Such easy lending cannot be sustained, particularly if enterprises are not ready to absorb it with a pipeline of viable projects.
Shen Minggao and Huo Kan 13 March 2009
The high loan growth of early 2009, supported by China’s monetary policy easing, suggests an economy receiving fresh investment and poised for growth. But growth will depend on more than the availability of funding, and may not materialize if the money is not converted into effective investments that will stimulate economic activity.
China issued 1.07 trillion yuan new loans in February as Beijing continued to unleash liquidity following January’s astounding 1.62 trillion in new credit. Lending in the first two months of 2009 accounts for more than half of the full-year target of 5 trillion yuan announced by Premier Wen Jiabao.
Such easy lending cannot be sustained, particularly if enterprises are not ready to absorb it with a pipeline of viable projects. Indeed, money supply data suggest that much of the new liquidity is going to non-productive destinations.
M2, the broadest measure of money supply, including circulating currency and fixed deposits, grew at 20.5 percent, the highest since 2003. Meanwhile, M1 is growing at just over half that pace at 10.9 percent. This means more money is being deposited for fixed- and long-term savings. M0, the most liquid measure of money supply, is up by even less - 8.3 percent.
The money supply data paint a picture of a business environment that isn’t exactly taking up all the liquidity available to it, and may even be pointing to further economic contraction.
Meanwhile hopes for a consumer revival are not supported by the data. Consumer loans accounted for an insignificant share of total lending, with about 80 percent going to medium to long-term lending and bills financing.
In the short term, China is expected to loosen money supply further before the economy hits bottom. There is still room to cut interest rates in the first half of 2008, but cuts will be minimal unless new loans slump in the coming months.
If consumption remains weak and is not accompanied by a revival in business, money injected into the economy can only reflect on asset prices, weakening the chances of the government’s achieving its goal of 8 percent GDP growth.
In the last few months, most Americans have felt poorer. Now they have the numbers to prove it.
The Federal Reserve reported Thursday that households lost $5.1 trillion, or 9 percent, of their wealth in the last three months of 2008, the most ever in a single quarter in the 57-year history of recordkeeping by the central bank.
For the full year, household wealth dropped $11.1 trillion, or about 18 percent. Though the numbers do not yet reflect it, the decline in the stock market so far this year has probably erased trillions more in the country’s collective net worth.
The next biggest annual decline in wealth came in 2002, when household net worth fell 3 percent after the collapse of the technology bubble. The most recent loss of wealth is staggering and will probably put further pressure on the economy because many people will have to spend less and save more.
Most of the wealth was lost in financial assets like stocks, which tumbled at the end of last year. The Standard & Poor’s 500-stock index, for instance, fell 23 percent in the fourth quarter. The value of residential real estate, the biggest asset for most families, fell much less — $870 billion, or about 4 percent.
Even the richest among us have become a lot poorer. This week, Forbes magazine published its list of the richest people in the world. At No. 1, Bill Gates, the founder of Microsoft, still had $40 billion to his name, but that was down $18 billion. The wealth of Warren E. Buffett, the investor whose company Berkshire Hathaway had a rare bad year, tumbled $25 billion, to $37 billion.
The loss of wealth is concentrated among the most affluent Americans, in large part because they own more stocks and bonds than the rest of the country. Only about 50 percent of households own stock, and many of them own relatively small sums in retirement accounts.
As a result of their greater wealth and higher incomes, the affluent tend to spend a lot more than their share of the population would imply. The top 20 percent of income earners spend more than the bottom 60 percent of income earners, according to calculations by Tobias Levkovich, the chief United States equity strategist at Citigroup.
“When their wealth is mauled, they are not particularly interested in spending,” Mr. Levkovich said.
The Fed report released on Thursday also showed that total borrowing and lending increased at an annual rate of 6.3 percent in the fourth quarter, mostly as a result of increased borrowing by the federal government to finance its operations and various bailouts of the financial system. The government’s borrowing increased at an annual rate of 37 percent.
But borrowing by households dropped 2 percent. Lending to businesses was up 1.7 percent. Recent surveys of loan officers by the Fed have shown that companies have been drawing down lines of credit that were established in the past, and that only a small fraction of the lending to the private sector is through new loans, which are much harder to obtain than in recent years.
By Scott Patterson and Leslie Scism March 12, 2009
WSJ - The tumbling financial markets are dragging down the life-insurance industry, an important cog in the U.S. economy, as mounting losses weaken the companies' capital and erode investor confidence.
A dozen life insurers have pending applications for aid from the government's $700 billion Troubled Asset Relief Program, and the industry is expecting an answer to its request for a bank-style bailout in the coming weeks. The government so far hasn't said whether insurers will be eligible for the program.
Life insurers have taken a beating in recent weeks. The Dow Jones Wilshire U.S. Life Insurance Index has fallen 59% since the beginning of the year, leaving it down 82% since its May 2007 all-time high. The Dow Jones Industrial Average has lost 21% year to date, off 51% since its October 2007 record.
Some of the hardest-hit companies are century-old names that insure the lives of millions of Americans. Shares of Hartford Financial Services Group Inc., which already received a capital injection from German insurer Allianz, are down 93% as of Wednesday's close from their 52-week high. MetLife Inc. and Prudential Financial Inc. are both suffering as the value of their vast investment portfolios declines.
Some life insurers are faring better than others, and some of the nation's giants retain triple-A ratings, including Massachusetts Mutual Life Insurance Co., New York Life Insurance Co., Northwestern Mutual Life Insurance Co. and TIAA-CREF.
But as the economy buckles, analysts say many insurers face losses that can eat away at the capital cushions regulators require them to maintain.
Long-time experts say the industry is going through its most tumultuous period in recent memory. "It's a pretty scary scenario right now," said Pete Larson, an analyst at Gradient Analytics, a Scottsdale, Ariz., research group.
Some state regulators have lately extended relief from certain capital requirements. But insurers haven't received the kind of injections banks got in recent months. That's partly because insurers didn't gobble up risky assets, and also because as long-term investors, they generally don't have to recognize on the bottom line short-term dips in values of their assets.
Ratings agencies and stock investors are growing concerned about how long the industry can avoid reckoning with the distressed assets on their books. Rating agencies Moody's Investors Service, Standard & Poor's and A.M. Best have cut the ratings of more than a dozen insurers in recent weeks.
The ramifications of a weakened life-insurance industry for the overall economy are significant. Life insurers are among the biggest holders of the nation's corporate debt. Together, they own about 18% of all corporate bonds outstanding, according to the American Council of Life Insurers, or ACLI, an industry trade group.
If life insurers stop buying bonds, the capital markets may not fully recover, say insurance industry representatives and analysts. Already, their buying activity has slumped. In the fourth quarter of 2008, life insurers agreed to buy $3.3 billion in stocks and bonds through private transactions, down 63% from the previous quarter, according to a survey by the ACLI. Insurers have been putting more cash into safe havens such as Treasury bonds.
Any sign of vulnerability among life insurers could further erode confidence and make jittery consumers reluctant to buy insurance products, analysts and financial advisers say. "I get as many emails from subscribers who worry about their policies as they do about their stock," said Morningstar analyst Alan Rambaldini, who covers life-insurance companies. Though life-insurance and variable-annuity sales fell industrywide in the fourth quarter of 2008, analysts say it is too soon to trace declines to consumer concerns about the stock action.
Ratings firms and Wall Street analysts say another problem for some life insurers is obligations for variable annuities, a retirement-income product that often guarantees minimum withdrawals or investment returns. As stock markets plunge to fresh lows, life insurers need to set aside additional funds to show regulators that they can meet their obligations, further crimping spare capital.
The industry has several things in its favor. Life insurers will likely continue to generate cash from the premiums on their policies, some analysts and executives say. And unlike investment banks and many other financial firms, life insurers don't need to routinely raise money in the capital markets to fund daily operations. Few of the biggest ones have any sizable debt of their own maturing in 2009. Many insurers have built up big cash chests in recent months, by hoarding their incoming premiums.
For now, the Treasury Department hasn't said whether life insurers will be eligible for TARP funds. Industry group ACLI expects Treasury to decide whether insurers will be eligible for federal aid some time later this month. "We don't have a clear picture of which way that clarification would tend to go," said ACLI representative Gary Hughes.
The Treasury Department didn't return calls for comment made late in the day.
One stumbling block is that the industry is overseen by state regulators, not a single federal agency. That means there's no group of federal officials responsible for it or with a deep understanding of its challenges.
The problems plaguing life insurers aren't the same as those at insurance giant American International Group Inc., which has received a $173 billion aid package. Its losses stemmed largely from derivatives, primarily credit default swaps, tied to complex securities that turned sour in the credit crunch.
Life insurers' woes have come largely from investment-grade corporate bonds, commercial real estate and mortgages, regulatory filings show. Many insurers ended 2008 with high levels of losses that, due to accounting rules, they haven't had to record on their bottom lines. MetLife, the nation's biggest life insurer by assets with $380.84 billion in its general account, had $29.8 billion in unrealized losses at the end of 2008.
MetLife says it is amply capitalized, with more than $30 billion in cash, and that it doesn't expect to realize significant losses from its investment portfolio. "We strongly believe that the way we've looked at our unrealized gains and losses is appropriate for our liabilities and for the most part that these [investments] will pay off," said MetLife spokesman John Calagna.
Hartford Financial had $14.6 billion in unrealized losses at year's end. Prudential, the second-largest insurer by assets, had nearly $11.3 billion in unrealized losses, up $5.4 billion in the fourth quarter from the previous quarter. Hartford didn't respond to requests for comment. A Prudential spokesman said, "We believe that we are adequately capitalized based on our objective of a double-A rating."
Canada Jobless Rate Jumps to the Highest Since 2003
By Greg Quinn
March 13 (Bloomberg) -- Canada lost more jobs than expected in February, led by construction, pushing the unemployment rate to the highest since 2003.
Employers pared a net 82,600 workers, following January’s record decline of 129,000, Statistics Canada said today in Ottawa. The unemployment rate rose to 7.7 percent from 7.2 percent. Economists predicted total jobs would fall by 55,000 in February and the unemployment rate would be 7.4 percent, according to Bloomberg News surveys.
The world’s eighth-largest economy is shrinking as a global credit crisis and a drop in commodity prices saps orders for Canada’s lumber, automobiles and metals. The jobless rate will reach 9 percent in the fourth quarter, say economists surveyed by Bloomberg News, which would be the highest since June 1997 and lower than a peak of 12.1 percent in November 1992.
“In the months ahead, we expect the deterioration in Canadian labor market conditions to continue as the ongoing domestic economic recession gathers steam,” Millan Mulraine, an economics strategist at TD Securities in Toronto, wrote in a note to clients before the report.
The Canadian dollar fell 0.3 percent to C$1.2819 at 7:06 a.m., from C$1.2778 late yesterday. The currency has depreciated 23 percent over the last 12 months.
Employers reduced full-time payrolls by 110,900 positions in February. Part-time jobs rose by 28,300.
Construction employment fell by 43,200, followed by a loss of 31,100 in professional, scientific and technical services, Statistics Canada said. Manufacturing employment rose by 24,700.
Average hourly wages grew 3.9 percent from a year earlier, Statistics Canada said, slower than the 4.8 percent pace in January.
Unemployment in Alberta, which had benefited from construction of new pipelines and oil sands facilities, rose to 5.4 percent, the highest in almost six years. In Ontario, the country’s manufacturing hub, the jobless rate rose to 8.7 percent, the highest since 1997.
Buffett’s Berkshire Has AAA Debt Rating Cut by Fitch
By Erik Holm
March 12 (Bloomberg) -- Billionaire Warren Buffett’s Berkshire Hathaway Inc. had its top-level AAA credit rating cut by Fitch Ratings, which cited concern about the potential for losses on the insurer’s equity and derivatives holdings.
Buffett’s role as chief investment officer also puts the company at risk if he becomes unable to do the job, Fitch said in a statement. Fitch cut the so-called issuer default rating on Berkshire to AA+, and senior unsecured debt to AA. The insurance and reinsurance units kept their AAA status, with a negative outlook for all entities, Fitch said.
“Fitch views this risk as unrelated to Mr. Buffett’s age, but rather Fitch’s belief that Berkshire’s record of outstanding long-term investment results and the company’s ability to identify and purchase attractive operating companies is intimately tied to Mr. Buffett,” Fitch said. Buffett is 78.
Berkshire joins General Electric Co., which was downgraded by Standard & Poor’s today and lost its status as one of the remaining AAA companies in the U.S. Berkshire stock fell 35 percent in 12 months on concern that Buffett’s bets on derivatives -- instruments he has called “financial weapons of mass destruction” -- will crush profit at the firm.
The downgrade isn’t surprising because the deteriorating economy is leading to increased uncertainty about all financial companies, said Michael Yoshikami, chief investment strategist at YCMNet Advisors.
An Abundance of Caution
“Triple-A in the end is probably going to be left for the Treasury when it’s all said and done,” said Yoshikami, whose Walnut Creek, California-based firm oversees $800 million and owns Berkshire Hathaway shares. “You’re seeing the rating agencies taking an abundance of caution at this point.”
S&P and Moody’s Investors Service assign the top credit grade to Berkshire. Buffett’s assistant, Carrie Kizer, didn’t respond to a message left after normal business hours in Omaha.
Berkshire has outperformed the S&P 500 Index in 38 of the 44 years Buffett has run the firm and handled its investments, according to the Omaha, Nebraska-based company’s 2008 annual report. The company is backing derivatives pegged to corporate junk bonds, municipal debt and the performance of stock indexes on three continents, with liability of more than $14 billion as of Dec. 31.
Buffett said in an e-mail in November that collateral calls from the institutions on the opposite side of his derivative bets are “under any circumstances, very minor.” In a Bloomberg Television interview conducted last week, Buffett said he plans to sell more derivative contracts, which he personally negotiates. Some investors have said the derivatives may saddle the insurer with billions of dollars in losses.
Making Money
“Oh, we’ll continue,” Buffett said. “We do anything that I think I understand and where I think that the odds strongly favor making money, which doesn’t mean you make money every time.”
The $37.1 billion in equity puts tied to four of the world’s stock markets -- the largest portion of the derivative contracts -- have “no collateral posting requirements with respect to changes in either the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire’s credit rating,” said the company’s latest annual report, released this month.
Buffett will “likely make money on at least the index put contracts,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of hedge fund Ram Partners LP. “Even if he didn’t, his balance sheet would in no way be as weak as GE’s.”
Insurers depend on high credit ratings to keep down the cost of raising capital and reassure policy holders that their claims will be covered.
“If Berkshire isn’t triple A, I’m not sure which company would be,” Buffett said in a Bloomberg interview at last year’s annual shareholders’ meeting.
Matthews said investors may ignore the Fitch rating change because they give more weight to analysis by S&P or Moody’s. He added, “Buffett’s true believers won’t believe it.”
Insurers’ Credit Swaps Fall as Rally in Stocks Eases Concerns
By Shannon D. Harrington
March 13 (Bloomberg) -- The cost to protect against defaults by insurers including Hartford Financial Services Group and MetLife Inc. and banks fell as the biggest weekly gain in stocks since November eased concerns that losses at the companies will reach bondholders.
Credit-default swaps on Hartford, Connecticut-based Hartford fell 2.25 percentage points to 12.75 percent upfront and 5 percent a year, according to CMA DataVision, meaning it would cost $1.275 million initially and $500,000 annually to protect $10 million of debt. Contracts on MetLife, the biggest U.S. life insurer, fell 2.25 percentage points to 11.75 percent upfront, CMA data show.
Credit-default swaps, which are used to hedge against losses or to speculate on a company’s ability to repay its debt, pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent.
The Standard & Poor’s 500 Index rose almost 11 percent the last five days, its biggest weekly increase since the week ended Nov. 28.
Contracts on U.S. banks including New York-based Citigroup Inc. also fell. Citigroup swaps, which reached a record 640 basis points last week, fell five basis points today to 540 basis points, according to CMA.
Contracts on Charlotte, North Carolina-based Bank of America Corp. declined 5.5 basis points to 297.5 basis points, and swaps on Wells Fargo & Co. of San Francisco fell nine basis points to 215 basis points. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Broader Measure Climbs
A broader gauge of North American corporate credit risk increased.
Credit-default swaps on the Markit CDX North America Investment-Grade index of 125 companies in the U.S. and Canada rose two basis points to 237 basis points in New York, according to Barclays Capital.
Swaps on Prudential Financial Inc., the second-biggest U.S. life insurer, fell 2 percentage points to 12 percent upfront, CMA data show. Contracts on Warren Buffett’s Berkshire Hathaway Inc., the insurer that lost its AAA ranking yesterday from Fitch Ratings Inc., declined 23 basis points to 415 basis points, according to CMA.
This week Citigroup shocked Wall Street by announcing that the company would be profitable in the current quarter. At the same time, the Obama Administration indicated that it would be unlikely to nationalize American banks, preferring to provide low- cost funding to encourage the private sector to buy distressed assets from the banks. The two developments sparked a vigorous rally in financial stocks, which had been drifting downward for weeks, caught in what appeared to be an unending death spiral. But have the good times really returned?
On the surface at least, there are some promising points. Based on current income, and an upward trending yield curve (that will allow banks to borrow at nearly no cost from the Fed and lend to borrowers at a good profit) the banks should generate strong cash flow. But that is hardly the full story.
Write-downs in the value of toxic assets already held on bank balance sheets will continue to explode like ticking time bombs. These debts may be too large to be overcome by a positive cash flow fueled by cheap access to short-term funding. If banks were simultaneously forced to write down assets, they could be rendered insolvent from a capital balance sheet point of view.
This is the underlying problem that America and the much of the world face with their banks: banks can be trading with positive cash flow but from a technically insolvent capital position – which is illegal.
Some argue that toxic assets make up only a very small part of the total assets of the banking system. That may be so, but the real issue is the enormous size of the toxic assets in relation to both the capital of the banks and the funding ability of the government.
According to the Bank of International Settlements, the world's total of derivatives investments, including the poorly understood credit default swap (CDS) market reached some US$700 trillion at its height, or more than 20 times the world's total annual production! The US portion was about $419 trillion, or some 40 times America's annual production.
The essential problem is that these inherently risky securities were used as collateral for loans. The fall in their value resulted in massive deleveraging. Of course, not all derivatives are yet flawed, or toxic. So it can be assumed that, in the absence of a total financial collapse, only a limited number will default.
However, if a conservative assumption were made that only some two percent of derivatives fail, it would still amount to some $14 trillion. The American share would be about $8 trillion, or almost one year of GDP once that figure declines to a sustainable level. The estimated total capitalization of all U.S. banks is some $1.6 trillion. But, this amounts to only 20 percent of the potential American liability.
So far, American citizens have been forced to provide financial institutions with nearly $2 trillion in additional bailouts. This brings the total of current U.S. banking capital to some $3.6 trillion, still less than half of the potential problem, leaving a massive $4.4 trillion shortfall. In light of this, even noted bearish economist Nouriel Roubini's estimate of a $3.6 trillion shortfall appears to be too optimistic.
Of course, not all American banks are in trouble. There are a number of local and regional banks whose managements did not participate in gambling away America's financial future. Nevertheless, investors should ask themselves some hard questions. What if the government is forced to face the fact that the U.S. banking system, as a whole, is already fundamentally insolvent? What if the administration is therefore forced, despite its expressed disinclination, to nationalize the problem banks?
Most importantly, while the good banks are being separated from the bad in the FDIC's 'corral', will all American banks be forced to close? Worse still, after the forthcoming G-20 meetings, will all international banks be closed on a temporary basis, on a long bank holiday, as happened in the Great Crash? If so, what would happen to consumer confidence and the price of gold?
Citigroup says that it is profitable. At the same time, most banks are in dire straits. Until Citigroup is able to put its capital where its mouth is, investors in U.S. financials should remain cautious.
John Browne is senior market strategist – Euro Pacific Capital, Inc. of Darien, Connecticut, USA. Euro Capital publishes the free, on-line investment newsletter http://www.europac.net/newsletter/newsletter.asp
In times like these, cash is king, and companies with a lot of it are set to succeed and poised to take advantage. Cash-laden companies are able to scoop up market share and increase revenues with the scarce capital it holds, whether it be through acquisitions or aggressive growth strategies via increased research and investment or updating and increasing production capabilities.
Here are the top 15 companies that have hoarded the most cash, in that order. Financials were excluded for obvious reasons (and that includes GE):
1. Exxon Mobil - Total Cash: $32.007 Billion
2. Cisco Systems - Total Cash: $29.531 Billion
3. Apple - Total Cash: $25.647 Billion
4. Berkshire Hathaway - Total Cash: $25.539 Billion
5. Pfizer Inc - Total Cash: $23.731 Billion
6. Toyota Motor - Total Cash: $23.151 Billion
7. Microsoft - Total Cash: $20.298 Billion
8. Google - Total Cash: $15.846 Billion
9. Royal Dutch Shell - Total Cash: $15.188 Billion
10. Wyeth - Total Cash: $14.54 Billion
11. IBM - Total Cash: $12.907 Billion
12. Johnson & Johnson - Total Cash: $12.809 Billion
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High Loan Growth Alone Can’t Revive Economy
Such easy lending cannot be sustained, particularly if enterprises are not ready to absorb it with a pipeline of viable projects.
Shen Minggao and Huo Kan
13 March 2009
The high loan growth of early 2009, supported by China’s monetary policy easing, suggests an economy receiving fresh investment and poised for growth. But growth will depend on more than the availability of funding, and may not materialize if the money is not converted into effective investments that will stimulate economic activity.
China issued 1.07 trillion yuan new loans in February as Beijing continued to unleash liquidity following January’s astounding 1.62 trillion in new credit. Lending in the first two months of 2009 accounts for more than half of the full-year target of 5 trillion yuan announced by Premier Wen Jiabao.
Such easy lending cannot be sustained, particularly if enterprises are not ready to absorb it with a pipeline of viable projects. Indeed, money supply data suggest that much of the new liquidity is going to non-productive destinations.
M2, the broadest measure of money supply, including circulating currency and fixed deposits, grew at 20.5 percent, the highest since 2003. Meanwhile, M1 is growing at just over half that pace at 10.9 percent. This means more money is being deposited for fixed- and long-term savings. M0, the most liquid measure of money supply, is up by even less - 8.3 percent.
The money supply data paint a picture of a business environment that isn’t exactly taking up all the liquidity available to it, and may even be pointing to further economic contraction.
Meanwhile hopes for a consumer revival are not supported by the data. Consumer loans accounted for an insignificant share of total lending, with about 80 percent going to medium to long-term lending and bills financing.
In the short term, China is expected to loosen money supply further before the economy hits bottom. There is still room to cut interest rates in the first half of 2008, but cuts will be minimal unless new loans slump in the coming months.
If consumption remains weak and is not accompanied by a revival in business, money injected into the economy can only reflect on asset prices, weakening the chances of the government’s achieving its goal of 8 percent GDP growth.
Household Wealth Falls by Trillions
By VIKAS BAJAJ
March 12, 2009
In the last few months, most Americans have felt poorer. Now they have the numbers to prove it.
The Federal Reserve reported Thursday that households lost $5.1 trillion, or 9 percent, of their wealth in the last three months of 2008, the most ever in a single quarter in the 57-year history of recordkeeping by the central bank.
For the full year, household wealth dropped $11.1 trillion, or about 18 percent. Though the numbers do not yet reflect it, the decline in the stock market so far this year has probably erased trillions more in the country’s collective net worth.
The next biggest annual decline in wealth came in 2002, when household net worth fell 3 percent after the collapse of the technology bubble. The most recent loss of wealth is staggering and will probably put further pressure on the economy because many people will have to spend less and save more.
Most of the wealth was lost in financial assets like stocks, which tumbled at the end of last year. The Standard & Poor’s 500-stock index, for instance, fell 23 percent in the fourth quarter. The value of residential real estate, the biggest asset for most families, fell much less — $870 billion, or about 4 percent.
Even the richest among us have become a lot poorer. This week, Forbes magazine published its list of the richest people in the world. At No. 1, Bill Gates, the founder of Microsoft, still had $40 billion to his name, but that was down $18 billion. The wealth of Warren E. Buffett, the investor whose company Berkshire Hathaway had a rare bad year, tumbled $25 billion, to $37 billion.
The loss of wealth is concentrated among the most affluent Americans, in large part because they own more stocks and bonds than the rest of the country. Only about 50 percent of households own stock, and many of them own relatively small sums in retirement accounts.
As a result of their greater wealth and higher incomes, the affluent tend to spend a lot more than their share of the population would imply. The top 20 percent of income earners spend more than the bottom 60 percent of income earners, according to calculations by Tobias Levkovich, the chief United States equity strategist at Citigroup.
“When their wealth is mauled, they are not particularly interested in spending,” Mr. Levkovich said.
The Fed report released on Thursday also showed that total borrowing and lending increased at an annual rate of 6.3 percent in the fourth quarter, mostly as a result of increased borrowing by the federal government to finance its operations and various bailouts of the financial system. The government’s borrowing increased at an annual rate of 37 percent.
But borrowing by households dropped 2 percent. Lending to businesses was up 1.7 percent. Recent surveys of loan officers by the Fed have shown that companies have been drawing down lines of credit that were established in the past, and that only a small fraction of the lending to the private sector is through new loans, which are much harder to obtain than in recent years.
The Next Big Bailout Decision: Insurers
By Scott Patterson and Leslie Scism
March 12, 2009
WSJ - The tumbling financial markets are dragging down the life-insurance industry, an important cog in the U.S. economy, as mounting losses weaken the companies' capital and erode investor confidence.
A dozen life insurers have pending applications for aid from the government's $700 billion Troubled Asset Relief Program, and the industry is expecting an answer to its request for a bank-style bailout in the coming weeks. The government so far hasn't said whether insurers will be eligible for the program.
Life insurers have taken a beating in recent weeks. The Dow Jones Wilshire U.S. Life Insurance Index has fallen 59% since the beginning of the year, leaving it down 82% since its May 2007 all-time high. The Dow Jones Industrial Average has lost 21% year to date, off 51% since its October 2007 record.
Some of the hardest-hit companies are century-old names that insure the lives of millions of Americans. Shares of Hartford Financial Services Group Inc., which already received a capital injection from German insurer Allianz, are down 93% as of Wednesday's close from their 52-week high. MetLife Inc. and Prudential Financial Inc. are both suffering as the value of their vast investment portfolios declines.
Some life insurers are faring better than others, and some of the nation's giants retain triple-A ratings, including Massachusetts Mutual Life Insurance Co., New York Life Insurance Co., Northwestern Mutual Life Insurance Co. and TIAA-CREF.
But as the economy buckles, analysts say many insurers face losses that can eat away at the capital cushions regulators require them to maintain.
Long-time experts say the industry is going through its most tumultuous period in recent memory. "It's a pretty scary scenario right now," said Pete Larson, an analyst at Gradient Analytics, a Scottsdale, Ariz., research group.
Some state regulators have lately extended relief from certain capital requirements. But insurers haven't received the kind of injections banks got in recent months. That's partly because insurers didn't gobble up risky assets, and also because as long-term investors, they generally don't have to recognize on the bottom line short-term dips in values of their assets.
Ratings agencies and stock investors are growing concerned about how long the industry can avoid reckoning with the distressed assets on their books. Rating agencies Moody's Investors Service, Standard & Poor's and A.M. Best have cut the ratings of more than a dozen insurers in recent weeks.
The ramifications of a weakened life-insurance industry for the overall economy are significant. Life insurers are among the biggest holders of the nation's corporate debt. Together, they own about 18% of all corporate bonds outstanding, according to the American Council of Life Insurers, or ACLI, an industry trade group.
If life insurers stop buying bonds, the capital markets may not fully recover, say insurance industry representatives and analysts. Already, their buying activity has slumped. In the fourth quarter of 2008, life insurers agreed to buy $3.3 billion in stocks and bonds through private transactions, down 63% from the previous quarter, according to a survey by the ACLI. Insurers have been putting more cash into safe havens such as Treasury bonds.
Any sign of vulnerability among life insurers could further erode confidence and make jittery consumers reluctant to buy insurance products, analysts and financial advisers say. "I get as many emails from subscribers who worry about their policies as they do about their stock," said Morningstar analyst Alan Rambaldini, who covers life-insurance companies. Though life-insurance and variable-annuity sales fell industrywide in the fourth quarter of 2008, analysts say it is too soon to trace declines to consumer concerns about the stock action.
Ratings firms and Wall Street analysts say another problem for some life insurers is obligations for variable annuities, a retirement-income product that often guarantees minimum withdrawals or investment returns. As stock markets plunge to fresh lows, life insurers need to set aside additional funds to show regulators that they can meet their obligations, further crimping spare capital.
The industry has several things in its favor. Life insurers will likely continue to generate cash from the premiums on their policies, some analysts and executives say. And unlike investment banks and many other financial firms, life insurers don't need to routinely raise money in the capital markets to fund daily operations. Few of the biggest ones have any sizable debt of their own maturing in 2009. Many insurers have built up big cash chests in recent months, by hoarding their incoming premiums.
For now, the Treasury Department hasn't said whether life insurers will be eligible for TARP funds. Industry group ACLI expects Treasury to decide whether insurers will be eligible for federal aid some time later this month. "We don't have a clear picture of which way that clarification would tend to go," said ACLI representative Gary Hughes.
The Treasury Department didn't return calls for comment made late in the day.
One stumbling block is that the industry is overseen by state regulators, not a single federal agency. That means there's no group of federal officials responsible for it or with a deep understanding of its challenges.
The problems plaguing life insurers aren't the same as those at insurance giant American International Group Inc., which has received a $173 billion aid package. Its losses stemmed largely from derivatives, primarily credit default swaps, tied to complex securities that turned sour in the credit crunch.
Life insurers' woes have come largely from investment-grade corporate bonds, commercial real estate and mortgages, regulatory filings show. Many insurers ended 2008 with high levels of losses that, due to accounting rules, they haven't had to record on their bottom lines. MetLife, the nation's biggest life insurer by assets with $380.84 billion in its general account, had $29.8 billion in unrealized losses at the end of 2008.
MetLife says it is amply capitalized, with more than $30 billion in cash, and that it doesn't expect to realize significant losses from its investment portfolio. "We strongly believe that the way we've looked at our unrealized gains and losses is appropriate for our liabilities and for the most part that these [investments] will pay off," said MetLife spokesman John Calagna.
Hartford Financial had $14.6 billion in unrealized losses at year's end. Prudential, the second-largest insurer by assets, had nearly $11.3 billion in unrealized losses, up $5.4 billion in the fourth quarter from the previous quarter. Hartford didn't respond to requests for comment. A Prudential spokesman said, "We believe that we are adequately capitalized based on our objective of a double-A rating."
Canada Jobless Rate Jumps to the Highest Since 2003
By Greg Quinn
March 13 (Bloomberg) -- Canada lost more jobs than expected in February, led by construction, pushing the unemployment rate to the highest since 2003.
Employers pared a net 82,600 workers, following January’s record decline of 129,000, Statistics Canada said today in Ottawa. The unemployment rate rose to 7.7 percent from 7.2 percent. Economists predicted total jobs would fall by 55,000 in February and the unemployment rate would be 7.4 percent, according to Bloomberg News surveys.
The world’s eighth-largest economy is shrinking as a global credit crisis and a drop in commodity prices saps orders for Canada’s lumber, automobiles and metals. The jobless rate will reach 9 percent in the fourth quarter, say economists surveyed by Bloomberg News, which would be the highest since June 1997 and lower than a peak of 12.1 percent in November 1992.
“In the months ahead, we expect the deterioration in Canadian labor market conditions to continue as the ongoing domestic economic recession gathers steam,” Millan Mulraine, an economics strategist at TD Securities in Toronto, wrote in a note to clients before the report.
The Canadian dollar fell 0.3 percent to C$1.2819 at 7:06 a.m., from C$1.2778 late yesterday. The currency has depreciated 23 percent over the last 12 months.
Employers reduced full-time payrolls by 110,900 positions in February. Part-time jobs rose by 28,300.
Construction employment fell by 43,200, followed by a loss of 31,100 in professional, scientific and technical services, Statistics Canada said. Manufacturing employment rose by 24,700.
Average hourly wages grew 3.9 percent from a year earlier, Statistics Canada said, slower than the 4.8 percent pace in January.
Unemployment in Alberta, which had benefited from construction of new pipelines and oil sands facilities, rose to 5.4 percent, the highest in almost six years. In Ontario, the country’s manufacturing hub, the jobless rate rose to 8.7 percent, the highest since 1997.
Buffett’s Berkshire Has AAA Debt Rating Cut by Fitch
By Erik Holm
March 12 (Bloomberg) -- Billionaire Warren Buffett’s Berkshire Hathaway Inc. had its top-level AAA credit rating cut by Fitch Ratings, which cited concern about the potential for losses on the insurer’s equity and derivatives holdings.
Buffett’s role as chief investment officer also puts the company at risk if he becomes unable to do the job, Fitch said in a statement. Fitch cut the so-called issuer default rating on Berkshire to AA+, and senior unsecured debt to AA. The insurance and reinsurance units kept their AAA status, with a negative outlook for all entities, Fitch said.
“Fitch views this risk as unrelated to Mr. Buffett’s age, but rather Fitch’s belief that Berkshire’s record of outstanding long-term investment results and the company’s ability to identify and purchase attractive operating companies is intimately tied to Mr. Buffett,” Fitch said. Buffett is 78.
Berkshire joins General Electric Co., which was downgraded by Standard & Poor’s today and lost its status as one of the remaining AAA companies in the U.S. Berkshire stock fell 35 percent in 12 months on concern that Buffett’s bets on derivatives -- instruments he has called “financial weapons of mass destruction” -- will crush profit at the firm.
The downgrade isn’t surprising because the deteriorating economy is leading to increased uncertainty about all financial companies, said Michael Yoshikami, chief investment strategist at YCMNet Advisors.
An Abundance of Caution
“Triple-A in the end is probably going to be left for the Treasury when it’s all said and done,” said Yoshikami, whose Walnut Creek, California-based firm oversees $800 million and owns Berkshire Hathaway shares. “You’re seeing the rating agencies taking an abundance of caution at this point.”
S&P and Moody’s Investors Service assign the top credit grade to Berkshire. Buffett’s assistant, Carrie Kizer, didn’t respond to a message left after normal business hours in Omaha.
Berkshire has outperformed the S&P 500 Index in 38 of the 44 years Buffett has run the firm and handled its investments, according to the Omaha, Nebraska-based company’s 2008 annual report. The company is backing derivatives pegged to corporate junk bonds, municipal debt and the performance of stock indexes on three continents, with liability of more than $14 billion as of Dec. 31.
Buffett said in an e-mail in November that collateral calls from the institutions on the opposite side of his derivative bets are “under any circumstances, very minor.” In a Bloomberg Television interview conducted last week, Buffett said he plans to sell more derivative contracts, which he personally negotiates. Some investors have said the derivatives may saddle the insurer with billions of dollars in losses.
Making Money
“Oh, we’ll continue,” Buffett said. “We do anything that I think I understand and where I think that the odds strongly favor making money, which doesn’t mean you make money every time.”
The $37.1 billion in equity puts tied to four of the world’s stock markets -- the largest portion of the derivative contracts -- have “no collateral posting requirements with respect to changes in either the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire’s credit rating,” said the company’s latest annual report, released this month.
Buffett will “likely make money on at least the index put contracts,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of hedge fund Ram Partners LP. “Even if he didn’t, his balance sheet would in no way be as weak as GE’s.”
Insurers depend on high credit ratings to keep down the cost of raising capital and reassure policy holders that their claims will be covered.
“If Berkshire isn’t triple A, I’m not sure which company would be,” Buffett said in a Bloomberg interview at last year’s annual shareholders’ meeting.
Matthews said investors may ignore the Fitch rating change because they give more weight to analysis by S&P or Moody’s. He added, “Buffett’s true believers won’t believe it.”
Insurers’ Credit Swaps Fall as Rally in Stocks Eases Concerns
By Shannon D. Harrington
March 13 (Bloomberg) -- The cost to protect against defaults by insurers including Hartford Financial Services Group and MetLife Inc. and banks fell as the biggest weekly gain in stocks since November eased concerns that losses at the companies will reach bondholders.
Credit-default swaps on Hartford, Connecticut-based Hartford fell 2.25 percentage points to 12.75 percent upfront and 5 percent a year, according to CMA DataVision, meaning it would cost $1.275 million initially and $500,000 annually to protect $10 million of debt. Contracts on MetLife, the biggest U.S. life insurer, fell 2.25 percentage points to 11.75 percent upfront, CMA data show.
Credit-default swaps, which are used to hedge against losses or to speculate on a company’s ability to repay its debt, pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent.
The Standard & Poor’s 500 Index rose almost 11 percent the last five days, its biggest weekly increase since the week ended Nov. 28.
Contracts on U.S. banks including New York-based Citigroup Inc. also fell. Citigroup swaps, which reached a record 640 basis points last week, fell five basis points today to 540 basis points, according to CMA.
Contracts on Charlotte, North Carolina-based Bank of America Corp. declined 5.5 basis points to 297.5 basis points, and swaps on Wells Fargo & Co. of San Francisco fell nine basis points to 215 basis points. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Broader Measure Climbs
A broader gauge of North American corporate credit risk increased.
Credit-default swaps on the Markit CDX North America Investment-Grade index of 125 companies in the U.S. and Canada rose two basis points to 237 basis points in New York, according to Barclays Capital.
Swaps on Prudential Financial Inc., the second-biggest U.S. life insurer, fell 2 percentage points to 12 percent upfront, CMA data show. Contracts on Warren Buffett’s Berkshire Hathaway Inc., the insurer that lost its AAA ranking yesterday from Fitch Ratings Inc., declined 23 basis points to 415 basis points, according to CMA.
Citigroup's Dead Cat Bounce
That quarterly profit is just an illusion
By John Browne
12 March 2009
This week Citigroup shocked Wall Street by announcing that the company would be profitable in the current quarter. At the same time, the Obama Administration indicated that it would be unlikely to nationalize American banks, preferring to provide low- cost funding to encourage the private sector to buy distressed assets from the banks. The two developments sparked a vigorous rally in financial stocks, which had been drifting downward for weeks, caught in what appeared to be an unending death spiral. But have the good times really returned?
On the surface at least, there are some promising points. Based on current income, and an upward trending yield curve (that will allow banks to borrow at nearly no cost from the Fed and lend to borrowers at a good profit) the banks should generate strong cash flow. But that is hardly the full story.
Write-downs in the value of toxic assets already held on bank balance sheets will continue to explode like ticking time bombs. These debts may be too large to be overcome by a positive cash flow fueled by cheap access to short-term funding. If banks were simultaneously forced to write down assets, they could be rendered insolvent from a capital balance sheet point of view.
This is the underlying problem that America and the much of the world face with their banks: banks can be trading with positive cash flow but from a technically insolvent capital position – which is illegal.
Some argue that toxic assets make up only a very small part of the total assets of the banking system. That may be so, but the real issue is the enormous size of the toxic assets in relation to both the capital of the banks and the funding ability of the government.
According to the Bank of International Settlements, the world's total of derivatives investments, including the poorly understood credit default swap (CDS) market reached some US$700 trillion at its height, or more than 20 times the world's total annual production! The US portion was about $419 trillion, or some 40 times America's annual production.
The essential problem is that these inherently risky securities were used as collateral for loans. The fall in their value resulted in massive deleveraging. Of course, not all derivatives are yet flawed, or toxic. So it can be assumed that, in the absence of a total financial collapse, only a limited number will default.
However, if a conservative assumption were made that only some two percent of derivatives fail, it would still amount to some $14 trillion. The American share would be about $8 trillion, or almost one year of GDP once that figure declines to a sustainable level. The estimated total capitalization of all U.S. banks is some $1.6 trillion. But, this amounts to only 20 percent of the potential American liability.
So far, American citizens have been forced to provide financial institutions with nearly $2 trillion in additional bailouts. This brings the total of current U.S. banking capital to some $3.6 trillion, still less than half of the potential problem, leaving a massive $4.4 trillion shortfall. In light of this, even noted bearish economist Nouriel Roubini's estimate of a $3.6 trillion shortfall appears to be too optimistic.
Of course, not all American banks are in trouble. There are a number of local and regional banks whose managements did not participate in gambling away America's financial future. Nevertheless, investors should ask themselves some hard questions. What if the government is forced to face the fact that the U.S. banking system, as a whole, is already fundamentally insolvent? What if the administration is therefore forced, despite its expressed disinclination, to nationalize the problem banks?
Most importantly, while the good banks are being separated from the bad in the FDIC's 'corral', will all American banks be forced to close? Worse still, after the forthcoming G-20 meetings, will all international banks be closed on a temporary basis, on a long bank holiday, as happened in the Great Crash? If so, what would happen to consumer confidence and the price of gold?
Citigroup says that it is profitable. At the same time, most banks are in dire straits. Until Citigroup is able to put its capital where its mouth is, investors in U.S. financials should remain cautious.
John Browne is senior market strategist – Euro Pacific Capital, Inc. of Darien, Connecticut, USA. Euro Capital publishes the free, on-line investment newsletter http://www.europac.net/newsletter/newsletter.asp
The 15 Most Cash Rich Companies
By Joseph Calhoun
March 13, 2009
In times like these, cash is king, and companies with a lot of it are set to succeed and poised to take advantage. Cash-laden companies are able to scoop up market share and increase revenues with the scarce capital it holds, whether it be through acquisitions or aggressive growth strategies via increased research and investment or updating and increasing production capabilities.
Here are the top 15 companies that have hoarded the most cash, in that order. Financials were excluded for obvious reasons (and that includes GE):
1. Exxon Mobil - Total Cash: $32.007 Billion
2. Cisco Systems - Total Cash: $29.531 Billion
3. Apple - Total Cash: $25.647 Billion
4. Berkshire Hathaway - Total Cash: $25.539 Billion
5. Pfizer Inc - Total Cash: $23.731 Billion
6. Toyota Motor - Total Cash: $23.151 Billion
7. Microsoft - Total Cash: $20.298 Billion
8. Google - Total Cash: $15.846 Billion
9. Royal Dutch Shell - Total Cash: $15.188 Billion
10. Wyeth - Total Cash: $14.54 Billion
11. IBM - Total Cash: $12.907 Billion
12. Johnson & Johnson - Total Cash: $12.809 Billion
13. Intel - Total Cash: $11.843 Billion
14. Hewlett Packard - Total Cash: $11.255 Billion
15. Oracle - Total Cash: $10.646 Billion
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