As companies plan for U.S. default, business may take a hit

(Reuters) - Delayed investments and purchases by companies and investors struggling to limit their exposure to financial harm from a possible U.S. debt default is contributing to a slowdown in business activity, executives said.

Investment firms and big Wall Street banks, including PIMCO, Fidelity Investments, Blackrock Inc (BLK.N), Citigroup Inc (C.N) and JPMorgan Chase & Co (JPM.N), said they had sold Treasury bonds that expire in the coming weeks, either to protect clients' investment portfolios or their own balance sheets against losses in the event of a U.S. default.

Investors have also shifted more assets into cash. Bank of New York Mellon Corp (BK.N) CEO Gerald Hassell said the bank has seen clients add $10 billion in cash to its balance sheet since the start of October alone.

Meanwhile, corporations are delaying plans to hire, invest or acquire companies, and mulling a new wave of cost-cutting if the economy is hurt badly by Congress' fiscal impasse, bankers and executives said.

Although the U.S. Congress looked set to reach a deal Wednesday afternoon, consumer confidence has already hit a nine-month low, and some economists expect the government shutdown to hurt the nation's economic growth this year.

Goldman Sachs says the impasse could knock half a percentage point off its forecast of 2.5 percent real GDP growth in the fourth quarter.

"Most CEOS I speak to in the United States say they're seeing a slowdown in business because of this," BlackRock Chief Executive Officer Laurence Fink said in an interview Wednesday.

"I was on a conference call with many of them, and I heard across the board, a slowdown from the American consumer because of this narrative, so it's having an impact on our economy already - and it's going to have an impact on job creation at a time when we need more job creation."

Bankers said companies either postponed or speeded up plans to go public or price deals to avoid getting caught in the middle of the debt-ceiling impasse. One investment banker said on Wednesday he has been giving clients one simple piece of advice: "Stay liquid!"

At one large Wall Street brokerage firm, executives were holding round-the-clock phone calls internally and with industry groups, such as the Securities Industry and Financial Markets Association, to figure out the various possible outcomes if the U.S. government does default. Thousands of SIFMA members dialed into its industry call this week, another source familiar with the matter said.

"People are on high alert," said an executive at the brokerage firm, who spoke on the condition of anonymity.

One big concern is what happens to Treasury bills that are scheduled to mature on October 17 if the government defaults, the executive said.

"Obviously if the firms do not get paid redemption on those bills, they are not going to credit clients' accounts," the executive said.

Wall Street is also grappling with how government securities will be valued if the U.S. defaults and bonds that mature are not redeemed, the executive said.

Even though these and other questions have no clear answer, the firm is creating communications for clients based on the various scenarios so that it can respond as soon as there is some indication of what is going to happen, the executive said.

"The expectation is Congress will pull back from the brink at the 11th hour and 59th minute ... but we have to be prepared."

Similarly, financial advisers are taking a more conservative approach with clients' portfolios until the fate of the U.S. debt ceiling is clear.

Scott Barkow, a financial adviser with Raymond James & Associates, the brokerage subsidiary of Raymond James Financial, has spent the past couple of weeks adding stop-loss orders, which are automated orders designed to limit investors' losses by selling securities when they hit a certain price.

Barkow also is holding off on buying bonds until it is clear what happens, he said.

"There are some periodic bond purchases that are we are holding off doing and if new money comes in we are waiting to invest in bonds for now," said Barkow, who has $229 million in assets under management.

(Additional reporting by Ross Kerber and Timothy McLaughlin; Editing by Paritosh Bansal and Bernadette Baum)

witness-chicken-the-police-version

Maybe your client is guilty. Maybe it will be easy for the State to prove that your client is guilty. That is, if they can get their witnesses to show up.

There are all sorts of reasons that defense lawyers set cases for hearings and trials, not the least of which is that they expect(well… hope?) that a judge will suppress some or all of the evidence, or that a jury will find their client not guilty.

Occasionally a client will even volunteer this as the solution to their problems, “What are the chances that so-and-so won’t show up, and my case will be dismissed?”

For now, I’ll ignore the ethical issues that answering that question raises, and focus on one small aspect of it. The answer depends greatly on whether or not the witness against your client is a police officer or a civilian. The chances of winning witness chicken when the only folks the State needs wear a badge and a gun are substantially less than if they don’t. Part of every cop’s job description includes “professional witness,” and they even take classes to learn how to do it.

So what are the chances that an officer won’t show up to testify in a pretrial suppression hearing? Usually pretty slight. But a cynic might say there are other factors to consider, such as… what your client does for a living. Is the answer different if your client is also part of the thin blue line?

From “Texas Officer Catches Break in DWI Case; Arresting officer is no-show for court”:

An Hidalgo County judge killed a McAllen policeman's criminal case after one of the defendant's fellow officers failed to appear in court and testify against him, court records state.

Judge Jay Palacios of Hidalgo County Court-at-law No. 2 dealt a "fatal" blow to the prosecution's case, Hidalgo County District Attorney Rene Guerra said, when he granted a motion to suppress evidence in Officer Alex Alvarez's pending case on a charge of driving while intoxicated.

No witness, evidence suppressed, case closed. Until the newspaper called, and the D.A. had to come up with an explanation.

District Attorney Guerra said he learned Wednesday that the case was set for dismissal when a Monitor reporter contacted him about the matter. Guerra said he would ask Palacios to reconsider his decision to suppress the evidence in the case.

"Legally, I don't know if he can reconsider it," the district attorney said. "I don't know until I try."

But why the arresting officer missed the court date remains unclear.

Did the state even ask for a continuance? According to the article, “McAllen's Police Chief Rodriguez said he believed the officer was hospitalized.” In Austin, prosecutors will ask for a continuance at a first setting, even if they have no idea why their witness isn’t there, and it will usually be granted. One time any way.

Did that happen in this case? And if it regularly happens in that court, but didn’t this time, what made this case different from any other?

Chinese Yuan Still Pegged, and US Treasury Purchases Continue

Karachi (News Desk, Younus) It’s still anyone’s guess as to if and when China will allow the Yuan (RMB) to continue appreciating. You can see from the chart below – which shows the trading history for the RMB/USD December 2010 futures contract – that expectations of revaluation have eroded steadily since December 2009. At that time, it was projected that that Yuan would finish 2009 at 6.57 RMB/USD, 4% higher than the current level. Fast forward to the present, and investors now only expect a modest 2% appreciation rise on the year.

What’s behind the change in expectations? The answer is a combination of economics and politics. On the economic side, China’s trade surplus is much smaller than in recent years, as import growth outpaces export growth. “Double-digit annual growth in exports is all but assured in coming months due to a low base of comparison in early 2009, but…sequential growth momentum went into reverse in January, with exports down 16 percent from December.” Moreover, while GDP growth appears strong, it appears tenuously connected to exports and fixed-asset investment. In addition, if the Central Bank of China raises interest rates to counter property speculation, it will have even less room to maneuver in its forex policy if it wishes to maintain high GDP growth. In terms of politics, the CCP doesn’t want to lose a crucial bargaining chip in international relations, and it also doesn’t want to mitigate the threat to its political legitimacy posed by a prolonged economic slowdown.

On the other hand, China still desires to turn the Yuan into a global reserve currency, again both for economic and political reasons. In order to accomplish such a feat, one of the prerequisites would be dual convertibility. Financial institutions and foreign Central Banks are still extremely reluctant to hold RMB currency since it’s difficult to convert into other currencies. “Citing data from the Bank of International Settlements (BIS), it [Citigroup] said the renminbi’s share in the global foreign-exchange market turnovers was only 0.25 percent in 2007, ranked 20th in the world and fifth among Asian emerging-market currencies.” This is pretty incredible considering that China’s economy is the world’s third largest, and will only change when the exchange rate regime is loosened.

While some analysts predict that the Yuan will continue rising as soon as next month – and at least by a slight margin for 2010 – the modest pace of appreciation will ensure that China’s foreign exchange reserves continue to grow. They are currently estimated at $2.4 Trillion, and while their composition is largely a secret, analysts estimate that more than 2/3 is denominated in USD-denominated assets. Recently, there was a perception that China had begun to diversify its reserves out of Dollars, as US Treasury data indicated that its Treasury purchases had all but stopped. As it turned out, China had merely moved to conceal its purchases by conducting them through a UK Bank.

The biggest threat to the USD posed by China is not an end to the RMB peg – for such is unlikely – but rather a change in its structure. Currently, the RMB is pegged directly to the Dollar, which means that the Bank of China MUST stockpile its trade surplus in USD-denominated assets, namely US Treasury securities. If the peg were to shifted to a basket of currencies, however, it would have more flexibility in the denomination of its reserves. Until then, China’s forex policy will continue to favor the Dollar.

Emerging Market Currencies Continue their Run

Karachi, (News Desk, Younus) Since most emerging market economies and financial markets are fairly small, their currencies are subject to the whims of international investors, moreso than is the case with major currencies. For that reason, when I research emerging market currencies as a whole, I often like to focus on what investors are saying are saying about their stocks and bonds.

According to one columnist, “For an asset class once considered a snake pit of risk, emerging market sovereign bonds have become remarkably popular among investors. So popular, in fact, that even the most cautious of institutions have developed an appetite. Indeed, US pension funds are poised to pour almost $100bn (£65m, €74m) into emerging market debt in the next five years…potentially helping push yields relative to US Treasuries to a record low.” The popularity of emerging market debt is pretty incredible in the context of the Greek debt crisis and the consequent spike in risk aversion. At the same time, emerging market countries have been lauded for their sound finances and low debt-to-GDP ratios, so perhaps it’s no surprise that investors remain willing to continue lending them money. “More and more investors are looking to emerging market local bonds as an alternative to standard global bond allocations, as the problems in Greece and the European periphery highlight the credit risks of that market that have been long underpriced.”

The same is basically true for emerging market stocks, as “A recovery in economic growth and exports in developing nations is boosting the outlook for…company earnings.” Added another analyst, “When you look at the most recent financial crisis, one of the key features has been that emerging market countries weathered the storm extremely well.” Going forward, the consensus expectation is that emerging markets will soon account for the lion’s share of global growth.

For the most part, investors are still quite bullish on both stocks and bonds, despite – or perhaps because of – their amazing performances in 2009. The MSCI emerging market stock index has doubled over the past year, and the JP Morgan EMBI+ bond index rose 28% in 2009 en route to a record high. Still, there is concern that since emerging market stocks and bonds are basically in line with fundamentals, a further inflow of capital would push them into bubble territory. “Jerome Booth, head of research at Ashmore Investment Management, reckons that currency appreciation will be the main source of return for local emerging market debt portfolios in the medium term. ‘The only questions are when it starts and whether it happens fast or slow: with old world currency crashes or managed adjustment.’ ” This is problematic because it means at this point, investors may be chasing currency appreciation rather than direct asset appreciation.

Some investors have started to talk about bubbles, but these appear to be more regional in nature, and the handful of bears point to specific countries rather than dismiss emerging markets outright. For example, it’s now clear that there is a bubble in China’s property market, but not necessarily in the country’s stock market. The South African Rand, meanwhile appears to be overvalued, but the Central Bank of South Africa has announced that it will allow the Rand to continue appreciating. The Chilean Peso, meanwhile, is also poised to appreciate, ironically because of the recent earthquake, as Billions of Dollars aimed at relief efforts are already pouring into the country.

There’s much else that can be said about emerging market currencies at this point, and the near-term will depend largely on if/when/how the Greek debt crisis is resolved. While emerging market investors like to pretend that this is irrelevant, the fact is that they are still somewhat skittish, and even a minor crisis would send them running towards the exits.

Papandreou Comments Force Euro Down

Karachi, (News Desk, Younus) EuroThe euro had just started the week gaining versus the dollar and the yen as the negative sentiment regarding the Greek crisis slowly fades, but after comments coming from Greece that the fiscal crisis in the country may spread to other countries, the EU’s single currency went down again.

It seems that markets still didn’t digest the Greek fiscal crisis and the euro is once again falling after events happening in the most problematic southern European Union member. This time, Greek Prime Minister George Papandreou affirmed that the country’s crisis may spread even beyond Europe, if speculators and financial markets with incorrect regulations aren’t stop. Despite Papandreou’s speech, which was in its content nothing new and actually very obvious, the market sentiment towards the euro is currently fragile, and it affected once again the currency’s rates.

Despite talks to solve Greece’s problem in both domestic and international sphere, the situation itself is rather far from a solution, and it’s likely that the euro will still bleed, specially if the situation spreads out to other nation’s in the region and globally.

EUR/USD traded at 1.3620 as of 17:14 GMT from an opening rate of 1.3630 yesterday.

If you want to comment on the Euro’s recent action or have any questions regarding this currency, please, feel free to reply below.

Canada’s Dollar Gains on National Commodities

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Karachi, (News Desk, Younus) Canadian DollarThe Canadian dollar traded high versus its U.S. counterpart and several other key-currencies in foreign-exchange markets as its main commodity export, the crude oil, rose again allowing the loonie to start this week advancing.

The Canadian dollar, nicknamed the loonie for the image of the waterfowl on the C$1 coin, continued following last week’s trend and touched the highest level in seven weeks versus its U.S. counterpart, and also trading near the highest level in 2010 against the euro, as speculations suggested that the North American nation will raise its interest rates at some point this year, helping the appeal for the country’s currency to raise in foreign-exchange markets.

Morgan Stanley stated today that the Bank of Canada may hike its interest rates as soon as this June, since the Canadian economy is recovering well and allowing central bankers to lift stimulus, which is consequently making the loonie to rank among the best performers in foreign-exchange markets this month.

USD/CAD traded at 1.0288 as of 02:52 GMT from 1.0276 when markets opened yesterday.

If you want to comment on the Canadian dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.