The government restructured its majority ownership of Ally Bank in a deal that aims to speed its exit from the $17 billion bailout of the former GMAC.
Treasury will boost its common stock stake in Ally to 74% from 56% under the deal outlined Thursday afternoon. Under the arrangement, Treasury will convert $5.5 billion of preferred stock to common shares.
The government emphasized that the deal will "accelerate Treasury's ability to exit its investment in the company," an important point at a time when the government is doing everything it can to paint the financial rescues of 2008 and 2009 as a win for taxpayers.
But by converting to common stock a large portion of the preferred stock Treasury received in propping the company up at the end of 2008, the deal also boosts a key measure of Ally's financial strength.
The bank's Tier 1 common ratio – measuring the proportion of stockholder capital available to absorb losses in a downturn – will rise to 9%, in line with the biggest U.S. banks, from 5% beforehand, officials said. That's important as policymakers brace for another downturn in the U.S. housing market and possible knock-on effects on the car business, which is where Ally does much of its financing.
The government rescued GMAC, which was faltering thanks to its souring mortgage business and its ties to the collapsing auto industry, at the end of 2008.
Thursday's announcement comes on the heels of a series of similar maneuvers by the government to show progress in extricating taxpayers from the bailouts that started in 2008 under the Bush administration. Treasury in recent weeks has held an initial public offering of General Motors (GM), sold the last of its common stock in Citigroup (C) and revamped for the umpteenth time its investment in AIG (AIG).
"Our action today parallels the actions we took in converting Citigroup preferred stock and in the pending conversion of AIG preferred stock to common stock," said Treasury Acting Assistant Secretary for Financial Stability Tim Massad. "Our ultimate goal in all these investments is to exit as quickly as possible on terms that realize the most value for the taxpayer, and this transaction will facilitate that."
Under the arrangement outlined Thursday, Treasury will be left with $8.6 billion of preferred stock, some of which it will sell with help from Ally.
The news comes on the heels of another major development at Ally, which this week agreed to pay $462 million to settle a mortgage dispute with Fannie Mae (FNMA).
The terms struck some observers as surprisingly favorable to Ally and prompted Chris Whalen, who watches the industry for the Institutional Risk Analytics consultancy and has been on the lookout for backdoor subsidies to the banks, to call the deal "a gift from Uncle Sam," which now controls Fannie.
The former car czar and private equity boss today agreed to pay $10 million in restitution to the State of New York, for his role in the state's public pension kickback scandal. He also has agreed to refrain from "appearing in any capacity" before any New York pension fund for the next five years.
This follows Rattner's earlier deal with the SEC, under which he agreed to repay $6.2 million and agree to a two-year ban from the securities industry.
In an official statement, Rattner said:
"I am pleased to have reached a settlement with the New York Attorney General's Office, which allows me to put this matter behind me. I apologize if during the course of this process there is anything I did that may have made reaching this agreement more difficult. I respect the work of the Attorney General and his staff to ensure that the New York State Common Retirement Fund operates properly and in the best interests of New Yorkers."
That's a far cry from what Rattner said just last month:
While settling with the S.E.C. begins the process of putting this matter behind me, I will not be bullied simply because the attorney general's office prefers political considerations instead of a reasoned assessment of the facts.
This episode is the first time during 35 years in business that anyone has questioned my ethics or integrity — and I certainly did not violate the Martin Act. That's why I intend to clear my name by defending myself vigorously against this politically motivated lawsuit.
For the uninitiated, Rattner's restitution is based on his time as a co-founding partner of Quadrangle Group, a New York-based private equity firm that invested in media, communications and information services companies. Here's the rundown, based on legal filings (note, I'm cribbing what follows from earlier posts, because nothing in the settlement appears to alter the underlying allegations):
- Rattner secured a video distribution deal for the brother of New York pension fund CIO David Loglisci, via a (now defunct) Quadrangle portfolio company. The deal was done over the initial objections of portfolio company management. Not only does this indicate pay-to-play, it also would seem to mean that Rattner violated his fiduciary obligations to Quadrangle limited partners (not letter of obligations, but spirit).
- Rattner also helped connect Logiscli's brother with people at film channel IFC, in which Quadrangle was an investor.
- Presumably at Loglisci's suggestion, Rattner secretly hired Hank Morris as a "placement agent," in order to secure a $100 million fund commitment for Quadrangle from the New York State Common Retirement Fund (it was later increased to $150m). This came after Quadrangle's legitimate placement agents had only been able to secure between $25 million and $50 million. Morris got Quadrangle the money without ever setting up or attending any meetings with CRF on Quadrangle's behalf.
- Morris also helped get Quadrangle $75 million from New York City pension systems, via a third-party who since has pled guilty to securities fraud.
- One of Loglisci's brothers put Rattner in touch with potential investors on the West Coast. These included Elliott Broidy, who sat on the board of the Los Angeles Fire & Police Pension Fund. LAFPPF committed $10 million to Quadrangle, and Broidy has since pled guilty to felony charges of rewarding official misconduct.
- In 2006, Morris allegedly asked Rattner for a contribution to the reelection campaign of State Comptroller Alan Hevesi (Loglisci's boss, who last week pled guity to fraud). Rattner demurred, saying that he had a policy against making contributions to public officials with oversight over investments, Morris suggested that Rattner contribute the money via a third party. Soon after, Rattner tapped a Democratic donor who subsequently contributed approximately $25k to Hevesi (plus another $25k from the donor's wife). That donor was not identified in court documents, but appears to have been Haim Saban. A source tells me that Saban was unaware of Rattner's backroom shenanigans.
A few final thoughts on this story:
1. This could have been FAR worse for Rattner, and perhaps would have been were Cuomo not leaving the AG's office in just two days. Cuomo originally sought restitution of between $18 million and $20 million in private, and then bumped it up to $26 million in a pair of lawsuits (both dropped today, as part of the settlement). He also had precedent on his side, based on the $20 million shelled out by Riverstone Group founder David Leuschen, for other activities related to Hank Morris, New York pensions and the aforementioned film (a horrendous piece of dreck called "Chooch"). Finally, Cuomo also was seeking a lifetime securities industry ban.
Not only did Rattner get off relatively cheaply -- and never face possible criminal charges -- but he even got a bit of a PR boon by settling on a day when half of the world is on vacation (or still stuck at an airport, as the case may be).
2. On the other hand, the timing makes a bad week even worse for Mike Bloomberg. Hizzoner used to employ Rattner as his personal money manager, via a Quadrangle wealth management group, and still sort of does (the Quadrangle unit broke off into a new group with which Rattner is affiliated).
When asked about Rattner over the summer, Bloomberg said: "I don't think [Rattner] did anything wrong… I happen to think the charge against him is ridiculous... I've always stood up for anybody that works with me who gets attacked by the press." He has since stuck by his friend, refusing to cut ties with someone who has tacitly admitted to public corruption in Bloomberg's own state.
3. We've seen private equity kickback scandals in a variety of state pension systems, including California and New Mexico, but the New York affair was enabled by a sole fiduciary structure. It's not coincidence that the only other state with such a structure, Connecticut, was rocked by a similar scandal that ended up with its treasurer in prison. A bill was proposed last year to drop the single fiduciary in favor of a board structure, but went nowhere. It's almost as if New York legislators are begging for its public pensioners to again be defrauded.
4. Now that this is settled, here's hoping that Rattner will sit down to speak about the situation with an informed interviewer who sdoesn't mind asking hard questions. No, not you Charlie Rose. I'll officially throw my hat in the ring, but won't hold my breath...
The days of the $500,000 average paycheck are long gone, even at Wall Street's most gilded firm.
So predicts a report issued Thursday by Credit Suisse analyst Howard Chen. He slashed his fourth-quarter earnings estimate on Goldman Sachs (GS) to $3.70 a share from $5.08, citing its latest soft trading quarter and higher non-compensation expenses.
"Due to persisting choppy market conditions and our expectations for a weaker finish to 2010 for fixed income sales & trading, we reduce our forward estimates," he wrote in a note to clients.
Chen continues to rate the stock buy, thanks in part to what he calls "continued expense discipline" at the firm. He expects Goldman to set aside a little more for pay and perks this year than last, but to be far thriftier on that front than it has for most of its public history.
He estimates the firm will devote 40% of 2010 revenue to cover employee-related costs. That would bring the firm's compensation expense for the year to $15.8 billion, or around $446,327 for each of the firm's 35,000 or so employees as of September.
Strong results in the first half of 2010 helped launch Goldman on what looked like a track for a return to a $500,000-plus average payout. But the firm suffered along with Morgan Stanley (MS) and the rest of Wall Street in a summer trading slowdown, and execs presumably remain loath to bring on any more bonus rage than is necessary.
Chen isn't the only one who sees Goldman paying less. David Hilder, an analyst at Susquehanna who also rates Goldman stock buy, predicted last week that Goldman would set aside 39.5% of 2010 revenue aside for employee pay. That's up from last year's 36% but remains the second-lowest figure in the decade or so since the firm went public.
Goldman shares were flat Thursday and are down less than 1% for the year.
Dominion Resources (D) CEO Thomas Farrell is coming up on his fifth year anniversary for the position this January. He spoke with Fortune about how the company dumped oil and gas assets in the nick of time, why his family's military background has kept safety on his mind and the biggest challenge for energy companies in the future.
Fortune: Your tenure as CEO has straddled the recession. How has the company changed?
Farrell: In 2005, our mix of earnings and businesses was very different than it is today. Almost a third of the company's earnings were in oil and gas production—think deepwater rigs.
We were reaping great benefits from that in the short term, but our view was that it was unsustainable because whenever prices are high, people drill like crazy. It's a classic boom bust business. Right now, it's in an extended bust. We saw that spilling over into electric prices, and we didn't expect that to be very popular, so we decided to sell our oil and gas business in 2006 and 2007. More
Most economists and pundits predict a continued upward trend for most assets next year, but they will eventually be proven wrong.
In one of my classes at the University of Chicago Business School in the 1970s, the eminent statistician Harry V. Roberts liked to tell a story showing the homespun wisdom of his colleague and idol, economist Milton Friedman. The great monetarist was part of a panel evaluating a PhD presentation on forecasting growth rates for the U.S. economy. The candidate painstakingly described his methodology for fitting a broad array of variables––global capital flows, future exchange rates, immigration trends, and sundry other factors––into a computer model that, presto, spat out a prediction for the following year's GDP.
According to Roberts, Friedman delivered a brief, cutting critique––probably in the same nasal monotone I remember when, decades later, he returned my long-distance calls collect. Declared Uncle Miltie: "Why would this extremely complex model, based on factors that are themselves hard to forecast and could easily be wrong, produce a better number than taking the growth rates for the past five years, and dividing by five?"
For Roberts, the anecdote amounted to a parable on the pitfalls of economic forecasting. Friedman also liked to use the aphorism, "Predictions are extremely difficult, especially when they're about the future." More
Just weeks after spurning a takeover offer from Google, online coupon site Groupon is in the money via a giant new investment. So are many of its earliest backers.
No new board members are listed, meaning that we do not know the identities of participating investors. Other media reports, however, have suggested that new backers include Morgan Stanley (good way to get the inside track for an IPO), T. Rowe Price and Fidelity.
Digital Sky Technologies, which led the company's $135 million Series C round this past spring, also is believed to be heavily involved.
Groupon's SEC filing indiates that the company still plans to raise upwards of another $450 million, which it first disclosed via an ammended certificate of incorporation. It is worth emphasizing, however, that the $950 million "offering amount" may represent an upper limit to the investment, rather than a target (sometimes companies list artificially-high numbers, in order to provide financial/accounting flexibility).
Groupon CEO Andrew Mason so far has declined to discuss the new funding, beyond the following Tuesday tweet:
Groupon is in the process of completing a new round of financing - we'll let everyone know when there's more to announce.
One purpose of Groupon's massive new round is to provide liquidity for existing shareholders, including those who may have been ticked off that the company spurned Google. Fortune has learned that all Groupon shareholders recently received a letter offering to buy back up to 15% of current stock holdings, and the SEC filing indicates that $345 million of the $500 million will be used to cash out insiders (both investors and management).
In addition to DST, Groupon previously raised venture capital from firms like Accel Partners, Battery Ventures, New Enterprise Associates and a whole host of individuals.
What is yet to be seen is if this will go down as the largest venture capital deal of all time. Most industry trackers only include "new equity" in their calculations, which would shrink the current Groupon raise from $500 million to just around $155 million. Still a large number, but nowhere near an all-time record. For example, movie studio DreamWorks (then a startup) raised $500 million from Paul Allen's Vulcan Capital in 1995. Moreover, both Better Place ($350m) and Twitter ($200m) have raised large "new equity" rounds just this past year.
Were Groupon to raise another $450 million of "new" equity, however, then it would indeed be the largest round (according to MoneyTree, a consortium that includes PwC, the National Venture Capital Association and Thomson Reuters).
In terms of total venture capitalization, Groupon would come in at around $776 million (including the new $450m, excluding the cash-out). According to a Business Insider analysis from this past summer, that would put Groupon fourth on the all-time list.
The private equity world is littered with folks who are famous for doing something else. Bono at Elevation Partners. Bill Frist at Cressey & Co. Mike Richter at Environmental Capital Partners. Colin Powell at Kleiner Perkins.
In most cases, the celebrity partner is used to wow potential investors, make some high-powered introductions and be on call. Every now and then, however, the celebrity partner actually spends his days sourcing deals, serving on portfolio company boards or the myriad of other tasks endemic to the typical private equity pro.
Among this latter group is Steve Young, the Hall of Fame quarterback who currently serves as a managing director with Huntsman Gay Global Capital. Young previously worked at a firm called Sorenson Capital -- along with many of the other Huntsman Gay partners -- and also was a member of Northgate Capital (run by fellow NFL alum Tommy Vardell).
Below is a brief profile of Young's new career by CNBC's Brian Schachtman. Two quick disclaimers: (1) Patriots owner Bob Kraft is effusive in his praise of Young, but it also should be known that Huntsman Gay was one of the first tenants in Kraft's Patriot Place facility. (2) I also happened to be in the suite where Schactman filmed much of his segment (to meet with sources, of course, not to watch Pats vs. Jets)...
More from Fortune:
* Les Leopold: Wall Street's 10 biggest lies of 2010
* Scoundrel: Is New Mexico Gov. Bill Richardson about to pardon Billy the Kid?
* Julia Ioffe: Facebook wants to move up from fifth place in Russia, whose citizens spend more time on social networks than any other nation
* Floyd Abrams: Why WikiLeaks isn't the Pentagon Papers
* Brett Arends: 10 reasons why I don't believe in this Santa rally
* Felix Salmon: Blogger spats have moved to Twitter, and it's a regrettable development
* Boston's Hancock Tower sells for $930 million, a remarkable turnaround that provides a template for other deals
* Indiana cities may soon be allowed to file for Chapter 9 bankruptcy protection. Maybe it's time to unload those Gary, IN muni bonds...
* Tweet of the Day: @darrenrovell: Brett Favre makes $11,373 per minute of every game. That means he's only giving up 4 1/2 MINUTES OF PAY for Sterger fine
* Term Sheet's daily email newsletter is on a holiday hiatus, but sign up for its return next week
* Marty Lipton explains why he invented the poison pill:
Four reasons for optimism in the 2011 economy
There are real signs that the economic recovery will gain strength next year, but that doesn't change the fact that most Americans still won't feel it.
It was around this time last year when it seemed like the U.S. economy was steering into better days. Businesses were investing more on equipment and software and consumer spending was stable. Exports rose at a healthy pace. And after aggressively reducing goods in stores and warehouses amid one of the deepest recessions in recent American history, companies were starting to restock – helping boost GDP during the last quarter of 2009 to a breakneck pace of 5.7%, the economy's largest growth spurt in six years.
Such indicators suggested a brighter outlook, but somehow the momentum abruptly faded as debt problems in parts of Europe escalated and government stimulus spending faded. By mid 2010, many who had thought a real recovery was finally under way were left mystified. They worried the economy might slip back into a recession.
As the New Year approaches, the latest economic indicators have analysts suggesting – again – that things will get better in 2011. But will the outcome really be any different this time around?
A few indicators, according to Lexington, Mass.-based economic forecasting firm IHS Global Insight, have helped build the case that things will improve in the coming year:
Working more hours
For one, the average workweek for all employees on private non-farm payrolls was 34.3 hours in November, a modest uptick from the 33.9 hours worked during the same time last year. An increase in worker hours is significant, especially since many employers dramatically cut hours during the recession that started in December 2007 and ended in June 2009. They'll usually use their existing workers for the maximum hours they can work before hiring new people. So a rise in the average workweek might suggest that sustained job growth is in the horizon.
Corporate spending on the rise
Just when it seemed like companies buying up computers, communications gear and the like would slow after seeing spikes during various periods throughout the year, business investment in capital equipment rebounded in November. Bookings climbed 2.6% after a 3.6% decline in October -- a decline that was smaller than previously estimated, according to the US Commerce Department. If the trend continues into 2011, it could be a positive contributor to US growth.
Dollars on the move
Real money supply – the amount of money in circulation measured in traveler's checks, savings deposits, currency, money market accounts and the like – has increased, rising by 2% this year compared to the previous year.
Nigel Gault, US Chief Economist with IHS, acknowledges that while the development isn't necessarily a huge move, it nevertheless indicates that activity in the private sector is picking up a bit. After all, the more transactions that happen, the more financing is needed and therefore the more money there is in circulation. And real money supply last year was declining, so the fact that it has reversed is a positive sign.
Wealth in stocks
Another hopeful sign is that stock prices have surged. The S&P 500 last week completed its recovery from the six-month plunge that followed Lehman Brothers' collapse in September 2008, extending its rally up 85% since its low in March 2009. The index is expected to end 2011 at 1,374 -- up more than 9% from today's levels, according to Bloomberg, citing the average forecast of 11 strategists at Wall Street's biggest banks. And as The Wall Street Journal reported recently, expectations are that 2011 could be the year that very large multibillion-dollar initial public offerings return, following a year in which most offerings raised less than $200 million.
"I certainly don't want to get too carried away in optimism," says Gault, who remains cautious over the prospects of the country's economic growth.
Gault believes the recovery through 2011 will be vastly different from the current year driven mostly by companies restocking inventory -- it will be more genuine. Judging by today's positive economic indicators, growth will likely be driven by final sales as opposed to inventory building. Gault forecasts that growth could rise around 3.3% next year, markedly higher than the expected 2.9% annual growth for 2010.
But the average person in America will probably still feel little difference. The annoyingly high unemployment rate will improve some but not by much next year. It will probably continue to hover around 9%.
And one of the most critical parts of the recovery, the housing market, probably won't see any real improvements. Many economists expect home prices to drop by an additional 15% to 30% due to an excess of inventory.
Indeed, this is a gradual recovery. Improvements will be slow – probably so slow that to many it will probably be hard, if not impossible, to follow, let alone take notice.
By George F. Will
Thursday, December 30, 2010
Cowlitz County in Washington state is across the Columbia River from Portland, Ore., which promotes mass transit and urban density and is a green reproach to the rest of us. Recently, Cowlitz did something that might make Portland wonder whether shrinking its carbon footprint matters. Cowlitz approved construction of a coal export terminal from which millions of tons of U.S. coal could be shipped to Asia annually.
Both Oregon and Washington are curtailing the coal-fired generation of electricity, but the future looks to greens as black as coal. The future looks a lot like the past.
Historian William Rosen (who wrote "The Most Powerful Idea in the World," about the invention of the steam engine) says coal was Europe's answer to the 12th-century "wood crisis," when Christians leveled much forestation to destroy sanctuaries for pagan worship and to open up farmland. Population increase meant more wooden carts, houses and ships, so wood became an expensive way to heat dwellings or cook. By 1230, England had felled so many trees it was importing most of its timber and was turning to coal.
"It was not until the 1600s," Rosen writes, "that English miners found their way down to the level of the water table and started needing a means to get at the coal below it." In time, steam engines were invented to pump out water and lift out coal. The engines were fired by coal.
Today, about half of America's and the world's electricity is generated by coal, the substance that, since it fueled the Industrial Revolution, has been a crucial source of energy. Over the past eight years, it has been the world's fastest-growing source of fuel. The New York Times recently reported ("Booming China Is Buying Up World's Coal," Nov. 22) about China's ravenous appetite for coal, which is one reason coal's price has doubled in five years.
Half of the 6 billion tons of coal burned globally each year is burned in China. A spokesman for the Sierra Club, which in recent years has helped to block construction of 139 proposed coal-fired plants in America, says, "This is undermining everything we've accomplished." America, say environmentalists, is exporting global warming.
Can something really be exported if it supposedly affects the entire planet? Never mind. America has partners in this crime against nature, if such it is. One Australian company proposes to build the Cowlitz facility; another has signed a $60 billion contract to supply Chinese power plants with Australian coal.
The Times says ships - all burning hydrocarbons - hauled about 690 million tons of thermal coal this year, up from 385 million in 2001. China, which imported about 150 million tons this year, was a net exporter of coal until 2009, sending abroad its low-grade coal and importing higher-grade, low-sulfur coal from, for example, the Powder River Basin of Wyoming and Montana. Because much of China's enormous coal reserves is inland, far from coastal factories, it is sometimes more economical to import American and Australian coal.
Writing in the Atlantic on China's appetite for coal and possible aptitude for using the old fuel in new, cleaner ways, James Fallows quotes a Chinese official saying that the country's transportation system is the only serious limit on how fast power companies increase their use of coal. One reason China is building light-rail systems is to get passenger traffic out of the way of coal trains.
Fallows reports that 15 years from now China expects that 350 million people will be living in cities that do not exist yet. This will require adding to China's electrical system a capacity almost as large as America's current capacity. The United States, China, Russia and India have 40 percent of the world's population and 60 percent of its coal.
A climate scientist told Fallows that stabilizing the carbon-dioxide concentration in the atmosphere would require the world to reduce its emissions to Kenya's level - for America, a 96 percent reduction. Nations with hundreds of millions of people in poverty would, Fallows says, have to "forgo the energy-intensive path toward wealth that the United States has traveled for so many years."
In his new political science treatise ("Don't Vote - It Just Encourages the Bastards"), P.J. O'Rourke says, "There are 1.3 billion people in China, and they all want a Buick." So "go tell 1.3 billion Chinese they can never have a Buick." If the future belongs to electric cars, those in China may run on energy currently stored beneath Wyoming and Montana.
Dollar Declines Amid Demand for Currencies Offering Higher-Yielding Assets
The dollar fell against most of its major counterparts as economic data signaled the world’s largest economy is accelerating into the new year, encouraging demand for currencies in nations with higher-yielding assets.
The U.S. currency weakened after economic reports showed business expansion, fewer jobless claims and more pending home sales. Canada’s currency traded above parity with the greenback for the third day. The Swiss franc climbed to a record versus the euro, pound and dollar. The International Monetary Fund announced it decreased the weight the dollar and yen make up in the basket that makes up its currency unit.
“The market prefers to be in currencies that are driven by fundamentals and that’s buying commodity currencies,” said John McCarthy, director of currency trading at ING Groep NV in New York. “The data, which one would ultimately assume is positive for the U.S., looks better for risk, which in turn puts downward pressure on the dollar.”
The dollar weakened 0.5 percent to $1.3291 per euro at 5:01 p.m. in New York, from $1.3225 yesterday. It fell 0.1 percent to 81.53 yen after touching 81.29 yen, the lowest since Nov. 9, from 81.62 yen yesterday.
The U.S. currency declined 1.1 percent against the franc to 93.53 centimes from 94.56 centimes, after touching a record low of 93.51 centimes. The franc appreciated as much as 0.8 percent to a record 1.2402 against the euro and as much as 1.7 percent to 1.4402 per pound.
The IMF said the value of its Special Drawing Right, the institution’s currency unit, will amount to the sum of $0.66, 0.423 euro, 0.111 British pound and 12.1 yen. The announcement made today results from a review last month.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners, slipped 0.4 percent to 79.499. The measure is headed for a 2.1 percent gain in 2010.
Business in the U.S. expanded in December at the fastest pace in 22 years. The Institute for Supply Management-Chicago Inc. said today its business barometer rose to 68.6 this month, exceeded the most optimistic forecast of economists surveyed by Bloomberg News and the highest level since July 1988.
Initial U.S. jobless claims fell last week to the lowest level since July 2008, a sign that the labor market is improving heading into 2011. The number of contracts to buy previously owned homes in the U.S. rose last month for the fourth time in five months, the National Association of Realtors reported.
Brazil’s real was among the best performing currency against the U.S. dollar today, surging as much as 1.1 percent to 1.6600 per dollar as the nation’s central bank said it would buy dollars in the spot market today. The currency headed for its second straight year of gains against the dollar, rising 5.1 percent. It has increased 39 percent since 2008.
“The Brazilians are uncomfortable every time we’ve seen the real strengthen,” said Paresh Upadhyaya, head of Americas G-10 currency strategy at Bank of America Corp. in New York.
Brazil’s benchmark interest rate is 10.75 percent after the central bank raised borrowing costs 2 percentage points this year to try to curb foreign investment.
South Korea’s won gained the most in two months versus the dollar as the nation’s central bank forecast its current-account surplus will widen. The nation’s industrial output expanded 10.4 percent in November from a year earlier, its 17th straight increase, Statistics Korea said in Gwacheon today.
South Korea’s currency rose for a fourth day, gaining 1 percent, the most since Oct. 6, to 1,134.85 per dollar.
The dollar will keep its reserve status in 2011 because China and Europe aren’t developed enough for their currencies to replace it, said Pacific Investment Management Co., which runs the world’s biggest bond fund.
“Rising powers such as China are not yet ready to absorb the $9 trillion in reserve assets the world holds, particularly because their bond markets are immature,” Anthony Crescenzi, a money manager at Pimco in Newport Beach, California, wrote in a report yesterday. “Europe, amid all of its financial woes, isn’t even close to ready to take the mantle.”
Europe’s 16-nation currency, which will add Estonia to its members in January, headed for a 10.5 percent decline in 2010, according to the Bloomberg Correlation-Weighted Indexes. The gauge tracks the performance of 10 developed-world currencies. The index shows the dollar down 2.8 percent and the yen up 12.6 percent.
The euro has been the worst-performing major currency against the dollar in 2010, sliding 7.2 percent. Economists surveyed by Bloomberg forecast the shared currency slipping to $1.31 by the end of 2011. Its performance is followed by the pound, which is headed for a loss 4.6 percent.
The biggest winner against the greenback this year has been the yen soaring 14.1 percent. The median estimate by 36 economists sees the Japanese currency retracing to 90 in the fourth quarter of next year.
The Australian dollar was the second-best performer against the greenback, climbing 13.3 percent. Today it touched the strongest level against the U.S. currency since it became free- floating in 1983.
The nation’s leading economic indicator, which aims to predict the economy’s direction about six months ahead, was 2.1 in December, the KOF research institute in Zurich said yesterday, matching analyst estimates. The 10-year average for the gauge is 1.13.
Canada’s currency traded stronger than parity for the third consecutive day as U.S. business, the largest destination for the country’s exports, picked up. Interest rates are 1 percent in Canada compared with the near zero in the U.S.
The loonie gained as much as 0.2 percent to 99.91 cents per U.S. dollar.
Venezuela Devalues Currency to 4.3 Bolivars Per Dollar
Venezuela devalued its currency for the second time since January, enabling the government to increase revenue at the risk of pushing up the world’s highest inflation rate.
The government will weaken the exchange rate on so-called essential goods such as food and medicine by 40 percent to 4.3 bolivars per dollar on Jan. 1, unifying its two fixed foreign exchange rates in bid to pull the economy out of recession, Finance Minister Jorge Giordani said today on state television. Imports of essential goods were previously bought at a rate of 2.6 bolivars per dollar.
The devaluation will help narrow the government’s budget deficit by bolstering the bolivar-based value of the state oil company’s exports, said Orlando Ochoa, an economics professor at Andres Bello Catholic University in Caracas. Inflation, which is already the highest among 78 countries tracked by Bloomberg at 27 percent, may quicken further as food prices climb, he said.
“Devaluing has fiscal benefits but also hurts the country’s economic activity,” Ochoa said. “Clearly, this adjustment in the preferential exchange rate directly affects inflation for 2011.”
The central government posted a deficit of 58.2 billion bolivars, or $13.5 billion at the new exchange rate, between January and November, according to a National treasury report.
Giordani, who has also served as planning minister under President Hugo Chavez, said the devaluation will help spur economic growth after two years of recession. Ochoa said that a pickup in inflation will “deepen the recession.”
Chavez devalued the bolivar in January for the first time since 2005 and created a multi-tiered exchange system in an attempt to spur non-oil exports and curb the consumption of luxury imports at subsidized exchange rates. Venezuela is the largest oil producer in South America.
The devaluation will boost the tax revenue that state oil company Petroleos de Venezuela SA turns over to the government because the company had been selling some of its dollar revenue at the 2.6 exchange rate, said Milton Guzman, an economist at Caracas-based consulting company Fortuny, Guzman & Asociados. Oil accounts for about 95 percent of Venezuela’s exports, according to the central bank.
About $18 billion of this year’s $30 billion of imports were also purchased at the 2.6 per dollar rate, said Juan Socias, director of Caracas-based Grupo Soluciones, a research company that studies Venezuela’s foreign exchange commission.
“With so many exchange rates in play there has been a lot of distortions” in the economy, said Guzman. “Now by selling everything at 4.3, PDVSA and the government’s fiscal contributions will improve. That will translate into a greater flow of bolivars for the government.”
Venezuela’s oil-dependent economy contracted in 2010 for a second consecutive year as foreign currency shortages grew and crude production dropped, the central bank said in a report published on its website today. Venezuela’s is the only major Latin American economy in recession.
The economy has suffered as a Chavez-led nationalization drive scared away private investment, Guzman said.
Gross domestic product shrank 1.9 percent this year, with the oil industry shrinking 2.2 percent and the non-oil sector contracting 1.8 percent, according to today’s report, which cited preliminary figures. The economy contracted 3.3 percent in 2009.
Chavez ordered a crackdown on brokerages this year and the dismantling of an unregulated currency market they administered, which was used by Venezuelans to obtain dollars when they couldn’t get permission from the government to buy at the official exchange rates.
Sitme, the exchange that replaced the unregulated or so- called parallel market, has traded $5.04 billion to date, an average of $36 million per day. The parallel market traded between $80 million and $100 million a day, Alberto Ramos, a Latin America economist at Goldman Sachs Group Inc. in New York said in June.
The devaluation, which investors had anticipated, will provide only temporary help for the budget, said Jaime Valdivia, head of emerging market research at Bluecrest Capital Management in New York.
“This will be a temporary measure that will alleviate some of the fiscal pressures but I don’t think this changes the fundamental story of Venezuela, which is one of very high inflation, high deficits and increasing debt problems,” Valdivia said. “This doesn’t really change that much.”
Jobless Claims in U.S. Fall to Lowest Level Since July 2008
Claims for jobless benefits dropped last week to the lowest level in two years, showing the U.S. labor market is taking a turn for the better as the economy accelerates into 2011.
Applications for unemployment assistance decreased by 34,000 to 388,000 in the week ended Dec. 25, breaking the 400,000 level for the first time since July 2008, according to Labor Department figures today in Washington. Other data showed businesses expanded this month at the fastest pace in two decades and pending home sales climbed in November for the fourth time in five months.
Firings may keep easing as a pickup in consumer spending prompts employers to retain staff, a necessary step toward increases in employment that will sustain demand. Gains in business investment and exports to growing emerging economies may keep factories churning out goods in the coming year, while more jobs may also help housing stabilize.
“The economy is gathering momentum,” John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said in an interview on Bloomberg Television. “The character of the recovery is a little more solid. Job growth will be stronger and that will help the consumer.”
Stocks declined as the Standard & Poor’s 500 Index’s highest valuation since June overshadowed the economic data. The S&P 500 fell 0.2 percent to 1,257.88 at the 4 p.m. close in New York. The benchmark 10-year Treasury note declined, pushing the yield up to 3.37 percent from 3.35 percent late yesterday.
Better Than Forecast
The median forecast of 29 economists surveyed by Bloomberg News projected claims would drop to 415,000. Estimates ranged from 395,000 to 430,000. The Labor Department revised the prior week’s figures to 422,000 from a previously reported 420,000.
The Institute for Supply Management-Chicago Inc. said its business barometer rose to 68.6 this month, exceeding the most optimistic forecast of economists surveyed and the highest level since July 1988. Figures greater than 50 signal expansion.
Reports showing consumer spending is picking up mean retailers will need to restock shelves, giving manufacturing a further lift. Holiday sales this year jumped 5.5 percent for the best performance since 2005, MasterCard Advisors’ SpendingPulse, which measures purchases by all payment forms, said this week.
“Once the American consumer starts kicking in, we will see stronger orders data,” Silvia said. “New orders will follow the better business confidence that is showing up.”
The Chicago group’s bookings and production gauges climbed to the highest levels in six years, while employment increased to a five-year high.
The number of contracts to buy previously owned homes rose more than forecast in November, a sign sales are recovering following a post-tax credit plunge, figures from the National Association of Realtors also showed today.
The index of pending resales increased 3.5 percent after jumping a record 10 percent in October. The median forecast in a Bloomberg survey called for a 0.8 percent rise in November, and the group’s data go back to 2001.
Home demand is stabilizing after sales collapsed to a record low in July, as the effects of a tax incentive worth as much as $8,000 waned. A jobless rate hovering near 10 percent means foreclosures will remain elevated and any recovery in housing, the industry that precipitated the worst recession since the 1930s, will take time to develop.
“Very Strong Note’
“We’re ending the year on a very strong note,” said Conrad DeQuadros, a senior economist at RDQ Economics LLC in New York. “This recovery is looking more sustainable. The labor market is improving, and the manufacturing numbers are quite robust. We’re seeing further stabilization in home resales.”
While last week’s claims data covered the Christmas holiday, leaving jobless Americans with one less day to file for benefits, a Labor Department spokesman said there was “nothing unusual” in the tally.
The four-week moving average, which helps eliminate week- to-week distortions, also dropped to the lowest since July 2008.
The number of people continuing to receive jobless benefits rose by 57,000 in the week ended Dec. 18 to 4.13 million. The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs.
Those who’ve used up their traditional benefits and are now collecting emergency and extended payments decreased by about 151,500 to 4.53 million in the week ended Dec. 11.
President Barack Obama on Dec. 17 signed into law an $858 billion bill extending for two years Bush-era tax cuts for all income levels. The measure also continues expanded jobless insurance benefits to the long-term unemployed for 13 months and reduces payroll taxes for workers by two percentage points during 2011.
Businesses adding workers include Motorola Inc., the Schaumburg, Illinois-based maker of mobile phones.
“We have been” hiring, co-Chief Executive Officer Greg Brown said in a Bloomberg Television interview on Dec. 15. Even so, “we need to create jobs faster.”
The Labor Department’s monthly jobs report next week will show payroll gains picked up in December after employers added a fewer-than-forecast 39,000 jobs last month, according the economists surveyed. The jobless rate fell to 9.7 percent from 9.8 percent in November, the survey also showed.
Business Activity in U.S. Grows at Fastest Pace in Two Decades
Businesses in the U.S. expanded in December at the fastest pace in two decades, adding to evidence the world’s largest economy is accelerating heading into 2011.
The Institute for Supply Management-Chicago Inc. said today its business barometer rose to 68.6 this month, exceeding the most optimistic forecast of economists surveyed by Bloomberg News and the highest level since July 1988. Figures greater than 50 signal expansion.
Gains in business investment on new equipment and growing exports to emerging economies will keep factories churning out goods in the coming year, contributing to the recovery. Reports showing consumer spending is also picking up mean retailers will need to restock shelves, giving manufacturing a further lift.
“The economy is gathering momentum,” John Silvia, chief economist at Wells Fargo Securities Inc. in Charlotte, North Carolina, said in an interview on Bloomberg Television. “New orders will follow the better business confidence that is showing up. Once the American consumer starts kicking in, we will see stronger orders data.”
The median forecast of 49 economists surveyed by Bloomberg News projected the gauge would fall to 61. Estimates ranged from 59 to 63.7.
A report today from the Labor Department showed claims for jobless benefits fell last week to the lowest level since July 2008, showing the labor market is improving heading into 2011. Filings decreased by 34,000 to 388,000 in the week ended Dec. 25, fewer than the lowest estimate of economists surveyed.
The number of contracts to buy previously owned homes rose more than forecast in November, a sign sales are recovering following a post-tax credit plunge, figures from the National Association of Realtors also showed today. The index of pending resales increased 3.5 percent after jumping a record 10 percent in October.
Stocks fluctuated between gains and losses after the reports as optimism over the economy offset concern share valuations were too high. The Standard & Poor’s 500 Index fell 0.2 percent to 1,257.36 at 10:18 a.m. in New York. The benchmark 10-year Treasury note declined, pushing the yield up to 3.38 percent from 3.35 percent late yesterday.
The world’s largest economy expanded at a 2.6 percent annual pace from July through September, almost a percentage point more than in the prior quarter, Commerce Department said last week. Gains in consumer spending, investments in equipment and software and inventories helped offset a growing trade gap spearheaded the pickup.
The Chicago group’s production gauge rose to 74, the highest level since October 2004, from 71.3 in November. The gauge of new orders climbed to 73.6 from 67.2. The employment measure increased to 60.2, last exceeded in April 2005, from 56.3 the prior month.
Retailers’ 2010 holiday sales jumped 5.5 percent for the best performance since 2005, MasterCard Advisors’ SpendingPulse, which measures retail sales by all payment forms, said this week. That compared with a 4.1 percent gain a year earlier. The numbers include Internet sales and exclude automobile purchases.
Automakers are also seeing sales increase. Vehicles sold at an annualized 12.3 million rate in November for a second month, the fastest pace since the U.S. government’s “cash for clunkers” program in 2009, said Autodata Corp.
Economists watch the Chicago index and other regional manufacturing reports for an early reading on the outlook nationally. The Chicago group says its membership includes both manufacturers and service providers, making the gauge of measure of overall growth. Its members have operations across the U.S. and abroad.
Other measures of manufacturing so far showed strength this month. One regional survey showed New York-region factories rebounded more than forecast in December while another Fed survey showed those in the Philadelphia area expanded at the fastest pace since April 2005.
The ISM’s monthly national factory index, due Jan. 3, may rise to 56.9 in December from 56.6 in November, according to economists surveyed.
Foreign sales are a bright spot for factories as exports in October rose to the highest level in more than two years, according to Commerce Department data released Dec. 10. Some businesses are responding to greater demand from the U.S. and abroad by replacing aging equipment with more innovative, fuel- efficient machinery.
DuPont Co., the third-biggest U.S. chemical maker, this month said earnings will rise to its 2012 target a year earlier than it forecast in 2009, led by sales to farmers and electronics makers.
“We have attractive growth opportunities supported by market-driven innovation,” Chief Executive Officer Ellen Kullman told a Dec. 9 teleconference. “Those opportunities are fueled by the megatrends of agricultural productivity, of reducing our dependence of fossil fuels and upon protecting people and the environment.”
Economists this month have boosted projections for fourth- quarter growth, reflecting a pickup in consumer spending and passage of an $858 billion bill extending all Bush-era tax cuts for two years. The legislation also continues expanded unemployment insurance benefits through 2011, cuts payrolls taxes by 2 percentage points next year and includes accelerated tax depreciation for purchases of equipment.