By Josh Barro Sep 18, 2012 5:02 AM GMT+0700
You can mark my prediction now: A secret recording from a closed-door Mitt Romney fundraiser, released today by David Corn at Mother Jones, has killed Mitt Romney's campaign for president.
On the tape, Romney explains that his electoral strategy involves
writing off nearly half the country as unmoveable Obama voters. As
Romney explains, 47 percent of Americans "believe that they are
victims." He laments: "I'll never convince them they should take
personal responsibility and care for their lives."
So what's the upshot? "My job is not to worry about those people," he
says. He also notes, describing President Obama's base, "These are
people who pay no income tax. Forty-seven percent of Americans pay no
income tax."
This is an utter disaster for Romney.
Romney already has trouble relating to the public and convincing
people he cares about them. Now, he's been caught on video saying that
nearly half the country consists of hopeless losers.
Romney has been vigorously denying President Obama's claims that his
tax plan would raise taxes on the middle class. Now, he's been caught on
video suggesting that low- and middle-income Americans are undertaxed.
(That one is especially problematic given the speculation about what's on Mitt's unreleased pre-2010 tax returns.)
Corn tells us there are more embarrassing moments on segments of the
video he hasn't released yet. Romney jokes that he'd be more likely to
win the election if he were Hispanic. He makes some awkward comments
about whether he was born with a "silver spoon" in his mouth.
But those are survivable. The really disastrous thing is the clip
about "victims," and the combination of contempt and pity that Romney
shows for anyone who isn't going to vote for him.
Romney is the most opaque presidential nominee since Nixon, and
people have been reduced to guessing what his true feelings are. This
video provides an answer: He feels that you're a loser. It's not an
answer that wins elections.
(Josh Barro is lead writer for the Ticker. E-mail him and follow him on Twitter.)
Read more breaking commentary from Bloomberg View at the Ticker.
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Showing posts with label economy. Show all posts
Showing posts with label economy. Show all posts
Tuesday, September 18, 2012
Tuesday, August 21, 2012
Most U.S. Stocks Fall as Europe Offsets Bank, Tech Rally
By Inyoung Hwang - Aug 21, 2012 4:00 AM GMT+0700
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Most U.S. stocks fell, after the Standard & Poor’s 500 Index rose to its highest level since April, as investor concern about Europe’s debt crisis overshadowed a rally in technology and financial companies.
Best Buy Co. lost 10 percent after saying its founder declined an offer from the board to conduct due diligence and go to shareholders with his buyout offer. Apple Inc. (AAPL) jumped 2.6 percent to its highest price ever, pacing a technology rally. Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) added at least 1.1 percent as financial companies recovered from early losses.
Traders work on the floor of the New York Stock Exchange. Photographer: Scott Eells/Bloomberg
Aug. 20 (Bloomberg) -- Adam Parker, U.S. equity strategist at Morgan Stanley, talks about the outlook for the U.S. stock market. He speaks with Linzie Janis on Bloomberg Television's "Street Smart." (Source: Bloomberg)
Aug. 20 (Bloomberg) -- James Bianco, president of Bianco Research LLC, Brian Angerame, a portfolio manager at Legg Mason Inc.'s ClearBridge Advisors, and Gina Martin Adams, an equity strategist at Wells Fargo Securities LLC, talk about Federal Reserve policies and their investment strategies. They speak with Trish Regan on Bloomberg Television's "Street Smart." (Source: Bloomberg)
Aug. 20 (Bloomberg) -- Barry Knapp, the New York-based head of U.S. equity strategy at Barclays Plc, discusses investment strategy and the outlook for the Standard & Poor's 500 Index. He talks with Deirdre Bolton, Julie Hyman, Alix Steel and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)
An employee cuts lumber for customers at a Lowe's Cos. store in the Brooklyn borough of New York. buyout offer. Lowe’s Cos. fell 4.2 percent after missing analysts’ profit predictions and cutting its earnings forecast. Photographer: Victor J. Blue/Bloomberg
The S&P 500 (SPX) was almost unchanged at 1,418.13 at 4 p.m. in New York, within a point of a four-year high set in April. The gauge fell 0.4 percent earlier as Germany’s Bundesbank stepped up its criticism of the European Central Bank’s bond-buying program. The Dow Jones Industrial Average lost 3.56 points, or less than 0.1 percent, to 13,271.64. Seven stocks fell for every five declining on U.S. exchanges, with volume at 4.9 billion shares, 23 percent below the three-month average.
“We’re at a pretty formidable technical resistance here,” Michael Strauss, who helps oversee about $26 billion of assets as the chief investment strategist at Commonfund in Wilton, Connecticut, said in a telephone interview. “The Bundesbank does have a hard problem with this,” he said, referring to the ECB’s bond-buying program. “Germany is being put in the position as being the lender of last resort in Europe.”
The S&P 500 last week capped its longest stretch of weekly gains since January 2011 as economic reports beat forecasts and Germany backed the ECB’s bond-buying plan. Trading volume and volatility have dropped this month as vacationing traders await policy clues from the Federal Reserve’s summit at the end of the month and an ECB meeting in September.
‘Stability Risks’
Government bond purchases “entail significant stability risks,” the Bundesbank said in its monthly report today. The ECB’s governing council may decide at its next gathering to set yield limits on each country’s debt, Spiegel magazine reported yesterday, without saying where it got the information. The ECB said the council has not discussed any plan to target the bond yields and that “it is absolutely misleading to report on decisions,” a bank spokesman said in an e-mailed statement.
Reports in the U.S. this week will show that combined purchases of new and existing houses increased to a 4.89 million annual rate in July from a 4.72 million pace in June, according to the median forecasts in surveys of economists before releases from the National Association of Realtors on Aug. 22 and the Commerce Department the next day. Bookings for long-lasting goods may have climbed the most this year, a release from the Commerce Department will show Aug. 24, according to the median estimate.
Jackson Hole
The Fed will on Aug. 22 release minutes from the Aug. 1 meeting of the Federal Open Market Committee, when policy makers declined to initiate a third round of monetary stimulus, a policy known as quantitative easing. The S&P 500 has rallied 11 percent since June 1 on speculation the central bank may signal more easing at the Kansas City Fed’s annual conference on Aug. 30 to Sept. 1 in Jackson Hole, Wyoming.
The 13 percent rally in the S&P 500 this year through Aug. 17 has lifted the gauge to its highest level ever compared with strategists’ forecasts, a sign that the best may be over for U.S. equities in 2012.
Shares have climbed 2.1 percent above the average projection of 1,389 from 13 firms from Morgan Stanley to JPMorgan tracked by Bloomberg. That’s the biggest premium on record for this time of year, according to data going back to 1999. Estimates by strategists in August have come true for the last three years, with the S&P 500 rising 11 percent on average through December, the data show.
‘Core Fundamentals’
“The core fundamentals are not really a reason to be long stocks,” said Barry Knapp, the New York-based head of U.S. equity strategy at Barclays Plc, in an interview on Bloomberg Television’s “In the Loop” with Deirdre Bolton. “Core fundamentals, earnings and revenue growth have deteriorated to a great extent.”
Phone and consumer discretionary companies posted the biggest declines out of 10 groups in the S&P 500, falling more than 0.5 percent.
Best Buy erased 10 percent for the biggest decline in the S&P 500 to $18.16. The retailer’s board proposed that founder Richard Schulze, beginning in January, be allowed to take his buyout offer to shareholders, should the board decide to reject any definitive proposal to acquire shares. Schulze didn’t accept the proposal, according to Best Buy.
Lowe’s Tumbles
Lowe’s Cos. tumbled 5.8 percent to $26.26. The second- largest U.S. home-improvement retailer reported second-quarter earnings that trailed analysts’ estimates as comparable-store sales fell. Adjusted earnings per share were 65 cents. Analysts had projected 70 cents. The retailer cut its full-year profit forecast to $1.64 a share from a projection of $1.83 a share in May.
Waste Management Inc. (WM) decreased 3 percent to $34.60 after Barron’s reported the trash handler may be poised to fall as much as 15 percent because of operating performance. Garbage volume has been little changed to down for years because of conservation, recycling and slow industrial growth, Barron’s said.
Corinthian Colleges Inc. (COCO) slipped 1.2 percent to $2.42. The for-profit college operator forecast revenue in the first quarter will be no more than $405 million, missing the average analyst estimate of $406.4 million.
Financial stocks rose 0.3 percent after dropping as much as 0.3 percent earlier. Bank of America, the second-largest U.S. bank by assets, climbed 1.9 percent to $8.15. JPMorgan, the biggest bank in the nation by assets, added 1.1 percent to $37.37.
Apple Soars
Technology stocks increased 0.3 percent. Hewlett-Packard Co. soared 2.9 percent to $20.09 for the biggest gain in the Dow.
Apple, the world’s most valuable company, advanced 2.6 percent to $665.15. The company’s market value reached $623.52 billion, higher than Microsoft Corp.’s record of $620.6 billion, according to Howard Silverblatt, senior index analyst at S&P, in a note today. The iPhone and iPad maker surpassed $600 billion in market value last week on speculation that production has started on a smaller version of the iPad tablet as well as a new television product.
Facebook Inc. (FB), the operator of the world’s largest social- networking service, jumped 5 percent to $20.01 after falling last week to a record low that was close to half the stock’s initial public offering price of $38 in May.
Health-care stocks added 0.3 percent as a group. Coventry Health Care Inc. (CVH) surged 20 percent to $42.04. Aetna Inc. (AET), a health insurer, will pay $42.08 a share for the medical-care provider in cash and stock, the companies said in a statement today. Aetna’s shares climbed 5.6 percent to $40.18.
To contact the reporter on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net
To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net
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Banks Use $1.77 Trillion to Double Treasury Purchases
By Cordell Eddings and Daniel Kruger - Aug 21, 2012 1:43 AM GMT+0700
Faced with a slowing U.S. economy, unemployment above 8 percent for more than three years and regulations forcing them to hold more and higher-quality assets, banks are lending at below pre-recession levels. The bond purchases help explain why even after rising this month, Treasury 10-year note rates are about half the 3.5 percent median forecast of 43 economists in a Bloomberg survey a year ago.
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The gap between U.S. bank deposits and loans is growing at the fastest pace in two years, providing lenders with more funds to buy bonds and temper the biggest sell-off in Treasuries since 2010.
As deposits increased 3.3 percent to $8.88 trillion in the two months ended July 31, business lending rose 0.7 percent to $7.11 trillion, Federal Reserve data show. The record gap of $1.77 trillion has expanded 15 percent since May, the biggest similar-period gain since July, 2010. Banks have already bought $136.4 billion in Treasury and government agency debt this year, more than double the $62.6 billion in all of 2011, pushing their holdings to an all-time high of $1.84 trillion.
A statue of the Albert Gallatin, the 4th Secretary of the Treasury, from the north patio of the U.S. Treasury Building. Photographer: Pablo Martinez Monsivais/AP Photo
A flag waves over the U.S. Treasury building in Washington. Photographer: Chip Somodevilla/Getty Images
“Bank deposits continue to explode and in turn they continue to buy Treasuries as the economy loses momentum, inflation is trending down, Europe continues to hang over our heads and political uncertainty reigns” said Michael Mata, a money manager in Atlanta at ING Investment Management Americas, which oversees about $160 billion. “There is no reason for interest rates to climb in any meaningful way any time soon.”
Borrowing Rises
While the gap has narrowed to $1.75 trillion as of Aug. 8 as lending of $7.12 trillion trailed $8.87 trillion in deposits, the gap is more than 17 times the $100 billion average in the decade before credit markets seized up, Fed data show.
Commercial and industrial lending reached a peak of $1.61 trillion in October 2008, a month after the bankruptcy of Lehman Brothers Holdings Inc. As the credit crisis deepened, loans tumbled to $1.2 trillion two years later, before recovering to $1.46 trillion Aug. 1.
The recent rise isn’t keeping up with record bank deposits as savings of U.S. households have risen to 4.4 percent of incomes as of June from 1.7 percent in 2007, the data show.
“Every bank is looking for a way to increase their yield,” said Mike Pearce, president of Bank of The West in Grapevine, Texas, whose company has been purchasing government securities after deposits grew faster than loans in 2010 and 2011. Instead of earning the Federal Funds rate of zero to 0.25 percent on the deposits, its bond holdings are yielding about 3.25 percent, he said.
Seeking Safety
Bank Treasury holdings reached $500 billion, the highest since June 2011, even with interest rates minus inflation for benchmark 10-year notes of 0.38 percent, compared to the average of 1.26 percent over the past decade.
Yields on 10-year Treasury notes rose 15 basis points, or 0.15 percentage point, last week to 1.81 percent. The price of the 1.625 percent security maturing in August 2022 declined 1 12/32, or $13.75 per $1,000 face value, or 98 9/32. The yield was little changed to 1.81 percent today.
They increased from a record low 1.379 percent on July 25 as investors became more optimistic about the economy. The U.S. added 163,000 jobs last month, a government report showed Aug. 3, more than the 100,000 projected by analysts. Sales at U.S. retailers increased 0.8 percent, more than the 0.3 percent forecast and following a 0.5 percent slide in June, Commerce Department data released Aug. 14 showed.
Rate Forecast
The benchmark notes will yield 1.60 percent by the end of September, below June’s projection of 1.90 percent, median estimates in separate Bloomberg surveys show. The year-end forecast fell to 1.65 percent from 2.1 percent.
Banks may be forced into more risky assets and lending practices if yields continue to hover about record low levels, said David Hendler, an analyst at financial research firm CreditSights Inc. in New York. Their net interest margin, a measure of lending profitability, has declined to 3.52 percent, the lowest since 2009, according to FDIC data.
“It doesn’t pay to be aggressive right now if you are a bank, but continuing to buy bonds near these levels is not sustainable in the long run,” Hendler said in an Aug. 14 telephone interview.
The Federal Reserve said in its quarterly survey of senior loan officers, released Aug. 6, that “domestic banks, on balance, continued to report having eased their lending standards across most loan types over the past three months.” Lending standards for large and medium-sized firms loosened, while those for small business were little changed for the fourth consecutive period.
Recession Legacy
Wall Street’s five biggest banks are off to their worst start in four years. JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley had combined first-half revenue of $161 billion, down 4.5 percent from 2011 and the lowest since $135 billion in 2008. The firms blamed the decline on low interest rates and a drop in trading and deal-making.
Low government bond yields are a legacy of the credit crisis that caused more than $2 trillion in write downs and losses at global financial institutions, according to data compiled by Bloomberg.
After cutting its target rate for overnight loans between banks in 2008 to a range of zero to 0.25 percent, the Fed under Chairman Ben S. Bernanke bought $2.3 trillion of Treasury and mortgage-related debt to reduce market interest rates and stimulate the economy.
The central bank owned $1.66 trillion of Treasuries as of August, ahead of China’s $1.16 trillion.
Extra Deposits
Investors are more willing to accept low yields “when you have large demand from the Fed as well as natural demand from banks,” said Matthew Duch, a fixed-income money manager at Calvert Investments, which oversees more than $12 billion in assets. “Are bonds where banks want to be right now? No, but given the uncertainty over regulation, the economy and still weak loan demand in the market it’s the best of lots of bad options,” he said.
Banks have “very conservative” balance sheets, JPMorgan Chief Executive Officer Jamie Dimon said in a July 13 conference call with analysts. The bank lent out $700 billion of its $1.1 trillion in deposits in the second quarter. “That would generally be considered totally conservative,” Dimon said.
JPMorgan increased the Treasury and government agencies portion of their available-for-sale credit portfolio to $11.743 billion as of June 30, from $8.351 billion at the start of the year, according to a filing with the Securities and Exchange Commission on Aug. 9.
Added Incentive
“We get a lot of deposits in,” he said. “The extra deposits of $423 billion, plus equity, plus some other net liabilities, give us $522 billion that’s not being lent out that we have to invest.”
The global supply of the highest-quality securities, as measured by ratings companies, is poised to fall by as much as $4 trillion. Reforms such as the Dodd-Frank financial-overhaul law and global regulations set by the Bank for International Settlements require institutions to hold more top-graded debt.
Lenders have an added incentive to buy Treasuries after the Basel Committee on Banking Supervision proposed rules in 2011 that banks increase available capital to bolster the cushion against potential losses and better measure and control their risk. Treasuries’ safety and liquidity makes them suitable capital under regulations designed to prevent a repeat of the global financial crisis.
Wrong Direction
Loans are being damped by the slow recovery. Gross domestic product expanded at a 1.5 percent annual rate in the second quarter after a revised 2 percent gain in the prior three months, below the average of 2.6 percent since 1982, the Commerce Department said on July 27.
The share of U.S. households viewing the economy as heading in the wrong direction rose to 45 percent in August, the highest since November, from 36 percent in July, the Bloomberg Consumer Comfort survey showed today. The monthly expectations gauge dropped to minus 22 from minus 11. The weekly Bloomberg Consumer Comfort Index fell to minus 44.4 in the period ended Aug. 12, the lowest since January, from minus 41.9.
Household purchases, which account for about 70 percent of GDP, grew at the slowest pace in a year, according to the commerce department’s report on GDP.
Stimulus Pledge
Fed policy makers said Aug 1 they would provide more monetary stimulus “as needed.”
“There’s all sorts of good long-term developments that are occurring on household balance sheets, but you sense the Fed would like them to be not quite as thrifty and instead put a little more money to work,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “But that’s not going to happen without salary incomes rising.”
That explains the gap between deposits and lending, said Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City who advises community banks on more than $30 billion of investments.
“It’s a function of inherently weak demand for loans and that relates to inherently weak demand in the economy,” he said. “Consumers, households, businesses: they’re paying down debt, they’re saving money, they’re not borrowing. They don’t have an appetite.”
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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Tuesday, July 10, 2012
Dealers Declining Bernanke Twist Invitation
By Susanne Walker and Cordell Eddings - Jul 10, 2012 2:10 AM GMT+0700
While the amount of marketable U.S. government debt outstanding has risen to more than $10.5 trillion, Treasuries are proving scarce in a world where five nations in Europe have sought bailouts, the U.S. economy is slowing again and China is weakening. That means interest rates on everything from mortgages to corporate bonds should remain at about record lows.
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Wall Street banks are increasingly choosing to hoard their U.S. bonds rather than sell them to the Federal Reserve as speculation grows that a slowing economy and global financial turmoil will only make them more dear.
The world’s biggest bond dealers offered an average of $7.2 billion in Treasuries a day to the central bank in June, down 40.5 percent from a high of $12.1 billion in October, data compiled by Bloomberg show. The amount tendered has fallen even as the dealers almost doubled their holdings of the securities.
Federal Reserve Chairman Ben Bernanke. Photographer: James Berglie/Zuma Press
Feb. 22 (Bloomberg) -- Leon Cooperman, chief executive officer of Omega Advisors Inc., talks about investment strategy and President Barack Obama's policies. Cooperman spoke with Bloomberg's Erik Schatzker yesterday. (Source: Bloomberg)
The Marriner S. Eccles Federal Reserve building in Washington. Photographer: Andrew Harrer/Bloomberg
Christine Lagarde, managing director of the International Monetary Fund, said “the global growth outlook will be somewhat less than we anticipated just three months ago.” Photographer: Tomohiro Ohsumi/Bloomberg
“People are not willing to sell Treasuries,” said Thanos Bardas, a managing director in Chicago at Neuberger Berman LLC, which oversees about $89 billion in fixed-income assets, in a June 28 telephone interview. “The data in the U.S. doesn’t look as good. The labor market has lost momentum. There will be more upside left in Treasuries despite the low levels of rates.”
Concern that the economy is losing momentum came July 6, when a Labor Department report showed American employers added fewer workers to payrolls in June than forecast and the jobless rate stayed at 8.2 percent.
IMF’s Warning
The International Monetary Fund will reduce its 3.5 percent estimate for global growth this year on weakness in investment, jobs and manufacturing in Europe, the U.S., Brazil, India and China, Managing Director Christine Lagarde said.
“The global growth outlook will be somewhat less than we anticipated just three months ago,” Lagarde said earlier in a July 6 speech in Tokyo. “And even that lower projection will depend on the right policy actions being taken.”
Treasuries rose last week, pushing 10-year yields down 10 basis points, or 0.1 percentage point, to 1.55 percent, according to Bloomberg Bond Trader prices. The benchmark 1.75 percent note rose 28/32, or $8.75 per $1,000 face value, to 101 26/32 in New York.
The 10-year note yield dropped four basis points today to 1.51 percent at 2:44 p.m. New York time, the lowest in more than a month.
The yield has fallen from this year’s high of 2.4 percent on March 20, and has averaged 3.8 percent the past decade. U.S. debt has returned 2.3 percent this year, including reinvested interest, led by a 6.3 percent gain in 30-year bonds.
‘Crowding Out’
Treasuries trail the Standard & Poor’s 500 index (CRY) of stocks, which has returned 9 percent with reinvested dividends, while beating the 6 percent loss posted by the Thomson Reuters/Jefferies CRB Index of raw materials.
“There is a reach for quality in the market,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The Fed and investors are elbowing each other out of the way, and that process is feeding on itself. We are seeing a crowding out effect as there remains a ton of demand for safe assets.”
The Fed under Chairman Ben S. Bernanke bought $2.3 trillion of Treasury and mortgage-related debt to stimulate the economy. It decided in June to extend a policy known as Operation Twist where it sells short-term securities and uses the proceeds to buy longer-term debt to $667 billion from $400 billion.
Primary dealers submitted offers equaling 2.32 times the $1.0804 billion of securities bought by the Fed today, down from an average ratio of 2.93 since the central bank began the program in October.
Bond Stockpiles
At the same time the Fed is trying to obtain Treasuries, the 21 primary dealers have boosted their holdings to $109.2 billion from a net short position as recently as September, according to the central bank. Stockpiles touched a record $136.4 billion on June 6.
As a result the central bank is paying more for less. Dealers pared their offers to sell in each month since March, when they submitted 3.16 times the securities bought by the Fed. The ratio fell to 2.92 in April, 2.82 in May and 2.48 in June.
At the end of May, the Fed was paying 31 cents per $1,000 face amount above intra-day market prices, compared with about 94 cents below in March, according to primary dealer Credit Suisse Group AG. That translates into an extra $312,500 on the purchase of $1 billion of eight to 10-year notes.
Most Expensive
By some measures Treasuries are about the most expensive levels ever. The term premium, a model created by economists at the Fed, touched negative 0.947 percent July 6, surpassing the most expensive level ever of negative 0.94 percent set on June 1. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
“The Fed is taking a fair amount out of the market,” Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut, said in an interview July 3. “With the amount that they are holding, as it gets closer to the end of Twist, it will be difficult to argue that that won’t distort the overall ability for those securities to trade without seeing some type of impact.”
Top-rated securities are in short supply worldwide. The U.S., Germany, Switzerland, Sweden and the U.K. are the only Group-of-10 nations with credit-default swaps trading at less than 100 basis points, the cheapest to insure against default, according to Bloomberg data.
New debt for sale is being snapped up. Bidders offered a record $3.16 for each dollar of the $1.075 trillion of notes and bonds auctioned by the Treasury Department in the first half of the year, a record high, even as yields on 10-year notes fell to all-time lows of 1.4387 percent on June 1.
Falling Yields
Average yields on investment and speculative-grade corporate bonds declined to 4.04 percent last week from about 10.5 percent in early 2009, Bank of America Merrill Lynch indexes show. The average rate for a 30-year mortgage dropped to 3.62 percent on July 5 from more than 5.5 percent in 2009, according to Freddie Mac.
Investors don’t see yields moving higher anytime soon. A measure of market expectations of interest rate changes, the Merrill Option Volatility Estimate, or MOVE, index fell to 70.2 basis points on June 28 after peaking at 264.6 basis points in October 2008. It touched 56.7 on May 7, the lowest since 2007.
‘Most Dangerous’
Demand for bonds has surprised even the most successful investors. Warren Buffett the billionaire chairman of Berkshire Hathaway Inc., in February said in his annual shareholder letter that debt securities and other holdings tied to currencies “are among the most dangerous of assets.” Leon Cooperman, founder of equity hedge fund Omega Advisors Inc., also said in February in a Bloomberg Television interview that bonds will be the worst place for investors to put their money for the next three years.
Many investors failed to anticipate the sluggish recovery. President Barack Obama said the creation of 80,000 jobs in June was “a step in the right direction” though the economy has to grow “even faster.” Republican presidential candidate Mitt Romney called it “another kick in the gut.”
Amid fears of a global slowdown, policy makers at major central banks boosted stimulus measures on July 5 to strengthen their economies.
The European Central Bank lowered its refinancing benchmark to a record low 0.75 percent, while the People’s Bank of China reduced its one-year rate for lending by 0.31 percentage point. The Bank of England raised its asset purchase program by 50 billion pounds ($78 billion), to 375 billion pounds.
Biggest Owner
After cutting its target rate for overnight loans between banks in 2008 to a range of zero to 0.25 percent, the Fed has focused on buying bonds to inject cash into the economy. This has left the central bank as the biggest owner of Treasuries, with $1.67 trillion as of June 27, ahead of China’s $1.15 trillion at the end of the first quarter.
“If the Fed is going to keep this up they will be forced to buy more expensive issues,” said Michael Cloherty, head of U.S. interest rate strategy at RBC Capital Markets in New York, a primary dealer, in a telephone interview July 3. “If you think the Fed is going to have to buy some issues very aggressively it makes it difficult to be short, so you are very reluctant to sell a large block of that to anyone.”
To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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Patriot Coal Files for Bankruptcy Protection in New York
By Tiffany Kary and Dawn McCarty - Jul 10, 2012 5:03 AM GMT+0700
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Patriot Coal Corp. (PCX) filed for bankruptcy after milder winters and a shift to natural gas sent coal demand to a 24-year low.
The company’s Chapter 11 petition listed $3.57 billion in assets and $3.07 billion in debts. The filing in U.S. Bankruptcy Court in Manhattan said dozens of the company’s units would join in the filing.
July 9 (Bloomberg) -- Carol Massar reports Patriot Coal Corp. has filed for bankruptcy after milder winters and a shift to natural gas has sent coal demand to a 24-year low. She speaks on Bloomberg Television's "Taking Stock." (Source: Bloomberg)
U.S. coal use in the first quarter was the lowest for that period since 1988, according to the Energy Information Administration. Photographer: Gary Gardiner/Bloomberg
“The coal industry is undergoing a major transformation and Patriot’s existing capital structure prevents it from making the necessary adjustments to achieve long-term success,” Patriot Chief Executive Officer Irl F. Engelhardt said in a statement that cited lower thermal coal prices, canceled customer contracts and rising costs for environmental liabilities for increasing pressure on the company in recent months.
Patriot already has a loan to finance operations in bankruptcy and expects its mining operations and customer shipments to continue through the case, the company said in its statement. The $802 million loan, which still requires court approval, is through Citigroup Global Markets Inc., Barclays Bank Plc, and Merrill Lynch, Pierce, Fenner & Smith Incorporated as joint lead arrangers.
Pay, Benefits
The company will also seek court approval to pay employees and continue health care and other benefits, according to the statement.
Patriot has 13 active mining complexes in Appalachia and the Illinois Basin and controls an estimated 1.9 billion tons of coal reserves, according to its website. It sells thermal coal to electricity generators and metallurgical coal to steel and coke producers.
Wilmington Trust Company, and U.S. Bank National Association were among Patriot’s largest unsecured creditors, according to court papers. The filing listed BlackRock Inc., State Street Corporation and The Vanguard Group Inc. as entities that control 5 percent or more of the voting stock in the company.
Shares closed at 61 cents after falling from an intraday high of $2.09 today in New York Stock Exchange composite trading. They tumbled 73 percent this year through July 5.
The company’s $250 million in 8.25 percent notes due 2018 traded at 34 cents on the dollar as of 5:17 EST today, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Its $200 million in 3.25 percent notes due 2013 last traded at 26 cents on the dollar at 5:20 EST today.
Coal Use
U.S. coal use in the first quarter was the lowest for that period since 1988, according to the Energy Information Administration. Utilities have switched some power plants to cheaper natural gas as regulations restricting emissions make coal costlier to burn. Gas fell to a decade low in April amid a surplus of the fuel.
This year, Patriot has reduced thermal coal production by more than 4 million tons, trimmed costs and laid off 1,000 employees or contractors, according to a May 9 filing with the U.S. Securities and Exchange Commission.
Patriot has worked to refinance debt since at least May, when it said it hired Blackstone Group LP while meeting with lenders to complete loan and credit facilities. Also that month, Engelhardt took over as Patriot’s chief executive officer after Richard M. Whiting resigned.
Forecast Cut
The company postponed closing a $625 million, 9.5 percent five-year loan after saying May 14 that a key customer might default on a contract for coal that had fallen as much as $30 a ton below the original contracted price. The same day, the company cut a 2012 forecast for sales of steelmaking coal.
On June 1, Patriot filed a complaint in federal court in Charleston, West Virginia, alleging that Fort Meyers, Florida- based Keystone Industries LLC breached a contract to buy “hundreds of thousands of tons” of coal. Later that month, Principal Accounting Officer Christopher Knibb resigned and was replaced by Chief Financial Officer Mark Schroeder, according to filings with the SEC.
Patriot got 87 percent of its 2011 revenue from coal mined in the Central Appalachian region of the U.S., which includes Kentucky and West Virginia. Its operating costs in Appalachia were $71.06 a ton last year while the average price of Central Appalachian coal futures was $75.86.
The bankruptcy case is In re Patriot Coal Corp.; 12-bk- 12900; U.S. Bankruptcy Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Tiffany Kary in New York at tkary@bloomberg.net; Dawn McCarty in Wilmington, Delaware at dmccarty@bloomberg.net.
To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net
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Patriot Said to Get Funding Ahead of Possible Bankruptcy
By Beth Jinks, Krista Giovacco and Jeffrey McCracken - Jul 10, 2012 4:04 AM GMT+0700
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Patriot Coal Corp. (PCX), the U.S. fuel producer that has lost more than $7 billion in value, has lined up financing ahead of a bankruptcy filing that may come as soon as today, said two people with knowledge of the matter.
The so-called debtor-in-possession financing is being provided by Citigroup Inc., Barclays Plc and Bank of America Corp., said the people, who asked not to be identified as the process is private.
Patriot mining operations. Photographer: Douglas Graham/Roll Call via Getty Images
U.S. coal use in the first quarter was the lowest for that period since 1988, according to the Energy Information Administration. Photographer: Gary Gardiner/Bloomberg
Patriot is the biggest casualty so far of the slump in the U.S. coal industry, which has seen tens of millions of tons of production cutbacks this year. Patriot, which owns mines in Kentucky and West Virginia, this year idled some of its mines, reduced a 2012 forecast for sales of steelmaking coal, and warned of a potential default by a key customer.
Coal miners are struggling because of a combination of a warm winter, utilities switching some generating capacity to cheaper natural gas and regulatory moves to curb emissions from coal-burning power plants. U.S. coal use in the first quarter was the lowest for that period since 1988, according to the Energy Information Administration.
The miner’s shares fell 72 percent to 61 cents by 4:15 p.m. New York time. Spun off five years ago by Peabody Energy Corp. (BTU), Patriot has tumbled 93 percent this year. The company’s market value peaked at $7.5 billion in 2008.
Patriot’s $250 million of 8.25 percent notes due in April 2018 dropped 7.9 cents to 34.1 cents on the dollar as of 4:57 p.m., according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The bonds are yielding 36 percent, Trace data show.
Working on Loans
Patriot, Citigroup, Barclays and Bank of America didn’t immediately return phone calls seeking comment.
The St. Louis-based company said in May it hired Blackstone Group LP as it worked with lenders to arrange $625 million of loans and credit facilities to refinance other debt. A commitment letter from Citigroup, Barclays and Natixis expired July 6.
Chairman Irl Engelhardt took over as Patriot’s chief executive officer on May 29 after Richard M. Whiting resigned.
Patriot last month sued Keystone Industries LLC over claims it broke a purchase contract for “hundreds of thousands of tons” of coal.
To contact the reporters on this story: Beth Jinks in New York at bjinks1@bloomberg.net; Krista Giovacco in New York at kgiovacco1@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net
To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net; Jeffrey McCracken at jmccracken3@bloomberg.net; Faris Khan at fkhan33@bloomberg.net
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Boeing Said to Win $8.4 Billion United Order for 100 Jets
By Thomas Black, Mary Schlangenstein and Susanna Ray - Jul 10, 2012 4:15 AM GMT+0700
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Boeing Co. is set to win an order this week from United Continental Holdings Inc. (UAL) for 100 of the planemaker’s 737 jets in a transaction that may be valued at about $8.4 billion, people familiar with the matter said.
The accord includes options for as many as 100 more jets and will be announced July 12 in Chicago, where both companies are based, said two of the people, who asked not to be identified because details aren’t public. The order will include the upgraded 737 Max model, the people said.
The Boeing Co. 737 MAX 9. Source: Boeing Co. via Bloomberg
The Boeing Co. 737 MAX 8. Source: Boeing Co. via Bloomberg
A deal later this week would be a boost for Boeing as it promotes the Max at the Farnborough International Air Show outside London. The company wasn’t offering the jet at the June 2011 expo in Paris, where Airbus SAS routed Boeing with sales and commitments for its revamped single-aisle A320neo.
“It’s one of many positives for Boeing,” said Ray Neidl, a Maxim Group LLC analyst who covers Boeing and United. “We all knew for a long time the airlines were starving for a more fuel- efficient narrowbody. Now that one’s available in the next few years, airlines are falling over themselves to get them.”
Boeing opened the air show today by announcing a $7.2 billion order for 75 single-aisle 737 Max aircraft from Air Lease Corp. (AL), the first such purchase by a lessor. General Electric Co. (GE)’s jet-leasing unit also is poised to purchase 100 737s, people familiar with that transaction said.
Exclusive Supplier
United’s mix of Max jets and current 737s will determine the list value of its order. The 737-8, the top-selling existing model, retails for $84.4 million, and the Max 8, the equivalent new plane, is $95.5 million, according to Boeing’s website.
The order is United’s first since the 2010 merger creating the carrier from former United parent UAL Corp. and Continental Airlines Inc. Boeing was Continental’s exclusive plane supplier for two decades, and the accord deepens ties between the world’s largest airline and the biggest aerospace company.
United declined to comment, said Christen David, a spokeswoman. A Boeing spokesman, Tim Bader, said the company had no comment.
Boeing rose 0.5 percent to $74.03 at the close in New York. United fell 1.4 percent to $23.90, declining along with most carriers in the Bloomberg U.S. Airlines Index. (BUSAIRL)
United held talks over about six months on a possible mixed order of current and new-model 737s and A320s before opting to stay with Boeing, people familiar with those discussions said in April.
Planemaker Competition
The U.S. planemaker is trying to reclaim the top spot in commercial production lost to Airbus in 2003. Toulouse, France- based Airbus had record orders of 1,419 aircraft in 2011, while Boeing’s tally was 805. Airbus won 95 percent of narrow-body sales at the Paris show, and has said 2012 orders may fall by half as an initial flurry of A320neo purchases wanes.
United’s order will make it the last of the four biggest U.S. carriers to announce single-aisle jet purchases in less than a year.
Delta Air Lines Inc. agreed in August to acquire 100 737s, a month after AMR Corp.’s American Airlines split a record order for 460 jets between Boeing and Airbus. Southwest Airlines Co. agreed in December to buy 208 737s in an order that was the first for the Max.
Boeings make up about 78 percent of United’s mainline jets, with the rest made by Airbus. The 555-plane regional fleet is split about evenly between Bombardier Inc. (BBD/B) and Embraer SA. (EMBR3)
United Fleet
Narrow-body jets made up 78 percent, or 545 planes, of United’s 701 mainline planes, according to its latest annual report. Boeing 757-200s are the oldest of United’s single-aisle jets, with an average age of 18.2 years, followed by 737-500s that average 16.6 years old. Both models are out of production.
Separately, United said today it plans a special livery for the Boeing 787 Dreamliners it will begin receiving in September, with a gold line running along the fuselage. United, the first North American carrier to receive the composite-plastic plane, expects to start flying five of the jets this year.
The airline has firm orders for 50 Dreamliners with deliveries through 2019.
To contact the reporters on this story: Thomas Black in London at tblack@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Susanna Ray in Seattle at sray7@bloomberg.net
To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Benedikt Kammel at bkammel@bloomberg.net
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Alcoa Beats Estimates as Carmakers Buy More Aluminum
By Sonja Elmquist - Jul 10, 2012 4:10 AM GMT+0700
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Alcoa Inc. (AA), the largest U.S. aluminum producer, reported second-quarter earnings and revenue that beat analysts’ estimates after an increase in orders from the auto and aerospace industries.
The company had a net loss of $2 million, or break even on a per share basis, compared with net income of $322 million, or 28 cents, a year earlier, New York-based Alcoa said today in a statement. Profit excluding a charge related a proposed settlement of Aluminium Bahrain BSC (ALBH)’s lawsuit and other items was 6 cents a share, compared with the 5-cent average of 19 estimates compiled by Bloomberg. Sales fell 9.4 percent to $5.96 billion from $6.59 billion, exceeding the $5.81 billion average of 11 estimates.
Alcoa, whose customers include Ford Motor Co. and Toyota Motor Corp., is benefiting as car and truck makers are being compelled by regulations to produce lighter vehicles. The U.S. aluminum industry will ship 16 percent more aluminum to automakers in 2012 as car output climbs 11 percent, according to Lloyd O’Carroll, an analyst at Davenport & Co. in Richmond, Virginia. Aircraft manufacturers also face record backlogs as airlines hurry to refurbish aging fleets.
“In their downstream business and midstream business, those two pieces we are seeing margin expansion,” Brian Yu, a San Francisco-based analyst at Citigroup Inc. who recommends holding Alcoa’s shares, said in a July 6 interview. “It’s a sign that, yes, the company is doing some things right.”
Forecast Reaffirmed
Alcoa rose 0.2 percent to $8.78 as of 5:03 p.m. in New York after the close of regular trading. The company, which is typically the first company in the Dow Jones Industrial Average to report quarterly results, has fallen 47 percent in the past year, the worst performance after Hewlett-Packard Co. (HPQ)
The aluminum producer also reaffirmed its forecast that demand for the metal will rise 7 percent this year, and that there will be a global supply deficit.
Global aluminum production rose 4.1 percent to 14.9 million tons in the first four months of 2012, beating usage by 623,703 tons, according to data compiled by Bloomberg. That surplus has weighed on prices. Aluminum for delivery in three months on the London Metal Exchange averaged $2,019 a metric ton in the quarter, 23 percent less than a year earlier.
“Although aluminum prices are down, the fundamentals of the aluminum market remain sound with strong demand and tight supply,” Alcoa Chief Executive Officer Klaus Kleinfeld said in the statement. “Alcoa is successfully capitalizing on accelerating demand in high-growth end markets such as aerospace and automotive.”
Price Decline
Alcoa’s earnings haven’t fully recovered since commodity prices tumbled after Lehman Brothers Holdings Inc. filed for bankruptcy at the height of the financial crisis in September 2008.
The company’s competitors have also suffered from the decline in aluminum prices. Russia’s United Co. Rusal, the largest producer, saw first-quarter profit slump to $74 million from a restated $451 million a year earlier. The company said in May it’s studying cutting as much as 600,000 tons of smelting output.
“The pilot light has kind of gone out on aluminum prices globally,” Jorge Beristain, a Greenwich, Connecticut-based analyst with Deutsche Bank AG, said by telephone today. “said. ‘‘Not a quarter to write home about. It’s not a turnaround-type quarter.’’
Norway’s Norsk Hydro ASA (NHY), the fifth-biggest producer, also posted a 90 percent decline in first-quarter earnings and said last month it would shut 120,000 tons of capacity in Australia because of weaker demand and oversupply.
Aluminum prices will average $2,188 a ton in the third quarter, according to the average of 21 analysts’ estimates compiled by Bloomberg. The fourth-quarter price will be $2,275, the data show.
To contact the reporter on this story: Sonja Elmquist in New York at selmquist1@bloomberg.net
To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net
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Goldman’s Hawker Beechcraft Accepts $1.79 Billion Offer
By Susanna Ray and Thomas Black - Jul 10, 2012 4:36 AM GMT+0700
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Hawker Beechcraft Inc., the business- jet maker owned by Goldman Sachs Group Inc. (GS) and Onex Corp. (OCX), may draw more bids in an auction after agreeing to sell itself to Superior Aviation Beijing Co. for $1.79 billion.
Superior will make payments over the next six weeks to help keep bankrupt Hawker in business until the deal closes, according to a statement today from the companies. The sale, which doesn’t include the planemaker’s defense business, remains subject to U.S. Bankruptcy Court approval and the auction process.
Hawker traces its history partly to Walter and Olive Beech, who started Beech Aircraft Corp. during the Great Depression in 1932, according to the company’s website. Photographer: Larry W. Smith/Bloomberg
Hawker Beechcraft sought bankruptcy protection in May after the company and other private-jet manufacturers struggled with lower demand following the recession. The planemaker’s debt included a term loan and notes used for the portion of its 2007 takeover price of $3.3 billion that wasn’t covered by $1 billion cash from buyers Goldman Sachs and Onex.
“Superior has had a long-standing interest in the commercial aircraft business of Hawker Beechcraft, having first approached the company several years ago” about a strategic partnership, said Chief Executive Officer Steve Miller. The merger would provide more “access to the Chinese business and general aviation marketplace, which is forecast to grow more than 10 percent a year for the next 10 to 15 years.”
Perella Weinberg
Hawker retained Perella Weinberg Partners LP as a financial adviser in December and hired Miller, a turnaround specialist, in February. Before its May 3 bankruptcy filing, the company and Perella Weinberg identified 35 potential buyers from strategic purchasers to private-equity firms, according to a court filing.
Net losses totaling more than $900 million in two years due to shrinking plane sales and declining U.S. military contracts prompted Hawker’s bankruptcy. The company received eight bids from mid-May through mid-June, according to the filing.
Hawker’s aircraft include the Hawker 4000 business jet and the Beechcraft King Air propjet. The company competes with planemakers including Textron Inc. (TXT)’s Cessna Aircraft Co., Embraer SA (EMBR3), Gulfstream Aerospace Corp. and Bombardier Inc. (BBD/B)
Textron is interested in buying Hawker for its propeller- driven business planes and military training aircraft, Chief Executive Scott Donnelly said in an interview today at the Farnborough air show near London before Superior’s announcement.
Textron Interest
Donnelly said Textron sees the most value in the Beechcraft King Air planes and the T-6, known as the trainer because the military uses the planes as a training aircraft. The Hawker 4000 and 900, which are jet planes that carry about 10 passengers, are struggling against the competition, he said.
“There are problematic parts and there are good parts. For the right number, you could manage that and we could make it a win for our shareholders,” Donnelly said. “But there’s no reason for a company like ours to overpay for that asset.”
Mahindra & Mahindra Ltd. (MM), India’s biggest maker of utility vehicles, also was considering bidding for the planemaker, a person with knowledge of the matter said July 5. Mahindra also builds turboprop aircraft, as does Hawker.
The Indian company has majority stakes in component maker Aerostaff Australia and Gippsland Aeronautics, and has been in talks with India’s National Aerospace Laboratories on possibly partnering for a regional jet.
Attractive Bid
Bill Boisture, chairman of Hawker Beechcraft, said the decision to move forward with the Chinese bidder was “based on two key factors: the bid for the company was the most attractive we received during the strategic review process and the going- forward plan offered the most continuity for our business.”
Superior is committed to maintaining Hawker Beechcraft’s strong presence in the United States as well as its employee base and management team, Boisture said.
Hawker traces its history partly to Walter and Olive Beech, who started Beech Aircraft Corp. during the Great Depression in 1932, according to the company’s website. With designer Ted Wells, they built the Beech Model 17, a biplane for business executives that sold for about $15,000, according to the U.S. Centennial of Flight Commission.
A reorganization plan that Hawker filed June 30 would give control of the company to secured creditors holding debt valued at $921.6 million, canceling other interests in the company. New York-based Goldman Sachs and Toronto-based Onex each owned 49 percent of Hawker Beechcraft stock, while former managers and directors held the remainder.
The company said it would borrow an unspecified amount to exit court protection and repay a $400 million loan that financed operations while in bankruptcy.
To contact the reporter on this story: Susanna Ray in Seattle at sray7@bloomberg.net
To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net
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U.S. Corn Growers Farming in Hell as Midwest Heat Spreads
By Jeff Wilson - Jul 10, 2012 3:19 AM GMT+0700
Tumbling yields will combine with the greatest-ever global demand to leave U.S. stockpiles on Sept. 1, 2013, at 1.216 billion bushels (30.89 million metric tons), according to the average of 31 analyst estimates compiled by Bloomberg. That’s 35 percent below the U.S. Department of Agriculture’s June 12 forecast, implying the biggest reduction since at least 1973. The USDA updates its harvest and inventory estimates July 11.
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The worst U.S. drought since Ronald Reagan was president is withering the world’s largest corn crop, and the speed of the damage may spur the government to make a record cut in its July estimate for domestic inventories.
Corn in Belleville, Illinois. Photographer: Erik M. Lunsford/St. Louis Post-Dispatch/MCT/Zuma Press
Dried corn plants in Idaville, Indiana. Photographer: Daniel Acker/Bloomberg
Farmer Andy Stoll looks over drought damaged field corn near his home in Idaville, Indiana, on July 6, 2012. Photographer: Daniel Acker/Bloomberg
Crops on July 1 were in the worst condition since 1988, and a Midwest heat wave last week set or tied 1,067 temperature records, government data show. Rabobank International said June 28 that corn may rise 15 percent more by December to near a record $8 a bushel. Photographer: Daniel Acker/Bloomberg
July 9 (Bloomberg) -- Jane King summarizes the top stories this morning on the Bloomberg Business Report. (Source: Bloomberg)
July 9 (Bloomberg) -- Richard Clarida, global strategic adviser at Pacific Investment Management Co., talks about investment strategy and the European sovereign-debt crisis. Clarida speaks with Adam Johnson and Alix Steele on Bloomberg Television’s “Lunch Money.” (Source: Bloomberg)
Crops on July 1 were in the worst condition since 1988, and a Midwest heat wave last week set or tied 1,067 temperature records, government data show. Prices surged 37 percent in three weeks, and Rabobank International said June 28 that corn may rise 9.9 percent more by December to near a record $8 a bushel. The gain is threatening to boost food costs the United Nations says fell 15 percent from a record in February 2011 and feed prices for meat producers including Smithfield Foods Inc. (SFD)
“The drought is much worse than last year and approaching the 1988 disaster,” said John Cory, the chief executive officer of Rochester, Indiana-based grain processor Prairie Mills Products LLC. “There are crops that won’t make it. The dairy and livestock industries are going to get hit very hard. People are just beginning to realize the depth of the problem.”
Top Commodities
Corn rallied 18 percent in the month through July 6 on the Chicago Board of Trade to $6.93, trailing only wheat among 24 commodities tracked by the Standard & Poor’s GSCI Spot Index, which rose 2 percent. The MSCI All-Country World Index of equities advanced 4 percent, and the dollar gained 1.3 percent against a basket of six currencies in the period. Treasuries returned 0.5 percent, a Bank of America Corp. index shows. Corn for December delivery in Chicago extended the rally today, jumping 5.3 percent to settle at $7.30.
About 53 percent of the Midwest, where farmers harvested 60 percent of last year’s U.S. crop, had moderate to extreme drought conditions as of July 3, the highest since the government-funded U.S. Drought Monitor in Lincoln, Nebraska, began tracking the data in 2000. In the seven days ended July 6, temperatures in the region averaged as much as 15 degrees Fahrenheit above normal. Soil moisture in Illinois, Indiana, Ohio, Missouri and Kentucky is so low that it ranks in the 10th percentile among all other years since 1895.
Fields are parched just as corn plants began to pollinate, a critical period for determining kernel development and final yields. About 48 percent of the crop in the U.S., the world’s largest grower and exporter, was in good or excellent condition as of July 1, the lowest for that date since 1988 and down from 77 percent on May 18, government data show.
Yield Losses
The USDA may cut its production forecast by 8.5 percent, the biggest July reduction since a drought in 1988 led the government to cut its estimate by 29 percent, a separate Bloomberg survey of 14 analysts showed. Farmers probably will collect 13.534 billion bushels, compared with the USDA’s June forecast for a record 14.79 billion, based on the average of estimates in the survey.
Goldman Sachs Group Inc. said July 2 that yields will reach 153.5 bushels an acre, below the USDA estimate for an all-time high of 166.
“Corn yields were falling five bushels a day during the past week” in the driest parts of the Midwest, said Fred Below, a plant biologist at the University of Illinois in Urbana. “You couldn’t choreograph worse weather conditions for pollination. It’s like farming in hell.”
Record Crop
Even with the drought, U.S. production in 2012 is expected to rise 9.5 percent from last year to a record after farmers sowed the most acres since 1937, the survey showed. Higher output would help boost inventories before next year’s harvest, up from what analysts said will be a 16-year low on Sept. 1 of 837 million bushels.
Futures fell 2.2 percent on July 6, the most in two weeks, after the USDA reported a 90 percent drop in export sales in the week ended June 28. U.S. refiners curbed output of corn-based ethanol last week to the lowest since September as gasoline demand weakened, government data show.
Corn’s rally also may stall if Europe’s widening debt crisis and a faltering global economy erode record demand for the grain. The International Monetary Fund will reduce its estimate for growth this year because of weakness in investment, employment and manufacturing in Europe, the U.S., Brazil, India and China, Managing Director Christine Lagarde said July 6.
“The shrinking global economy is the elephant in the room that no one wants to discuss as long as U.S. crops are under siege,” said Dale Durcholz, the senior market analyst for Bloomington, Illinois-based AgriVisor LLC. “Corn demand at $5 is much more robust than when it costs $7.”
Changing Expectations
Corn tumbled into a bear market in September and kept dropping as farmers planted more crops. Robert Manly, the chief financial officer at Smithfield Foods, the largest U.S. pork producer, told analysts on a June 14 conference call that hog- raising costs would “begin to decline starting in the fall.” Corn has surged 41 percent since then, reaching a nine-month high today.
U.S. corn production may drop to 11 billion bushels, the smallest crop in seven years, because the hot, dry weather killed the pollen and rains now may be too late to reverse the damage, according to Cory, the Indiana mill owner and a former investment banker. Prices may reach $9 before demand slows, he said.
World corn use rose to a record every year since 1997 as the expanding economy boosted incomes and the consumption of meat and dairy products from animals raised on the grain. The USDA projected last month a 6.4 percent increase in global demand to 923.39 million tons in the year that starts Sept. 1, the biggest gain in six years. More U.S. output went to ethanol production than livestock feed in 2011 for the first time ever.
Vulnerable Period
While the U.S. harvest is about two months away, the drought reached plants at the most vulnerable period in their growing cycle, said Nick Higgins, a London-based analyst at Rabobank, predicting a 13.488 billion-bushel harvest.
Based on current soil moisture and June temperatures, the drought is probably the worst since 1988, said Joel Widenor, a vice president at the Commodity Weather Group in Bethesda, Maryland. The private forecaster said July 5 that corn output this year will be 13.52 billion bushels, and that hot, dry weather in the next two weeks may reduce yields further.
The drought may spark a rebound in global food prices this month through October, halting a slide that sent costs in June to the lowest level in 21 months, Abdolreza Abbassian, an economist in Rome at the United Nations’ Food & Agriculture Organization, said July 5.
Base Ingredient
“Corn is key because of its widespread use as a base ingredient in so many foods and for its use in feed for livestock,” said Stanley Crouch, who helps oversee $2 billion of assets as chief investment officer at New York-based Aegis Capital Corp. “We are at the tipping point.”
In May, retail prices of boneless hams, ground beef and cheese in the U.S. were close to all-time highs set earlier this year, while chicken breast jumped more than 12 percent during the first five months of the year, government data show.
“When people look at rising prices for hamburger, butter, eggs and other protein sources from higher corn costs, that’s when more money ends up in the food basket,” said Minneapolis- based Michael Swanson, a senior agricultural economist at Wells Fargo & Co., the biggest U.S. farm lender. “We were hoping for a break, and we aren’t going to get it.”
To contact the reporter on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net
To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net
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Monday, July 9, 2012
Japan’s Current-Account Surplus Slides as Orders Point to Slump
By Keiko Ujikane - Jul 9, 2012 7:40 AM GMT+0700
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Japan’s current-account surplus was the smallest in May since at least 1996 and machinery orders fell the most in more than five years, adding to signs a slump in demand is threatening the nation’s rebound.
The excess in the widest measure of the nation’s trade shrank 62.6 percent from a year earlier to 215.1 billion yen ($2.7 billion), the Ministry of Finance said in Tokyo today. The median estimate of 24 economists surveyed by Bloomberg News was for a surplus of 493.1 billion yen. Machinery orders, an indicator of capital spending, fell 14.8 percent in May from the previous month, the Cabinet Office said, the biggest drop since comparable data were made available in 2005.
Yoshihiko Noda, Japan's prime minister, gave approval for a restart of reactors at the Ohi nuclear plant. Photographer: Haruyoshi Yamaguchi/Bloomberg
The Bank of Japan raised its economic evaluation of all regions for the first time in more than two years. Photographer: Tomohiro Ohsumi/Bloomberg
Japan’s trade position has weakened due to growing energy imports after last year’s earthquake and nuclear meltdown and also the yen’s gain of 4.9 percent against the dollar since mid- March. Prime Minister Yoshihiko Noda gave approval for a restart of reactors at the Ohi nuclear plant, which resumed power generation last week, to avoid power shortages and rolling blackouts over the summer.
“The restart of a Ohi nuclear reactor itself will only have limited impact on energy imports,” unless there will be more developments on a restart of other nuclear plants, Itochu’s Maruyama said.
Trade Deficit
Japan posted an 4.4 trillion yen trade deficit in the fiscal year that ended March 31 as energy imports rose and exports fell due to the yen’s gains and weak demand in Europe and Asia. Income from investment abroad, which includes interest payments and dividends on equities and debt securities, has served as a buffer against a deficit in the current account balance.
The economy grew at an annualized 4.7 percent pace in the first three months of this year, a pace which probably cooled to 2 percent in the second quarter and about 1.5 percent in the last 6 months of 2012, according to a Bloomberg survey of economists.
The Bank of Japan (8301) raised its economic evaluation of all regions for the first time in more than two years, citing improvements in consumer spending and rebuilding demand from last year’s earthquake, it said in a report released last week.
Kansai Electric Power Co. (9503), the nation’s second-biggest generator, resumed electricity generation at its No. 3 reactor at the Ohi plant in central Japan on July 5. That ended a two- month period in which all 50 of the country’s reactors were off- line.
To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net
To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net
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