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Asian Markets Rally After U.S. Debt Deal

August 1, 2011 by Leave a Comment

HONG KONG — Asian financial markets heaved a sigh of relief Monday over the last-minute agreement in Washington to raise the U.S. debt limit, shrugging off for now the lingering concerns about longer-term global growth prospects.

Stock markets rallied across the region on news that top U.S. policy makers had reached the framework for a budget deal that will clear the way for an increase in the U.S. government’s borrowing limit and could help avert a default. The agreement has yet to be approved by the Senate and the House of Representatives.

The key indexes in Japan and South Korea jumped 1.3 percent in early trading and picked up steam as the deal was announced by President Barack Obama.

The Nikkei 225, which rose as much as 2 percent, finished 1.3 percent higher at 9,967.01 points, with investors also encouraged by the Japanese currency’s fall against the U.S. dollar after the debt deal.

The U.S. debt woes had undermined the dollar’s value in international currency markets in recent weeks, especially against the yen — a worrying trend for Japanese exporters, as a strong yen makes their goods more expensive for shoppers overseas.

By midafternoon in Tokyo on Monday, the dollar bought 77.7 yen, about 1 yen more than it did late Friday in New York.

Expressing a general sense of guarded optimism about the debt deal, Yukio Edano, Japan’s chief cabinet secretary, said Monday, “We welcome the deal, which we hope will lead to market stability.”

Similarly, Wayne Swan, the Australian treasurer, said the debt agreement was an important first step but that U.S. fiscal consolidation was necessary to ensure global growth.

However, some analysts believe that the deal as outlined by President Obama may not be enough to stave off a downgrade from one or more of the major ratings agencies.

The debt-ceiling debate, said David Carbon, an economist at DBS in Singapore, “has made people realize just how much there is left to do on the fiscal front.”

U.S. economic growth has been slow over several quarters, Mr. Carbon said, and the risk of a double-dip recession is now much greater than it appeared a year ago.

Still, investors on Monday were heartened by the debt ceiling framework. U.S. stocks appeared set to recoup some of the past week’s losses, with S.P. 500 stock futures 1.6 percent higher.

Gold, which has struck multiple record highs amid the uncertainty of the past weeks, fell nearly 1 percent to $1,613 per ounce. Oil rose about $1 to $97 a barrel.

Also helping market sentiment in the Asia-Pacific region was fresh evidence that the Chinese economy may not be slowing as rapidly as feared.

A manufacturing index released by the China Federation of Logistics and Purchasing on Monday showed a reading of 50.7 for July. That was slightly lower than the 50.9 reading in June but better than analysts had expected.

(An index over 50 indicates an expansion.)

Similarly, a separate index compiled by HSBC came in at 49.3 on Monday, better than the preliminary reading of 48.9 that the bank had published last month.

“China’s growth is slowing, but not as much as feared,” said Dariusz Kowalczyk, a strategist at Crédit Agricole in Hong Kong. “As for the global picture, the fear of a default has been put off, that’s clearly a relief.”

Many economists in the region see the slowdown in China as a welcome development, as the red-hot pace of growth has moderated to more sustainable levels. Beijing has been engineering the slowdown by gradually reining in bank lending and raising rates since last year.

While there is some nervousness that the Chinese authorities may tighten monetary policy too much, Mr. Carbon stressed that China, unlike the United States, had the ability to react quickly if the slowdown accelerated more than intended.

“If there is one economy in the world that can fix any mistakes quickly by dialing back again if needed, it is China,” he said.

Stocks in mainland China took the manufacturing data in stride. The Shanghai composite index was up 0.1 percent by midafternoon.

Elsewhere in the region, the Kospi in South Korea closed 1.8 percent higher, and the benchmark index in Australia rose 1.7 percent.

In Singapore, the Straits Times index gained 1.1 percent and in Hong Kong, the Hang Seng rallied 1.5 percent. In India, the benchmark Sensex climbed 0.8 percent.

Hiroko Tabuchi contributed reporting from Tokyo.

Article source: http://www.nytimes.com/2011/08/02/business/asian-markets-rally-after-us-debt-deal.html?partner=rss&emc=rss

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Optimism on Wall St. Tempered by Hurdles

August 1, 2011 by Leave a Comment

The doomsday discussions that dominated conversations of late quickly faded as political leaders in Washington first signaled a compromise was close, then finally announced a deal on Sunday night.

Wall Street was hesitant to declare total victory, though, because lawmakers still faced the hurdle of getting a bill through both chambers of Congress.

The optimism was further tempered by the broader economic challenges that continue to confront the United States and global markets.

“The debt ceiling is out of the way, but the current picture is far from rosy,” said Ajay Rajadhyaksha, head of United States fixed-income and securitized strategy at Barclays Capital. “Economic growth is so much weaker than many people thought just six months ago, and we are heading into a period of austerity.”

Analysts and investors warned that the markets could remain turbulent in the weeks ahead. Besides sluggish economic growth, the threat of a ratings downgrade on United States debt and Europe’s continuing financial troubles loom.

Still, the first signs of market reaction to the deal were positive. Stock markets in Japan and South Korea picked up steam as the deal was announced by President Obama, and they rallied close to 2 percent by midday. Futures contracts on the American stock market also jumped, indicating that Wall Street may recoup some of the past week’s losses once trading starts in New York on Monday.

Gold, a traditional haven that struck record highs amid the uncertainty of the past weeks, fell 1 percent to $1,610 an ounce. Oil rose about $1, to $97 a barrel.

In the currencies markets, the dollar gained against the yen and the Swiss franc after falling last week. It was barely changed against the euro.

For Wall Street executives, it was a roller-coaster weekend. Although optimistic that Congress would reach an 11th-hour agreement, bankers had been planning for the worst in case a deal was not struck.

But there was little of the market panic that in the 2008 financial crisis had bankers traders stuck at their desks for much of every weekend. Citigroup, Goldman Sachs and Morgan Stanley executives were monitoring the news from home.

“Everybody still has the fireman boots and fireman hat on, but there is a significant sigh of relief these guys are moving in the right direction,” said one senior Wall Street executive, who spoke on condition of anonymity on Sunday afternoon as the deal was coming together.

At JPMorgan Chase, Jamie Dimon huddled with his senior managers at the bank’s Park Avenue headquarters. Bank executives also set up a war room at an operations center in Columbus, Ohio, to react to customer issues stemming from the political developments — just as they did for natural catastrophes like Hurricane Katrina.

By Sunday night when the deal had been announced, lobbyists and financial executives were almost gleeful. “This is huge,” said Scott E. Talbott of the Financial Services Roundtable, an industry lobbying group. “It provides much-needed certainty during an uncertain economic time.”

Mr. Talbott said his group was still reviewing details of the deal, but would likely move forward with a lobbying blitz over the next two days. “We will light it up with Hill visits, joint-letters, and encourage our member companies to consider contacting members of Congress, too,” he added.

Indeed, BlackRock, the giant asset manager, issued a statement urging lawmakers to take prompt action. “Every day of delay in resolving this situation will erode economic confidence, jeopardize job creation and undermine the credibility of the United States in global financial markets,” it said.

With the deal yet to be approved by lawmakers, Chase announced that it would temporarily waive overdraft fees and other account charges for Social Security recipients, military workers and other federal employees if their government-issued checks were not posted. Last week, the Navy Federal Credit Union pledged that it would advance pay to active military and civilian defense workers in the event of a breach of the debt ceiling.

Investors were hopeful that approval of the deal by Congress would cause the markets to rebound. after tumbling 3.9 percent last week.

“It isn’t a ‘grand bargain’ to cut the deficit — that would have been great for the market,” said Byron Wien, the vice chairman of Blackstone Advisory Partners. But he said that the current blueprint, if passed, at least deals with the debt ceiling and that the government’s bills will be paid.

“This is a positive, but there was so much negative momentum going into the weekend,” he added.

Indeed, some investors cautioned that failure to pass the bill would be catastrophic, recalling how the market dropped precipitously in 2008 when Congress initially voted down a huge bailout package for the nation’s banks. “You are looking at Dow 10,000 if this doesn’t get resolved in a very short period of time,” said M. Jake Dollarhide, chief executive of Longbow Asset Management in Tulsa, Okla. That would be a 21 percent drop from where the Dow Jones industrial average closed on Friday.

Even as attention has shifted to the domestic fiscal problems, the European Union financial health continues to deteriorate despite a second bailout package it put in place for Greece last month in an effort to stem its sovereign debt crisis. In one sign of worsening trouble, the spreads on credit-default swaps on the debt of Italy and Spain are nearing their widest level of the year. Investors are betting that those countries are becoming more likely to default on their debts.

Meanwhile, new data released on Friday showed the United States economy had experienced a significant slowdown during the first half of 2011, underscoring the weakness of the recovery. And the political mayhem in Washington has done little to bolster consumer confidence, a crucial economic engine.

Daniel J. Arbess, manager of the Xerion fund at Perella Weinberg Partners in New York, said the fiscal problems in the United States and Europe were “chronic and will be persisting” for some time. “Investors need to get used to them,” he said. “No single episode of tension is the ultimate one, nor is any patch the ultimate solution.”

Nelson D. Schwartz, Susanne Craig and Bettina Wassener contributed reporting.

Article source: http://www.nytimes.com/2011/08/01/business/optimism-on-wall-st-tempered-by-hurdles-ahead.html?partner=rss&emc=rss

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Stocks Fall After G.D.P. Data

July 31, 2011 by Leave a Comment

A disappointing report on the nation’s second-quarter economic activity spurred a steep initial decline in stocks in the United States on Friday, adding to the malaise in the markets as investors wait for an outcome of the debt ceiling debate in Washington.

The three main indexes raced lower by about 1 percent shortly after the market opened, responding to the Commerce Department’s report that gross domestic product grew at an annual rate of 1.3 percent in the second quarter, well below analysts’ forecasts. The department also revised the first-quarter annual rate to 0.4 percent from earlier estimates of 1.7 percent.

But through the course of the trading session, stocks retraced some ground, possibly in response to the prospect of a resolution related to the other main market factor on Friday: the debt ceiling impasse.

At the close, the Dow Jones industrial average, retreating for the sixth consecutive trading day, was down 96.87 points, or 0.79 percent, to 12,143.24.

The Standard Poor’s 500-stock index, a broader measure of the market, lost 8.39 points, or 0.65 percent, to 1,292.28. The Nasdaq composite index fell 9.87 points, or 0.36 percent, to 2,756.38.

The broader market as measured by the S.P. ended the week down about 3.9 percent, its largest weekly loss in more than a year. It also recorded its third consecutive monthly loss. The last time the broader market closed lower for three straight months was in 2008, for the months of September, October and November.

Commerce Department revisions to earlier G.D.P. figures suggested that the recovery was weaker than initial estimates had let on. Consumer spending, accounting for about 70 percent of G.D.P., was virtually unchanged in the second quarter.

Stephen Wood, Russell Investments’ chief market strategist, noted that many economists had expected a slow second quarter, for reasons including severe weather and the supply chain disruptions that followed the earthquake in Japan.

But changes to the G.D.P. estimates for the first quarter and the quarters before it weighed especially heavily on sentiment.

“We were clearly looking at a second-quarter slow patch,” he said. “The revision to Q1 caught the market by surprise.”

The lack of a strong recovery highlights the difficulties Congress is facing in its deadlocked deliberations to raise the debt ceiling for the American government because some businesses are delaying decisions amid the uncertainty. A recovery in the job market and consumer spending is seen as crucial in stimulating the pace of the economy.

While it was another day of selling, investors had few alternatives for their money.

“The debt ceiling debate, if you can call it that, is an ongoing drama,” Mr. Wood said. “Where do you go given that Treasuries are in the teeth of the debt ceiling negotiations? This is uncharted waters.”

Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company, described the G.D.P. report as “roundly disappointing.”

He also said that the stalemate in the debate in Congress was having an impact on the markets.

“The Treasury market is trading higher this morning as yet another day goes by without a viable plan for resolving the debt ceiling impasse,” said Mr. Giddis in an early commentary, referring to prices.

As Treasury prices rose, the yield on the benchmark 10-year note fell sharply to 2.79 percent in late afternoon trading, compared with 2.96 percent late Thursday.

Lawmakers have to reach a deal by Aug. 2 or the government might face a shortfall and be unable to meet its financial obligations.

Declines in European markets steepened after the G.D.P. report was released in the United States. The FTSE 100 in London fell 0.99 percent to 5,815.19, the DAX in Frankfurt was down 0.44 percent to 7,158.77 and the CAC 40 in Paris fell 1.07 percent to 3,672.77. The euro rose to $1.439.

Catherine Rampell contributed reporting from Washington.

This article has been revised to reflect the following correction:

Correction: July 29, 2011

An earlier version of this article referred imprecisely to the number of consecutive trading days the Dow Jones industrial average had declined. Friday was the sixth.

Article source: http://feeds.nytimes.com/click.phdo?i=b8199419c85a214e8d218391640020f2

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Obama Calls for Debt Deal; Congress Still Widely Split

July 29, 2011 by Leave a Comment

After a caucus meeting to round up the votes needed for House passage, Republicans said that Speaker John A. Boehner had agreed to modify his plan, which raises the debt ceiling only enough to last a few months, to make the next round of spending cuts and debt relief contingent on Congressional approval of a balanced-budget amendment to the Constitution.

That, lawmakers confirmed, won pledges of enough votes to allow Mr. Boehner to pass his bill, which was put on hold at the last minute on Thursday, with only Republican votes, including those of many from the Tea Party faction.

But Democrats said it only made the House bill more unpalatable. “This is the most outrageous suggestion I have heard,” said Senator Richard J. Durbin, the assistant Democratic leader.

“Any solution to avoid default must be bipartisan,” Mr. Obama said. “I urge Democrats and Republicans in the Senate to find common ground on a plan that can get support from both parties in the House, a plan that I can sign by Tuesday.”

Mr. Obama urged Republicans in the House and Senate to abandon a bill that “does not solve the problem” and has no chance of passage in the Senate.”

“There are a lot of crises in the world that we can’t always predict or avoid,” he said. “This isn’t one of those crises.”

In an effort to break the logjam, Senator Harry Reid, the majority leader, called on Senator Mitch McConnell, the Republican leader, to meet with him on Friday to try to resolve to the stalemate, given the failure of House Republicans to advance their own budget proposal.

“My door is open,” Mr. Reid said as the Senate convened. “I will listen to any idea to get this done in a way that prevents a default and a dangerous downgrade to America’s credit rating. Time is short, and too much is at stake, to waste even one more minute.

“The last train is leaving the station,” he said. “This is our last chance to avert default.”

It appears that the Senate will be in session around the clock this weekend.

The Democrats said they would file a motion on Friday that would start the Senate debate, running down the procedural clock while Republicans, presumably, filibustered against the Reid proposal. The first vote on breaking the filibuster would come shortly after midnight Saturday. Unless the Democrats can win over enough Republicans to cut off debate and move to approving the Reid bill or some variant, the Republicans would be forced to hold the floor continuously, awaiting some kind of deal.

Mr. McConnell, who had been working with Mr. Reid on a fallback plan, abandoned that attempt and has been supporting the effort by Mr. Boehner to push through a proposal that would raise the debt limit in two stages — an approach flatly rejected by Senate Democrats and the White House even before it was toughened with the latest demand for a constitutional amendment.

Mr. McConnell, too, came to the Senate floor on Friday and offered little indication that he was ready to deal, accusing Democrats of devoting recent days to undermining the House plan. “Our Democratic friends in the Senate have offered no solutions to the crisis that can pass either chamber,” he said.

Mr. Reid said he would be making changes to his measure to attract more support but made clear that he considered the Senate plan the final effort to avert a default next week.

“There will be no time left to vote on another bill or consider another option here in the Senate,” he said. “None.”

Mr. Reid said he had also had a “sobering” conversation on Friday with Treasury Secretary Timothy F. Geithner about the consequences of a default.

“It is really precarious for our country,” he said.

Until now, the White House and Senate Democratic leaders had been waiting for the House to act before making their next move with an eye on the Tuesday deadline set by the Treasury Department for raising the debt ceiling or facing the possibility that the government would not be able to meet all its financial obligations.

Failure to pass his proposal would have represented a significant defeat for Mr. Boehner, the first-year speaker who has invested significant political capital in trying to get his fractious majority behind the legislation, which had the strong support of the entire leadership team.

Facing that prospect, he adjusted his proposal to the right, and his opposition within the caucus evaporated.

Article source: http://www.nytimes.com/2011/07/30/us/politics/30fiscal.html?partner=rss&emc=rss

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Wall Street Holds Its Breath During Debt Talks

July 29, 2011 by Leave a Comment

“Congress is often referred to as a reactive force rather than a proactive one,” said Tobias Levkovich, chief United States equity strategist at Citigroup. “If we had a 500-point drop in the Dow, it would scare that reactive body.”

With negotiations to cut the deficit and raise the debt ceiling deadlocked on Capitol Hill, the Dow Jones industrial average sank nearly 100 points Friday, closing at 12,143.31. Investors expressed their displeasure with both the political stalemate and new economic data that showed the economy grew at a slower-than-expected pace in the second quarter.

The Standard Poor’s 500-stock index was down 3.9 percent this week, the biggest weekly drop in more than a year.

The last time Washington surprised investors and failed to act was on Sept. 29, 2008. Then, lawmakers rejected the TARP legislation to bail out the banking system at the height of the financial crisis after the collapse of Lehman Brothers, and investors sent the Dow plunging by 778 points.

Congress quickly reversed course, and by Oct. 3, both the Senate and the House had approved the legislation. But the damage had been done — that 778-point drop wiped out $1 trillion in shareholder value. And with investors unnerved, the stage had been set for more big drops. The Dow fell 936 points on Oct. 13 and another 889 points on Oct. 28.

“In sum, Washington grumbles, Wall Street stumbles,” said Sam Stovall, chief investment strategist for Standard Poor’s equity research in New York. “Once again, history repeats itself.”

So far, Wall Street isn’t yet in panic mode, Mr. Levkovich said Friday, with most investors still counting on a resolution to the logjam, averting a default. But, he said, “the level of complacency is eroding. I suspect there will be a lot of frantic calls going around this weekend.”

Indeed, within Wall Street’s biggest firms, worries are growing about what inaction will mean for the market.

Many in the business community are concerned that Congress won’t be able to act before the Tuesday deadline, said Robert Nichols, chief executive of the Financial Services Forum, a lobbying group in Washington that represents many of the biggest commercial and investment banks. “We have strongly urged policy makers to reach an agreement this week so we don’t have to learn the grave consequences of inaction.”

David Joy, chief market strategist for Ameriprise, said on Thursday that he still thought a deal would get done by Tuesday. “If we don’t, I would expect there to be an immediate adverse reaction in capital markets, similar perhaps to what happened in TARP.”

The steeper the move, he said, the stronger the message, suggesting that a 5 percent drop — about 600 points on the Dow — would be a wake-up call for Washington.

Investors were also rattled Friday morning by new figures from the Commerce Department that showed an economy on the verge of a stall. The country’s gross domestic product grew just 1.3 percent in the second quarter, while government statisticians revised downward their estimate for first-quarter growth to 0.4 percent, from an earlier estimate of 1.9 percent.

Arvind Sanger, managing partner at the hedge fund GeoSphere Capital Management, said he had reduced his exposure to stocks in the last two days, fearing the market could plunge if the debt issue remained unresolved.

“That’s something that I haven’t seen yet, but I have 2008 fresh enough in my mind that I’m taking it down anyways,” he said.

Despite the standoff in Washington and worries about how a default or a credit rating downgrade might affect the markets, Treasury bonds rallied. The yield on the benchmark 10-year bond was lower by 13 basis points, at 2.82 percent just after 3 p.m.

“Why in the midst of all this would the 10-year yield be that low?” asked Quincy Krosby, a market strategist for Prudential Financial, adding: “Growth is slow, and it moved down even more in the midst of this Washington politicking.”

The view in the market, she said, is that the debt situation “is going to add to growth concerns if this doesn’t get fixed in a timely, orderly fashion.”

Azam Ahmed and Patrick Scott contributed reporting.

Article source: http://www.nytimes.com/2011/07/30/business/wall-street-holds-its-breath-during-debt-talks.html?partner=rss&emc=rss

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DealBook: An I.P.O. Built on the Basics: Sugar and Coffee

July 28, 2011 by Leave a Comment

Nigel Travis, chief executive of Dunkin' Brands, celebrated the stock offering outside the Nasdaq MarketSite in New York.Mario Tama/Getty ImagesNigel Travis, chief executive of Dunkin’ Brands, celebrated the stock offering outside the Nasdaq MarketSite in New York.

The latest splashy stock debut had all the markings of a sizzling technology start-up company: a better-than-expected offering price, a swarm of investors clamoring for shares and a first-day pop that defied a broader market drop.

But the company was not an online music service or a social networking site. It was a fast-food chain that sells bite-size Munchkin donuts and extra-large cups of coffee.

On Wednesday, shares of the Dunkin’ Brands Group, which priced its initial public offering at $19 a share, soared 46.6 percent, to close at $27.85. In spite of the turbulent market conditions related to the gridlock over the debt ceiling talks, the stock was flying high.

The gains on the first day mimicked those of newly minted Internet stocks like LinkedIn, Yandex and Pandora. At that level, Dunkin’, whose shares trade on the Nasdaq market under the ticker symbol DNKN, is valued at about $3.5 billion.

“People love brands, and we have two iconic brands with real history,” said Nigel Travis, the company’s chief executive. “We felt like this was good timing.”

For all the attention heaped on Facebook, Groupon, Zynga and other technology start-ups developing the next new thing, demand has been just as strong for some basic businesses that sell food, clothes and other consumer goods.

A crush of international and domestic investors tried to get initial public stock offering shares of Dunkin’, with orders amounting to more than 20 times the size of the eventual offering, according to one person with knowledge of the matter. In all, Dunkin’ sold 22.25 million shares and raised $422.75 million.

Over the last year, 20 consumer-oriented companies have gone public, generating average returns of 29.5 percent, according to Renaissance Capital, an I.P.O. advisory firm. Francesca’s Holdings, a women’s boutique chain that went public last week, is trading 56 percent above its offering price. Despite getting off to a shaky start, retail offerings overseas have also posted strong gains, with Prada up 25 percent from its initial offering and Ferragamo up 44 percent.

By comparison, there have been 50 technology offerings in the last 12 months that have gained a more modest 21.7 percent on average. The initial offering market over all is up 16.4 percent in the same period, based on Renaissance Capital data.

“Consumer I.P.O.’s are resonating well because they are easy to understand,” said Paul Bard, vice president of research at Renaissance Capital. “Despite cautious signals, investors are looking forward and expecting consumer spending to improve.”

For Dunkin’s new investors, the offering was an opportunity to bet on a well-known brand that is expanding in the United States. Its brands Dunkin’ Donuts and Baskin-Robbins have long been staples in America’s quick-food industry, with histories stretching back to the 1950s. Five years ago, the spirits maker Pernod Ricard sold the company for $2.4 billion to the private equity firms Bain Capital Partners, the Carlyle Group and Thomas H. Lee Partners, which still own 78.3 percent.

Dunkin’, which makes nearly all its money from franchising, blankets the New England and New York areas with about one store for every 9,700 people. In contrast, the Western half of the United States suffers from a severe Coolatta shortage. Unlike the coffee-peddling rivals McDonald’s and Starbucks, which have thousands of locations in the region, Dunkin’ Donuts has just 109 outlets. According to Mr. Travis, the company will open about 250 stores this year and will double the number of American stores in 20 years.

“This is a long-term play for us,” said Josef Schuster, the founder of the money manager IPOX Schuster, which got shares in the Dunkin’ offering. “Although their sales growth is modest, they haven’t touched the West, and that’s where strong earnings growth can come from.”

Unlike Web start-ups, consumer stocks are often established companies generating cash and profits. In 2010, Dunkin’ Brands earned $26.9 million on revenue of $577.1 million. Teavana and the Chefs’ Warehouse, other retail companies that are expected to start trading this week, are both profitable, too.

The consumer stocks are also cheaper in many cases. Dunkin’ is selling for about six times sales. LinkedIn trades around 39 times trailing sales.

“Many of these companies have a strong earnings record and are modestly priced,” said Mr. Schuster, who also owns the stocks of other recent offerings like Francesca’s and Vera Bradley, the accessories maker. “As these stocks continue to perform well, demand increases for consumer brand I.P.O.’s.”

Consumer stocks, particularly newly minted ones, are hardly a sure bet, particularly in an environment with a weak job market, anemic economic growth and global uncertainty. The private equity-backed Dunkin’ has the added burden of a $1.89 billion debt load. The company plans to use proceeds from the offering to help pay down its debt, according to a recent filing.

Retail companies typically do not have the same trajectory as fast-growing technology start-ups, either. Revenue at Dunkin’ increased 7 percent in 2010. LinkedIn’s sales more than doubled in the same period.

And today’s hot I.P.O. can always turn out to be tomorrow’s dud. Shares of Krispy Kreme Doughnuts, the fast-food chain that had a popular offering in 2000 and at one point traded for nearly $50, is currently at $8.27.

Still, the mood was celebratory on Wednesday when Dunkin’ went public on Nasdaq. To mark the day, the stock exchange unofficially changed its name to Nasddaq and splashed its logo with the signature pink and orange hues of Dunkin’ Donuts.

As shares of Dunkin’ climbed higher, Mr. Travis and his team sipped on the brand’s coffee and nibbled on a generous spread of doughnuts, Munchkins and Baskin-Robbins ice cream, which came in flavors like mint chocolate chip and strawberry.

“I’ve had at least seven cups of coffee today and a doughnut,” said Mr. Travis. “I’m delighted with the current enthusiasm, but I’ll wait until next week before I get too excited.”

Article source: http://feeds.nytimes.com/click.phdo?i=3705be33dd822cf40f9c21bb82a2e5b1

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Economix: On Debt Talks, a Lose-Lose-Lose-Lose Situation

July 25, 2011 by Leave a Comment

DESCRIPTIONEndemol/NBC Universal Sorry, Howie Mandel: Deal or no deal, the American economy probably still loses.

1:07 p.m. | Updated with a fifth (less likely) scenario.

Almost whatever happens this week with Washington’s debt talks, the economy will most likely be worse off.

As Dean Maki, the chief United States economist at Barclays Capital, put it: “The basic issue is that the U.S. is on an unsustainable fiscal track, which is pretty widely agreed upon. From that point, none of the choices are fun.”

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

Here are the likely scenarios I see:

1) Held up by disputes over how to reduce deficits, Washington doesn’t raise the debt ceiling in time. As a result, the Treasury stops paying debts it owes.

If that happens, the rating agencies downgrade the United States’ debt. The cost of borrowing for the United States government shoots up, since lenders demand higher interest rates from borrowers that are less trustworthy. Many other interest rates are pegged to the cost for the United States to borrow, making interest rates on all sorts of other loans, like mortgages, rise too. Credit markets freeze up, crushing an already-feeble economic recovery.

Macroeconomic Advisers predicts that failing to raise the debt ceiling in time — even if the delay is only one month — will very likely result in a new recession. And because it’s more expensive for the United States to borrow, the United States debt gets even larger, the exact opposite effect from what fiscal hawks are hoping for.

2) Held up by disputes over how to reduce deficits, Washington doesn’t raise the debt ceiling in time. But rather than default on its debt, it diverts money from other spending into paying back bondholders.

That could mean that Social Security checks are not sent, soldiers in Afghanistan and Iraq are not paid, and all sorts of other consequences.

In addition, bond markets might still freak out because the threat of default remains, so interest rates could rise anyway and cause all the terrible consequences in Scenario No. 1 (potential second recession and even bigger federal debt).

3) Washington comes up with a deal to raise the debt ceiling, but it amounts to less than $4 trillion in savings.

Standard Poor’s has said that just raising the debt ceiling is not enough; without a “credible” plan for at least $4 trillion in savings, the United States might still have its credit rating downgraded. That could, again, mean higher interest rates and all the other terrible consequences of Scenario No. 1.

4) Washington comes up with a deal to raise the debt ceiling that amounts to more than $4 trillion in savings over a near-term horizon.

The credit rating agencies are appeased, but such severe austerity measures put the fragile economic recovery at risk. The states in particular are anxious about what major spending cuts mean for them and for the many social safety net services they provide with federal support.

As Bruce Bartlett and others have written, similar fiscal tightening during a fragile economy happened in 1937. Those actions resulted in a severe second recession and prolonging of the Great Depression, partly because it was coincident with monetary tightening as well. While a sharp, sudden monetary tightening seems unlikely, the Fed is at the very least pulling back on its easy monetary policy with the end of its second round of quantitative easing.

As The Wall Street Journal’s Kelly Evans observed, Japan had a similar experience in 1998, when austerity measures were followed by a recession and a widespread sell-off of Japanese bonds.

And even if these likely American austerity measures don’t result in an outright recession, job growth is already so feeble that most Americans still think we’re in recession.

Imagine how terrible things would feel if the economy slowed down even further.

5) Washington comes up with a deal to raise the debt ceiling that amounts to more than $4 trillion in savings, but over a longer-term horizon.

This is the best-case scenario: It deals with the long-term unsustainability of the country’s fiscal arrangements — which is good for growth in the long run — but doesn’t rock the boat in the current economic recovery.

Unfortunately, it also seems to be the scenario that is least likely to be pulled off effectively.

Economists want spending cuts and/or tax increases that come after 2012, when the economy is expected to be stronger. But to use Standard Poor’s lingo, cuts that take effect in 2012 may not be fully “credible.” Committing to future cuts/tax increases is just another way of kicking the can down the road, as Washington has been doing for decades now. Almost every time Congress promises painful fiscal measures at some future date, later politicians jump in to dismantle them just before they take effect.

“We do seem to have a time-consistency problem,” Mr. Maki said. “There does never seem to be a good time for major cuts, and they’re not going to be more popular five years from now versus now.”

He says that Congress must come up with a way to prove that these are cuts that will actually happen, versus something that’s on the drawing board and is therefore erasable.

Unfortunately, he says, “There is no way to completely tie the hands of future legislators.”

Article source: http://feeds.nytimes.com/click.phdo?i=5b05fc9011a78b54005b4978d1896edc

Filed Under: Economy News Tagged With: , ,

Lawmakers Renew Push to Reach Deal on Cutting Deficit

July 23, 2011 by Leave a Comment

“We are working, and I’m confident there will be resolution,” Mr. Boehner told fellow House Republicans on an afternoon conference call, according to participants. “There has to be.”

Mr. Boehner’s comments came a little more than a week before the federal government risks defaulting on its debts, a fate that could be avoided if Congress agrees to increase the $14.3 trillion debt ceiling.

The speaker, who abruptly broke off budget talks with President Obama on Friday evening, said he hoped the plan could be finished within 24 hours. He said the savings would most likely be achieved in two stages and would meet Republican fiscal demands that have led to a Congressional cliffhanger on the debt limit.

He spoke with his colleagues after Congressional leaders met at the White House on Saturday morning at the request of Mr. Obama. The meeting broke up without resolution just before noon, after about an hour of discussion.

Lawmakers and top aides said privately that despite the White House session, the search for a solution was now focused on Capitol Hill, where senior advisers gathered Saturday afternoon to exchange ideas on a plan that could get the go-ahead from top members of Congress.

In a statement after the White House session, Senator Mitch McConnell of Kentucky, the Republican leader, indicated that he and his leadership counterparts were trying to devise a fallback measure to assure the borrowing ceiling was raised in time.

“The president wanted to know that there was a plan for preventing national default. The bipartisan leadership in Congress is committed to working on new legislation that will prevent default while substantially reducing Washington spending,” Mr. McConnell said.

The White House, in its own statement, said that Mr. Obama reiterated his opposition to a short-term extension of the ceiling — he wants a level that would carry the Treasury through the 2012 elections — because it would hurt the economy, prompt rating agencies to downgrade the nation’s credit rating and drive up interest rates for all Americans.

“As the current situation makes clear, it would be irresponsible to put our country and economy at risk again in just a few short months with another battle over raising the debt ceiling,” the White House statement said.

Conversations were to continue through Saturday, the White House said. But Congressional aides said that talks between senior advisers to House and Senate leaders began Friday as soon as it became clear that negotiations between Mr. Obama and Mr. Boehner had broken down, leaving Congress with no clear route to a debt limit increase and time running short.

The rancorous ending to the debt discussions on Friday means that leaders of the House and Senate now have only days to find a debt limit solution that has eluded them for months, gaming out ways to get a debt increase through a Republican-controlled House packed with conservatives demanding deep cuts and no new revenues.

They must do so in a way that calms markets that may be jittery after the halt in the talks just days before the Aug. 2 deadline. The drama played out in real time on television Friday night in extraordinary exchanges between Mr. Obama and Mr. Boehner, who has told his colleagues that the House needs to begin moving by Monday to give the Senate time to act.

In his weekly address on Saturday, Mr. Obama urged Republicans to accept additional new revenues — a key sticking point in the negotiations — as a way to balance the cuts he described as substantial.

“We can come together for the good of the country and reach a compromise; we can strengthen our economy and leave for our children a more secure future,” he said. “Or we can issue insults and demands and ultimatums at each another, withdraw to our partisan corners, and achieve nothing.”

Republicans countered that the emphasis needed to be on cutting government spending.

Article source: http://feeds.nytimes.com/click.phdo?i=86f5fe73f35e487258d211d8baeb101e

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Economix: Could Tax Reform Make the Financial System Safer?

July 21, 2011 by Leave a Comment

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Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

In the deafening cacophony of voices in Washington on the debt ceiling, it is easy to miss a potentially more significant development. There is growing bipartisan interest in tax reform, including changing the corporate tax system to make it more sensible and a bulwark against financial sector instability.

Today’s Economist

Perspectives from expert contributors.

The House Ways and Means Committee and the Senate Finance Committee held a joint hearing last week — the first time these two committees had met in this fashion to discuss taxation in more than 70 years, their chairmen said. The theme of the hearing, “Tax Reform and the Tax Treatment of Debt and Equity,” might sound dry, but in fact it was well designed to carve out some space for agreement across the political spectrum.

The basic question at the hearing was: Did the tax code contribute to the severity of the financial crisis in 2008-9? At one level the answer is a simple yes, because the tax deductibility of interest payments encourages families to take out bigger mortgages and companies to borrow more relative to their equity capital. (Dividend payments to stockholders are not tax deductible.)

But where in the tax code should we focus attention if the goal is to prevent similar crises in the future?

I testified at the hearing and argued that banks and other financial institutions should be the priority, because their overborrowing was central to past crises and is likely to be a salient issue in the future. It is also ironic — perhaps even bizarre — that while we try to constrain how much banks borrow through regulation, we give them strong incentives to borrow more through the tax code.

This “debt bias” is covered in detail by two very good Joint Committee on Taxation reports that were released at the hearing, one on business debt and one on household debt. (This committee comprises a subset of members from the Ways and Means and Finance Committees; on these technical issues it makes sense to get as many legislators as possible on the same page.)

One goal is “tax neutrality,” meaning that from a tax perspective it would be equally attractive to raise capital through issuing debt or through issuing equity. This could be done by limiting the tax deduction on interest payments or creating an equivalent type of deduction for dividends. In other words, you could raise more or less revenue with such a change, but the debt bias can be addressed.

I proposed that we go further and consider a tax on “excess leverage” in the financial sector. The idea — already being applied by some European countries and further developed by some of my former colleagues at the International Monetary Fund — is based on the premise that a high level of borrowing relative to equity is a form of pollution, creating negative spillovers for the rest of the economy.

When any entity in the financial system has little equity relative to its debts, it has moved closer to becoming insolvent. We need big banks, in particular, to have strong loss-absorbing buffers, and that is the role played by equity capital. But the same logic applies to insurance companies, hedge funds and even leveraged buyout firms.

When anyone has a great deal of leverage, this amplifies the upside return on equity — for a given return on assets, equity holders get more. It also amplifies the downside returns. And executives do not generally pay sufficient concern to the effects of their firm’s potential bankruptcy on the rest of the financial system.

One way to structure this approach would be as a “thin capitalization” tax — so companies of any kind would be taxed on debts that exceeded some reasonable multiple of their equity (perhaps a multiple of three or four).

We tax pollutants to discourage their production in other parts of the economy. Sometimes we use regulation, as in limits on auto or power-plant emissions. But in banking we limit leverage (debt relative to equity) through regulation while encouraging leverage through the tax code. This makes no sense.

The revenue from the excess leverage tax or thin capitalization tax could be used to help pay for broader tax reductions for the nonfinancial corporate sector.

When banks implode, a big part of the costs are imposed on nonfinancial companies, their employees and their investors. The companies lose access to credit, their customers become reluctant to buy and so on. The fiscal costs of a major bank-induced recession are also huge: the 2008-9 episode will end up increasing our ratio of government debt to gross domestic product by more than 40 percent.

For 2018, the Congressional Budget Office estimates that we will have more than $8.5 trillion in government debt as a direct result of the crisis (the details are in my testimony).

Either taxes will be increased or productive government spending will be decreased, or both, as a result of the crisis, with a direct negative impact on the nonbank part of the economy.

Why not give everyone a tax break, financed by taxing the pollution generated by banks? At the very least, the prospect of such a break should encourage powerful corporate lobbies to reflect on whether American banks should continue to get their unnecessarily favorable tax treatment.

Article source: http://feeds.nytimes.com/click.phdo?i=5a4a7dc5b045ccb7e8601da6aa54cee0

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Wall Street Pauses After Big Gains

July 20, 2011 by Leave a Comment

Global stocks rallied further Wednesday as a raft of positive earnings reports from American businesses and signs of progress over raising the United States debt ceiling helped offset debt concerns afflicting Europe. But Wall Street opened quietly, absorbing Tuesday’s broad advance.

Investor sentiment has been buoyed by better-than-expected earnings from the likes of Coca-Cola, I.B.M.
and Apple, and further earnings from eBay, Intel and American Express were expected to be of interest later on Wednesday.

In addition, there were signs Tuesday that progress was being made in raising the $14.3 trillion United States debt limit to avoid a default, after President Barack Obama backed a bipartisan plan proposed by six senators.

“News that there was progress being made in raising the U.S. debt ceiling, along with some bumper earnings news from tech stocks like Apple, has helped cheer investor sentiment,” said Ben Critchley, a sales trader at IG Index.

In morning trading, the Dow Jones industrial average fell 9.30 points, or 0.07 percent, to 12,578.12. The Standard Poor’s 500-stock index added 0.97 points, or 0.07 percent, to 1,327.70, and the Nasdaq composite index lost 3.58 points, or 0.13 percent, to 2,822.94.

In Europe, the FTSE 100 index of leading British shares was up 0.94 percent at 5,844, while Germany’s DAX rose 0.26 percent to 7,211. The CAC 40 in France was 1.57 percent higher at 3,752.

Wall Street was also poised for further gains at the open; Dow futures were up 50 points.

As investors monitor developments over the debt ceiling, they will also keep a close watch on any developments in Europe’s debt crisis, a day ahead of a meeting of European Union leaders in Brussels.

Hopes of a dramatic move were dashed Tuesday after Chancellor Angela Merkel of Germany said the summit wouldn’t yield a quick and comprehensive solution. She said there won’t be anything as “spectacular” as a restructuring of Greek debt.

The International Monetary Fund, itself a big contributor to the euro zone’s three bailouts, also ratcheted up the pressure on the Continent to get a grip on its debt problems.

“The resilient recovery of the euro area economy stands in marked contrast with the authorities’ struggle to come to grips with the sovereign crisis affecting some member states and casting a shadow over the economic and monetary union project,” the fund said in a report on Tuesday.

Despite ongoing concerns over Europe’s debts and its handling of the crisis, the euro is faring fairly well. By late morning, it was trading 0.4 percent higher at $1.4209.

“The consensus opinion still remains that the deterioration in investor confidence in euro zone debt will eventually be contained by policy action,” said Lee Hardman, currency economist at The Bank of Tokyo-Mitsubishi UFJ.

Earlier in Asia, Japan’s Nikkei 225 stock average rose 1.2 percent to close at 10,005.90 and South Korea’s Kospi was up 1.2 percent to end at 2,154.95. Hong Kong’s Hang Seng climbed 0.4 percent to close at 22,003.69.

Mainland Chinese shares spent most of the day fighting to get into positive territory. The Shanghai Composite Index ended the day 0.1 percent lower at 2,794.20.

Oil prices rose above $98 after a report showed crude supplies in the United States had dropped more than expected, a sign demand may be improving. Benchmark oil for August delivery was up $1.19 to $98.69 a barrel in electronic trading on the New York Mercantile Exchange.

Article source: http://feeds.nytimes.com/click.phdo?i=b7c22d8f14c8f3b7987c8e6b68ff0e0b

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