California expected to boost bond sale amid strong demand

California expected to boost bond sale amid strong demand

Once again, a big bond sale by California is shaping up to be a hit with investors -- despite the state’s low credit rating.

Treasurer Bill Lockyer’s plan to sell up to $4 billion in taxable bonds is said to be attracting heavy interest from big investors such as pension funds. Bidding appears to be strong enough to allow the state’s investment banks to supersize the deal, perhaps to as much as $7 billion, according to municipal bond market analysts.

The bonds, which will raise money for infrastructure projects, are expected to be priced Wednesday.

The state is selling taxable, rather than tax-free, bonds in part to take advantage of the federal government’s new Build America Bonds plan. Under that program, which Congress passed as part of the economic-stimulus package, the Treasury picks up 35% of the annual interest cost of bonds sold to finance public works.

The talk in the marketplace today was that the 30-year bonds in the state’s offering would pay an annualized yield of about 7.4%. With the government covering 35% of that, the net interest cost to the state would be about 4.8%.

That would be a significant savings compared with the 6.1% yield California paid on 30-year tax-free bonds it sold March 24.

Debt issuance under the Build America Bonds plan could help Lockyer whittle down the $61-billion backlog of voter-approved infrastructure bonds he has left to sell. More public works projects would mean more jobs, at a time of soaring unemployment in California.

As I noted in this post last week, the state is tailoring the taxable bond sale for big investors. Individual investors, who were voracious buyers of the tax-free bonds sold in March, weren’t given the usual preferential treatment in the taxable-bond sale.

-- Tom Petruno

Photo: California Treasurer Bill Lockyer

Yahoo profits drop 80%

SAN FRANCISCOYAHOO! on Tuesday reported that its net profit slumped nearly 80 per cent in the first three months of the year and that it will trim its workforce by five per cent to cut costs.

Yahoo! said its net income for the first quarter was US$117.6 million (S$177 million), or eight cents per share, compared to US$536.8 million, or 37 cents per share, during the same period last year.
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How to retire the old 'Concorde' financial system for good

How to retire the old 'Concorde' financial system for good

Best known for his accurate warnings of impending doom in the global economy over the last few years, Nouriel Roubini now opts to deliver some constructive criticism about how to permanently fix the financial system.

His summary advice to global banking regulators: Forget the idea of having the equivalent of a Concorde supersonic plane for a financial system; aim for one that is "somewhat slower but more stable."

The New York University economics professor, writing on his Global EconoMonitor blog over the weekend with colleagues Viral Acharya and Matthew Richardson, suggests four major alterations to the system to reduce risk and avoid a repeat of the catastrophe of the last two years:

--- Change the pay structure for traders and other "profit centers" at major financial institutions to provide bonuses for good performance but also clawbacks of pay for bad performance. The basic idea: Make sure traders etc. know there will be a penalty for taking extreme risks, beyond just losing one's job.

--- Charge institutions appropriately for "socialized risks -- deposit insurance, too big to fail, temporary loan guarantees and the like," so that the net effect is to "discourage size and risk distortions" in the system. In other words, stop rewarding bigness that could destabilize the entire system.

Roubini, Acharya and Richardson note: "Financial institutions will attempt to exploit government guarantees if that is in the interest of shareholders. That is what they are paid to do. So it is imperative to price the guarantees right," which means governments should junk any one-price-fits-all approach.

--- Create a regulatory authority capable of quantifying the systemic risk posed by large financial institutions and with the power to manage their failure.

--- Enforce better transparency of over-the-counter derivatives and off-balance-sheet transactions, including credit default swaps.

"The recent meeting of the Group of 20 went some way to set the system to rights," Roubini, Acharya and Richardson write. "First, there seems to be general agreement that regulators should work together on a core set of principles. Without such an agreement financial institutions will be able to cherry-pick their jurisdictions. Second, at least from our point of view, the G20 has homed in on most of the important threshold issues, especially the focus on systemic risk, opacity and compensation within the financial system.

"We think the issues of implicit and explicit government guarantees (the second point above) warrant far more air-time at future G20 meetings. A solution as simple as pricing these guarantees at the appropriate market rate will help solve the problem, as higher fees for higher systemic risk and leverage will organically lead these institutions to lower their risk profiles."

What about the potential for regulators to go overboard with reforms and stifle financial innovation?

Roubini, Acharya and Richardson respond: "The goal is not to have the most advanced financial system, but one that is reasonably advanced and robust. That is also what we seek in other areas of human activity."

Drawing a parallel between the Concorde and the high-speed financial system that developed over the last 20 years, the academics note that Concorde aircraft finally were retired in 2003 after 27 years in service and ongoing controversy over the program's complexity and cost vs. its benefit of supersonic flight.

So "we do not use the most advanced aircraft to move millions of people around the world" anymore. "We use reasonably advanced aircraft whose designs have proved to be reliable."

-- Tom Petruno

More GM workers laid off

DETROITGENERAL Motors Corp started firing 1,600 white-collar workers Monday, continuing its effort to slash costs and qualify for more government loans on the same day it revealed it spent US$2.8 million (S$4.23 million) in the first three months of this year to lobby federal lawmakers.

Meanwhile, Fiat's CEO left Italy to resume critical talks on an alliance with Chrysler LLC, as deadlines draw closer for GM and Chrysler to finish their restructuring plans.
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Baltimore County Executive James T. Smith (second from right) leads the ribbon cutting by Lockheed Martin's Michael Leff (second from left) and Linda Gooden (center) as Lockheed announced plans to hire 160 workers at a new Woodlawn facility. Looking on (far left) is State Del. Adrienne Jones and William E. Gray (far right), deputy commissioner for systems at Social Security Administration.

Glaxo to buy private US firm

NEW YORKBRITISH drugmaker GlaxoSmithKline PLC is reportedly nearing a deal to purchase privately held US skincare products maker Stiefel Laboratories Inc for about US$3 billion (S$4.5 billion).

The Wall Street Journal, citing unnamed people familiar with the matter, said on Sunday that the deal could be announced on Monday, but is not etched in stone.
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SHANGHAI — International automakers are converging on China's commercial capital for a show that, once marginal, is now a key showcase — and battleground — for the world's only major growing car market.

NPR's 'Planet Money,' live from Santa Monica

NPR's 'Planet Money,' live from Santa Monica

Fans of NPR's Alex Blumberg and Adam Davidson, who produced the award-winning housing-crisis explainer "The Giant Pool of Money," will want to tune in to KCRW on Sunday from 6 to 7 p.m. PDT: The two will be broadcasting their "Planet Money" show live from the Broad Stage in Santa Monica.

Following on the success of "The Giant Pool of Money" in May 2008, Blumberg and Davidson launched Planet Money in early September to blog on the nation’s economic crisis. Their timing was perfect: Planet Money began on Sept. 7 -- the day the government seized Fannie Mae and Freddie Mac, the first dominoes to fall in the financial-system collapse.

-- Tom Petruno

Worst of downturn over?

NASHVILLE (Tenn)TOP US officials on Saturday offered reassurances that the worst of the economic downturn is likely over, helped by unprecedented efforts to keep credit flowing, though the recovery will be slow.

Two Federal Reserve policy-makers, Vice Chairman Donald Kohn and New York Fed chief William Dudley, both pointed to signs that measures taken by the US central bank are indeed working to help revive the economy.
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California jobless at 33-yr high

It's OK to look at your investment statements again

Go ahead -- check your 401(k) this weekend. You deserve some good news.

Stock markets worldwide mostly racked up another week of gains, with Wall Street extending its winning streak to six weeks. That’s the longest stretch of green ink since the spring of 2007.

The Standard & Poor’s 500 index, which added 0.5% today to close at 869.60, was up 1.5% for the week. The index has rebounded 28.5% from its 12-year low March 9.

Other market sectors -- including small and mid-sized stocks and emerging markets such as Russia and Mexico -- have staged even more impressive bounces over the last six weeks, as investors have become much more hopeful that the global economy is in the process of bottoming.

Domestic stock mutual funds today reached a milestone, of sorts, according to data tracker Morningstar Inc.: Averaging the performances of all U.S. fund categories, the year-to-date net change now is zero -- meaning, the average fund has recouped all of its first-quarter losses.

That may or may not apply to your individual funds, of course. Among the largest portfolios, for example, American Funds’ Growth Fund of America is up 4% this year and Fidelity Magellan is up 8.4%. But Dodge & Cox Stock still is off 3.9%.

The recovery of the last six weeks hasn’t just been built on blind faith. Plenty of economic reports have offered reason to be less pessimistic, if not actually optimistic. On Friday, the University of Michigan said its index of U.S. consumer confidence edged up to 61.5 this month from 57.3 in March

The confidence data followed better-than-expected reports Thursday on new claims for unemployment benefits and mid-Atlantic manufacturing activity.

As for corporate earnings, first-quarter results for many major companies (General Electric Co., Nokia, Google Inc. and JPMorgan Chase & Co., among others) have been lousy -- but better than analysts’ worst fears. That’s all many market bulls were hoping to see.

Things also continue to improve in the credit markets. The average annualized yield on an index of 100 junk bonds fell to 12.4% on Friday, down from 12.52% on Thursday and the lowest since early October. The yield has tumbled from 14.88% on March 9.

Companies issued $3.1 billion in new junk debt this week, the most since at least July, according to Bloomberg News.

There still is enormous doubt on Wall Street that the stock market can sustain this rebound. The test of the rally’s staying power will be how doubting investors react when the next significant pullback occurs: Will they rush at the chance to get in at lower prices -- or stay away, convinced that they were right to remain on the sidelines all along?

-- Tom Petruno

California jobless at 33-yr high

LOS ANGELESCALIFORNIA'S unemployment rate soared to its highest level in more than 30 years in March, climbing to 11.2 per cent as 62,100 jobs vanished, official figures showed on Friday.

US Department of Labor figures showed the number of unemployed increased sharply from 10.6 per cent in February, giving California the highest jobless rate in the nation behind Michigan, Oregon and South Carolina.
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Dozens of plant workers who claim their health was damaged by exposure to a chemical used to give a buttery flavor to microwave popcorn have filed lawsuits in Cincinnati against makers of the flavoring.

For stocks, all news isn't good news, but it's good enough

For stocks, all news isn't good news, but it's good enough

Every day, investors get a new chance to decide whether the economy glass is half full or half empty. Today, the vote was heavily in favor of half full.

Major stock indexes rose to their best levels of the spring rally after another round of mixed economic data and corporate earnings reports that were lousy, just not lousier than investors already had expected.

The Dow Jones industrial average closed up 95.81 points, or 1.2%, to 8,125.43, extending the six-week rally to a gain of 1,547 points, or 24.1%, from the 12-year low reached March 9.

The government reported that the number of Americans receiving unemployment benefits last week topped six million for the first time -- a gruesome piece of data. But the number of new benefit claims slid 53,000 to 610,000 last week from the previous week, the second consecutive decline.

The latest drop in claims may have been skewed by the Easter holiday. But for the glass-half-full crowd, the data offered another reason to believe that the recession is bottoming. Ditto for the Philadelphia Federal Reserve’s report today on its index of manufacturing activity in April, which came in much better than expected.

As for corporate earnings, first-quarter reporting season is shaping up exactly as market bulls had hoped: Many companies are reporting dismal results for the quarter, but are tempering the numbers with forecasts that are at least modestly hopeful.

Cell phone giant Nokia, for example, reported that first-quarter profit dived 91% from a year earlier, but said it still expected to meet previous profit margin forecasts for 2009 as a whole. The stock surged $1.52 to $14.88.

Harley-Davidson Inc. reported a 37% drop in quarterly earnings but said it still expected to ship between 264,000 and 273,000 cycles this year, in line with its previous forecast. The stock added 98 cents to $18.11. The shares are up 121% since March 5.

It’s entirely possible that corporate executives are in dreamland, and that any upbeat (or less-downbeat) projections will be blown out of the water in a matter of months.

The problem for disbelieving investors is that, the higher the market goes, the more afraid they become of staying on the sidelines.

"The pressure on brokers who couldn’t bring themselves to buy four or five weeks ago is enormous," said Jeffrey Saut, chief investment strategist at brokerage Raymond James & Associates. The Standard & Poor’s 500 index is up 28% from its low on March 9.

Understandably, many investors now are praying for some kind of sharp reversal so they can get in at cheaper prices. But the market hasn’t give up much since the rally began on March 10. The biggest pullback in the S&P 500 was the 5.4% drop that occurred over the March 27 and March 30 sessions (a Friday and a Monday).

In the last 12 sessions, the S&P has closed lower on just three days.

Many analysts continue to assert that the market is "overbought" and needs a rest. Itchy money on the sidelines can only hope they’re right.

-- Tom Petruno

Carrefour Q1 sales drop

PARISFRENCH retailer Carrefour on Thursday reported a 2.8 per cent decline in first quarter sales to 22.71 billion euros (S$46 million) against last year, a fall it blamed on a weak performance in Europe.

Sales in Europe, excluding France, were down 5.9 per cent from first quarter 2008 while those in France fell 5.1 per cent.
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As copper surges, Wall St. wonders: What's the message?

As copper surges, Wall St. wonders: What's the message?

Lowly copper has a reputation for heralding economic turning points. So with the metal’s price up 57% this year, to a six-month high on Wednesday, some stock market bulls see copper as underpinning the case that the economy is bottoming.

But copper’s ascent could just be the result of some old-fashioned hoarding by China -- the one major government with loads of money to spend on something other than a banking-system rescue.

Near-term copper futures in New York rose to $2.20 a pound Wednesday, up from $2.11 on Tuesday and the highest since mid-October. The price has surged from $1.41 a pound at the end of 2008.

By contrast, raw materials prices overall, as measured by the Reuters/Jefferies CRB index of 19 commodities, are down slightly this year.

"What’s happening in copper now is a reflection of the broader global economic story," Michael Cuggino, chief executive of Pacific Heights Asset Management, told Bloomberg News. "We’re still expecting to see long-term global growth that’s going to drive demand for copper and the other commodities."

But is the price of copper really a good early-warning signal for the rest of the economy? The historical evidence isn’t very convincing, as Guy Lerner points out on this post at the MarketOracle website.

And this time around, stockpiling by China -- rather than fundamental demand for the metal from a broad range of industrial users -- may be skewing the price.

From a Financial Times of London report on March 22:

Industry reports point to buying by Beijing’s State Reserves Bureau, which manages the country’s strategic stockpiles.

SRB’s decisions are shrouded in secrecy, making it virtually impossible to assess accurately how much the Chinese government has bought. Traders estimate that the SRB is in the process of securing 300,000 tons and speculate that it could buy up to 1.2 million tons this year. Global copper production last year stood at 18 million tons.

"Real demand has played little part in the current copper price rally and remains notably weak as global manufacturing activity continues to decline," David Wilson, metals analyst at Societe Generale, told the Times.

Of course, copper traders may not care what’s fueling the metal’s bull move. But stock traders may want to be careful about drawing conclusions about the economy based on copper’s current hot streak.

-- Tom Petruno

Photo: Uploading copper ore at the Prominent Hill mine in Australia. Credit: Coober Pedy News / AFP Getty Images

British retail sales drop 1.2%

LONDONRETAIL sales in Britain fell for the ninth time in ten months during March as demand for furniture slumped to its lowest level for at least nine years, a leading industry lobby group said on Thursday.

In its monthly survey, the British Retail Consortium (BRC) said like-for-like retail salesthose that exclude new stores and spacedeclined by 1.2 per cent in March from the year before, when sales were depressed by extremely cold weather.
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