Investment News: Money Morning » Home Page http://www.moneymorning.com Investment News Provider Sat, 21 Nov 2009 18:52:59 +0000 http://wordpress.org/?v=2.8.4 en hourly 1 Hot Stocks: Comcast Looks to Expand Its Brand with Potential NBC Universal Takeover http://www.moneymorning.com/2009/11/20/comcast-nbc-ge/ http://www.moneymorning.com/2009/11/20/comcast-nbc-ge/#comments Fri, 20 Nov 2009 09:00:09 +0000 Bob Blandeburgo http://www.moneymorning.com/?p=10126 By Bob Blandeburgo
Associate Editor
Money Morning

With a possible buyout of General Electric Co.’s (NYSE: GE) NBC Universal Inc. in the works, Comcast Corp. (Nasdaq: CMCSA) is adapting to a changing technological landscape.

Comcast, the United States’ largest cable television provider, is hoping to avoid becoming the next newspaper or record company by expanding its role from an entertainment medium to a content provider.

“The world of cable delivery is about to change,” Forrester Research (Nasdaq: FORR) analyst James McQuivey told the Los Angeles Times. “Cable companies for years have made their living by selling consumers hundreds of television channels bundled together. But the future is going to be very different, and cable companies instead will be selling an ‘entertainment experience.’”

While Comcast is now a major player in the Internet service provider (ISP) business as well as telephone service, more than half of its revenue comes from its cable TV customers. But factors working against Comcast include:

  • More Competition: No longer limited to satellite TV providers, telephone companies continue to widen their reach through fiber-optic cable.
  • Higher fees for content: The fees Comcast pays for programs from TV networks are on the rise.

The likely Comcast-NBC deal would give the cable provider a 51% stake in NBC, while GE would retain a 49% stake and contribute roughly $12 billion in debt to the new company, according to The New York Times. GE would eventually sell its ownership interest over a period of several years. The two companies agreed to value NBC at about $30 billion, Bloomberg News reported.

Paris-based Vivendi SA, which owns 20% of NBC, has no intention of being a part of the new entity, Vivendi Chief Financial Officer Philippe Capron said at a Morgan Stanley (NYSE: MS) conference in Barcelona.

Vivendi is seen as the last obstacle for GE to strike a deal with Comcast, and Vivendi is asking GE for a higher price for its stake and certain deal protections, two people familiar with the matter told The Wall Street Journal.

Competition Likely to Change Comcast’s Business Model

More than 54% of Comcast’s top line comes from its TV customers, who are fleeing.

Rate increases have helped offset 10 consecutive quarters of net subscriber losses, but Comcast can only raise rates so many times before it alienates its customer base.

When the market decides it can no longer bear Comcast’s rate increases, the company will likely turn to advertising revenue, which currently represents just 3.6% of sales. A deal with NBC Universal brings to the table more ad revenue from its 11 networks -including Bravo, USA Network and MSNBC – aligning the Comcast-NBC with media giants like Viacom Inc. (NYSE: VIA) and The Walt Disney Corp. (NYSE: DIS).

There are also Comcast’s interactive, targeted ads a la Google Inc. (Nasdaq: GOOG), which generated just $15 million in sales in the third quarter. So far, these ads reach only a few subscribers in isolated areas across the country.

“But the big number,” Chief Operating Officer Stephen Burke said of interactive ads earlier this month, “will be generated when the industry gets together and allows a national advertiser the ability to advertise across the country.”

Cable operators like Comcast once had entire regions to themselves. But in the mid-1990s companies like The DirecTV Group (Nasdaq: DTV) and Dish Network Corp (Nasdaq: DISH) – with much-smaller dishes to mount than what was previously available – made it easy for consumers to switch to satellite TV.

From 2007 to 2008, DirecTV grew its subscriber base 4.6% while Comcast’s shrank 0.8%. DirecTV now has 18 million TV subscribers to Comcast’s 23.7 million.

Comcast and its satellite rivals saw new challengers with fiber-optic TV and Internet service, particularly Verizon Communications Inc.’s (NYSE: VZ) FiOS. Similar to the dawn of cable, Verizon’s biggest challenge is burying the cables in neighborhoods (cable companies use copper-based coaxial cables versus FiOS’ fiber-optic cables, so they can’t share wires). As it installs more fiber in neighborhoods, Verizon is becoming more of a threat to Comcast.

Both providers use their market penetration – or how many customers they have out of the total amount of wired homes – as a key measurement for growth. Comcast was wired in 51 million U.S. homes at the end of the third quarter and saw its video penetration fall by two percentage points to 46.5%, compared to 48.5% in the same period a year ago.

Verizon FiOS TV, while available in far fewer homes – 10.9 million – is penetrating the number of wired homes fast, with a 24.7% penetration in the third quarter compared to 19.7% in the same quarter last year.

Because the number of wired homes grew by almost 2% in the past year, Comcast’s market penetration on the surface looks flat. But that’s not the case.

Comcast actually lost TV customers, going from 24.4 million subscribers in third-quarter 2008 to 23.7 million in this year’s comparable quarter – a loss of roughly 700,000. Verizon’s FiOS TV, which started in Texas in 2005, now has 2.7 million subscribers.

Comcast’s penetration of homes that can receive its Internet service is growing, but at a slower rate than Verizon’s. Of the 50.8 million homes wired for Comcast Internet, penetration was 30.9% in the third quarter versus 29.5% a year ago. Verizon’s FiOS equivalent jumped to a penetration of 28.5% of the 11.5 million wired homes in the third quarter, compared to 24.2% in the same period last year.

Why Rent When You Can Buy?

Carrying cable channels like MTV, Comedy Central and the Disney Channel doesn’t come cheap, and it’s getting more expensive for Comcast as content providers try to make up for ad dollars lost to the recession.

Broadcast networks such as Fox and CBS intend to charge for their over-the-air channels that they once transmitted for free, putting pressure on cable companies’ bottom line.

“Comcast’s fear is that it will become more difficult to pass those price hikes on to viewers because of the increased competition,” Jason Bazinet, a media analyst with Citigroup Global (NYSE: C) told the LA Times.

“If you are [Comcast Chief Executive Officer] Brian Roberts, buying a content company is a hedge against these rising programming costs,” he said.

This would enable Comcast to help set the prices itself.

“For Comcast,” Bazinet noted, “you would be collecting as many checks as you are cutting them.”

Buying NBC would also make Comcast a bigger player in the sports arena; it already owns nine regional networks as well as the cable channel Versus. NBC brings to the table the NFL, NCAA football, the PGA and the Olympics. The deal would put Comcast in the same space as Disney’s ESPN, according to Bazinet.

News and Related Story Links:

]]> http://www.moneymorning.com/2009/11/20/comcast-nbc-ge/feed/ 0 Why Gold Will Reach a Record $2,000 in 2010 http://www.moneymorning.com/2009/11/19/gold-prices-8/ http://www.moneymorning.com/2009/11/19/gold-prices-8/#comments Thu, 19 Nov 2009 08:31:03 +0000 Jason Simpkins http://www.moneymorning.com/?p=10104 [Editor's Note: This gold-price report is part of our “Outlook 2010” series, which will chronicle the global-investing outlook for the New Year.]

By Jason Simpkins
Managing Editor
Money Morning

Gold has surged 60% in the past 12months and it’s not letting up. The “yellow metal” is continuing that scorching surge into the last part of the year, establishing new highs on a near-daily basis. In fact, gold established yet another record price yesterday (Wednesday) when it peaked at $1,153.40 an ounce on the New York Mercantile Exchange (NYMEX).

And the records are going to keep on coming.

With the U.S. dollar in a freefall and global gold demand rising, analysts say the precious metal will likely continue its bullish trend through at least the first half of 2010. It could rise as high as $2,000 an ounce, which would represent a 73% gain from current record levels.

“Everything is pointing to the price of gold going higher,” Mike Sander, an investment adviser at Seattle-based Sander Capital Advisors, wrote in an e-mailed report.

And “a whopping budget deficit continuing to balloon, a Federal Reserve in no place of raising rates, and central banks all over the world diversifying away from the dollar,” will be the main catalysts for gold’s continued rise, he said.

Indeed, the U.S. Federal Reserve’s loose monetary policy has put the dollar under duress. The central bank has pumped more than $2 trillion into the U.S. economy since the financial crisis began more than two years ago. It has lowered its benchmark Federal Funds rate to a record-low range of 0%-0.25% and it has stepped up purchases of U.S. Treasuries and mortgage-backed securities.

More recently, the return of investor risk appetite and the widespread belief that the Fed will have to keep its stimulus measures in place as the U.S. economy struggles out of a long and deep recession have put downward pressure on the greenback.

The dollar tumbled about 20% against the euro in the past year, and the Dollar Index – which measures the greenback against the euro and five other currencies – fell to a 15-month low of 74.679 on Monday and was retesting that low as of Wednesday.

With the dollar in freefall, central banks and hedge funds have sought shelter in hard assets, particularly gold. That’s a big reason why gold has experienced such a remarkable run this year.

“You have to consider the amount of money sloshing around the world right now – China’s $2.2 trillion in reserves, India’s $285 billion in reserves, all of the money in central banks throughout the Middle East,” said Martin Hutchinson, a contributing editor for Money Morning and a veteran banker with more than two decades experience in the international marketplace. “If all of the serious money charges into gold and gold really gets going, you’ll see a tremendous spike in prices.”

Concludes Hutchinson: “I believe the price of gold will hit $2,000 an ounce next year.”

Such steep run-ups have happened before. From 1978 to 1980, for instance, gold soared from $185 an ounce to $850 an ounce, Hutchinson recalls. Interest rates were about 10% at that time. Credit is much easier to get today.

“Right now, the cost of borrowing money and investing in gold is virtually zero,” Hutchinson said.

How Global Demand Will Drive Gold to $2,000

Indeed, the bull-run in gold is already well underway, and it’s picking up steam.

Prices actually began their most recent rally when the International Monetary Fund (IMF) earlier this month revealed that it sold 200 metric tons of gold to the Reserve Bank of India (RBI) from Oct. 19 to Oct. 30.

The RBI paid $6.7 billion for the 200 metric tons of the yellow metal – the equivalent of about 8% of the world’s annual mine production.

The move surprised many analysts, as India for the past 15 years had largely neglected its gold reserves.

India’s gold holdings peaked at 20% of its foreign exchange reserves – all the way back in 1994. Since that time, India’s gold holdings had fallen:
Indeed, prior to the central bank purchase, India’s gold holdings had dropped to just 3.6% of the nation’s estimated $285.5 billion in foreign reserves.

Little wonder that last month’s gold purchase nearly doubled India’s holdings, which now stand at 558 metric tons, or 6.2% of the nation’s forex reserves.

India’s gold holdings as a percentage of foreign reserves are now higher than even China’s. The People’s Bank of China (BOC) holds about 1,054 metric tons of gold, equal to roughly 2% of its $2.3 trillion in foreign currency reserves.

Asia’s third-largest economy now has the world’s 10th-largest gold reserve, behind Russia, which has about 568 metric tons.

“Our Reserve Bank decided to buy some gold. I think about 400 tonnes. That’s normally something we do from time to time. The IMF wanted to sell gold and we wanted to buy gold,” Pranab Mukherjee, India’s finance minister, said in an interview with the Financial Times.

However, analysts have been far less flippant about the purchase.

Timothy Green, the author of “The Ages of Gold,” described India’s purchase to Bloomberg News as “the biggest single central-bank purchase that we know about for at least 30 years in such a short period.”

“The only comparable event was the U.S.’s steady purchases in the 1930s and 1940s,” he said.

Analysts believe India’s highly publicized purchase – which was made when prices were near record highs – will spawn a chain reaction in which other countries and investors ramp up their gold purchases.

“This is a landmark trade,” Jonathan Spall, a director at Barclays Capital (NYSE ADR: BCS) and a gold specialist, told the FT. “Central banks are conservative institutions and India’s move is a sign for other central banks and sovereign wealth funds that were contemplating buying gold.”

The IMF said in September that it would sell 403.3 metric tons of the metal to shore up its finances and increase its ability to lend at reduced rates to low-income countries.

And with 203.3 metric tons still on sale at the IMF, don’t be surprised if China decides to bulk up on gold, too. China, the world’s sixth-largest holder of gold, has increased its yellow-metal reserves by 76% since 2003. But the 1,054 metric tons it now holds is equal in value to just 2% of its world-record $2.3 trillion in total reserves.

“It is but a matter of time until China and the IMF announce much of the same,” Dennis Gartman, an economist and the editor of The Gartman Letter, told Bloomberg.

Worldwide demand for gold is clearly on the upswing. However, just as that’s happening, supply and production of the precious metal are falling.

Annual worldwide mine production of gold has decreased by nearly 8% since 2001, even as the price of gold has tripled.

Meanwhile, investment demand for gold remained very strong – surging 46% in the second quarter of 2009 from a year ago, according to the World Gold Council.

“Everyone who says that gold will hit $2,000 in five years is wrong,” said Money Morning’s Hutchinson. “It will be back down in 5 years. If it’s going to $2,000 it will get there next year.”

“It will turn around when [central banks] start taking monetary policy seriously, and they won’t do that in a hurry,” he added. “Gold’s bull run is a bubble, just like all the other bubbles.  Except this is more of a bang than a bubble, because it’s taking place so quickly.”

Four Ways to Play Gold

  1. Market Vectors Gold Miners ETF (NYSE: GDX): Gold miners benefit disproportionately from a rise in the price of gold, because their production costs are fixed. This means that miners are a more-leveraged way to play gold than the metal itself, particularly since surging speculative demand can increase mining companies’ Price/Earnings (P/E) ratios.
  2. SPDR Gold Shares ETF (NYSE: GLD): GLD holds more than 1,000 ounces of gold, and has a market capitalization of $39 billion. As an investment, GLD is more convenient than buying gold bars directly. The fund’s share price fluctuates in concert with the price of gold.
  3. Barrick Gold Corp. (NYSE: ABX): Barrick is the largest and financially strongest gold producer, with a market capitalization of $43 billion, reserves of 124.6 million ounces of gold (plus copper and silver), and operations in North America, South America, Australasia and Africa.
  4. Yamana Gold Inc. (NYSE: AUY): A growing gold producer with a $6.8 billion market capitalization that made an unexpectedly good profit in the fourth quarter of 2008, Yamana is expanding both production and reserves (currently 19.4 million ounces) with operations in Canada and Latin America. Its expansion magnifies the likely potential benefit from an increase in gold prices.

[Editor’s Note: Money Morning’s “Outlook 2010” series has already provided readers with a forecast for the U.S. economy in the New Year. Coming up next week will be a report on the outlook for the banking sector. Watch for future installments addressing the economic outlook for oil prices, the high-tech sector, retailing, foreign investments and other key topics.]

News and Related Story Links:

]]> http://www.moneymorning.com/2009/11/19/gold-prices-8/feed/ 1 When Stimulus Spending Winds Down, Will U.S. Businesses Step in For Tapped-Out Consumers? http://www.moneymorning.com/2009/11/18/u.s.-economy-2010/ http://www.moneymorning.com/2009/11/18/u.s.-economy-2010/#comments Wed, 18 Nov 2009 09:00:48 +0000 Don Miller http://www.moneymorning.com/?p=10079 [Editor's Note: This is Part II of a two-part story that looks at the prospects for the U.S. economy in 2010. It's part of Money Morning's annual "Outlook" forecasting series. In the days and weeks to come, watch for additional installments addressing the 2010 outlook for gold, oil, banking, foreign markets and other key topics. Part I of the U.S. economy forecast story appeared yesterday (Tuesday). ]

By Don Miller
Associate Editor
Money Morning

It’s no secret that government spending has been fueling much of the growth in the $14.2 trillion U.S. economy. And if consumers aren’t ready for the handoff when that stimulus spending winds down – and they certainly don’t appear to be – it will be up to the U.S. business sector to carry the ball.

And it’s not at all clear that Corporate America is ready, willing or able to fulfill that role.

For one thing, companies just aren’t hiring en masse. That means the current economic rebound is actually a “jobless recovery,” and could be vulnerable to unforeseen shocks, San Francisco Fed President Janet Yellen told an audience during a speech in Phoenix, Ariz, earlier this month.

“Unemployment could stay high for several years to come,” Yellen said during the speech that was given less than a week after the U.S. Federal Reserve left interest rates unchanged at near zero. “High unemployment, weak job growth and paltry wage increases are a recipe for sluggish consumer spending growth and a tepid recovery.”

U.S. Businesses Throttle Back on Spending Plans

Even though a recently released government report showed that the U.S. economy grew at a 3.5% annual rate in the third quarter, 75% of economists polled in a separate survey concluded that the gross domestic product (GDP) number will be revised downward in the future. The key reason for that belief: The U.S. unemployment rate is expected to keep rising in the new year, heightening the prospects of a jobless recovery.

Small businesses, which employ more than half of all private-sector workers – and which have generated 64% of all new jobs over the past 15 years – are not even close to picking up the slack.

In fact, 16% of small-business owners surveyed by the National Federation of Independent Business said they are planning to cut jobs in the next three months – nearly double the number of those planning to add jobs.

“The ‘job generating machine’ is still in reverse,” the federation said.

A survey of 1,537 chief financial officers in the latest Duke University/CFO Magazine Global Business Outlook Survey showed that most large U.S. companies do not plan to increase capital spending in the near future.

Furthermore, 56% of U.S. companies say they are still being adversely affected by credit-market conditions. Among those negatively affected, two-thirds say the cost of credit is their biggest problem, and half say credit is simply less available. That can’t help but stifle GDP growth.

“For full economic recovery we need to see capital spending increase by double digits, rather than simply treading water as we’re seeing now,” said John Graham, a finance professor at The Fuqua School of Business who is also the director of the CFO Magazine survey.

Most firms will take several years to return to pre-recession employment levels and some expect to operate with permanently reduced workforces. Unemployment could reach 10.5% before leveling off in the third quarter of 2010, further crimping consumer spending.

“We’ll see a steeper decline in investment and business structures and a little less growth in residential investment,” said Randell Moore, editor of the Blue Chip Economic Indicatorsnewsletter.

Money Morning’s Outlook: U.S. businesses – big and small – have embraced a leaner, lower-cost mindset that leaves firms reluctant to hire and reticent about making capital investments other than those that can’t be avoided. That will prolong the jobless recovery, and result in lower contributions to U.S. GDP growth by both consumers and businesses. But there is a benefit. With this newfound frugality, companies should be able to maintain – or even boost – profitability, even during a sluggish revenue environment. That, in turn, could be good for U.S. stock prices, and for the ongoing stock-market rebound.

Unemployment Handcuffs the Fed

In an effort to get the economy on its feet, the government so far has put up at least $3.27 trillion in stimulus programs, including the American Recovery and Reinvestment Act and the Troubled Asset Relief Program (TARP).

Sign up below…and we’ll send you a new investment report for free:

How China Is Axing the U.S. Dollar…

Email:

According to Standard & Poor’s Inc. (NYSE: MHP), only about a third of the $787 billion stimulus package has hit the U.S. economy. Most of the infrastructure spending is just getting started now after being delayed by both the political and bidding processes.

Additionally, the Federal Reserve since last March has kept the benchmark Federal Funds rate for overnight lending to banks at between zero and 0.25%. More recently, the Fed has promised to keep rates “exceptionally low” for “an extended period.”

The unemployment rate has never peaked inside a recession and the Fed has never raised interest rates while unemployment was still rising. That means that all signs point to the central bank continuing its current lending programs until unemployment starts to subside.

Despite the U.S. dollar’s decline and the recent surge in the price of oil, gold and other commodities, the fear of inflation is probably unwarranted, U.S. Federal Reserve Chairman Ben Bernanke and other policymakers contend.

Economists who subscribe to this viewpoint say that inflation is currently at acceptable levels and overcapacity will continue to cast a long shadow over the housing and labor markets. Some believe we might even see deflation within the next 18 months.

Just yesterday (Tuesday), in fact, the Labor Department reported that “core” producer prices – which exclude such volatile items as food and energy – posted an unexpected moderate decline for October. The 0.6% decrease for October followed a 0.1% decrease in September. That surprised economists, who had been expecting core prices to increase 0.1%.

However, overall producer prices increased 0.3% in October after an unrevised 0.6% drop in September. Big jumps in food and energy prices powered the increase. Energy prices soared 1.6% in October after falling 2.4% in September, while food prices also rose 1.6%, after a 0.1% decline the month before.

“Core producer price inflation accelerated above 4.5% during the boom in the latter part of the previous cycle, but plunged during the recession,” FTN Financial Group Chief Economist Chris Low said in an interview with RTTNews. “Core producer prices tend to bottom a year or two after recessions, so there is still disinflation to come at the wholesale level.”

But there’s another school of thought – one that says that the policies now being followed will fan the flames of inflation and cause an inflationary conflagration the likes of which the country hasn’t seen since the 1970s and early 1980s. If that inflationary escalation comes while unemployment remains high it could turn into “stagflation,” a culprit that’s hard to vanquish once it’s gone to ground.

A report on consumer prices will be released today (Wednesday). Economists expect overall consumer prices to increase 0.2%, with “core” consumer prices rising 0.1%.

Regardless of what school of thought you subscribe to, look for the government to keep the pedal to the metal. The Fed won’t hike rates before late 2010, most likely after the mid-term elections. And while talk of a “second stimulus” is surfacing once again, it’s also possible that any additional spending programs will be put on the back burner by the burgeoning $2 trillion deficit, which is approaching 10% of GDP.

Money Morning’s Outlook: Fed policymakers are in a tough spot: Raise rates too soon and they choke off the recovery; wait too long to boost borrowing costs and they’ve spawned potentially ruinous inflation – and possibly even stagflation. Investors will need to spend some serious time watching the Fed in the New Year, while closely tracking such statistics as unemployment and commodity prices.

[Editor's Note: Part I of Money Morning's U.S. economic analysis of what's to come in 2010 appeared yesterday (Tuesday). To read that story, please click here. Part I focused on the overall outlook for growth in the New Year and examined how the "jobless recovery" would impact consumer spending.]

News & Related Story Links:

]]> http://www.moneymorning.com/2009/11/18/u.s.-economy-2010/feed/ 3 U.S. Economy Will Dodge a Double-Dip Downturn, But Won’t Escape Unemployment Woes During 2010 Jobless Recovery http://www.moneymorning.com/2009/11/17/us-economy-2010/ http://www.moneymorning.com/2009/11/17/us-economy-2010/#comments Tue, 17 Nov 2009 10:20:41 +0000 Don Miller http://www.moneymorning.com/?p=10032 [Editor's Note: This is Part I of a two-part story that examines the U.S. economy's prospects for 2010. It's also the leadoff story for Money Morning's annual "Outlook" series, which will forecast the prospects for gold, oil, banking, and top investing trends in the New Year. Part II of the U.S. economy story will appear tomorrow (Wednesday).]

By Don Miller
Associate Editor
Money Morning

Historically, the U.S. stock market has been one of the key leading indicators of a U.S. economic rebound.

With the Standard & Poor’s 500 Index up more than 60% from its March lows – and the Dow Jones Industrial Average up nearly 40% – prognosticators are finally confident that the U.S. economy will dodge the “double-dip” recession that has been the focus of much fear since the Bush and Obama administrations launched their financial counterattacks on the worst financial crisis since the Great Depression.

But those same forecasters are reluctant to forecast a sharp economic rebound for 2010. In fact, as opposed to a classic “V-shaped” economic recovery that would accelerate as the year goes on, many economists are predicting that the rate of growth will slow as the New Year unfolds.

Forecasts from Standard & Poor’s Inc. (NYSE: MHP) and Goldman Sachs Group Inc. (NYSE: GS) illustrate this outlook. S&P recently projected average GDP growth of 1.6% for all of 2010, while top Goldman Sachs economists expect to see the U.S. growth rate decline from 3% early in the year to 1.75% by the fourth quarter.

“We don’t expect a V-shaped recovery; in fact we think that 2010 is going to be a bit slower in terms of annualized GDP growth than the second half of 2009,” Goldman Sachs Chief U.S. Economist Jan Hatzius said during a recent speech in New York City.

For analysts and economists who play the forecasting game, 2010 promises to be one of the toughest challenges in decades.

Unemployment has pierced the psychologically daunting 10% level, placing U.S. joblessness at its highest level in a quarter century. Serious questions remain about the strength of the country’s banking and financial systems. The U.S. dollar is under siege and inflationary concerns are at their highest levels in years. There’s massive uncertainty about the nation’s residential and commercial real estate markets. And even the stock-market rebound – one of the strongest in history – is considered suspect by some analysts: They worry that federal stimulus money and the U.S. Federal Reserve’s “zero-interest-rate policy” has forced bearish investors to become reluctant bulls.

Among the difficulties would-be forecasters currently face economists face is the fact that 4% of the economic growth in recent months is attributable to temporary factors, most notably the replenishing of inventories and government fiscal stimulus, Goldman’s Hatzius said. Those factors are likely to diminish by the second half of 2010, due to high unemployment, budget-conscious consumers, and overcapacity in the manufacturing sector and housing markets.
Despite these obvious difficulties, the outlook for 2010 is far from dismal. Among the bright spots:

  • The stimulus seems to be having its intended effect – one reason the odds of a double-dip recession remain remote.
  • The U.S. housing market – a crucial element of the consumer sector – is showing signs of bottoming out.
  • The weak U.S. dollar is making U.S. exports highly competitive, giving a much-needed boost to American manufacturers.
  • With their reluctance to hire, businesses are clearly operating in a highly cost-conscious zone – a reality that could bode well for corporate profits, and for stock prices.
  • And the overall outlook for the U.S. economy is much better than it was a year or 18 months ago, and actually continues to improve – albeit slowly – a reality that can feed on itself to further bolster growth.

In this leadoff story in Money Morning’s Third Annual “Outlook” forecasting series, we’ll take a look at overall expectations for the U.S. economy for the New Year, will consider four key challenges, and will give you our take on each one. The areas that we’ll explore will include:

  • Economic expectations and the odds of a double-dip downturn.
  • The odds for maintaining growth with a “jobless recovery.”
  • The outlook for business investment and spending.
  • And the risks and rewards of current central bank policies.

Let’s take a look …

Handicapping U.S. Growth in 2010

A new survey concluded that top economic forecasters have grown in confidence that the U.S. recovery is sustainable. But those analysts also expect that growth will fall short of the typical post-recession rebound, the Blue Chip Economic Indicators newsletter reported in its November issue.

The U.S. economy should expand 2.7% next year, the consensus estimate of 52 economists polled by the newsletter. That’s an upward revision from the consensus prediction of 2.5% made just one month before.

“The major uncertainty surrounding the outlook for growth next year involves the degree to which private demand accelerates as the positive contributions to GDP from reduced business inventory liquidation and fiscal stimulus play out,” the newsletter said.

Those factors alone pose some significant challenges to a robust rebound. Add in the near-certainty that this recovery will be a jobless one – as well as the fact that most economists believe that U.S. growth will slow, and not accelerate – as 2010 progresses, and it might be overly optimistic to expect a growth rate of 2.7%, which is how well the economic often performs even during healthy periods.

Sign up below…and we’ll send you a new investment report for free:

How China Is Axing the U.S. Dollar…

Money Morning Chief Investment Strategist Keith Fitz-Gerald is forecasting growth of, at best, 2.0% in 2010, a key reason he continues to tell investors to look abroad for some of the most-profitable investment plays.

The U.S. economy “will be lucky to do 2.0% ” next year, Fitz-Gerald said. “The economy faces some very difficult challenges. There’s a slight chance – depending on what happens with some outside factors – that the U.S. could do 2.5%, but I really doubt it. China could actually pull us along [to higher-than-expected growth], but those are some long odds.”

That’s not to say that 2.0% growth is bad news. That’s more than enough to negate the odds of a double-dip recession. Indeed, after reviewing U.S. economic history all the way back to the 1850s, Deutsche Bank AG (NYSE: DB) economists recently found that double-dip recessions are exceedingly rare.

And Money Morning Contributing Writer Jon Markman notes that when these double-dip downturns do occur, they happen under circumstances quite different from the ones that we face today. Reprised recessions usually occur in concert with a fight against inflation.

“A repeat of the 1980s just isn’t in the cards,” Markman said.

Money Morning’s Outlook: Overall, the likelihood is that the U.S. economy will experience slow GDP growth. In terms of the average growth rate for the year, investors are most likely looking at a range of 1.0% to 2.0% for all of 2010, as a protracted jobless recovery extends the housing and banking crisis, puts a damper on wages, reduces consumption. And that growth rate will decelerate as the year progresses, meaning that it’s measure investors should watch closely.

U.S. Joblessness Will Stifle Consumer Spending

As we’ve all learned as far back as Econ 101, the U.S. marketplace is chiefly consumer driven. Historically, consumer spending spurred 60% of U.S. growth. In recent years, that number has surged as high as 70%. Given the U.S. economy’s avowed consumer focus – coupled with the near-certainty that we’re facing a jobless recovery – investors who are hoping for stronger-than-expected growth would best keep the champagne on ice, according to economist Joel Naroff.

“We need households to become a little more confident and businesses to start thinking about tomorrow so we can transition out of the government- and Fed-supported economy into a private-sector recovery,” Naroff, president of the Holland, PA-based Naroff Economic Advisors, said in a note to investors.

To that end, Naroff is concerned about the effect a jobless recovery could have on consumer spending.

“Can consumers save the day? Only if incomes grow solidly and that is not going to happen … businesses have some room to expand without hiring lots of new employees,” Naroff noted. “It could take four to five years for the unemployment rate to get back to full employment. There is little reason to expect that happy times are here again.”
The U.S. unemployment rate in October pierced the psychologically important 10% barrier for the first time since 1983, as employers made deeper-than-predicted payroll cuts.

It’s no surprise, then, that U.S. consumers in September cut their spending for the first time in five months, reducing their outlays for products and services by a hefty 0.5%.

Only one other time since World War II has the unemployment rate topped 10% – between September 1982 and June 1983. It hit 10.1% in September 1982, moving up from 9.8% the month before.

The economy, as measured by gross domestic product (GDP), was basically flat in summer 1982. But the economy at that time was actually getting ready to recover.

Then the economy began to surge in early 1983, fueled by tax cuts and, more importantly, substantial interest-rate cuts by the Federal Reserve. By the end of 1983, the unemployment rate was down to 8.3% and dropped to 7.3% in 1984 and 7.0% in 1985.

But that was then and this is now.

Although the official unemployment rate hit 10.2% last month, the employment outlook is actually much worse: If you factor in part-time workers who’d prefer a full-time position, and people who want work but have given up looking, the “real” unemployment rate is actually a record-high 17.5%.

That means that more than 16 million people are now out of work, compared to 6 million in 1982. In July – the last month the government released statistics – there were more than six officially unemployed persons for every job opening. Historically, the ratio is closer to 2-to-1.

What’s worse is that productivity is increasing as employers are successfully getting their existing staff to produce more in fewer hours – making it less likely they will start hiring.

Any improvements will come slowly. In the Blue Chip Economic IndicatorsNovember issue, 52% of the economists surveyed said the unemployment rate won’t fall back below the 7.0% level on a sustained basis until the second half of 2013 – and it may take longer than that.

Money Morning’s Outlook: The recession may technically have ended, but for the millions of unemployed workers the hard times are far from over. Given that almost one-fifth of the U.S. work force is unemployed or underemployed, don’t expect consumers to step up and step in if stimulus spending falls short, or ends. The upshot is that, from this vantage point, GDP growth for the New Year is likely to be severely constrained.

[Editor's Note: Part II of Money Morning's U.S. economic outlook story will appear tomorrow (Wednesday). Part II will focus on business spending and the U.S. Federal Reserve.]

News & Related Story Links:

]]> http://www.moneymorning.com/2009/11/17/us-economy-2010/feed/ 5 Hewlett Packard-3Com Deal Shows Urgency for Growth in Competitive Tech Sector http://www.moneymorning.com/2009/11/16/hewlett-packard-3com-deal/ http://www.moneymorning.com/2009/11/16/hewlett-packard-3com-deal/#comments Mon, 16 Nov 2009 08:31:41 +0000 Bob Blandeburgo http://www.moneymorning.com/?p=9994 By Bob Blandeburgo
Associate Editor
Money Morning

Hewlett-Packard Co.’s (NYSE: HPQ) pending buyout of 3Com Corp. (Nasdaq: COMS) highlights an accelerating race in the tech sector to grow businesses in an industry where development from within simply is not enough.

H-P will pay $2.7 billion in cash for 3Com, which is second to Cisco Systems Inc. (Nasdaq: CSCO) in business networking. Cisco and H-P have steadily been encroaching on each other’s businesses: Earlier this year, Cisco started making servers while H-P last year began to renew investment in its ProCurve networking business.

Deals like the one between H-P and 3Com are “part of a broader theme where there’s a lot of talk of convergence in the data center,” said Jayson Noland, an analyst at Robert W. Baird & Co. Inc. “Cisco and H-P are going to compete more and more.”

PC market leaders like H-P and Dell Inc. (Nasdaq: DELL) diversified away from their core business of desktop and laptop computers as the recession clamped down on consumer spending. Instead, they chose to focus more on enterprise servers, software and services.

Dell acquired Perot Systems Corp. (NYSE: PER) in a bid to capture more of the lucrative services sector and to take share away from H-P, which last year paid $13.9 billion for Electronic Data Systems LLC (EDS). Services now make up almost 31% of H-P’s sales, compared to Dell’s pre-Perot 10%.

“This was a move designed to try and catch up with its competitors,” Kaufman Brothers LP analyst Shaw Wu told Bloomberg News. “[Dell was] behind in services and being vertically integrated. That’s the model that worked – providing the hardware, software and services.”

In the case of the H-P’s acquisition of 3Com, the convergence lies in data centers, huge warehouses filled with servers that operate everything from Web sites to corporate networks. The data center market is fast becoming flooded with dollars, and by the time this year has ended, businesses will have spent $100 billion on data center software and hardware, market research firm Interactive Data Corp. (NYSE: IDC) forecasts.

The drive by tech companies to make their companies more businesses-friendly could spur more mergers and acquisitions (M&A).

A Competitive Advantage Through Consolidation

There’s plenty of growth to be had for even the largest tech companies, and it’s not just in enterprise. Online advertising giant Google Inc. (Nasdaq: GOOG), bought mobile application advertiser AdMob Inc. for $750 million just days after a Money Morning analysis on Google’s push to monetize the budding smartphone market. 

“AdMob is clearly the best of its ilk for applications monetization,” Google Chairman and Chief Executive Officer Eric Schmidt told Bloomberg in an interview last week. “We think that’s as strategic as search monetization, which, of course, we’re very good at.”

Many popular mobile apps are free, particularly news and social media apps, which makes them a prime space for ads.

“The free apps have to be paid for somehow, and the model we’ve become very comfortable with is using advertising,” Carl Howe, an analyst with Yankee Group Research Inc. told Bloomberg. “I think it could be, actually, a big business.”

Even though Google would likely be successful by bringing its AdSense program to mobile phones, it chose to buy the established AdMob, which was founded in 2006. AdMob specializes in image-based mobile display ads within apps, giving Google – which only had text-based ads being shown in apps – a head start on competitors like Yahoo Inc. (Nasdaq: YHOO) and Microsoft Corp. (Nasdaq: MSFT).

Microsoft has a clear opportunity for in-app advertising. Its counter to Apple’s App Store and Google’s Android Market, Windows Marketplace for Mobile, just launched last month.

Like it did with traditional Web search, the Redmond, Wash. software giant once again finds itself looking up at Google. That’s not to say it isn’t trying: Earlier this year it formed a partnership with Quattro Wireless.

In this fast-paced game of staking a market share claim, Quattro could find itself the target of an acquisition by either Microsoft or Yahoo.

Google’s buy of AdMob “is a catalyst event, so [it will] likely will make other players take a look at what they need to do to take advantage of the growth in consumer, advertiser and publisher interest in mobile to impact their own growth,” Quattro said.

Quattro has seen its ad impressions go from 150 million a year ago to 5.5 billion per month this year, Bob Davis, of Quattro investor Highland Capital Partners LLC told Fortune magazine.

Then there’s smartphones themselves, which are steadily growing into handheld computers.

Microsoft and Google already make operating systems for handsets, while Dell will debut its first smartphone in China later this month. And of course, there’s Apple Inc.’s (Nasdaq: AAPL) iPhone rounding out the list of computer-related companies with its hands in mobile. H-P, the world’s largest PC maker, clearly has an opportunity with smartphones: It has one currently on the market and another due for release later this month.

With a war chest of more than $13 billion, H-P could go shopping for a faster start in an already crowded race. One company that would stand out is H-P’s old PDA nemesis, Palm Inc. (Nasdaq: PALM).

Palm’s flagship Pre smartphone has sold just 205,000 units since its summer launch, compared to 146,000 iPhones sold on its first day on the market in 2007, according to Ars Technica. With a market cap of about $1.6 billion, Palm is affordable for H-P and would benefit from H-P’s vast resources. H-P would get an established name and well-reviewed mobile operating system in Palm’s WebOS.

Whether these scenarios play out or not, the one certainty is recent pickup in the tech industry’s consolidation won’t be ending anytime soon.

News and Related Story Links:

 

 

]]> http://www.moneymorning.com/2009/11/16/hewlett-packard-3com-deal/feed/ 1 The 10 Rules for Successful Investing http://www.moneymorning.com/2009/11/12/10-rules-for-investing/ http://www.moneymorning.com/2009/11/12/10-rules-for-investing/#comments Thu, 12 Nov 2009 09:00:41 +0000 Keith Fitz-Gerald http://www.moneymorning.com/?p=9909 [Editor's Note: This essay is adapted from "Fiscal Hangover," which will be published on Monday (Nov. 16).]

By Keith Fitz-Gerald
Chief Investment Strategist
Money Morning/The Money Map Report

With all the financial woes in the global economy, the worst thing an investor can do is to “freeze up.” With all the ups and downs in the market, it’s all too easy for investors to allow their emotions to take control. That’s when the smallest mistakes turn into the biggest mistakes.

There’s one antidote for this problem … remembering a few basic rules. Just embrace the 10 ideas that follow and you’ll be in line to make some serious money in the months ahead.

Rule Number 1: Invest on the Right Side of Major Economic Trends: That old investing adage “Don’t fight the Fed” serves as a good example here. Rising interest-rate environments make meaningful gains difficult to sustain – unless you know what to look for. Far too many investors got it wrong in the 2000-2003 and 2008-2009 periods by betting on growth stocks in a recessionary economy, and they’re still getting it wrong. Those investors are likely to get burned again should the economy slow even more, despite the government-bailout and federal-stimulus efforts. Make sure to analyze all of the other major global trends, as well – and ride the ones that are truly unstoppable. You’ll know them when you see them, because they’ll have trillions of dollars in new capital flowing directly at them – investment plays in such areas as infrastructure, inflation, energy, food, and water (both supply and purity) are great examples.

Rule Number 2: Sell Your Winners: This may seem counterintuitive, but – if you want to succeed – you must sell your winners. Rule Number 6 – thinking like a plumber to prevent losses – is only part of the success equation. To be really effective, you have to take profits, too. That way, you get more capital that you can put to work. Think of it this way – Safeway Inc. (NYSE: SWY) regularly replenishes the inventory in its Produce Department to keep it fresh. You should do the same with the “inventory” in your portfolio because, if you let your stocks sit on the shelf too long, they’ll eventually go bad – just like fruit that’s past its expiration date.

Rule Number 3: Always Sit in an Exit Row: This rule goes hand in hand with Rule Number 2. One of the most common problems investors have is not knowing when to sell. Sometimes, they’ll let a big loss get out of control (which violates Rule Number 6) – or, worse, they’ll notch a big gain and then sit on the investment so long that it sneakily turns into a loss. The bottom line is that, up or down, you should always have planned exit pointswhen you initiate a position – and enforce them with “protective stops,“adjusting them as prices move in your favor (but never when they go against you).

Rule Number 4: Your Broker is a Salesman. So unless you know you want to buy what he has, don’t go shopping today! Wall Street is not a service business. Brokers exist for one reason and one reason only – to sell you stuff and make money . . . from your money. And the more of your money you give to them, the less you have to make more for yourself. So buy only what you want and what fits your goals and objectives – not the “stock of the day ” the broker is pushing to meet his weekly quota.

Rule Number 5: Invest for High Yields:Contrary to popular belief, rather than investing for capital gains, you should aim for the highest possible yields and the most certainty you can find. The real secret to wealth-building is compounding small gains over long periods of time. In fact, studies show that compound returns can outperform so-called “growth stocks” by as much as 22-to-1. Furthermore, dividends account for a huge percentage of total returns – varying studies have claimed anywhere from 60% to as much as 97% over time. So, don’t ignore them!

Sign up below…and we’ll send you a new investment report for free:

“Credit Crisis Report.”


 
 Rule Number 6:Think Like a Plumber: Big losses – like six inches of water in your living room – are expensive and can set you back years. Professional traders – and I’m not including the risk-junkie cowboys who drove the derivatives mess to heck in a handbasket – understand this. And because they do, they focus the majority of their efforts on avoiding losses, instead of oncapturing gains. It’s counter-intuitive, but it really makes a difference. Besides, if you keep those portfolio pipes from bursting, you won’t have to worry about your assets leaking away, drip by drip.

Rule Number 7: Buy Value: Buying when the underlying value is “right” can mean the difference between pathetic single-digit gain and truly market-beating returns. It’s hard to make money when valuations – as reflected by Price/Earnings (P/E) ratios are greater than 20. More normal valuations sit in the 12 to 14 range. However, to reallymake money, you need to buy when valuations have been beaten down into the single digits – assuming, of course, that the company’s underlying value is real. Doing so puts the odds strongly in your favor and can dramatically boost returns.

Rule Number 8: Retirement is a Lifestyle Issue, Not a Monetary One: When most people think about retirement, they think about safety. Big mistake. The single biggest problem facing us today is running out of money before we run out of life. If you’ve followed Rule Number 9, this shouldn’t be a problem. However, if you’ve thought about safety and have not invested enough, what you’re really doing is crippling your ability to earn future income – income you’re going to need in order to eat, keep a roof over your head, and provide lifelong life health care. Oh yeah, and have some fun.

Rule Number 9: Start Early and Leave Your Money Alone For as Long as Possible: This is not the same thing as “buy-and-hold” investing. Buy-and-hold is not an investing strategy, it’s a marketing gimmick – and, these days, it’s more like “hope-and-pray” investing, anyway. The world’s most successful investors – think Jim Rogers, Warren Buffett and the late Sir John Templeton, to name a few – don’t buy and hold. And I don’t believe you should, either. These experts buy and “manage,” confining themselves to stocks and strategies that meet their specific objectives. Given that one of our critical objectives is to have our money working hard for us rather than us working hard for it, the point is that you want to start as early in your life as possibleand never miss an opportunity to invest. The longer you have your money in play, the better you will be paid when you’re ready to cash out!

Rule Number 10: All Investments Contain Risks – But Not All Investments Contain the Same Risks: Despite all my talk about avoiding losses, the simple truth is this: If you want to grow your wealth, you have to take on risk. It’s unavoidable. Every investment involves risk – the only questions are how much and under what circumstances. Remember, success is not about how much money you can make, but about how much money youkeep. As such, the true secret of wealth-building is taking risk properly.

Indeed, the late legendary U.S. Army Gen.George S. Patton Jr., once said: “There is nothing wrong with taking risks.” But he also cautioned: “That’s quite different from being rash.” I completely agree. What’s more, I think that Patton would have agreed with my belief that if you want to be successful in anything, you have to take a certain amount of risk every day. It’s just a fact of life.

Yet, most folks are unwilling to do so – or they spread themselves too thin, and over-diversify, all with the goal of “protecting” themselves. Unfortunately, by doing so, these investors actually set themselves up for failure – not because they take too muchrisk, but because they don’t concentratethe risks they do take in the right places!

What are those “right” spots? They’re the investments that can provide the potential rewards to justify the risks the investor has taken.

[Editor's Note: Keith Fitz-Gerald is the chief investment strategist for Money Morning and The Money Map Report. Fitz-Gerald has pulled all his best thoughts together in his new book, "Fiscal Hangover: How to Profit From the New Global Economy." The reviews are excellent. Investors interested in ordering the book can save $10 off the cover price at Amazon.com. Just click here.]

News and Related Story Links:

]]> http://www.moneymorning.com/2009/11/12/10-rules-for-investing/feed/ 6 U.S. Sen. Christopher Dodd’s Plan for Financial Reform as Ambitious as it is Antagonistic http://www.moneymorning.com/2009/11/12/dodd-financial-reform/ http://www.moneymorning.com/2009/11/12/dodd-financial-reform/#comments Thu, 12 Nov 2009 09:00:14 +0000 Jason Simpkins http://www.moneymorning.com/?p=9906 By Jason Simpkins
Managing Editor
Money Morning

U.S. Sen. Christopher Dodd, D-CT, on Tuesday released an 1,136-page draft bill for sweeping financial regulatory reform that will create several new protection agencies, increase regulation of credit agencies and derivatives, and alter the role played by the U.S. Federal Reserve in the financial system.

And that’s just the beginning what will be a long and contentious battle to get the bill past the Senate, the House of Representatives and the Obama administration. Lobbyists, large banks, and the heads of government regulators, such as the Federal Deposit Insurance Corp. (FDIC) Chairwoman Sheila Bair, will have their say on the proposal as well.

Still, Dodd’s bill, which he worked closely with U.S. Rep. and Chairman of the House Financial Services Committee Barney Frank, D-MA, to draft, is an important first step in the push for financial regulatory reform, which in recent months had been overshadowed by the Obama administration’s push for healthcare reform.

Among the most controversial elements of Dodd’s bill are four new, independent regulatory agencies that would combine the powers of certain regulators, particularly the U.S. Federal Reserve.

  • The Financial Institutions Regulatory Administration: Perhaps the most controversial fixture of Dodd’s proposal is this “super-cop” of a regulatory agency that would combine parts of the Fed, FDIC, the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) to oversee all of the nation’s banks – large and small.
  • Agency for Financial Stability: This agency would be headed by a nine-member board that includes financial regulators and an independent chairman appointed by the president. It would be responsible to identifying and addressing systemic risks throughout the financial system. It would aim to discourage firms from growing so large and complex that a breakdown in operations would pose a threat to the nation’s financial stability.
  • Consumer Financial Protection Agency (CFPA): A favorite of the Obama administration, this new, independent agency would oversee loans made directly to American consumers, such as mortgages and credit cards.
  • National Insurance Office: This office would be created within the U.S. Treasury Department to oversee the insurance industry. This would be the first attempt by the federal government to regulate an industry that has traditionally been monitored by state authorities.

The bill also aims to create a safe way to shut down companies that are “too big to fail” by imposing tough new capital and leverage requirements and requiring they write their own “funeral plans.” There also would be changes made at the Securities and Exchange Commission (SEC).

Sign up below…and we’ll send you a new investment report for free:

“Credit Crisis Report.”

The SEC would be self-funded through registration fees paid by companies. And a new office would be created to monitor credit ratings agencies. The SEC, along with the Commodities Futures Trading Commission (CFTC), would also gain the authority to regulate over-the-counter derivatives.

Meanwhile, hedge funds worth more than $100 million would be required to register with SEC as investment advisers and to disclose certain data. Companies that sell securitized products would be required to retain a part of the risk. And executive compensation would be subject to a nonbinding shareholders vote.

It’s unlikely that all of these reforms will find their way into the final legislation. A regulatory reform bill that is as large and ambitious as Dodd’s will draw fire from many different angles. But the Connecticut senator was determined to make the most of his opportunity to revolutionize finance regulation

“I could have tried to draft something that was already a compromise of ideas in a sense, but I think you make a huge mistake by doing that,” Dodd said. “You’re given very few moments in history to make this kind of a difference. We’re trying to do that and I think this is important,” he said.

Financial Reform in for a Fight

The scope and complexity of Dodd’s bill make it unlikely the proposal will pass the Senate by year’s end. But it will force opponents to pick their battles and it’s clear that Dodd adopted a number of his colleagues’ suggestions – either to garner early support or because he thought they were good ideas.

U.S. Sen. Charles Schumer, D-NY, had requested the bill give shareholders more say over executive pay. Hence, the “say-on-pay” portion of the bill that forces executives to be susceptible to shareholder vote. Schumer also advocated financing the SEC with registration fees.

The bill also included ideas from U.S. Sens. Jack Reed, D-RI, and Mark Werner, D-VA. Werner had previously introduced a bill that would give the government greater resolution powers over firms deemed “too big to fail.”

Of course, that doesn’t mean Democratic support is a lock. Democratic representatives have said they stand behind Dodd, but even Werner said he had “some concerns” and that there are aspects of the bill he’s hoping to change.

There so far have been no signs of Republican support for the bill, and it will almost certainly take flak from the Federal Reserve and FDIC, which would be stripped of their supervisory powers.

The Fed faces the biggest disintegration of authority. It would lose its role as a supervisor of banks to the new Financial Institutions Regulatory Administration and its consumer protection duties to the Consumer Financial Protection Agency. Meanwhile, the Agency for Financial Stability would be responsible for snuffing out systemic risks to the financial system, with the Fed holding just one of its nine seats.

That ultimately leaves the Fed with the responsibility of setting monetary policy and little else. The move reflects the opinion of Dodd and others that the central bank – which failed to recognize, much less prevent, the onset of the financial crisis – already has too much responsibility.

“We saw over the last number of years when they took on consumer protection responsibilities and the regulation of bank holdings companies, it was an abysmal failure,” Dodd said.

However, Fed Chairman Ben S. Bernanke, who Dodd said is “doing a terrific job,” has argued that the central bank’s regulatory duties are essential if it is to have the information, expertise and authority to promote stability and regulate monetary policy.

“It’s hard to imagine monetary policy being conducted effectively in an environment where financial stability is lacking from the Fed’s mandate,” J. Alfred Broaddus Jr., a former president of the Richmond Fed, told Bloomberg News.

It also runs counter to the proposals of the Obama administration, which suggested expanding the Fed’s power.

“Dodd is basically starting out by out-reforming the administration,” a senior congressional staff member told The Washington Post.

The Financial Institutions Regulatory Administration and the Agency for Financial Stability could be the two biggest sticking points for the Obama administration.

“The biggest thing that jumps out is the consolidation of the bank regulators from four down to one. There doesn’t seem to be that much support for it politically,” Douglas Elliott, a fellow with the Brookings Institution, told American Banker. “The administration has not proposed it. I don’t know that they have a big problem with it, but they had certainly concluded it was not worth the political pain that it would require. This wasn’t a fight that the administration wanted to pick.”

Indeed, Dodd’s proposal goes a step further than the House bill, which simply sought to combine the OCC and OTS. And some lawmakers and industry groups are already skeptical of creating such a large bureaucracy to oversee all of America’s banks.

While Dodd’s plan requires the new agency to have a division explicitly devoted to community banks, some worry that the needs of smaller banks will be overshadowed by the demands of larger institutions.

“We are adamantly opposed to a single regulator,” Camden Fine, president of the Independent Community Bankers of America, told American Banker. “The 15 or 20 largest banks will soon dominate that regulatory agency. … There will be no counter voice.”

There could also be strife over Dodd’s systemic risk agency. Treasury Secretary Timothy Geithner already has warned that a regulatory council will lack accountability. And again, the Fed will fight to keep its role as arbiter of systemic risks.

“The Fed should have a particularly important role in supervising institutions that create a systemic risk,” said Janet Yellen, president of the Reserve Bank of San Francisco.

And even the proposed CFPA, which has been advocated by the Obama administration, will be contested.

“We’re against creating a separate agency to protect consumers,” Scott Talbott, chief lobbyist for the Financial Services Roundtable, an industry group that represents big financial institutions, told NPR. “We think you can protect consumers a more effective way by strengthening the existing regulators rather than creating a separate agency.”

Regardless of the fight Dodd is in for, however, analysts and lawmakers alike agree that it is an important first step on the long way to necessary reform.

“Chairman Dodd’s draft bill moves us one step closer toward comprehensive financial reform,” said Geithner. “We look forward to working with the chairman and his committee in the coming weeks on a set of strong reforms to strengthen consumer protection, crack down on excessive risk-taking, and stabilize the financial system while protecting the taxpayer.”

News and Related Links:

]]> http://www.moneymorning.com/2009/11/12/dodd-financial-reform/feed/ 2 The Three Key Economic Issues Obama Will Tackle In His First Asia Trip http://www.moneymorning.com/2009/11/11/obama-asia/ http://www.moneymorning.com/2009/11/11/obama-asia/#comments Wed, 11 Nov 2009 09:00:34 +0000 Bob Blandeburgo http://www.moneymorning.com/?p=9861 By Bob Blandeburgo
Associate Editor
Money Morning

When U.S. President Barack Obama this week makes his first visit to Asia as the nation’s chief executive, he will have no shortage of issues to address. However, there are three key subjects that he will pay particular attention to.

  • China’s currency, the yuan, which Beijing keeps undervalued to boost exports.
  • The large trade imbalance between China and the United States.
  • And a pending free trade agreement (FTA) with South Korea.

Analysts believe President Obama will push to ratify a free trade deal with South Korea that was signed in 2007 but has failed to pass legislatures in both countries. Many also hope he will pursue other agreements like it.

“We are standing on the sidelines while Asian nations clinch new trade deals,” said Thomas Donohue, president and chief executive officer at the U.S. Chamber of Commerce. “We’ll pay the price if this continues. It’s time to see action from Washington.”

There are 168 free trade agreements currently in place in Asia, up from just 22 in 1980, according to the U.S. Trade Representative. Eighteen more have been completed but not yet implemented and 70 more are being negotiated. However, the United States has only two FTAs with Asia-Pacific countries: Singapore and Australia.

Former President George W. Bush pledged U.S. participation in the Trans-Pacific Strategic Economic Partnership Agreement, also known as “P4,” which includes Singapore, Chile, New Zealand and Brunei. In addition to its FTA with Singapore, the United States has an agreement with Chile, but would need deals with New Zealand and Brunei to become a full member of the pact.

So far, the White House has stalled on P4 negotiations as it reviews the U.S. trade agenda. U.S. Trade Representative Ron Kirk said the talks are “the most practical way to be engaged” with the region, but declined to say when or even if the United States would resume negotiations over the agreement.

When President Obama stops in Singapore this weekend, he will participate in the Annual Economic Cooperation summit, where he’ll be pressed on the United States’ trade stance. He’ll then face questions next week in Seoul over ratification of a 2007 FTA with South Korea.

Trade Representative Kirk said last week the Obama administration would not send the deal to Congress for a vote until Seoul allows more U.S. exports, including automobiles.

“Our market is open to Korean autos,” Kirk said in a speech to the U.S.-Korea Business Council. “All we are asking for is for our own auto companies to be able to compete on a level playing field in the Korean market.”

Sign up below…and we’ll send you a new investment report for free:

“Credit Crisis Report.”

Ratification of the South Korea FTA would eliminate an 8% duty on U.S. auto imports. South Korea President Lee Myung-Bak said in June that he was committed to the deal, but declined to set a timeframe.

Trade Imbalance, Yuan Highlight Full Agenda for Obama in China

The most closely watched part of President Obama’s visit will be next week when he visits Shanghai and Beijing.

Speaking to Reuters, the president said he would raise with Chinese leaders the sensitive issue of the yuan, which hasn’t appreciated since July 2008 and is considered to be a large factor contributing to the U.S. trade deficit with China, which stood at $20.2 billion as of October.

“As we emerge from an emergency situation, a crisis situation, I believe China will be increasingly interested in finding a model that is sustainable over the long term,” President Obama said. “They have a huge amount of U.S. dollars that they are holding, so our success is important to them.”

Still, the president warned if currency and yuan issues don’t get resolved, he thinks “both economically and politically it would put enormous strains on the relationship.”

It’s unlikely that China’s will reverse its stance on the yuan, as exports are still suffering, having fallen 15.2% in September.

Beijing will hold its official line on the nation’s exchange-rate policy, Qin Gang, spokesman for China’s Ministry of Foreign Affairs told Dow Jones Newswire. The government will continue to reform its exchange-rate regime by raising rate flexibility while still keeping the yuan rate basically static.

Qin also reiterated the Red Dragon’s concerns about the United States, calling on the American government to maintain the medium- and long-term sustainability of its fiscal policy.

“This will be conducive to the stability of the U.S. dollar exchange rate and it will be conducive to China and the whole world,” Qin said.

Governments in trade surplus countries – such as China – must act to cut the disparity between saving and investment so they can raise demand in their own economies, U.S. Federal Reserve Chairman Ben Bernanke said last month at a conference of the Federal Reserve Bank of San Francisco.

“Admittedly, just as increasing private saving in the United States is challenging, promoting consumption in a high-saving country is not unnecessarily straightforward,” Bernanke said, suggesting that governments remove its citizens’ motive for saving by making pension systems stronger and increasing spending on health care and education.

President Obama will also attempt to cool tensions over the trade spat that has escalated between the two countries in the last few months.

In September President Obama imposed a 35% tariff – on top of the existing 4% duty – on Chinese tires coming into the United States. That order came mainly at the behest of the United Steelworkers union, which says 5,000 union jobs have been lost since 2004 because low-cost Chinese tires are flooding the market. From 2004 to 2008, the number of tire imports from China has tripled.

That was followed in October by a U.S. investigation into seamless steel pipe imports from China. The government agency will make a decision on preliminary anti-dumping duties in December and could impose new duties of almost 100% on imports of steel pipes from China as soon as February.

China responded with an “anti-dumping” probe into U.S. auto parts and chicken meat imports. Beijing is also investigating Detroit’s “Big Three” automakers to determine whether or not they are receiving U.S. government subsidies, or selling their products in China below market costs.

The United States isn’t seeking to engage in trade protectionism, U.S. State Department official Robert Hormats told Chinese university students yesterday (Tuesday), but acknowledged the trade tensions between the world’s No. 1 and No. 3 economies.

“Support for international trade in the United States is much less today than it was several years ago,” Hormats said, adding that especially with rising unemployment “there is skepticism about trade, and I have to say that to you candidly.”

Hormats stressed the United States would rather settle the dispute as opposed to taking them to the World Trade Organization (WTO).

“I know the tire case caused a great deal of tension in China,” Hormats said. “But I want to assure you that the U.S. is not a protectionist country.”

News and Related Story Links:

]]> http://www.moneymorning.com/2009/11/11/obama-asia/feed/ 3 G20 Fizzles as China-Africa Summit Leads to a $10 Billion Loan http://www.moneymorning.com/2009/11/10/g20-summit-2/ http://www.moneymorning.com/2009/11/10/g20-summit-2/#comments Tue, 10 Nov 2009 09:00:21 +0000 Jason Simpkins http://www.moneymorning.com/?p=9846 By Jason Simpkins
Managing Editor
Money Morning

While U.S. and European officials this weekend squabbled over the specifics of an economic recovery plan, China took another step to ensure long-term economic growth by inking another multibillion-dollar deal with Africa.

Finance ministers from the Group of 20 (G20) met over the weekend to discuss the ongoing healing process taking place in the world’s financial system. Officials agreed that stimulus measures should remain in place, as the global economic recovery is still vulnerable. They also acknowledged that while the dollar is weakening, its downside risk is outweighed by the need to “continue to provide support for the economy until the recovery is assured.”

Analysts say that the dollar’s decline will take a back seat to the economic recovery so long as it remains orderly.

“With that, the dollar is going to remain in a structural downturn,” Paul Mackel, senior currency strategist at HSBC Holdings PLC (NYSE ADR: HBC), told Reuters. “But it’s orderly, and that’s the key thing. The dollar’s going to remain a sell on rallies.”

The euro has risen more than 11% against the dollar this year, and yesterday (Monday) it again broke the psychologically important $1.50 level. Many investors have also sought the shelter of hard assets, with the price of gold breaching new record highs on a fairly routine basis over the past week. Gold gained as much as 1.3% on the Comex division of the New York Mercantile Exchange (NYMEX) yesterday, hitting another fresh record of $1,109.50 an ounce.

The International Monetary Fund (IMF) added to the dollar’s woes by saying in its note to the G20 that the U.S. currency was still “on the strong side” in terms of its trade-weighted basis.

But while international policymakers have agreed that stimulus should be employed until the global economy firms, they failed to reach a consensus on much else. Officials agreed the global economy needs more balance. For instance, the United States needs to reduce its trade deficit, while other countries – such as China and Germany – must become less dependent on exports. But a specific strategy aimed at solving the shortcomings that currently exist was lacking.

“The G20 meeting failed to deliver any real specifics as to how it intended to rebalance the global economy, suggesting the drift in the dollar is not likely to be addressed on a coordinated basis,” Daragh Maher, deputy head of global foreign exchange strategy at Calyon Credit Agricole, told The Associated Press.

G20 finance ministers also offered no details on how they plan to limit bonuses at financial firms, to what extent they will force banks to accumulate more cash reserves, and how they will finance a new climate change agreement ahead of a crucial meeting in Copenhagen next month.

“The meeting turned out to be a mostly irrelevant sideshow on the way to the Copenhagen talks,” Richard Dixon, a director of environmental group WWF Scotland, told Bloomberg News.

Sign up below…and we’ll send you a new investment report for free:

“Credit Crisis Report.”

The United States and Britain, two historically close allies, even clashed over the application of a so-called Tobin tax. British Prime Minister Gordon Brown advocated the tax on financial transactions to support future bank rescues.

“It cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us,” Prime Minister Brown said. There must be a better economic and social contract between financial institutions and the public based on trust and a just distribution of risks and rewards.”

France and Germany have advocated such a tax in the past, but U.S. Treasury Secretary Timothy F. Geithner opposed the idea.

“A day-by-day financial transaction tax is not something we’re prepared to support,” he told Sky News.

Analysts have pointed out that as the recovery gathers steam, the opportunity for real change fades.

“Each day the crisis recedes, the old battle-lines reemerge and it gets tougher to find common conclusions,” Tim Adams, a former U.S. Treasury official who is now managing director at The Lindsey Group, told Bloomberg.

China’s $10 Billion Loan Lands Under the Radar

While finance ministers and central bankers of the world’s 20 most developed nations conferred in Scotland, another, less publicized meeting – the fourth ministerial Forum on China-Africa Cooperation (FOCAC) – was taking place in Sharm el-Sheikh, Egypt.

There, Chinese Premier Wen Jiabao and Chinese President Hu Jintao unveiled eight measures on bilateral cooperation, as well as $10 billion of low-interest loans to African nations over three years.

“The Chinese people cherish sincere friendship toward the African people, and China’s support to Africa’s development is concrete and real,” said Premier Wen. “We will help Africa build financing capabilities. We will provide $10-billion for Africa in concessional loans.”

Indeed, China has found exceptional economic growth at a time when most of the Western world is struggling back from the brink. A continent rich in commodities, which have been skyrocketing in value, Africa is integral to China’s plans for sustained growth.

Chinese oil companies alone have announced plans to spend at least $16 billion to gain access to the continent’s energy assets.

For instance, it was revealed in September that China’s state-owned CNOOC Ltd. (NYSE ADR: CEO) is in talks with Nigeria to buy 6 billion barrels of oil – equivalent to one-sixth of the country’s total reserves.

Acquiring one out of every six barrels of Nigerian oil equivalent could cost between $30 billion and $50 billion. China has made huge investments in Africa in exchange for large supplies of iron ore, nickel, copper, cobalt, bauxite, silver and gold.

Last year, China vaulted over the United States to become Africa’s largest trading partner, as two-way trade between the two parties totaled $107 billion. In fact, trade between the two regions has surged tenfold in the past eight years, to almost $107 billion in 2008.

However, several Western authorities – some of which are concerned about the security of their own operations – have accused China of plundering the continent for its resources with little or no concern its citizens.

For instance, China’s friends in Africa include President Omar Bashir of Sudan – who is currently wanted by the International Criminal Court for war crimes – and Zimbabwe President Robert Mugabe – who has been accused of driving his country into economic ruin and starvation and is heavily sanctioned by the United States and European Union.

“The People’s Republic of China (PRC) aids and abets oppressive and destitute African dictatorships by legit­imizing their misguided policies and praising their development models as suited to individual national conditions,” said a report from the Heritage Foundation. “Moreover, China rewards its African friends with diplomatic attention and financial and military assis­tance, exacerbating existing forced dislocations of populations and abetting massive human rights abuses in troubled countries such as Sudan and Zimbabwe.”

China is the largest supplier of arms to Sudan, which received $7 billion of Chinese defense exports between 2003 and 2007, according to the U.S. Department of Defense.

Both Sudan’s al-Bashir and Zimbabwe’s Mugabe were present for Wen’s speech.

Still, the Chinese Premier was at a loss in understanding criticism from the West.

China’s imports of African mineral resources and energy account for only 13% of the continent’s total exports and its investments in Africa’s oil and gas sector were only one-sixteenth of the total investments in the continent, Wen told reporters at the FOCAC.

Chinese investments in Africa were up 77% in the first three quarters of 2009.

“So, why do some people only criticize China?” he asked.

News and Related Story Links:

]]> http://www.moneymorning.com/2009/11/10/g20-summit-2/feed/ 2 Commodities-Rich Australia Leads the West’s Recovery http://www.moneymorning.com/2009/11/09/commodities-rich-australia/ http://www.moneymorning.com/2009/11/09/commodities-rich-australia/#comments Mon, 09 Nov 2009 08:25:58 +0000 Bob Blandeburgo http://www.moneymorning.com/?p=9828 By Bob Blandeburgo
Associate Editor
Money Morning

The Reserve Bank of Australia (RBA) last month became the first Western economy to raise its key interest rate since the financial crisis began almost two years ago. It proceeded to raise the rate for a second time in a month last week, just before it published its quarterly report on Friday, which says bottlenecks obstructing exports of its vast resources such as iron ore and coal are about to be relieved.

“Over the next two years, if capacity comes on line as planned, production of these bulk commodities could increase by around one third, with further significant increases possible over the remainder of the decade,” the RBA said

As a result of this expected boom in the commodities sector, the RBA raised its forecast for growth of Australia’s economy from 0.5% to 1.75%, and boosted its 2010 estimate a full percentage point to 3.25%.

“The RBA here is foreshadowing years of expansion based on resources, population and Asian demand,” Su-Lin Ong, a senior economist with RBC Capital Markets Corp. told Reuters. “It’s big picture positive for Australia and the Australian dollar, and means rates are going nowhere but up.”

At the forefront of the Australian economic boom will be the nation’s huge natural gas reserves, particularly the Gorgon gas field, first discovered in 1981. Developers Chevron Australia, Shell Development Australia and Mobil Australia Resources in September got their first approval to begin work on the field, which has more than 40 trillion cubic feet of gas.

The Gorgon field, Australia’s largest natural resource, is responsible for the nation’s largest trade deal ever with the world’s fastest-growing economy: China. Inked last summer, the deal calls for PetroChina Co. Ltd. (NYSE: PTR) – Asia’s largest oil and gas company – to buy 2.25 million tons per year of liquefied natural gas (LNG) from Gorgon over a period of 20 years.

“The Gorgon Project is globally and nationally significant with a resource base of more than 40 trillion cubic feet of gas and an estimated economic life of at least 40 years from the time of start-up,” said Chevron Australia Managing Director, Roy Krzywosinski.

“Furthermore, the Gorgon Project is Australia’s largest single resource project and is set to deliver significant economic benefits and create around 10,000 indirect and direct jobs during peak construction.”

While Australia patiently waits for the first Gorgon LNG to ship in 2014, it expects LNG from the $12 billion Pluto project in early 2011, just six years after the field was discovered. Combined with the larger Gorgon project, the RBA says LNG exports could grow three to four times, rivaling its mineral exports.

“Production increases of this magnitude would likely see the value of LNG exports increase towards a similar share of total exports as for coal or iron ore,” the RBA said.

Encouraging as this growth may be to Aussies, it won’t come without some growing pains.

Australia faces an “extended period of prosperity in the years ahead,” meaning a strain will be put on the country’s housing and labor markets, RBA Deputy Governor Ric Battelino said at a conference last week.

Australia’s population is growing more than 2% per year, with two-thirds of the growth coming from immigration in the past year.

“Workers are likely to be in short supply, leading to strong demand for skilled migrants and therefore fast population growth,” Battellino said. “This, in turn, will have flow-on effects for housing markets.”

That bodes well for home prices in Australia, which gained 3.7% in the third quarter and are up 6.5% on the year, according to market research firm Australian Property Monitors. But that’s not going to help a buyer if there aren’t enough homes on the market.

“We’ve got to get ahead of the curve,” Australian Treasurer Wayne Swan said in October at a press conference. “We’ve not been building enough houses and we have strong population growth so it will be very important as we move through to economic recovery to ensure we don’t have capacity constraints that flow from the shortage of housing.”

Australia is Leading the West’s Recovery

Looking at interest rate increases in Australia could serve as a sign of things to come in other Western nations, most of which have kept their key lending rates at record lows.

Inflation in Australia may be a leading indicator of inflation in the United States, but until the United States or the European Union begins to raise their interest rates, “we’ll carry on in the current modest recovery with commodities bubble,” said Money Morning Contributing Editor Martin Hutchinson, an investment banker with more than 25 years’ experience.

Still, unusually low interest rates worldwide should give way to rising prices, and Hutchinson says to “watch for U.S. inflation to start ticking up soon.”

The U.S. Federal Reserve should begin to raise its key interest rates sometime next year, but has yet to give any specifics, stating last week that current economic conditions are “likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Meanwhile, the United Kingdom also kept interest rates low as it continues to inject money into its system, announcing Thursday that it will spend another $41 billion (25 billion pounds) on stimulus measures.

Australia’s 5.7% unemployment rate looks tame next to the United States’ 10.2% and the United Kingdom’s 7.9%. Even commodities-rich Canada saw its rate swing back up again to 8.6% in October.

In the United States, programs like the Car Allowance Rebate System, better known as “Cash for Clunkers,” helped prop its economy up 3.5% in the third quarter, while the United Kingdom’s gross domestic product (GDP) disappointed, falling 0.4% as consumers put more of their earnings toward paying off debt.

News and Related Story Links:

]]> http://www.moneymorning.com/2009/11/09/commodities-rich-australia/feed/ 0