Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


US stimulus boosted growth by up to 4.5%
y James Politi and Robin Harding in Washington
Published: August 24 2010 23:44 | Last updated: August 24 2010 23:44
Copyright The Financial Times Limited 2010
http://www.ft.com/cms/s/0/e99a3cfc-afcf-11df-b45b-00144feabdc0.html


The $814bn stimulus programme enacted by the Obama administration at the start of 2009 boosted the US economy by as much as 4.5 per cent in the second quarter of this year, keeping unemployment below 10 per cent, congressional analysts said on Tuesday.

The report by the Congressional Budget Office, a non-partisan agency that studies the budgetary impact of legislation for members of Congress, will come as a boost to congressional Democrats and Obama administration officials, who have been arguing the recession would have been much deeper in the absence of the stimulus.

But it will raise further concerns about the sustainability of the already sputtering recovery in the absence of government support. If the economy had been 4.5 per cent smaller in the second quarter of 2010, then real output would have been below even its lowest point during the recession.

Republicans have fiercely attacked the stimulus as ineffective government spending that added to the country’s budget deficit without meaningfully helping the economy.

The CBO analysis is much more sanguine, however. In its latest report, the agency said real gross domestic product was lifted in the second quarter by between 1.7 per cent and 4.5 per cent. Last month, the commerce department said the US grew at an annualised rate of 2.4 per cent in the second quarter, but that is likely to be revised lower – closer to 1 per cent, given the weaker economic data that have surfaced since.

This would mean the stimulus, whose impact will gradually fade away during the rest of the year, provided crucial support to the recovery between April and June. According to the CBO, the stimulus also reduced the unemployment rate – now at 9.5 per cent – by between 0.7 and 1.8 percentage points during the quarter, as it increased the number of employed Americans by 1.4m to 3.3m people.

The CBO uses models from companies such as Macroeconomic Advisers and IHS Global Insight. But some sceptics question the assumptions of these models, saying they do not take enough account of people’s expectations of the future, when they will have to pay back the stimulus with higher taxes. “All this stimulus spending has gotten us nowhere . . . We are now borrowing 41 cents of every dollar we spend from our kids and grandkids,” said John Boehner, Republican leader of the House.





US home sales plunge to 15-year low
By Alan Rappeport in New York
Published: August 24 2010 15:46 | Last updated: August 24 2010 18:24
http://www.ft.com/cms/s/0/50d8c172-aefe-11df-8e45-00144feabdc0.html


Purchases of previously owned homes plunged to their lowest level in 15 years last month as a weak jobs market and strict financing requirements stalled buying activity, heightening fears that the housing market will drag down the US economy.

Home resales declined by 27.2 per cent in July to an adjusted annual rate of 3.83m, according to the National Association of Realtors. That was far worse than the 13.4 per cent drop that economists were expecting and left sales down by 25.5 per cent from a year ago.

Existing home sales have fallen for three months running, as the housing market sputtered after the expiry of the government’s first-time homebuyer tax credit, which spurred demand earlier in the year.

The disappointing housing data are the latest in a raft of weak indicators that have signalled that the US recovery is losing steam. Many economists have downgraded their projections for economic growth in the second half of the year.

“If foreclosures flood the market faster than we expect, home prices could take another serious leg down, tipping the economy back into recession,” said Michelle Meyer, senior US economist at Bank of America Merrill Lynch. “The interplay between the economy and the housing market should not be underestimated.”

In July, distressed sales accounted for nearly a third of all transactions and first-time purchases made up 38 per cent of sales, down from 43 per cent in June.

Sales were weak across the US, falling by 29.5 per cent in the north-east, 35 per cent in the mid-west, 25 per cent in the west and 22.6 per cent in the south.

“Consumers rationally jumped into the market before the deadline for the homebuyer tax credit expired,” said Lawrence Yun, NAR’s chief economist. “Since May, after the deadline, contract signings have been notably lower and a pause period for home sales is likely to last through September.”

Tom Meyer, chief executive at J.I. Kislak Mortgage, a Florida-based lender, said that tough underwriting standards had made it difficult for buyers to secure loans. He said he has been turning away about 20 per cent of potential homebuyers looking for finance.

“The pendulum has swung beyond the point of equilibrium, towards ultra conservatism,” Mr Meyer said. “You have this desire to buy and people are shopping, but they are having a difficult time qualifying.”

July home prices were flat from a year ago, with the median price of an existing home ticking up 0.7 per cent to $182,600.

With sales slowing, the glut of housing inventory swelled last month, rising by 2.5 per cent to 3.98m. At the current sales pace, it would take a record 12.5 months to clear the houses on the market, while economists at Capital Economics note that in a healthy housing market it should take seven months.

“Unemployment, foreclosures and shadow inventory are keeping consumers on the sidelines, waiting for prices to drop further,” said Mitchell Hochberg, principal at Madden Real Estate Ventures.

In northern California, luxury housing has remained firm while the rest of the market weakened as low-end shoppers – the most likely beneficiaries of the tax credit – avoided the market. In his market report, Rick Turley of Coldwell Banker said uncertainty about employment and strained consumer confidence were hitting sales.




China fund bond sale faces criticism
By Jamil Anderlini in Beijing
Copyright The Financial Times Limited 2010
Published: August 24 2010 22:23 | Last updated: August 24 2010 22:23
http://www.ft.com/cms/s/0/f8a0f0fc-afc4-11df-b45b-00144feabdc0.html


The domestic arm of China’s main sovereign wealth fund completed its first bond sale on Tuesday, raising Rmb40bn ($5.9bn) from the interbank market as it prepares to help recapitalise some of the world’s largest banks.

The bond sale is the first in a planned series by Central Huijin Investments, the domestic arm of China Investment Corp, which aims to raise Rmb187.5bn from the interbank bond market and hand the money to China’s largest state-controlled banks.

But analysts have derided the exercise for its circular nature and voiced concerns that the bond sales will increase risks in the banking system. This is because large state-controlled banks themselves were estimated to have bought more than 80 per cent of Huijin’s first bond issue on Tuesday, according to a senior Chinese bond analyst.

This means that new assets are being created on the balance sheets of Huijin and the banks without new cash entering the system.

“There is a certain circularity about this that seems strange,” said an analyst from an international bank. “The banks are basically funding themselves.”

Adding to concerns over the bond sale were reports from bond traders that Huijin had ordered the very banks it plans to recapitalise to subscribe heavily to the bond issue.

Huijin holds controlling stakes on behalf of the state in nearly all of China’s largest banks, including China Construction Bank, Agricultural Bank of China and Bank of China.

Last month Agricultural Bank sold shares to the public in Hong Kong and Shanghai in the world’s largest initial public offering yet. The rest of China’s largest lenders have announced plans to raise tens of billions of dollars to repair their balance sheets following an unprecedented government-directed lending binge last year.

Huijin said it planned to use the proceeds from its bond sales to recapitalise policy lenders Export-Import Bank of China and China Export and Credit Insurance Corp on behalf of the state. It also promised to subscribe to the bulk of the upcoming rights issues of BoC, CCB and Industrial and Commercial Bank of China, the world’s largest bank by market value.

Huijin’s bond sale on Tuesday included Rmb20bn worth of seven-year bonds with an annual interest rate of 3.16 per cent and Rmb20bn of 20-year bonds with an interest rate of 4.05 per cent. Huijin was expected to sell an additional Rmb6bn in seven-year bonds and Rmb8bn in 20-year bonds as interbank investors exercised an over- allotment quota.

Some senior financial officials have complained in the past that Huijin exerts undue influence over the country’s largest banks and its position as the largest shareholder in most of them raises serious issues about their corporate governance structure.




Market jittery over growth
By Michael Mackenzie in New York, Robin Harding in Washington and Anousha Sakoui in London
Copyright The Financial Times Limited 2010
Published: August 24 2010 19:16 | Last updated: August 24 2010 23:53
http://www.ft.com/cms/s/0/575452f6-afa7-11df-b45b-00144feabdc0.html


Fears that the US and other major economies are slowing sharply sent investors piling into the safety of government debt on Tuesday, sending UK, German and US bond yields down to record lows.

Global equities and commodities such as oil that move on expectations of growth prospects, also fell sharply. Investors sent the Japanese yen to a 15-year high against the dollar as investors exited risky currency trades.

Analysts say the moves reflected expectations that in order to stimulate global growth, central banks have to buy more government bonds and are in no position to tighten monetary policy until 2012 at the earliest.

“There is a global perception that while we are not necessarily going into a Japan-type scenario, there is a recognition of a slow recovery accompanied by disinflation that means there is little pressure on central banks to raise rates,” said Gerald Lucas at Deutsche Bank.

The slide in bond yields will focus attention more than usual on Ben Bernanke, the Federal Reserve chairman, when he gives a policy speech at the central bank’s Jackson Hole conference on Friday.

Mr Bernanke is set to use his speech to explain the Fed’s move at its last meeting to reinvest cash from maturing mortgage-backed securities and thereby stop its balance sheet from shrinking.

That move took markets by surprise and fuelled heavy flows into bonds and out of equities. Some Fed officials are concerned that, by shaking market confidence, it may have been counterproductive.

Mr Bernanke will want to convince the markets that the change did not reflect deep Fed pessimism about the economic outlook. Most Fed officials agreed the outlook is somewhat weaker, so it no longer made sense to tighten policy by shrinking the Fed’s balance sheet. Mr Bernanke is also likely to discuss the Fed’s options if the economy weakens. But given deep divisions on the rate-setting Federal Open Market Committee, he is unlikely to outline what the Fed would do.

Fears about the economy were exacerbated by news that purchases of previously owned homes in the US tumbled 27.2 per cent in July to a 15-year low.

The danger is that an increased supply of unsold homes will lead to a ‘double-dip’ in house prices, further undermining consumer confidence and bank balance sheets.

The news sent the S&P 500 down as much as 1.9 per cent, while benchmark UK and German 10-year yields fell to record lows of 2.85 per cent and 2.15 per cent respectively. The yield on US 10-year notes plumbed 2.47 per cent, the lowest since March 2009, at the peak of the financial crisis. The yield on US two-year notes touched a record low of 0.46 per cent, while seven-year notes hit a record low of 1.89 per cent.

In Europe, the premium that investors need to buy Irish bonds over German bonds rose to their highest levels since the creation of the euro, as concerns about the banking sector in Ireland added to market jitters.

Standard & Poor’s also cut its ratings on Ireland to AA-minus and assigned the country a negative outlook, saying that it expects Dublin to face substantially higher costs to support its ailing financial institutions.






Facebook’s ‘value’ soars as investors seek pre-IPO stake
By David Gelles in San Francisco
Copyright The Financial Times Limited 2010
Published: August 24 2010 19:54 | Last updated: August 24 2010 19:54
http://www.ft.com/cms/s/0/054fc0ee-afa7-11df-b45b-00144feabdc0.html


Facebook is now worth as much as $33.7bn based on secondary market transactions, giving the privately held company an implied valuation greater than the market capitalisations of publicly traded internet stalwarts such as Ebay and Yahoo.

Common stock in Facebook is trading as high as $76 a share as investors scramble to get a piece of the company before it files for an initial public offering, which analysts say could be the biggest technology IPO since Google’s $1.67bn flotation in 2004.

Facebook’s ballooning valuation compared with listed groups such as Ebay and Yahoo, which have market caps of $30.1bn and $18.3bn respectively, signals a new dynamic between technology companies and investors.

While Facebook and other successful Silicon Valley companies, such as Twitter, LinkedIn and Zynga, are delaying their IPOs because of perceived weak appetite on the public markets, some investors are not content to wait. They are acquiring stakes in technology companies while they are still private, hoping that their eventual IPOs will send share prices even higher.

Facebook, which is backed by a mix of venture capital and investment firms, has indicated it may remain unlisted until at least 2012. However, employees and investors are free to sell their stock and, in the absence of an IPO, many are doing so as a means to achieve liquidity.

Facebook’s predicament represents a broader trend in Silicon Valley that is creating complications for private companies and upending traditional cycles of investment.

Executives are uncomfortable with Facebook’s rising valuation. People close to the company emphasise that prices on the secondary market are inflated because available shares are scarce and arrived at without transparent knowledge of its financial performance.

Yet US Internal Revenue code mandates that Facebook gives these implied valuations some consideration when the company determines its own value.

“This all adds a level of complexity when assessing what the true value of these companies is,” said Mark Heesen, president of the National Venture Capital Association.

Facebook, which is headed by Mark Zuckerberg, has sought other ways to contain trade in its common stock. As a private company, it must limit the number of shareholders to no more than 500. People close to the company say it remains well below that threshold.

But, in an effort to limit the number of new shareholders, Facebook is exercising its right of first refusal to buy back its own shares, often assigning that right to an existing investor such as Tiger Global, the investment firm.