Capital inflows to China
Hot and bothered
Despite strict capital controls, China is being flooded by the biggest wave of speculative capital ever to hit an emerging economy
A POPULAR game this summer among watchers of the Chinese economy is to guess the size of speculative capital or “hot money” flowing into the country. One clue is that although China’s trade surplus has started to shrink this year, its foreign-exchange reserves are growing at an ever faster pace. The bulk of its net foreign-currency receipts now comes from capital inflows, not the current-account surplus.
According to leaked official figures, China’s foreign-exchange reserves jumped by $115 billion during April and May, to $1.8 trillion. In the five months to May, reported reserves swelled by $269 billion, 20% more than in the same period of last year. But even this understates the true rate at which the People’s Bank of China (PBOC) has been piling up foreign exchange.
Logan Wright, a Beijing-based analyst at Stone & McCarthy, an economic-research firm, has done some statistical detective work to make sense of the figures. The first problem is that reported reserves exclude the transfer of foreign exchange from the PBOC to the China Investment Corporation, the country’s sovereign-wealth fund. The reserve figures have also been reduced in book-keeping terms this year by the PBOC “asking” banks to use dollars to pay for the extra reserves that they are now required to hold at the central bank. Adding these two items to reported reserves, Mr Wright reckons that total foreign-exchange assets rose by an astonishing $393 billion in the first five months of 2008 (see chart), more than double the increase in the same period last year.
China’s trade surplus and foreign direct investment (FDI) explain only 30% of this. Deducting investment income and the increase in the value of non-dollar reserves as the dollar has fallen still leaves an unexplained residual of $214 billion, equivalent to over $500 billion at an annual rate. Some economists use this as a proxy for hot-money inflows. But some of it may reflect non-speculative transactions, such as foreign borrowing by Chinese firms. Mr Wright therefore estimates that China received up to $170 billion in hot money in the first five months of 2008. This far exceeds anything previously experienced by any emerging economy.
Michael Pettis, an economist at Peking University’s Guanghua School of Management, reckons that speculative inflows during that period were perhaps well over $200 billion, because hot money also comes into China through companies overstating FDI and over-invoicing exports. Foreign firms are bringing in more capital than they need for investment: the net inflow of FDI is 60% higher than a year ago, yet the actual use of this money for fixed investment has fallen by 6%. Some of it has been diverted elsewhere.
It is one thing to deduce how much money is coming in. It is another to work out where it is going and how it gets past China’s strict capital controls. The stockmarket, which continues to plunge (see article), is no home for hot money. Some has gone into property. The lion’s share is in bog-standard bank deposits. An interest rate of just over 4% on yuan deposits compared with 2% on dollars, combined with an expected appreciation in the yuan, offers a seemingly risk-free profit for those who can get money into China.
It comes in via various circuitous routes. Big Western investment funds which care about liquidity would find it hard to move money into China, although rumours abound of hedge funds that are investing money through Chinese partners. Trade and investment offers a big loophole for Chinese and foreign firms. Resident individuals can use the $50,000 annual limit for bringing money into China from abroad—many also use their friends’ and relatives’ quotas. Another big loophole lets Hong Kong residents transfer 80,000 yuan ($11,600) a day into mainland bank deposits.
The government is trying to crack down, but that risks shifting the activity towards underground money exchangers. And if the government were to increase its monitoring of FDI and trade flows, the extra bureaucracy could harm the real economy. China needs to reduce the incentive for destabilising capital inflows, rather than block the channels.
Massive hot-money inflows present two dangers to China’s economy. One is that capital could suddenly flow out, as it did from other East Asian countries during the financial crisis a decade ago and Vietnam this year. China’s economy is protected by its current-account surplus and vast reserves, but its banking system would be hurt by an abrupt withdrawal.
A more immediate concern is that capital inflows will fuel inflation. The more foreign capital that flows in, the more dollars the central bank must buy to hold down the yuan, which, in effect, means printing money. It then mops up this excess liquidity by issuing bills (as “sterilisation”) or by lifting banks’ reserve requirements. But all this complicates monetary policy. China’s interest rates are below the inflation rate, but the PBOC fears that higher rates would attract yet more hot money and so end up adding to inflationary pressures. The central bank has instead tried to curb inflation by allowing the yuan to rise at a faster pace against the dollar—by an annual rate of 18% in the first quarter of this year. But this encouraged investors to bet on future appreciation, exacerbating capital inflows. Since April the pace of appreciation has been much reduced, in a vain effort to discourage speculators.
Mass sterilisation
Some economists argue that the problems caused by hot money have been exaggerated. After all, the PBOC has so far succeeded in sterilising most of the increase in reserves. Inflation, at an annual rate of 7.7% in May, has also started to decline, and the impact of last week’s rise in fuel prices is likely to be offset over the next couple of months by falling food-price inflation.
The snag is that money-supply growth would explode without sterilisation, which is now close to its limit. It is becoming very costly for the central bank to mop up liquidity by selling bills, so it is now relying more heavily on raising banks’ reserve requirements (the PBOC pays banks only 1.9% on their reserves, against over 4% on bills). Since January 2007 the minimum reserve ratio has been raised 16 times, from 9% to 17.5%. But it cannot climb much higher without hurting banks’ profits. To curb future inflation, China therefore needs to stem the flood of capital.
One solution would be a large one-off appreciation of the yuan so that investors no longer see it as a one-way bet. This, in turn, would give the PBOC room to raise interest rates. The snag is that the yuan would probably have to be wrenched perhaps 20% higher to alter investors’ expectations, and this is unacceptable to Chinese leaders, especially when global demand has slowed and some exporters are already being squeezed.
This implies that monetary policy will remain too loose. The longer that the torrent of hot money continues and interest rates remain too low, the bigger the risk that underlying inflation will creep up.
Microsoft
The meaning of Bill Gates
As his reign at Microsoft comes to an end, so does the era he dominated
WHEN Bill Gates helped to found Microsoft 33 years ago there was a company rule that no employees should work for a boss who wrote worse computer code than they did. Just five years later, with Microsoft choking on its own growth, Mr Gates hired a business manager, Steve Ballmer, who had cut his teeth at Procter & Gamble, which sells soap. The founder had chucked his coding rule out of the window.
In becoming the world’s richest man, Mr Gates’s unswerving self-belief has repeatedly been punctuated by that sort of pragmatism. But those qualities have never been on such public display as they were this week, when the outstanding businessman of his age stepped back from a life’s work.
As Microsoft’s non-executive chairman, Mr Gates will devote most of his efforts to his charitable foundation, where he will pit himself against malaria and poverty, rather than Google and the Department of Justice. To choose such formidable new foes in the middle of your life takes bags of self-belief, but it is also pragmatic—and a little poignant. Mr Gates has revelled in the day-to-day details of running his firm. To let it all go is to acknowledge that his best work at Microsoft is behind him. It is to accept that the innovator’s curse is to be transitory.
MS DOS and don’ts
As with many great innovations, Mr Gates’s vision has come to seem so obvious that it is hard to imagine the world any other way. Yet, early on, he grasped two things that were far from obvious at the time, and he grasped them more clearly and pursued them more fiercely than his rivals did at Commodore, MITS or even Apple.
The first was that computing could be a high-volume, low-margin business. Until Microsoft came along, the big money was in maintaining a select family of very grand mainframes. Mr Gates realised that falling hardware costs, combined with the negligible expense of making extra copies of standard software, would turn the computer business on its head. Personal computers could be “on every desk and in every home”. Profit would come from selling a lot of them cheaply, not servicing a few at a great price. And the company that won a large market share at the start would prevail later on.
Mr Gates also realised that making hardware and writing software could be stronger as separate businesses. Even as firms like Apple clung on to both the computer operating system and the hardware—just as mainframe companies had—Microsoft and Intel, which designed the PC’s microprocessors, blew computing’s business model apart. Hardware and software companies innovated in an ecosystem that the Wintel duopoly tightly controlled and—in spite of the bugs and crashes—used to reap vast economies of scale and profits. When mighty IBM unwittingly granted Microsoft the right to sell its PC operating system to other hardware firms, it did not see that it was creating legions of rivals for itself. Mr Gates did.
The technology industry likes to sneer at Microsoft as a follower. And it is true that the company has time and again bought in or imitated the technology of others. That very first PC operating system was based on someone else’s code. But Mr Gates’s invention was as a businessman. His genius was to understand what he needed and work out how to obtain it, however long it took. In an industry in which visionaries are often sniffy about anyone else’s ideas, the readiness to go elsewhere proved a devastating advantage.
And look at what happened when Mr Gates’s pragmatism failed him. Within Microsoft, they feared Bill for his relentless intellect, his grasp of detail and his brutal intolerance of anyone whom he thought “dumb”. But the legal system doesn’t do fear, and in a filmed deposition, when Microsoft was had up for being anti-competitive, the hectoring, irascible Mr Gates, rocking slightly in his chair, came across as spoilt and arrogant. It was a rare public airing of the sense of brainy entitlement that emboldened Mr Gates to get the world to yield to his will. On those rare occasions when Microsoft’s fortunes depended upon Mr Gates yielding to the world instead, the pragmatic circuit-breaker would kick in. In the antitrust case it did not, and, as this newspaper argued at the time (see article), he was lucky that it did not lead to the break-up of his company.
Inevitability and temperament are two hallmarks of Gates the innovator. The third is the transience of all pioneers. The argument was brilliantly laid out by Clayton Christensen, of Harvard Business School. The perfecting of a technology by a well managed company catering to its best customers leaves it vulnerable to “disruption” by a cheaper, scrappier alternative that is good enough for everyone else. That could be a description of Microsoft’s Office, which now does more than almost anybody could wish for—even as Google and others are offering free basic word-processors and spreadsheets online.
Mr Gates was haunted by Mr Christensen’s insight—he even asked for his help to keep back the tide. Microsoft successfully extended Windows as an operating system for servers; it has moved into new areas, such as mobile devices and video games; and it has lavished billions of dollars on all sorts of research—without much to show for it. Despite all those efforts, the PC, Mr Gates’s obsession, has ended up as an internet terminal. The company still has everything to prove online (see article). Watching Microsoft in the company of Google and Facebook is a bit like watching your dad trying to be cool.
Business is good for you
Mr Gates had the good fortune to be perfectly suited for his time—but he is less well-equipped for the collaborative and fragmented era of internet computing. This does not diminish his achievement. Nor, as some would have it, does his philanthropy necessarily magnify it. Whatever the corporate-social-responsibility gurus say, business is a force for good in itself: its most useful contribution to society is making profits and products. Philanthropy no more canonises the good businessman than it exculpates the bad. In spite of his flaws, Mr Gates is one of the good kind. Some great industrialists, like Henry Ford, stick around even as the world moves on and their powers fail. Mr Gates, pragmatic to the end, is leaving at the top.
Commentary by William Pesek
June 27 (Bloomberg) -- ``The worst is over.'' One hears some variation of this view constantly when traveling around Asia.
It's a comforting one, predicated on the idea that the U.S. economy will avoid the recession that markets have priced in for some time. It's also a view that could be in for some serious revision as the year unfolds, and not in a good way.
The latest sign comes from a Harvard University report. Growing foreclosures and tighter lending standards are creating an environment that ``is shaping up to be the worst in a generation,'' Harvard's Joint Center for Housing Studies said on June 23.
``The slump in housing markets has not yet run its full course,'' said Nicolas Retsinas, director of the center.
The U.S. market seems likely to remain mired in a recession. And as Retsinas pointed out, housing markets historically recover only after an economy contracts and prices fall enough to improve affordability.
That's a bigger problem for Asia than many investors may want to admit.
There's much relief that Asia is holding its ground as the U.S. economy slows and credit-market woes humble Wall Street's biggest names. While asset markets are heading lower from Tokyo to Jakarta and Shanghai to Mumbai, healthy economic growth has confounded the pessimists -- so far.
Knock-On Effects
The knock-on effects are coming, just more stealthily than many expect. Asia is unlikely to get off easy even if the U.S. skirts a recession. The region hasn't decoupled from America as much as some would say.
The worst-case scenario -- a prolonged U.S. decline -- could be devastating, particularly at a time when record oil and food prices are hurting Asian households. Billionaire investor Warren Buffett laid it out in a June 25 Bloomberg interview. He's unsure when the U.S. will recover.
``It's not going to be tomorrow, it's not going to be next month, and it may not even be next year,'' said the chairman of Omaha, Nebraska-based Berkshire Hathaway Inc.
The idea that Asia will continue to display an impressive immunity to U.S. events ignores how dependent China is on the American economy. It also ignores how reliant Asia is on China's 10 percent growth. Slowing U.S. demand will chip away at that country's export-driven expansion exponentially.
China's Limits
China is one of several Asian economies with negative real interest rates. With its annual inflation above the central bank's benchmark lending rate, China would be hard-pressed to stimulate growth with lower borrowing costs or increased government spending.
Monetary quandaries abound in Asia. Bank of Japan officials, for example, are making it clear interest-rate deliberations have become increasingly challenging over the last two months.
``At the time of the June meeting, both downside and upside risks had risen compared with when we met in May,'' BOJ policy board member Seiji Nakamura said yesterday in Asahikawa, Japan.
The credit crisis that began with U.S. subprime loans is just one force crimping U.S. spending. A new Bloomberg/Los Angeles Times survey shows most Americans are feeling the pain from rising gasoline prices and many are tightening their belts. Seven in 10 of those surveyed said higher gas prices have caused them ``financial hardship.''
Export Woes
That may mean less spending on cars, flat-screen televisions, cellular phones, name-brand clothing items and other goods manufactured in Asia. With U.S. consumers accounting for 70 percent of gross domestic product, any pullback would have an outsized impact on global economies. Housing is arguably the key to all of this.
The U.S. will expand 1.4 percent in 2008, the weakest performance since 2001, according to a Bloomberg survey. U.S. growth may be cut by a half to a full percentage point if consumers spend less and save more, according to Deutsche Bank AG economists. For Asia, that is decidedly bad news.
So is Harvard's housing report and Buffett's concern that the U.S. is heading for stagflation. Rising home prices and easy access to credit have been the major drivers of U.S. growth in recent years. If U.S. housing remains weak, Asia's export- dependent economies are particularly vulnerable.
Here, recent comments by Federal Reserve officials are both good and bad for Asia.
The Fed this week left its benchmark rate at 2 percent, saying ``uncertainty about the inflation outlook remains high.'' Further rate cuts seem unlikely, something that could disappoint some investors. The specter of continued rate moves supported optimism about Asia's export markets.
Yet easy Fed policies also cause problems in Asia. Much of the liquidity that U.S. officials create ends up in Asian markets, increasing so-called hot-money flows. That has made it harder for Asian central banks to control money supply and inflation. Taking a longer-term view, an end to Fed rate cuts isn't a bad thing.
The catch is that with Asia's most important customer in trouble, the region's growth outlook is dimming. Here, the U.S. housing market is more of a linchpin than many in Asia think.
June 27 (Bloomberg) -- An era of active government may be approaching -- no matter who wins the presidency.
In a variety of areas -- from oil-futures trading and investment banking to climate change and home mortgages -- Republican John McCain and Democrat Barack Obama both see a bigger government role in the economy. So, too, do many Democrats in Congress, whose numbers are likely to grow after November's elections. Put it all together and a shift away from President George W. Bush's anti-regulation ideology is in store.
``We're going to see more regulation and more government intervention in the economy,'' said William Niskanen, chairman of the Cato Institute, a libertarian research group in Washington that supports limited government.
Behind the shift: Americans' growing disenchantment with where the country is headed. Almost 8 out of 10 people questioned in the latest Bloomberg/Los Angeles Times poll said the country is on the wrong track.
``There's a certain amount of disillusionment with free trade and globalization, and the deregulation movement,'' said Martin Baily, senior fellow at the Brookings Institution in Washington and a former chief White House economist under President Bill Clinton. ``It's a genuine shift in sentiment toward a more active role for government.''
That worries Michael Tanner, a Cato senior fellow. ``Regulation is not cost-free,'' Tanner said. ``It's a form of an indirect tax.''
More Regulation
To be sure, government's reach would probably expand more with Obama in the White House than it would under McCain. The Illinois senator has proposed greater regulation of everything from credit cards, where he has talked of a cardholder bill of rights, to the Internet, where he backs rules to bar broadband providers from giving favorable treatment to some Web content and services.
``If Obama is elected, there will be strong pressures from the Congress and executive to regulate more,'' said Robert Hahn, executive director of the American Enterprise Institute's Center for Regulatory and Market Studies in Washington.
Yet even a President McCain would be more inclined to government intervention than Bush, Hahn said.
``He's clearly more populist than Bush,'' J.D. Foster, senior fellow at the Heritage Foundation in Washington, said of the Arizona senator. ``And often times, that means calling for more regulation.''
Similar Rhetoric
McCain and Obama have responded to voters' concerns with rhetoric that, at times, sounds similar. Both have blamed speculators for driving up oil prices and have promised new regulations of futures trading.
Both candidates have proposed a bigger government role in stemming home foreclosures in the continuing housing bust. McCain, 71, wants the Federal Housing Administration to help subprime borrowers refinance into lower-cost, government-backed mortgages. Obama, 46, would go further, creating a $10 billion government fund to prevent foreclosures.
Obama and McCain say they favor increased regulation of Wall Street in the wake of turmoil that forced the Federal Reserve in March to help arrange JPMorgan Chase & Co.'s proposed takeover of Bear Stearns Cos.
``We saw not enough capital backing loans that were made, not enough capital for people who were involved in investments,'' Douglas Holtz-Eakin, McCain's top economic policy adviser, told Bloomberg Television on June 6. ``We need to establish a regulation system that has those kinds of incentives.''
Watching Wall Street
Americans favor more aggressive regulation of Wall Street by a margin of about 3-2, according to the Bloomberg/Los Angeles Times poll. The survey interviewed 1,233 adults from June 19-23.
On the environment, both McCain and Obama back mandatory limits on greenhouse-gas emissions and proposed a cap-and-trade system to help bring that about.
Eric Toder, of the Urban Institute, said no matter how the cap-and-trade system is set up, it will mean more government bureaucracy. ``One way of the other, it's going to be adding complexity,'' he said. ``There's going to be a lot of special pleading by companies looking for exceptions.''
Obama, with potential backing from a Democratic-led Congress, has proposed programs that would extend the reach of government, including a major revamp of the health-care system and a $10 billion plan to promote early-childhood education.
``For eight long years, our president sacrificed investments in health care, and education, and energy, and infrastructure on the altar of tax breaks for big corporations and wealthy CEOs,'' Obama said in a June 9 speech in Raleigh, North Carolina.
Reversing Reagan
Niskanen, of the Cato Institute, said Obama effectively wants to extend U.S. regulation abroad by insisting that trade agreements contain added protections for workers and the environment. ``It would be exporting regulation,'' he said.
Tom Gallagher, managing director in Washington for ISI Group, a money management and research firm, likens this year's election to a mirror image of the 1980 race. Republican Ronald Reagan's victory that year cemented a swing toward deregulation that began under Democrat Jimmy Carter, who, among other steps, removed most government regulation of airlines.
This year's election may mark a turning point in the opposite direction, building on such regulatory actions as the Sarbanes- Oxley law that increased oversight of corporate governance, according to Gallagher.
``'08 may be the opposite of '80,'' he said.
June 27 (Bloomberg) -- U.S. natural-gas producers are drilling wells previously deemed too costly and resurrecting abandoned fields from Appalachia to the Rockies, spurred by the biggest rally in fuel prices in eight years.
Devon Energy Corp. and Range Resources Corp. are drilling horizontal wells that cost three times as much as traditional vertical shafts to unlock gas from rock formations that were unprofitable to exploit before this year's 75 percent gain by gas futures. The number of active U.S. gas rigs rose to a nine- month high last week, according to a survey by Baker Hughes Inc.
``As prices are better you want to drill more wells to get more production on line as quick as possible,'' said Larry Pinkston, chief executive officer at Unit Corp., a Tulsa, Oklahoma-based gas producer and drilling-rig operator. ``So we definitely are drilling more wells.''
The rise in gas futures in New York this year exceeded the 45 percent surge in oil and all commodities besides coal. U.S. gas demand probably will grow 4 percent this year, double the rate of new supply, said Roger Read, an analyst at Natixis Bleichroeder Inc. in Houston.
Gas gained the most since prices more than doubled in the first half of 2000. This month, futures rose above $13 per million British thermal units for the first time since 2005, when Hurricanes Katrina and Rita idled wells in the Gulf of Mexico. Read attributed the gain to ``unrelenting growth in electric power demand,'' lower-than-expected imports and increasing demand for alternatives to coal and oil.
Producer Shares Rise
An index of independent energy producers in the Standard & Poor's 500 climbed 29 percent this year, led by gains of more than 60 percent at Southwestern Energy Co. and Chesapeake Energy Corp. All 10 index members get most of their output from gas. Unit Corp., which isn't in the index, jumped 75 percent. The S&P index of integrated producers such as Exxon Mobil Corp., driven more by oil wells and refining, has fallen 1.7 percent.
New drilling projects will boost U.S. gas supplies in 2009 by 3.6 percent, the biggest increase since 1994, Read said. Gas is the most widely used U.S. furnace fuel and the third-largest source of power generation, according to the Energy Department.
The U.S. Bureau of Land Management, which oversees energy exploration on federal property, issued 7,124 permits to drill in the fiscal year ended Oct. 1, 5.7 percent more than fiscal 2006. Nine out of 10 of those permits were issued for projects in Wyoming, New Mexico, Utah and Colorado.
Drilling Accelerates
Range Resources, based in Fort Worth, Texas, increased its capital budget 40 percent this year to $1.27 billion to sink more wells in the Barnett Shale in Texas and the Marcellus Shale in Pennsylvania and West Virginia.
Range Resources, which gets most of its production from the Barnett Shale, expects to begin pumping commercial volumes of gas from the Marcellus in early 2009.
Drilling horizontal wells in deep, hard deposits such as the Barnett Shale costs about $3 million each, compared with $1 million to $1.5 million for a vertical well, Range Resources President Jeffrey Ventura said in a telephone interview.
Horizontal drilling is costlier because it requires more sophisticated rigs with more powerful motors, said Michael McMahon, managing director of New York-based leveraged buyout firm Pine Brook Road Partners LLC, which bankrolled three new gas producers in the past 15 months.
Horizontal Wells
Horizontal drilling is the only way to tap formations that otherwise won't give up their gas, Ventura said.
``There some areas of the Barnett Shale that didn't work at all as vertical developments but are very commercial as horizontals,'' Ventura said. ``Rock formations that people thought were non-prospective are now prospective.''
Unit Corp.'s Pinkston plans to drill at least 280 wells this year, up 11 percent from 2007. The program will let the company replace at least 150 percent of the gas and oil it pumps for the next several years, he said.
The company, which also owns 131 onshore rigs and a pipeline business, built two new rigs this year and plans to add another two in the fourth quarter, Pinkston said. Unit will decide in the next few weeks whether to order more rigs for 2009 delivery, he said.
Competition for drilling equipment and rig crews is escalating costs for producers, said Pine Brook's McMahon.
Pine Brook, founded in 2006 by former Warburg Pincus Vice Chairman Howard Newman, is stockpiling about 20 miles of pipe, enough to excavate six wells, in response to delivery delays from pipe makers because of soaring demand, McMahon said.
June 27 (Bloomberg) -- Most U.S. stocks fell, extending the Dow Jones Industrial Average's worst monthly drop in almost six years, as record oil prices dragged down consumer shares and mobile-phone companies declined on concern demand is waning.
AT&T Inc. and Verizon Communications Inc. dropped after London-based Sony Ericsson Mobile Communications Ltd. said demand for more expensive phones is weakening. KB Home tumbled after the real-estate developer reported its fifth straight quarterly loss. American International Group Inc., the world's largest insurer, slid on plans to absorb as much as $5 billion of losses for a dozen units hit by writedowns.
More than four stocks declined for every three that rose on the New York Stock Exchange. The Standard & Poor's 500 Index added 0.68 points to 1,283.83 at 12:26 p.m. in New York. The index dropped 2.9 percent yesterday, the steepest decline since June 6. The Dow lost 41.69, or 0.4 percent, to 11,411.73, down 9.7 percent this month in its worst June since 1930. The Nasdaq Composite Index slipped 6.39 to 2,314.98.
``This week the news on earnings is that the second quarter is probably going to be worse than we thought,'' said Ron Sweet, vice president of equity investments at USAA Investment Management Co., which oversees $100 billion in San Antonio. ``The old news keeps sticking around: it's energy prices, it's writeoffs at banks, it's the slow economy.''
The S&P 500 has fallen 2.5 percent this week, while the Dow has slid 3.6 percent and the Nasdaq tumbled 3.7 percent. The four consecutive weeks of declines for the S&P 500 is the index's longest losing streak since January. The S&P 500's 8.3 percent decline so far in June is the worst monthly performance since the 11 percent plunge in September 2002.
Earnings Slump
Analysts forecast earnings for companies in the S&P 500 will slump 11 percent on average, according to a Bloomberg survey today, compared with a projected decline of 8.9 percent a week ago. Goldman Sachs Group Inc. strategist David Kostin said in a report today that expectations for 2008 and 2009 profits are ``too optimistic'' and are likely to be reduced.
AT&T decreased 34 cents, or 1 percent, to $33.13. Verizon lost 12 cents to $34.19.
Palm Inc. dropped 61 cents to $5.93. The maker of the Treo e-mail phone reported a wider fourth-quarter loss than analysts estimated.
AIG Slides
American International Group Inc. decreased 37 cents to $27.73. The world's largest insurer plans to absorb as much as $5 billion of losses for a dozen insurance units after their securities-lending accounts suffered $13 billion of writedowns tied to the subprime-mortgage collapse during the past year.
Micron Technology Inc., the largest U.S. producer of memory chips, tumbled 63 cents to $6.36 after posting a wider third- quarter loss as prices plunged for semiconductors used to store pictures and music in portable devices.
U.S. stocks tumbled yesterday as oil's $5-a-barrel surge, forecasts of more credit-market writedowns and a slowing economy threatened to extend a yearlong profit slump.
``The month of June has been difficult,'' Matthieu Bordeaux- Groult, who helps oversee about $6.2 billion as fund manager at Richelieu Finance in Paris, said in a Bloomberg Television interview. ``There are a lot of negative elements in the market such as high raw materials prices, but valuations are low and offer buying opportunities.''
The S&P 500, which has fallen 13 percent this year, is valued at 21.3 times earnings, near the lowest in two months.
June 27 (Bloomberg) -- U.S. consumer spending rose more than forecast in May as tax rebates drove the biggest gain in incomes in almost three years, enabling households to at least temporarily overcome soaring fuel bills.
The 0.8 percent rise in purchases was the biggest since November, as Americans bought furniture, clothes and electronics after filling their autos' gas tanks, the Commerce Department said today in Washington. Incomes grew 1.9 percent, the most since September 2005, and measures of inflation were lower than anticipated.
The figures indicate that the fiscal stimulus will cause a pickup in economic growth this quarter after an expansion of 1 percent in the first three months of the year. The gains may not last, most economists predict, as rising unemployment and gasoline prices eviscerate consumer confidence. Sentiment among Americans fell in June to the lowest level since 1980, the Reuters/University of Michigan survey showed today.
``Consumers aren't fooled -- they know this is a temporary boost to their income,'' Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in an interview with Bloomberg Television. Wages and salaries grew just 0.3 percent in May, the Commerce Department figures showed.
Treasuries were higher, with the benchmark 10-year note yielding 3.99 percent as of 11:29 a.m. in New York, down 4 basis points from yesterday. The Standard & Poor's 500 index was down 0.1 percent at 1,282.24.
`Holiday From Reality'
``This is the tax rebate that you're seeing here,'' Chris Low, chief economist at FTN Financial in New York, said in a Bloomberg Radio interview. ``It's a sense of hope, but it doesn't last. Call it a holiday from reality.''
Economists had forecast spending would rise 0.7 percent, according to the median of 72 estimates in a Bloomberg News survey. The spending estimate for April was revised up to 0.4 percent from an originally reported 0.2 percent increase.
Gross domestic product may increase about 2 percent in the second quarter, Low said, before shrinking in the final three months of the year. Economists at Morgan Stanley estimated the expansion may be 1.6 percent in April to June, up from a previous estimate of 0.8 percent.
The gain in income was almost five times larger than the median forecast of a 0.4 percent gain. Disposable income, or the money left over after taxes, surged 5.7 percent, the largest increase since May 1975.
Fed's Preference
The report also contained good news on inflation for Federal Reserve policy makers. The central bankers' preferred gauge of prices, which excludes food and fuel, increased 0.1 percent, compared with a 0.2 percent median estimate in the Bloomberg survey.
The price measure was up 2.1 percent from May 2007, also less than anticipated. Wages and salaries grew just 0.3 percent in May, the Commerce Department figures showed.
Adjusted for inflation, spending rose 0.4 percent, the biggest gain since December 2006.
Because the increase in spending was smaller than the gain in incomes, the savings rate jumped to 5 percent, the highest since March 1995, from 0.4 percent in April.
Fed policy makers this week kept the benchmark rate unchanged at 2 percent, ending a series of rate cuts, and said higher energy costs threatened to boost inflation. Still, they maintained a forecast that prices would ``moderate'' later this year, according to their statement.
`Diminished' Risk
Policy makers also said that ``although downside risks to growth remain, they appear to have diminished somewhat,'' partly as a result of ``some firming in household spending.''
A Commerce report earlier this month showed retail sales rose more than twice as much as forecast in May. Private surveys indicate the spending splurge continued this month as discounters, including Wal-Mart Stores Inc. and Costco Wholesale Corp., offered rebate-linked promotions.
About $48.1 billion worth of tax rebate checks were distributed in May and a total of $78.3 billion have gone out through today, according to the Treasury Department. Almost all of the tax rebates will be sent out by the second week of July, according to Treasury spokesman Andrew DeSouza.
There are signs the boost will not last. American Express Co. Chief Executive Officer Kenneth Chenault this week said credit indicators have deteriorated beyond the company's expectations.
Brunswick Woes
The rebates aren't large enough to benefit manufacturers like Brunswick Corp., the maker of Sea Ray yachts and Boston Whaler fishing boats. The Lake Forest, Illinois-based company said yesterday it plans to close four more North American plants and may fire as much as 10 percent of its workforce after U.S. powerboat sales fell to the lowest in more than 40 years.
Conditions in the energy, housing and labor markets ``continue to erode U.S. consumers' confidence and are reducing their ability and desire to purchase discretionary items,'' Chief Executive Officer Dustan McCoy said in a statement.
Record gasoline prices are also causing Americans to scale back travel plans. The number of travelers over the U.S. Fourth of July holiday will decline for the first time this decade, motoring group AAA said yesterday.
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