Saturday, May 14, 2011
Friday, May 13, 2011
U.S. Living Costs Climb on Food, Fuel as Confidence Gains With Job Growth
The consumer-price index increased 0.4 percent, matching the median forecast of economists surveyed by Bloomberg News and following a 0.5 percent advance in March, figures from the Labor Department showed today in Washington. Excluding food and energy, the so-called core gauge rose 0.2 percent.
Another report showed consumer sentiment climbed more than forecast this month, signaling improving job prospects will help sustain spending even as household expenses climb. The pickup in inflation has yet to concern some Federal Reserve policy makers, including Chairman Ben S. Bernanke, who predict the acceleration will be temporary.
“Inflation is starting to bubble underneath the surface,” saidOmair Sharif, an economist at RBS Securities Inc. in Stamford,Connecticut. “The Fed is still pretty relaxed about inflation but we may get to a point in the next few months when policy makers will have to think a little more seriously about it.”
Stocks retreated as shares of financial and technology companies dropped. The Standard & Poor’s 500 Index decreased 0.8 percent to 1,337.77 at the 4 p.m. close in New York.Treasury securities rose, sending the yield on the benchmark 10-year note down to 3.17 percent from 3.22 percent late yesterday.
Sentiment Improves
The Thomson Reuters/University of Michigan preliminary consumer sentiment index rose to 72.4, a three-month high, from a final reading of 69.8 in April, the group reported today. The gauge was projected to rise to 70, according to the median forecast of 62 economists surveyed by Bloomberg.
The increase was driven by the component gauging expectations for six months from now, which rose to 67.4 from 61.6, the biggest jump since September 2009. The measure more closely projects the direction of consumer spending, according to economists.
Growing optimism about jobs led to the improvement as 31 percent of respondents said they had heard employment was improving, the most since 1983, according to an e-mailed note from economists at Barclays Capital Inc. in New York.
The University of Michigan’s index of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, fell to 80.2 from 82.5 the prior month.
Forecasts for consumer prices in the Bloomberg survey of 76 economists ranged from gains of 0.3 percent to 0.7 percent.
Year-Over-Year Gain
Prices increased 3.2 percent in the 12 months ended April, the biggest year-over-year gain since October 2008. The core CPI rose 1.3 percent from April 2010, the most since February 2010.
“There clearly has been some acceleration, even at the core level,” said Jim O’Sullivan, chief economist at MF Global Inc. in New York, who accurately forecast the overall April gain. “The Fed is happy to see core inflation move back up a bit, but I suspect they’d almost like to see it move a little slower. The numbers are still pretty tame.”
Improving job prospects and a growing economy may make it easier for companies likeColgate-Palmolive Co. (CL) to pass rising costs on to customers. Ian Cook, the company’s chief executive officer, said yesterday that the New York-based toothpaste maker is not seeing consumers resist higher pricing. Cook spoke at a conference sponsored by Goldman Sachs Group Inc.
Energy Costs
Energy costs increased 2.2 percent from a month earlier, and have climbed at a 39 percent annual rate so far this year, today’s report showed. Gasoline prices increased 3.3 percent from the prior month, and food costs rose 0.4 percent.
Commodities excluding food and fuel climbed 0.4 percent in April, the biggest advance since October 2009, showing cost increases are broadening.
The core rate was pushed up by increases in new and used automobiles and medical care, which rose 0.4 percent.
Commodity prices have retreated since the end of April, on concern rising interest rates in countries from China to India will slow the global economic recovery. Crude oil has dropped 13 percent from the end of April to yesterday on the New York Mercantile Exchange.
The declines support Bernanke’s views on inflation. The Fed chairman and some of his colleagues, including Vice Chairman Janet Yellen and Federal Reserve Bank of New York President William C. Dudley, have said in recent speeches that the threat from accelerating prices will prove “transitory.”
“Measures of underlying inflation, though having increased modestly in recent months, remain subdued, and longer-term inflation expectations have remained stable,” Bernanke said last month at a press conference in Washington.
Credit Markets: The Default Deluge
This year will see a record volume of default in corporate debt, in line with expectations, as the U.S. continues to be the epicenter of economic and credit-market weakness
Following the end of the summer, the final stretch of 2009 offers a good opportunity to take stock of the events that roiled the economy this year and assess the tone of the financial markets for the rest of the year.
Buoyed by an encouraging stream of positive economic data, sentiment in the financial markets has been relatively upbeat. Much of the recovery has stemmed from the monetary and fiscal stimulus the government pumped into the financial system in copious amounts to revitalize critical pipelines of money and credit.
However, this year will see a record volume of default in corporate debt, in line with expectations. In the first eight months of 2009 a total of 216 corporate issuers defaulted (both nonfinancials and financials), affecting rated debt worth $523 billion. If this pace continues, the global default tally will reach 324 in 2009, the highest annual total in 28 years—since the inception of our data series on defaults. The volume of debt affected by these defaults also soared to a record high.
Other key takeaways from the year thus far:
• The U.S. is the epicenter of economic and credit-market weakness. At the beginning of the year our 12-month forward baseline prediction for the U.S. speculative-grade default rate was 13.9% by yearend, with an upper bound of 18.5% and a lower bound of 10.0%. The default rate hit 10.4% in the 12 months ended in August 2009, giving us reason to believe it is headed toward our predicted range by the end of the year. Corporate default incidence (by count) within the population or rated companies has been highest in the U.S., which blazed ahead with 158 defaults in 2009 (through Sept. 16). Of the remainder, the EU recorded 15, the other developed markets (mainly Canada) 12, and the emerging markets 31.
• Consumer discretionary sectors lead the global default count, though industrials and housing-related sectors also are reporting numerous casualties. Companies in leisure/media are in the lead globally (mainly because of the U.S.), with 53 defaults in 2009 (through Aug. 31). Next in line is the aerospace/auto/capital goods/metals category (35 defaults), followed by forest products and building materials (26 defaults), and consumer/service (24 defaults). When factoring in only speculative-grade ratings, homebuilders and forest products led with a global default rate of 18% for the trailing 12 months ended in August.
• Defaults continue to emerge from the lowest rungs of the ratings ladder. This is true not only in a single year but also on a cumulative basis. More than four-fifths (86%, or 187 entities) of this year's defaults year-to-date emerged from the speculative-grade domain, with an initial rating of BB+ or lower.
• Companies with an original rating of B face maximum default risk exposure. Among this year's defaulters, entities with an initial rating in the B rating category (which includes B+, B, and B-) accounted for the largest number of defaults, at 122. Next in line were entities with an initial rating in the BB rating category, with 54. Companies with a first rating of CCC+ or lower accounted for 11 of this year's total default count.
• An avalanche of low-rated rating originations during the credit boom indicates that considerable default risk still resides in the pipeline. For example, a total of 1,340 new speculative-grade ratings were originated globally from 2006 through the first half of 2009, of which only 100 have defaulted. This indicates a survival rate of 92.5%, which is expected to erode over time as more casualties occur and more issuers age. It is difficult to pinpoint the exact timing for such casualties because forbearance measures can delay the day of reckoning, particularly as financing conditions ease.
• The flow of distressed-debt exchanges has accelerated substantially and likely will reach an all-time high in 2009. Plummeting liquidity and deteriorating fundamentals set in motion a flurry of corporate distressed exchanges. In part, the increase reflected a pragmatic reaction to the shortage of financing options in the throes of the financial crisis. Of this year's 216 defaults, 81 were defined as distressed exchanges, by far the single leading default trigger across both developed and emerging markets. With $71.0 billion in rated debt, Ford Motor (F) was the largest issuer (by par volume) so far in 2009 to implement a distressed exchange. CIT Group (CIT), with $42.1 billion, came in second.
• By contrast, formal bankruptcy filings have been lower. The liquidity crunch created several bottlenecks for exit financing options and hastened the use of alternative pragmatic strategies, including prepackaged bankruptcies, distressed exchanges, and standstill agreements. Only 54 formal bankruptcies have been recorded globally this year, of which 48 were in the U.S., affecting rated debt worth $150.5 billion. With $53 billion in rated debt, General Motors was by far this year's biggest bankruptcy, followed by Charter Communications, with $22.5 billion.
•Troubled leveraged buyouts (LBOs) from prior years remain a fertile source of defaults this year. The actual volume of LBOs has dropped precipitously, totaling only $21.9 billion in the U.S. in the first half of 2009, compared with a peak of $433.7 billion in full-year 2007, according to Standard & Poor's Leveraged Commentary & Data. Moreover, in contrast with 2006, new deals in the U.S. are increasingly being funded with higher equity contributions and smaller shares of senior debt. Nevertheless, prior-year deals continue to emerge as casualties. In Europe, for example, 42 of 48 defaults recorded in the first half of 2009 were LBO-related.
Politicians Are Demonizing Big Oil? Time to Buy!
Oil stocks look cheap based on the 2011 profit outlook and global growth
Politicians in Washington and cable TV pundits are fulminating over oil industry profits as the average price of a gallon of regular gas approaches $4 in the U.S. Meanwhile, President Barack Obama wants to repeal $46.2 billion of tax breaks for oil and gas producers over 10 years and instead invest in alternative energy. Time for investors to dial back on energy stocks?
Not really, say equity analysts and investors. U.S. oil industry profits continue to exceed expectations as the global economy recovers. On a price-to-earnings basis energy companies are trading at the lowest valuation of the 10 broad industry groups in the Standard & Poor's 500-stock index. In other words, today's stock prices may not fully reflect the high-powered profits analysts see for the sector in 2011. The 41 drillers, refiners, and oil-field service providers in the S&P 500 are projected to earn $134.8 billion this year, up 41 percent from 2010, based on analyst forecasts issued in April.
The sector probably earned $31 billion in the first quarter of this year, a 41 percent advance from the year before, according to Wall Street forecasts tracked by Bloomberg. Earnings upgrades reduced industry valuations to 11.7 times projected 2011 income, from 13.7 in March. "Multiples on energy stocks are very low, and the investment opportunity remains pretty good," says Brian Barish, who oversees $8 billion, including Chevron (CVX) shares, as president of Denver-based Cambiar Investors. His Cambiar Aggressive Value Fund beat 99 percent of its peers in the past year.
Civil strife in the Middle East and North Africa, combined with forecasts that 2012 will see the fastest U.S. economic growth in seven years, sent oil prices up 35 percent in the past year, to $103.88 a barrel on May 10, even after a 15 percent plunge in early May. With gasoline prices up 64 percent since August and the unemployment rate 1.1 percentage points below the 26-year high reached in 2009, industry profits are on a tear.
ExxonMobil (XOM) reported profit of almost $11 billion in the first quarter of 2011, a 69 percent increase over the same period in 2010. Even so, ExxonMobil, the world's largest company by market value, trades at 9.6 times projected 2011 earnings, less than its 23-year median of 15.5 based on reported results, according to data compiled by Bloomberg. Chevron, the second-largest U.S. energy company, trades at 8.2 times estimated income even after a 14 percent advance this year. The company beat analysts' first-quarter profit estimates on Apr. 29; sales rose 25 percent, to $60.3 billion.
President Obama and Democrats in Congress say the profit surge justifies ending tax breaks for oil companies. Obama's 2012 budget would repeal tax breaks for oil and gas producers to generate $18.3 billion in revenue over 10 years. "There is absolutely no reason to continue to subsidize the most profitable companies in the history of the world," Representative Edward J. Markey (D-Mass.), the top-ranking Democrat on the House Natural Resources Committee, said in an Apr. 28 statement. "What is good for the biggest oil companies isn't always what's good for American taxpayers."
Oil executives say such criticism on the tax issue is misguided. "We've paid a total of $59 billion in taxes over the past five years, and that's a significant part of government revenue as well as more than we've earned through our U.S. operations," says Alan Jeffers, an ExxonMobil spokesman. "Any claim that we're not paying our fair share of taxes is inaccurate." Chevron says losing the tax breaks would hurt the industry's global competitiveness. "Discriminatory taxes would put U.S.-based energy companies at a competitive disadvantage around the world and discourage development of domestic oil and gas resources," says Lloyd Avram, a Chevron spokesman.
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