel Golden Jan. 19 (Bloomberg) — Apollo Group Inc. , whose for-profit University of Phoenix is among the largest colleges in the U.S. with campuses in 29 of the 30 most populous states, faces one long-standing obstacle to staking its claim as the future of higher education: New York. During Apollo’s 12-year quest to enter the third-biggest state, founder John Sperling raised money for Eliot Spitzer ’s 2006 gubernatorial campaign, and the company hired Mel Miller, former speaker of the New York Assembly, as a lobbyist. New York has blocked Phoenix’s bid for a Manhattan campus, questioning its academic quality, its dropout rate, how it compensates recruiters, and even its right to call itself a university, according to interviews and documents obtained under a state Freedom of Information Law request. One state review said introductory algebra was less demanding than a high school course. Phoenix has 455,600 undergraduate and graduate students, slightly less than the State University of New York’s 464,981 enrollment. “The last thing we need to do is open a college that’s not successful,” Joseph Frey, New York’s deputy commissioner for higher education, said in a Dec. 11 interview in his Albany office. “I’m not bringing anything in front of the Board of Regents until I’m confident the university is playing by the rules of the U.S. Education Department and complies with our requirements.” SEC Investigation Investors are beginning to share New York’s skepticism. While the benchmark Standard & Poor’s 500 Index of stocks has advanced 6.8 percent, Apollo shares have fallen 17 percent since Oct. 27, when the company said the Securities and Exchange Commission opened an informal probe into its accounting practices. Apollo said its accounting is appropriate, and it intends to cooperate with the inquiry. Apollo’s swoon partly reflects concern that federal authorities may follow New York’s lead and keep closer tabs on for-profit colleges, said Trace Urdan, an analyst at Signal Hill Capital Group in San Francisco. “In the Obama administration, the pendulum has swung back closer to where New York state has been the whole time,” Urdan said in a telephone interview. The absence of a New York campus hurts Phoenix’s efforts to boost enrollment and revenue. Phoenix described New York in a June 2004 planning document as having “the highest number of potential students” of any state. Growth ‘Deceleration’ A “deceleration of growth” in Phoenix’s two-year associate degree program, which accounts for 45 percent of enrollment, is worrying investors, said Ariel Sokol , an analyst at Wedbush Morgan Securities in New York. The slowing growth reflects the school’s shift to higher-quality bachelor’s degree candidates, he said. The U.S. Education Department also is prodding Phoenix to disclose more information about costs and course requirements to prospective students, which could deter some of them from enrolling, he said. While 39 for-profit colleges operate in the state, including ITT Educational Services Inc. and DeVry Inc ., New Yorkers have to attend Phoenix online or cross the Hudson River to the university’s Jersey City, New Jersey, campus. Phoenix, which generated 95 percent of Apollo’s $3.97 billion in revenue in the year ended Aug. 31, enrolls students in face-to-face and online classes. More than 15,000 New Yorkers are enrolled at Phoenix online “to take advantage of our innovative, accredited education to help their careers during these difficult economic times,” Sara Jones, an Apollo spokeswoman, wrote in an e-mail. No Vote Phoenix’s application has never reached a formal vote by the New York regents, who oversee education in the state, Frey said. Phoenix students don’t qualify for the state tuition assistance program, which provided $813 million of aid in the 2008-09 academic year, he said. New York officials’ questions are similar to those that the Obama administration is asking about the for-profit college industry generally. The U.S. Department of Education is considering restrictions on paying recruiters for enrollments and on giving misleading information to prospective students, and may require for-profit colleges to show how much their programs increase graduates’ earnings, according to department documents. The department is examining institutions that increasingly rely on federal financial aid, Robert Shireman, the U.S. deputy undersecretary of education, said in a Sept. 1 interview. Phoenix derived 86 percent of its $3.77 billion in revenue in fiscal 2009 from Education Department grants and loans to students, up from 48 percent in 2001, according to its Oct. 27 10-K filing with the Securities and Exchange Commission. Late Refunds Apollo was late in paying federal financial aid refunds for dropouts, according to a government report the company disclosed in its 10-Q on Jan. 7. The findings by the Education Department will cost about $1.5 million, Phoenix-based Apollo said. Apollo rose 13 cents, or less than 1 percent, to $60.37 in Nasdaq stock market composite trading on Jan. 15. Phoenix’s failure to gain approval in New York is one of its few defeats since Apollo went public in 1994. Founded in 1976 by John Sperling, a faculty-union organizer and former San Jose State University history professor, Phoenix pioneered a model that used part-time faculty with practical experience to teach five-week courses to working adults. The university has expanded nationwide, aided by well-connected board members, campaign contributions and extensive lobbying. Educational Access The quality of Phoenix’s educational offerings and its policy of admitting any applicant who has completed high school or earned an equivalency degree have driven the university’s growth, said Jones, the Apollo spokeswoman. Phoenix “provides access to those who otherwise might not have the opportunity to pursue higher education,” she said. In Pennsylvania, Phoenix managed to overturn a ban on for- profit colleges. In Texas, with the support of then-Governor George W. Bush and his education adviser, Margaret Spellings , later U.S. secretary of education, it outlasted the state higher education commissioner who tried to block its entry. For-profits are freer than most nonprofit colleges to form political action committees and donate to candidates for state office, said Miriam Galston, a law professor at George Washington University in Washington. “In all my time there, New York was the only state we didn’t win,” Charles Seigel, a former Apollo senior vice president for government affairs and now vice president for public policy at Cornell Companies Inc. in a telephone interview. Saga Begins The New York saga began in 1995, when Seigel got in touch with New York education officials. Phoenix applied for a license two years later, seeking to open a Manhattan campus for graduate and undergraduate students. Three years later, a state review team visited the university’s campuses in Phoenix and Tucson, Arizona. The university “really wanted New York very badly,” Miller , Apollo’s New York lobbyist from 1999 to 2006, said in a telephone interview. By 2001, Phoenix was growing impatient. “I am beginning to believe all of this is intentional delay,” Seigel wrote to Gerald Patton, then New York’s deputy commissioner for higher education. “It is becoming my view that this process will never end.” In a January 2002 letter to a university official, Frey proposed a compromise — licensing Phoenix only for graduate programs, which had received better reviews than its undergraduate offerings. Against Miller’s advice, Phoenix spurned the offer, Miller said. ‘Worst Enemy’ “The university was its own worst enemy,” he said. After a 2002 site visit to a Phoenix campus in Philadelphia, a state review team found fault with the college’s newly designed general-education courses for undergraduates. First-year algebra “is not a college-level mathematics course” and “does not demand as high a level of critical thinking as the high school curriculum” in New York, according to a 2003 draft report. Courses in human nutrition and in environmental issues and ethics lacked basic science, and instructors were unqualified, according to the report. “The reviewers continue to question that college-level content in the liberal arts and sciences, in particular in the math and science disciplines, can be covered in a five-week session,” the authors wrote. Phoenix’s general-education courses “are at the appropriate level and quality,” Manny Rivera, an Apollo spokesman, wrote in an e-mail. The school continually evaluates and updates its curriculum and has won Arizona awards for course development, he said. Graduate Program While New York criticized Phoenix’s undergraduate quality, the state’s graduate-only proposal remained on the table. “We are ready to move forward” with five proposed graduate programs in business, Frey wrote in April 2004 to Susan Mitchell, a Phoenix vice president who is now Apollo’s senior vice president for government affairs. This time, Phoenix acquiesced. The school, which didn’t offer enough doctoral programs in academic fields to describe itself as a university under state rules, would go by “Phoenix.edu” in New York, Mitchell wrote Frey in June 2004. The New York market had “astounding” potential, Phoenix said that month in a planning document submitted to state officials. “In the past year, the university has been contacted by 20,000 residents, many of them from the Manhattan area,” according to the document. “These numbers represent the highest number of potential students approaching the institution in any state.” Local Colleges The state then canvassed area colleges for their views on Phoenix opening a graduate campus. Fordham University in the Bronx, Pace University in Manhattan, Polytechnic University in Brooklyn, and the Association of Proprietary Colleges in Albany all opposed Phoenix and requested a public hearing. “The MBA program is just a foot in the door for the initiation of additional programs in direct competition,” wrote David Chang , then Polytechnic’s president and now chancellor of Polytechnic Institute of New York University. In response, Mitchell wrote to Frey in November 2004 that Phoenix “fully understands the limitations on registration and approval in New York.” New York has barred Phoenix to protect local colleges, said Thomas Triscari Jr., an associate professor at Rensselaer Polytechnic Institute in Troy, New York, who served on the six- member state review team that visited Phoenix campuses in 2000. Vision, Foresight Phoenix’s approach to education “is well-structured, well thought-out,” Triscari said in a telephone interview. “These guys have vision and foresight. Competition is in the fabric of our society. Why have we precluded that in academic circles?” Another member of that team also said the state should approve Phoenix. “They’re as good as any of those other for-profits operating in New York,” said David Breneman , a professor at the University of Virginia in Charlottesville and former dean of its school of education. “I don’t see any reason you’d single them out for retribution.” New York was about to schedule a hearing on the local colleges’ objections when the news broke in September 2004 that Apollo had agreed to pay $9.8 million to the Education Department to settle alleged violations of a 1992 law banning incentive compensation for recruiters. The company didn’t admit wrongdoing. State officials pulled back, complaining that Phoenix had failed to alert them to the federal probe. Hearing Delayed “We cannot proceed as planned to schedule a hearing,” Barbara Meinert, coordinator for the state education department’s Office of College and University Evaluation , wrote Mitchell in October 2004. Laura Palmer Noone , then Phoenix’s president, apologized in a September 2005 letter to a New York official “for any embarrassment or concern this delay in providing the information caused for the Board of Regents.” She defended the university’s compensation policies. “There is no correlation between the number of students recruited and the amount the enrollment counselors were paid,” she wrote. “We were set for the final hearing and then everything blew through the moon,” Miller said. The hearing on Phoenix’s application for a graduate campus was never scheduled, Frey said. Another Tack Stymied, Sperling took another tack. After meeting Spitzer, then state attorney general and the frontrunner in the governor’s race, through mutual friends at a dinner, Sperling suggested a fundraiser for him, said Kristie Stiles, the candidate’s national finance director. “I knew Phoenix wasn’t operating in New York,” she said in a telephone interview. At least 15 executives and board members of Phoenix and Apollo Group attended the 2006 fundraiser in Sperling’s Arizona home, according to campaign finance filings . The event reaped at least $50,000, Stiles said. Sperling and Phoenix were accustomed to politics. In his 2000 autobiography, “Rebel With a Cause,” Sperling described his skills as “primarily educational and political.” Before obtaining a license in Pennsylvania, Phoenix had to persuade the Legislature to overturn a century-old state law prohibiting a university from operating as a for-profit, according to Sperling’s autobiography. Phoenix officials met with each member of the state’s House and Senate education committees, and brought some of them to visit its campuses, Seigel said. The repeal was adopted in 1997 as an amendment to an elementary-school budget bill, he said. ‘Bitterly Opposed’ “The private colleges were bitterly opposed to us, but by the time they found out” about the maneuver, “it was too late,” Seigel said. When Phoenix sought entry into Texas in the mid-1990s, Kenneth Ashworth, then the state’s higher education commissioner, was skeptical of the school’s reliance on part- time faculty, he said in a phone interview. “I stood in the breach and tried to keep the University of Phoenix out of Texas,” Ashworth said. Phoenix hired Diane Allbaugh, wife of then-Governor Bush’s chief of staff, Joseph Allbaugh , as a lobbyist, according to records of the Texas Ethics Commission, a state agency based in Austin. Bush’s education adviser, Margaret La Montagne, later Margaret Spellings, prodded Ashworth to expedite the license, he said. ‘Unshirted Hell’ “She called and gave me unshirted hell,” Ashworth said. “Why wasn’t I letting Phoenix into Texas?’ I said they couldn’t meet our standards.” While Spellings doesn’t recall specific discussions about Phoenix with Ashworth, she talked to him all the time on educational policy, Holly Kuzmich, Spellings’s spokeswoman, said. Spellings and Bush supported “new and innovative developments in higher education,” including Phoenix, Kuzmich said. Diane Allbaugh declined to comment. Ashworth’s retirement in 1997 cleared the university’s path. Phoenix “was offering better-quality degree programs than those offered at some public institutions in Texas,” Ashworth’s successor, Don Brown, said in a telephone interview. Phoenix’s first Texas campus, in Dallas, was approved in February 2001. Apollo created a political action committee in 1994, and Sperling encouraged the company’s top seven executives to contribute the maximum $5,000, he wrote in his autobiography. He soon persuaded the next two levels of executives to donate, and Apollo formed three more PACs. Political Contributions “If we were to be in the ‘game,’ it required contributions to members of Congress and the Senate, not to mention presidential candidates — this, on top of a growing number of state legislators and governors,” Sperling wrote. Phoenix studded its board with political insiders such as Richard Bond , former Republican National Committee chairman; John Burton , chairman of the California Democratic Party and former president of the California Senate; Alan Wheat, a former U.S. House member from Missouri; and William Goodling , former chairman of the House education committee. Board members were unavailable for interviews, Apollo’s Rivera said. Sperling and Nancy Pelosi , speaker of the U.S. House of Representatives, are longtime friends, as well as neighbors in San Francisco, where Sperling owns a home, Jorge Klor de Alva, Phoenix senior vice president for academic excellence, said in a Sept. 9 interview at the university’s Arizona headquarters. Pelosi’s Attendance Pelosi attended a Democratic Congressional Campaign Committee fundraiser that Sperling hosted in Arizona last May, according to two people familiar with the event. In 2003, Pelosi went to a small gathering at Sperling’s home and discussed with him how to position the Democratic Party to retake the House and make her speaker, according to a Pelosi aide and to a person acquainted with both Pelosi and Sperling. Sperling co-wrote a 2004 book, “The Great Divide,” advising Democrats on how to win the “red” states and citing Pelosi’s views. Sperling hasn’t asked for the speaker’s help on any legislation affecting the university, the Pelosi aide said. Sperling declined to comment. Phoenix experienced success with Congress. In 2008, for example, the university helped pass a provision expanding federal financial aid to for-profit colleges beyond vocational programs to include liberal-arts students, House aides said. Phoenix plans to offer more liberal-arts courses for aspiring teachers who need degrees in academic fields, William Pepicello , the university’s president, said in a Sept. 9 interview at its Arizona headquarters. Spitzer Fundraiser In New York, Sperling thought the Spitzer fundraiser “would take care of everything. He thought he had positive signals from Eliot,” Miller said. “If I was Sperling, I would have been the same way. ‘We’ve done this the honorable way, we get no results, let me try another route.’” Miller said he warned the university that the fundraiser would be futile because the regents are appointed by the Legislature, not the governor, and because he thought Spitzer wouldn’t go out of his way to reward contributors. In July 2006, Spitzer returned $2,000 donations from Sperling and Hedy Govenar , the founder of Governmental Advocates Inc. , a Sacramento, California, lobbying firm that represents Apollo. Govenar has served on the boards of Phoenix and Apollo. The campaign refunded the money after learning about Apollo’s 2004 incentive compensation settlement, Stiles said. Apollo said in December 2009 that it paid $78.5 million to settle a lawsuit over the same issue of recruiter compensation. The company did not admit wrongdoing. ‘Nice House’ Spitzer remembers the fundraiser, not why it was held or why he gave back the money, he said in a telephone interview. “I recall being in a nice house, chatting for about 15 minutes,” he said. “I raised $40 million around the nation. People supported what we were doing.” Spitzer was elected governor in 2006 and served until his March 2008 resignation. The fundraiser was Sperling’s personal undertaking, “separate and distinct from Apollo Group’s political activism, which is expressed through the company’s nonpartisan PAC,” Apollo’s Jones said. Apollo has donated $10,150 to New York state legislators and to state Democratic Assembly and Senate campaign committees since 2001, according to campaign finance documents. The company gave $1,000 in 2006 to Ron Canestrari , then chairman of the Assembly’s higher education committee and now majority leader; $400 in 2007 to Kenneth LaValle , now ranking Republican on the Senate’s higher education committee; and $500 in 2007 to Kevin Parker, a member of that committee. The university currently doesn’t have a lobbyist in New York and isn’t engaging in political activity on behalf of its application, Rivera said. Dropout Rate State officials remain concerned that Phoenix’s dropout rate is too high, said Saul Cohen, a regent and a former president of Queens College in New York. Only 8.9 percent of first-time, full-time college students who enrolled at Phoenix in 2001 completed their degrees in six years, according to the National Center for Education Statistics , in Washington. Including transfer students, 26 percent of candidates for associate degrees finish in three years, and 36 percent of students pursuing bachelor’s degrees graduate in six years, according to Phoenix’s 2009 academic annual report. “You bring in bodies that may not have much of a chance of completion,” Cohen said in a telephone interview. “That certainly is part of the issue.” Apollo is introducing a three- week orientation course for unprepared students, the company said Jan. 7. Waterfront Campus Phoenix continues to seek approval in New York and is updating the information in its application at the state education department’s request, Jones said. At the same time, “we look forward to continuing to serve our New York students through our neighboring New Jersey campus,” Jones said. At the campus on the Jersey City waterfront, which New Jersey approved in 2003, about a fourth of the students come from New York, according to a December 2004 letter from Mitchell to Frey. Phoenix student Maurice Murphy, a 32-year-old Bronx resident, takes a subway under the Hudson six days a week to school. If all goes smoothly, his commute takes half an hour, Murphy said as he headed to class Dec. 17 in Jersey City. He is majoring in human services management and wants to become a social worker. “Now we’ve got a resource center with TVs and computers,” Murphy said. “This is like I’m really going away to college.” To contact the reporter on this story: Daniel Golden in Boston at dlgolden@bloomberg.net

Read the full article →

Grand Canyon Education Signs Lease at Desert Canyon 300 in Phoenix, AZ

January 12, 2010

ATLANTA and PHOENIX, Jan. 12, 2010 (GLOBE NEWSWIRE) — Piedmont Office Realty Trust, Inc. announced today that it has completed a a 103,671 square-foot lease agreement with Grand Canyon Education, Inc. at its Desert Canyon 300 property, located at 2411 West Peoria Avenue in Phoenix. The tenant currently occupies one floor of the building on a sublease basis and plans to continue its tenancy on a direct basis through 2021.

Read the full article →

Foreclosures Hurting Home Appraisals

January 4, 2010

LOS ANGELES — It wasn’t the first time that Katherine Scheri ruined a real estate agent’s day with a low property appraisal. Scheri, a real estate appraiser, had sized up a three-bedroom, two-bath house in Santa Ana, Calif., for $30,000 less than what the buyers offered to pay. A typical deal-killer for a seller. The agent urged the lender to force Scheri to consider several other properties that could back up the original $310,000 sale price. Then he tried good old-fashioned guilt, telling Scheri her appraisal was going to ruin the buyers’ shot at the American Dream. “That’s what he laid on me,” Scheri recalled. “And I said, ‘Don’t you care they could be potentially spending $30,000 too much for a house?” Across the country, agents and homebuilders are complaining too many appraisals are coming in low, scuttling deals. The National Association of Realtors says nearly one in four of its members has reported clients losing a sale due to botched appraisals. The National Association of Home Builders, meanwhile, said low appraisals were sinking a quarter of all new home sales and argues it’s not fair to compare distressed properties to brand-new homes. And that gets to the heart of the problem. Roughly 40 percent of all home sales this year were foreclosures or short sales, meaning the property sold for less than the mortgage. In some markets, like Las Vegas and Phoenix, they’ve hit more than 50 percent. Appraisers determine the value of a property by looking at recent sales of comparable homes. They take an apples-to-apples approach, excluding or making adjustments for certain features, such as a swimming pool or finished basement. And generally, a foreclosure isn’t used as a comparison for a standard sale. But in some areas, appraisers like Scheri contend they are only sizing up homes according to the reality of the market, though they concede its becoming increasingly harder pinpoint what a home is worth. Home prices in many large metro areas, including Los Angeles and San Diego, hit bottom earlier this year and are recovering, data last week showed. Yet there are many neighborhoods across the country where foreclosures and other financially distressed sales are still rising. “It used to be a very infrequent thing that you did an appraisal and the value wasn’t supported,” says Scheri, who is based in San Diego. “Now, it’s more common than not.” So, if you’re trying to sell your home in a neighborhood where foreclosures and short sales are predominant, an appraiser could determine your home is actually worth less than what some buyers may be willing to pay. Part of the problem, critics contend, is that many real estate appraisers are now hired under new industry rules. Designed to limit conflicts of interest that can bias an appraisal, the rules bar mortgage brokers from ordering appraisals themselves, forcing them to do so through a mortgage lender. Lenders may order appraisals through in-house staff or appraisers hired by outside firms known as appraisal-management companies. But neither may talk to the appraisers about the value of the property they’re evaluating. The result, however, can mean that low-cost appraisers are hired from outside the area and don’t have the local knowledge to find homes that can be a better benchmark for regular homes. Chris Heller, agent-owner of Keller Williams Realty in northern San Diego, recently had the sale of a home nearly botched for the second time because of a low appraisal. The three-bedroom, two-bath house in the Poway suburb of San Diego was appraised for $55,000 less than what the buyer agreed to pay. The seller wasn’t willing to drop the price down to $400,000, but knocked off $20,000 when the buyer agreed to come up with $35,000 in cash. “The seller is taking less because of the appraisal,” Heller said, noting that almost all of the comparable homes used to gauge the property’s value were distressed sales. Still, the buyer is paying a premium not to have to deal with the risks involved in buying a foreclosed home or a short sale, which can take several months to close. So, should distressed homes sales be compared with other homes? Is one inherently worth more than the other? A new analysis of foreclosure and non-foreclosure sales by Zillow.com found that even when most of the market is made up of bank-owned homes, non-foreclosures sell for as much as 30 percent more. Another study by Harvard’s Joint Center for Housing Studies came up with a similar conclusion. In Las Vegas, which has one of the highest foreclosure rates in the nation, the median sale price for bank-owned homes sold in September was about 23 percent less than other types of properties, according to the Zillow study. “There are two markets, two very distinct markets,” said Zillow economist Stan Humphries. That doesn’t mean foreclosures don’t weigh down the value of nearby homes, although there’s loud disagreement on how much. The Joint Center for Housing Studies examined home sales over 20 years in Massachusetts and found that a foreclosure within less than 100 yards of a home lowers the price of that home by 1 percent. So it appears that in neighborhoods with high foreclosure rates, values for all homes are being pulled lower than in areas where there are few or none. That means you can live in one area of Las Vegas and values can be down twice as much as they are in another neighborhood just a few miles away. When it comes to appraisals, that leaves a lot of room for interpretation.

Read the full article →

Soldier Can’t Remember Lessons at For-Profit College Funded by Taxpayers

December 15, 2009

By Daniel Golden Dec. 15 (Bloomberg) — Marine Corps Corporal James Long knows he’s enrolled at Ashford University, one of at least a dozen for-profit colleges making money off active-duty military with subsidies from American taxpayers. He just can’t remember what course he’s taking. The 22-year-old from Dalton, Georgia, suffered a brain injury that impaired his ability to concentrate when artillery shells hit his Humvee in Iraq in 2006, he said. Long signed up for the online college, a unit of Bridgepoint Education Inc., after its recruiter gave a sales pitch this year at a barracks for wounded Marines at Camp Lejeune in North Carolina. Under base rules, the barracks are off-limits to college recruiters, said Robert Songer, director of lifelong learning at Lejeune. For-profit online colleges are taking over higher education of the U.S. military, lured by a Defense Department pledge of free schooling up to $4,500 a year for active members of the armed services, costing taxpayers more than $3 billion since 2000. The schools account for 29 percent of college enrollments and 40 percent of the half-billion-dollar annual tab in federal tuition assistance for active-duty students, displacing public and private nonprofit colleges, according to Defense Department and military data. The shift is leading to educational shortcuts and over- zealous marketing, said Greg von Lehmen, chief academic officer of the University of Maryland University College in Adelphi, the adult-education branch of the state system and one of the earliest and biggest providers of military education. Faster, Easier “In these schools, the rule is faster and easier,” von Lehmen said. “They’re characterized by increasingly compressed course lengths and low academic expectations. One has to ask: Is the Department of Defense getting what it is seeking?” Some online schools offer free laptops or fast degrees. At Apollo Group Inc.’s University of Phoenix, the biggest for- profit college, active-duty military personnel can earn an associate’s degree, which typically takes two years of study, in five weeks. Taxpayers picked up $474 million for college tuition for 400,000 active-duty personnel in the year ended Sept. 30, 2008, more than triple the spending a decade earlier, Defense Department statistics show. Any college degree provides a boost toward military promotion, said James Pappas, vice president for outreach at the University of Oklahoma . Credentials from online, for-profit schools are less helpful in getting civilian jobs, especially in a tight labor market, Barmak Nassirian , associate executive director of the American Association of Collegiate Registrars and Admissions Officers in Washington, said in an e- mail. Disappointed Grads “I’m afraid that the ease with which these outfits hand out diplomas is matched only by the disappointment of their graduates when they find out how little their degrees are actually worth,” Nassirian said. Mike Shields, a retired Marine Corps colonel and human resources director for U.S. field operations at Schindler Elevator Corp., rejects about 50 military candidates each year for the company’s management development program because their graduate degrees come from online for-profits, he said in an interview. Schindler Elevator is the North American operating entity of Schindler Holding AG in Hergiswil, Switzerland, the world’s second-largest elevator maker. “We don’t even consider them,” Shields said. “For the caliber of individuals and credentials we’re looking for, we need what we feel is a more broadened and in-depth educational experience.” He does hire service members with online degrees for jobs on non-leadership tracks, he said. Several online for-profit schools have become a concern on military bases because of practices that exploit soldiers and the federal subsidies they are promised, said Songer at Camp Lejeune. Marine ‘Prey’ “Some of these schools prey on Marines,” Songer said. “Day and night, they call you, they e-mail you. These servicemen get caught in that. Nobody in their families ever went to college. They don’t know about college.” Most online for-profits, such as American Public Education Inc.’s American Military University, “do a very good job taking care of students,” Songer said. Executives at for-profit colleges said they pay more attention to customer service than traditional schools do, and their online format suits military students who move frequently. “It’s about flexibility and options,” said Rick Cooper, vice president of military and corporate programs at Columbia Southern University in Orange Beach, Alabama. “You can enroll any day of the week, any week of the year.” Columbia Southern grants transfer credits to soldiers for courses in which they earned grades as low as D. Grantham University in Kansas City, Missouri, has handed out free laptop computers and American Military in Charles Town, West Virginia, gives free textbooks as recruitment inducements. Less Demanding Online schools such as American Military University have relocated their headquarters to obtain certification from regional boards with less demanding standards, according to interviews with for-profit college officials and accrediting agencies. Or they’re approved by less established organizations, leaving students hard-pressed to transfer credits to other colleges or find jobs at major corporations. Holders of master’s degrees in business administration from for-profits Phoenix and American Intercontinental University earn less than graduates with the same degrees from Oklahoma or Maryland’s University College, according to Payscale.com , a provider of employee compensation data. Salary Comparisons Recent MBA graduates from University College and Oklahoma have median annual incomes of $78,600 and $68,400, respectively, compared with $60,200 from Phoenix and $54,600 from American Intercontinental, the data show. Recent bachelor’s graduates from University College earn a higher median salary ($55,200) than their counterparts at Phoenix ($50,500) and American Intercontinental ($43,100). Oklahoma, at $41,100, trails Maryland and the two for-profit schools. Travis Daun, a 33-year-old former Navy lieutenant commander who trained as a nuclear engineer on a submarine, left the service in August after receiving an online MBA from American Intercontinental, a unit of Career Education Corp ., based in Hoffman Estates, Illinois. “I was disappointed in the rigor and challenge of the courses,” Daun said in an interview, adding that each course lasted five weeks, with at most two hours a week of class time. “I don’t think I had a 4.0 effort, yet I had a 4.0 grade-point average.” Daun is unemployed. His college roommate, who also became a nuclear engineer in the Navy and earned an MBA from the University of Maryland’s University College, did find work, Daun said. “His MBA from Maryland definitely helped him a lot more than my AIU degree is helping me,” he said. Headhunter’s Perspective Daun is working with Lucas Group, an executive search firm that specializes in placing former military personnel. “Does his master’s from American Intercontinental open a lot of doors for him? No, it doesn’t,” said Lee Cohen, an Irvine, California-based managing partner at Lucas. American Intercontinental provides a high-quality education for adult students, said Jeff Leshay, a spokesman for Career Education. Leshay said the company doesn’t track where graduates find jobs. While deployed in Iraq, Christopher Brotherton earned a bachelor’s degree in homeland security from American Military in 2007. When the staff sergeant retired from the Army in June, his degree, which included courses in geography and history, helped him find a job teaching social studies in a middle school in Ardmore, Oklahoma. ‘No Problems’ “The state, when they saw my transcript from AMU, they had no problems with any of it,” Brotherton, 42, said. “It was a respected school to them.” Brian Kilgore’s quest for a college degree was set back in 2007. Then a petty officer first class in the Navy, Kilgore needed two more courses to earn an associate’s degree from Grantham when the online for-profit college eliminated the software engineering program he was taking, he said in an interview. Kilgore switched to computer science and soon left school, still four classes short of that degree. “I was upset,” said Kilgore, 38, who recently retired from the military and works in aviation maintenance. “Gosh, I was almost there.” The program was eliminated due to lack of interest, Grantham said. When service members do earn degrees from online for- profits, human resources executives at Fortune 500 firms are often reluctant to hire them, said Cohen, citing three where he has placed candidates. “There are some firms that are heavily credential-oriented,” he said. “McKinsey & Co. is one of them. They might balk. Amazon might balk. Shell Oil is another one.” McKinsey, Amazon.com and Shell declined to comment. Career Disadvantage Bradford Rand, chief executive of Techexpo Top Secret in New York, which runs job fairs for defense contractors recruiting recent veterans, said a degree from an online for- profit is a disadvantage. “You have two people of the same caliber, one has a degree from a real college, one has a degree from a computer, I’m going to favor the one from the live college,” Rand said. “It’s more verifiable, more credible.” The Defense Department plans to subject online programs to review by the American Council on Education in Washington, which already monitors face-to-face classes on military bases , defense officials said. The new online standards, which the department began to develop in 2004, have taken longer than expected and are a year away from being implemented, Tommy Thomas, deputy undersecretary of defense for military community and family policy, said in an e-mail. Of the dozen colleges with the biggest active-duty enrollment, five are for-profits that conduct most or all of their courses online. Three — American Military University, Apollo’s Phoenix, and closely held Grantham — charge $250 a credit, or $750 a course, which allows them to receive the maximum reimbursed by U.S. taxpayers without service members having to pay any out-of-pocket tuition. Publicly funded community colleges offer classes on military bases for as little as $50 a credit, according to their Web sites. American Public Education has risen 72 percent since the company went public in November 2007. It closed yesterday at $34.41 in Nasdaq composite trading, up 3 percent from the previous day. Apollo shares closed at $62.06 in Nasdaq trading, falling 19 percent this year, as of yesterday. The expansion of online for-profit colleges into the military comes as the companies face U.S. government inquiries into their tactics in recruiting and educating civilians. The Obama administration is tightening scrutiny of for-profits, from the content of their pitches to prospective students to their increasing reliance on federal financial aid, Robert Shireman, deputy undersecretary of the U.S. Education Department, said in an interview. SEC Probe In addition, the Securities and Exchange Commission’s Enforcement Division has begun an informal probe into how Apollo Group books revenue. Apollo intends to cooperate fully with the inquiry, the company said. By expanding its military business, Phoenix has been able to enroll more civilian students who are supported by grants and loans from the Education Department, without violating federal law that dictates how much revenue the school can receive from the government. Phoenix derived 86 percent of its $3.77 billion in revenue in fiscal 2009 from the Education Department, according to its annual 10-K filing, up from 48 percent in 2001 and approaching the limit of 90 percent set by a 1992 law known as the 90/10 rule. Tuition payments to for-profit schools by the military don’t count toward the 90 percent ceiling. One way that Phoenix plans to stay below the legal threshold is building its military business, Gregory Cappelli , co-chief executive of Apollo, which is based in Phoenix, said in a June 29 conference call with investors. Military Market When the law was enacted, for-profits hadn’t yet moved into the military market, so the legislation’s sponsors weren’t focused on Defense Department tuition assistance, Sarah Flanagan, who helped draft the law as the Senate’s specialist in federal student aid, said in an interview. The law was intended to ensure that for-profit colleges offered an education good enough that some students were willing to pay for it, said Flanagan, now vice president of the National Association of Independent Colleges and Universities in Washington. “Counting Defense Department funding for servicemen’s education as part of the money that’s supposed to come out of consumers’ pockets violates the purpose of the original legislation,” Flanagan said. Apollo spokeswoman Sara Jones said in an e-mail that Phoenix began serving military students long before the advent of “the misguided 90/10 rule.” Phoenix Recruitment Phoenix ranks among the top five colleges serving military students, including about 5,000 in the Army and 2,700 in the Navy, according to the two services. While Phoenix offers campus-based graduate programs in education and management at Air Force bases in the Pacific, most of its active-duty students take classes online, school officials said. Phoenix has 452 recruiters in its military division, up from 91 in 2003, said Scott McLaurin, its executive enrollment counselor at Camp Lejeune, the largest Marine Corps base on the East Coast. Military enrollment at exclusively online for-profits is soaring. American Military has 36,772 active-duty students, up from 632 in 2000, it said. It has the most Air Force and Marine Corps students of any college. Closely held Columbia Southern has 9,582 service members, up from 649 in 2002, it said. Closely held TUI in Cypress, California, has more than doubled active- duty enrollment to 7,665 in the first quarter of 2009, from 3,661 in 2004, it said. While six public and private non-profit colleges hold face- to-face classes on Camp Lejeune, none has the highest active- duty enrollment there. That distinction belongs to American Military, with 1,623 students, up from 11 in 1999. Phoenix’s enrollment there has risen to 296 from 15 over the same period. Slumping Enrollment Active-duty enrollment at public and nonprofit schools has slumped. The University of Oklahoma , once the leading provider of graduate degrees to service members, has lost half of its military enrollment in a decade, said Pappas, the vice president for outreach. “A decade from now, you may not find traditional national public and private universities in military education,” Pappas said. “That’s one of the real dangers.” Faculty members at online for-profit colleges, usually part- timers with practical experience in their fields, have less control over curriculum than in conventional academia, said Benjamin Bolger, who has taught at the University of Phoenix and the College of William & Mary in Williamsburg, Virginia. Professors assign reading and writing and discussion topics prescribed by the school. Students don’t have to log on at a specific time. At their convenience, they complete weekly coursework and respond to classmates on discussion boards. Trimming Requirements While many colleges adopt what are known as “military- friendly” practices, the online for-profits go further than most. They accelerate course and degrees for service members, trimming requirements and granting abundant transfer credits. At Phoenix, members of the armed forces can earn an associate’s degree by taking one five-week online class, “Written Communication.” They can make up for the other 19 courses required for an associate’s degree with credits for classes taken elsewhere, military experience including basic training, and passing grades on tests that gauge knowledge of a subject area. Civilians seeking the same degree must take at least six Phoenix courses and can use credits from outside sources for no more than 14. Traditionally, two-year students must take 10 courses, or half of the required load, from the school that awards their degrees, so it can vouch for their training, Nassirian said. Fast Track Only a handful of active-duty students choose Phoenix’s one- course option, called the Associate of Arts Degree Through Credit Recognition, said Mike Bibbee, the university’s director of military programs. At Columbia Southern, students can finish courses in three weeks and gain credit for as many as three classes taken at other colleges in which they received grades as low as D, according to its catalog. All exams are open-book. “It would be quite unorthodox for traditional institutions to grant transfer credit to coursework completed below a grade of C,” Nassirian said. Columbia Southern’s academic quality is comparable to a state or nonprofit university, Cooper said. The University of Alabama, in Tuscaloosa, also accepts D’s for transfer courses, according to its Web site. On Oct. 16, several Marines waited their turn on benches outside American Military’s office in the education center at Camp Lejeune. Inside, AMU education coordinator Brian Miller made his pitch to Jyher Lazarre and Hyunwoo Kim. Lazarre, 19, of Orlando, Florida, and Kim, 20, of Leonia, New Jersey, joined the Marines in 2008 and are roommates at Lejeune, they said. Cutting Time Of 20 courses needed for a two-year degree, they could satisfy eight through basic training and other military experience, Miller said. They could test out of seven more, leaving them to take five classes. “I can cut the time of this degree literally in half,” Miller told them. “It’s going to make you competitive toward promotion as well.” “If we can cut it down, that’s really good,” Kim said. Conflicts with accrediting associations that certify academic quality have dogged several online for-profits. American Military, founded in Virginia in 1991 by a former Marine Corps officer, applied in 1998 for accreditation by the Commission on Colleges of the Decatur, Georgia-based Southern Association of Colleges and Schools. The southern association is one of six regional bodies that approve public and nonprofit institutions and represent the gold standard in accreditation. Early Step In June 1999, the commission denied American Military a candidacy visit, an early step in the accreditation process, said Ann Chard, commission vice president. The university didn’t meet the requirements of having full-time professors and a library, instead relying on part-time faculty and a lending library network, said James Herhusky , a trustee. American Military then shifted its headquarters to West Virginia to seek regional accreditation by the Higher Learning Commission of the North Central Association, according to the minutes of a July 2002 meeting of the Virginia Council of Higher Education, based in Richmond. In 2006, North Central approved American Military, which offers degrees in fields including homeland security, counter-terrorism studies and weapons-of- mass-destruction preparedness. ‘More Accommodating’ “At the time, North Central was the only region we knew that was accrediting totally online institutions,” Herhusky said. “We found their criteria to be less prescriptive and more accommodating.” American Military now has 160 full-time professors and an online library, Herhusky said. The school has almost quadrupled active-duty enrollment since 2005, when it hired James Sweizer, former head of education for the Air Force, to run its military programs. “I came to AMU with the philosophy of relationship marketing,” Sweizer said in an interview. “You cater to the needs of key influencers.” Sweizer said he’s seen “dramatic improvement” in how American Military manages courses and faculty. Probationary Period American Intercontinental, which ranked 20th in tuition assistance from the Marine Corps in fiscal 2009, also didn’t meet the standards of the Southern Association of Colleges and Schools. It was placed on probation from 2005 to 2007 for academic and administrative shortcomings, including an inadequate number of full-time professors, according to accreditation records. The school addressed the association’s concerns, and the improvements it made during those two years have strengthened the university, Career Education spokesman Leshay said in an e-mail. American Intercontinental moved its headquarters this year from Atlanta to Chicago and was accredited by North Central. American Intercontinental relocated because its online campus is based there, Career Education spokesman Leshay said. Two other for-profits in the military market, Grantham and Columbia Southern, have a status known as national accreditation. Newer than the regional groups, the seven national bodies mostly approve for-profit colleges, including vocational and distance-education programs. Only 14 percent of colleges accept credits transferred from nationally accredited institutions, according to a 2006 study by the University Continuing Education Association in Washington. Expanding Market Three policy changes in the past decade opened the military market to for-profit colleges. The Defense Department, which had paid tuition assistance mainly to regionally accredited schools, began in 1999 to reimburse nationally accredited colleges as well. It increased funding in 2002 from 75 percent to 100 percent of tuition up to the $250-per-credit ceiling. In 2006 and 2007, the Army cut 233 counselors who used to guide soldiers through college choices, replacing them with interactive Web sites that offer information, said Army spokesman Wayne V. Hall. These moves coincided with the rise of Internet courses. For-profits were ahead of most traditional colleges in online education, which helps service members deployed worldwide keep up their studies. In fiscal 2008, the first year that the Defense Department collected such data, 64 percent of active- duty students took distance-education classes. War Zones Soldiers even take online classes in war zones. While in Afghanistan, Army sergeant Patrick Peake earned a bachelor’s degree in criminal justice from American Military, enrolling in as many as four online courses at a time. Cavalry scouts “set up a wireless connection at the mud- brick building we were at,” Peake, 29, said in an interview. After studying counter-terrorism at AMU, Peake said, he told friends in Army intelligence about terrorist groups in the region. “This dumb grunt helped them out a little,” he said. Unlike most traditional schools, for-profits vie to offer inducements to students. American Military gives textbooks for free to undergraduates, who may resell them to the school’s vendor after use for $30 to $50 per book, Miller said. Columbia Southern is considering a similar buyback program, according to Cooper. Grantham, the seventh-biggest recipient of undergraduate tuition money from the Army in fiscal 2008, gave new laptop computers made by Dell Inc., from March to July to active-duty students who had completed at least four courses with grades of C or better. The free laptops were part of a pilot research project on student retention, said Tim Arrington, Grantham director of military programs. Laptop Largesse Michael Lambert, executive director of the Distance Education Training Council, which accredits Grantham, advised the school to stop the laptop largesse, he said. “The concern is, schools will outdo each other and we’ll have an arms race,” he said. “Free laptops, free Kindles, free iPods, all coming out of taxpayers’ pockets.” Servicemembers Opportunity Colleges, a Defense Department Washington-based contractor that develops policies for 1,800 colleges involved in military education, is also considering guidelines to limit laptop giveaways and other inducements. “I don’t think it’s out of hand, but the potential is there,” said Kathy Snead, the group’s director. Former Marines Career Blazers Learning Center, a New York-based vocational school, gave away laptops loaded with instructional software to Marines about to be deployed to combat zones, owner Paul Viboch said. It also hired former Marines as recruiters and paid referral fees to students for signing up other service members. Entire units enrolled, and Career Blazers received $4.5 million in tuition assistance from the Marine Corps in 2006, the most of any post-secondary provider. Career Blazers charged $4500 — the maximum that the military reimburses in a year — for self-paced lessons on how to perform basic computer applications or balance checkbooks. Much of the material was available for less expense at workshops or community college classes on bases, education specialists said. “The military overpaid for laptops,” said Johanna Rose, an education technician at Camp Lejeune. Relocated to Martinsburg, West Virginia, and renamed Martinsburg Institute, Career Blazers stopped giving away laptops three months ago. Its tuition assistance from the Marine Corp. slipped to $616,000 in fiscal 2009, as education officials on some Marine bases discouraged service members from enrolling, Viboch said. “I was too successful, too quickly,” he said. ‘Underhanded’ Techniques Unauthorized marketing pitches by for-profit recruiters have become widespread on military bases. “Some of these schools are a little underhanded,” said Pat Jeffress, branch manager of lifelong learning at Camp Pendleton, a Marine Corps base in California, said. “They try to backdoor me. They come onto the base when they don’t have permission and they set up shop.” One recruiter for Ashford University recently ignored the anti-solicitation rule at Camp Lejeune, said Songer, the base’s lifelong learning director. Bridgepoint , based in San Diego, has climbed 67 percent since the company went public on April 14. Bridgepoint closed yesterday at 17.58, up 7.6 percent from the previous day. Songer said he told the recruiter, whose husband is in the military, that she could only meet students at the base’s education center. Instead, she pitched the online for-profit in the recreation room of a barracks for wounded Marines. About 30 Marines showed up, said Brad Drake, a corporal who attends Ashford. ‘Attractive’ Recruiter “It helped she was really attractive,” said Drake, 23, who suffered a traumatic brain injury in Afghanistan when a rocket hit his truck. “That got everyone’s attention.” The recruiter spoke at the barracks with the approval of the unit’s commanding officer, Bridgepoint spokeswoman Shari Rodriguez said in an e-mail. “We keep our students’ needs at the forefront of all we do.” Unit commanders are often unfamiliar with educational rules, Songer said. He told the recruiter, “‘If you cross that line again, you’ll never be allowed on this base,” he said. Ashford’s Enrollment Ashford ranked sixth in Marine Corps enrollment in the year ended Sept. 30, 2009, with 1,018 students. At Camp Lejeune, Ashford had 119 active-duty students, up from 25 in the previous year, and six in fiscal 2007. About eight to 10 wounded Marines signed up for Ashford after the recruiter’s presentation, among them Corporal Long, the brain-injured soldier, who also walks with a cane. Long is pursuing a bachelor’s degree in organizational management through Ashford. In his first class, students could retake the final test until they passed, he said. “I took it 10 times,” he said. “I kept getting the same answers wrong.” Long, who aspires to be an occupational or physical therapist, said he wonders if he can graduate. He is married and says he needs to provide for his family. “I got my doubts,” he said. “My family’s more important than my doubts. That keeps me going.” To contact the reporter on this story: Dan Golden in Boston at dlgolden@bloomberg.net .

Read the full article →

Distressed US debt offers a pay off | Value Investing News

December 13, 2009

“They say nobody rings a bell at the top or the bottom of a market, but for credit, there was a bell rung last Christmas Eve,” says Jeffrey Peskind, of Phoenix Investment Adviser, a distressed bond fund manager.

Read the full article →

Homeowners in U.S. Lost $5.9 Trillion Since 2006 as Defaults Cut Values

December 9, 2009

By Dan Levy Dec. 9 (Bloomberg) — U.S. homeowners have lost about $5.9 trillion in value since the housing market’s peak in March 2006 as mounting foreclosures and the recession weighed on prices, according to Zillow.com . Almost half a trillion dollars was wiped out this year through November as housing headed for a third straight annual decline. New foreclosures and higher mortgage rates in 2010 may hinder a rebound, the property data service said today in a statement. “A phenomenal amount of wealth has been erased since the housing bust,” Stan Humphries , chief economist for Seattle- based Zillow, said yesterday in an interview. “For many households, most of their wealth is tied up in real estate.” The net worth of U.S. households at the end of June fell 19 percent from two years earlier to $53.1 trillion, according to Federal Reserve data. Employers have cut more than 7.2 million jobs since the start of the recession in December 2007. Unemployment was 10 percent in November as payrolls declined by 11,000, the Labor Department said last week. LaVonna Gottschall paid $260,000 for her Merced, California, home in September 2007. She put down more than half the price and financed the rest with a 30-year fixed loan. Today, houses in her neighborhood are worth 59 percent less, according to Zillow. “I almost wiped out all my savings,” Gottschall, 64, a retired insurance-company clerical worker, said yesterday in an interview. “I did the right thing. I didn’t get in over my head. Now I’m living month-to-month.” Foreclosure Filings The slowing of property declines because of a government tax credit for first-time buyers and record-low mortgage rates will be tested as more foreclosures reach the market and borrowing costs rise, Humphries said. More than two-thirds of the 154 markets tracked by Zillow have lost value this year. Home foreclosure filings surpassed 300,000 for the eighth straight month in October, according to RealtyTrac Inc. More defaults and job losses “loom over any nascent housing recovery,” James Saccacio , chief executive officer of the Irvine, California-based seller of default data, said Nov. 12. The value of U.S. housing today is about $24.7 trillion, down 19 percent from the market’s peak, according to Zillow. Homes declined $489 billion in the first 11 months of the year. Biggest Drops Merced had the biggest percentage loss in house value from January through November with an estimated 37 percent decline, according to Zillow. Las Vegas was second at 25 percent. The loss was 21 percent in Fort Myers, Florida; 17 percent in Stockton, California; and 16 percent in Orlando, Florida . Values dropped 16 percent in Bakersfield, California, and Anderson, South Carolina, and Phoenix; and 15 percent in Naples, Florida, and Modesto, California, rounding out the 10 biggest declines, Zillow said. Los Angeles had the biggest dollar loss with an estimated $60.8 billion wiped out, Zillow said. Chicago followed with a decrease of $49.6 billion, New York was third at $49 billion, Miami-Fort Lauderdale was fourth at $45.9 billion and Phoenix fifth at $45.1 billion. Boston had the biggest dollar gain, at $23.3 billion, according to Zillow. Increases were estimated at $12.4 billion in Providence, Rhode Island; $10.7 billion in Denver; $7.6 billion in Atlanta; and $4.7 billion in Rochester, New York. Gottschall’s house on a cul-de-sac in Merced has three bedrooms, two bathrooms and a gray-tiled roof. She bought it to be “more comfortable” and now regrets that she didn’t wait another year before purchasing. The median home price in Gottschall’s ZIP code sank to $95,800 in October, the latest Zillow data show. To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net .

Read the full article →

FDIC Shuts Down AmTrust Bank, 5 Others: 130 Failed Banks So Far In 2009

December 4, 2009

WASHINGTON — Regulators have shut down six more banks, bringing to 130 the number of U.S. banks to be brought down so far in 2009 by recession and mountains of bad debt. The Federal Deposit Insurance Corp. on Friday took over Ohio’s AmTrust Bank, the fourth-largest bank to fail this year, with about $12 billion in assets and $8 billion in deposits. The Cleveland-based bank’s failure is expected to cost the federal deposit insurance fund an estimated $2 billion. About a year ago, the federal Office of Thrift Supervision put restrictions on AmTrust because of concern that its reserves against losses were dangerously low. The regulators told the bank to limit new loans for land acquisition, development or speculative residential construction. In addition to its branches in Ohio, AmTrust – formerly Ohio Savings – had branches in Florida and the Phoenix area. New York Community Bank, based in Westbury, N.Y., agreed to assume the deposits of AmTrust Bank and about $9 billion of its assets. The FDIC will retain the rest for eventual sale. AmTrust’s 66 branches will reopen starting Saturday as offices of New York Community Bank, the FDIC said. In addition, the FDIC and New York Community Bank agreed to share losses on about $6 billion of the failed bank’s loans and other assets. Also seized by the FDIC on Friday were three Georgia banks: Buckhead Community Bank, based in Atlanta, with $874 million in assets and $838 million in deposits; First Security National Bank, based in Norcross, Ga., with $128 million in assets and $123 million in deposits; and Tattnall Bank, of Reidsville, Ga., with assets of $49.6 million and deposits of $47.3 million. Benchmark Bank, based in Aurora, Ill., with $170 million in assets and $181 million in deposits, also was closed, as was Greater Atlantic Bank, of Reston, Va., with $203 million in assets and $179 million in deposits. The failure of Buckhead Community Bank is expected to cost the federal deposit insurance fund an estimated $241.4 million; that of First Security National Bank, around $30.1 million; Tattnall Bank, $13.9 million; Benchmark Bank, about $64 million; and Greater Atlantic Bank, $35 million. The three shutdowns in Georgia brought to 24 the number of bank failures in that state so far this year. Benchmark Bank was the 20th to fail in Illinois. Failures also have been concentrated in California and Florida. As the economy has soured, with unemployment rising, home prices tumbling and loan defaults soaring, bank failures have accelerated and sapped billions out of the federal deposit insurance fund. It has fallen into the red. The FDIC expects the cost of bank failures to grow to about $100 billion over the next four years. Depositors’ money – insured up to $250,000 per account – is not at risk, with the FDIC backed by the government. The FDIC still has about $21 billion cash in loss reserves apart from the insurance fund. It can also tap a Treasury Department credit line of up to $500 billion. Banks have been especially hurt by failed real estate loans. Banks that had lent to seemingly solid businesses are suffering losses as buildings sit vacant. As development projects collapse, builders are defaulting on their loans. If the economic recovery falters, defaults on the high-risk loans could spike. Many regional banks hold large concentrations of these loans. Nearly $500 billion in commercial real estate loans are expected to come due annually over the next few years. The 130 bank failures are the most in a year since 1992 at the height of the savings-and-loan crisis. They have cost the federal deposit insurance fund more than $28 billion so far this year. They compare with 25 last year and three in 2007.

Read the full article →

← Previous Entries

Next Entries →