March 25, 2023

Samsung Cuts Its Forecast as Sales Growth Slows for Its Costliest Smartphones

Samsung, the largest maker of consumer electronics, said on Friday that it expected weaker profit and revenue, which analysts attributed to slowing sales of high-end smartphones. This is a trend that also bedevils Apple, its main rival.

Samsung, the No. 1 maker of mobile phones, aims its Galaxy models at the top end of the market. Apple sells its iPhone to these customers, too. And while sales of smartphones continue to grow over all, the rate of increase for the more expensive devices has been easing in recent months.

In recent days, BlackBerry and HTC, the Taiwanese phone maker, have also reported difficulties selling advanced smartphones.

In the United States, more than 58 percent of adult consumers who own cellphones own a smartphone, according to comScore, a market research firm. Only three years ago, it was 20 percent.

Rival smartphone makers like Sony and HTC have mounted a renewed challenge with their latest handsets. But for Samsung, the real problem may be that much of the growth in smartphone sales in coming years will be at the lower end of the market, where Chinese manufacturers are gaining share. Samsung simply does not have the most appealing models for those consumers. As smartphones become increasingly commoditized, prices will fall and profit margins will shrink.

“The concern is the future of the smartphone market, which is already saturated at the high end,” said C. W. Chung, an analyst at Nomura Securities. “The smartphone industry may be becoming more like the PC industry,” in which consumers make their buying decisions mostly on price, despite attempts by manufacturers to differentiate their products.

Samsung said it expected to post an operating profit of 9.5 trillion won, or $8.3 billion, for the second quarter, a 47 percent increase from a year earlier.

While many companies would envy such a growth rate, the forecast disappointed financial analysts, who had, on average, expected Samsung to post operating profit of more than 10 trillion won in the quarter.

Even before the news on Friday, some analysts downgraded their forecasts for Samsung. Investors have taken heed, and Samsung Electronics shares are down about 17 percent since the start of the year. (Apple shares are down about 21 percent in the same period.) Samsung shares dropped 3.8 percent on Friday in trading in Seoul.

In April, Apple reported its first year-over-year decline in quarterly earnings in a decade, as iPhones sales showed signs of slowing. The company sold 37.4 million iPhones in its fiscal second quarter or about 2.88 million phones a week.

Samsung’s Galaxy S4 got off to a quicker start than its predecessor model, the S3. It took only 60 days to sell 20 million S4 handsets, a slower pace than the older iPhone, but still far faster than the 100 days it took Samsung to sell that many Galaxy S3 phones.

While Samsung is also the world’s largest television maker, profit margins in that business have been squeezed by competition. So Samsung remains highly dependent on its mobile division, which delivered three-quarters of the company’s operating profit in the first quarter.

Samsung’s overall estimated revenue grew strongly in the second quarter, rising 20 percent, to 57 trillion won. But that, too, was slightly below expectations.

“With Samsung, the market had gotten used to upside surprises,” Mr. Chung of Nomura said. “But the previous quarters were abnormal. People need to adjust their focus.”

In March, Samsung introduced the Galaxy S4 amid considerable fanfare at an event at Radio City Music Hall in New York. While the new model has sold well in the United States, now at a carrier-subsidized price of $200, it has not performed as strongly as some analysts expected. It sells in China for about $850.

The cost of Samsung’s heavy marketing — it is a bigger worldwide advertiser than Coca-Cola — has eaten into profit margins. It also has the expense of opening Samsung shops inside more than a thousand Best Buy stores in the United States.

The high-end phone makers faced another profit-margin problem. As lower-price smartphones get more sophisticated and the advantage of higher-price smartphones is reduced, more people may shift to those lower-price phones, putting increased price pressure on companies like Samsung or Apple.

Mark Newman, an analyst at Sanford C. Bernstein in Hong Kong, says he thinks investors became too pessimistic about Samsung. Profit margins will rebound in the second half of the year, he said. “At current valuations, the market is assuming the mobile business will destroy value,” he wrote in a note to clients. “We believe Samsung is cheaper than ever.”

Some analysts noted that even if smartphone profit margins fell and Samsung faced greater pressure from rivals, it could benefit because it is the biggest producer of the semiconductors used in smartphones and other computing devices. Prices of memory chips have also been rising in recent months after a long slump.

Samsung plans to post its official report of second-quarter earnings on July 26.

Article source:

DealBook: JPMorgan Shows Strength in Quarter

Jamie Dimon, the chief of JPMorgan Chase, at a Senate panel last year.Larry Downing/ReutersJamie Dimon, the chief of JPMorgan Chase, at a Senate panel last year.

JPMorgan Chase, the nation’s largest bank, reported a 33 percent rise in first-quarter earnings on Friday, bolstered by gains in the investment banking business and a surge in mortgage lending.

“All our businesses had strong performance, and our client franchises did exceptionally well,” Jamie Dimon, the bank’s chief executive, said in a statement.

Related Links

As the economy recovers slowly, demand for loans remained stagnant. JPMorgan said total loans at the bank fell 1 percent. Yet gains from investment banking allowed JPMorgan to record 12 consecutive quarters of profit.

Within the investment banking unit, assets grew by 8 percent to $19.3 trillion for the first quarter. Fees rose 4 percent, to $1.4 billion.

The net earnings of $6.5 billion, or $1.59 a share, exceeded Wall Street analysts’ expectations of $5.41 billion, or $1.40 a share. Revenue was $25.8 billion, compared with $26.8 billion in the same period a year earlier.

The report kicked off the bank earnings season. As the nation’s largest bank by assets, JPMorgan is often looked at as a bellwether.

A bright spot for JPMorgan’s earnings was mortgage lending, fueled in part by federal programs that have helped damp interest rates. Those low rates have prompted homeowners to refinance. In total, the mortgage banking group posted a profit of $673 million for the first quarter, down 31 percent from a year earlier.

Mortgage originations rose 37 percent in the quarter, to $52.7 billion. Still, application volumes were down, 1 percent from a year earlier, settling in at $60.5 billion. Appetite for loans was dampened, the bank said, by an uptick in interest rates earlier this year.

“We are seeing positive signs that the economy is healthy and getting stronger,” Mr. Dimon said. “Housing prices continued to improve, and new home purchases are also starting to come back.

The bank’s credit card business also improved, with sales volume rising to $94.7 billion, an increase of 9 percent from the same quarter a year earlier, but down 7 percent from last quarter. Auto lending also grew by 12 percent from a year earlier to $6.5 billion.

The results point to some of the larger challenges facing the nation’s biggest banks. As low interest rates continue to undercut profits, banks like JPMorgan are under pressure to cut expenses.

JPMorgan said on Friday that its total head count continued to fall, reaching 255,898. Non-interest expenses plummeted by 16 percent to $15.42 billion from a year earlier.

The bank has pinned some of its hopes for future profitability on its asset management business, as profits from riskier businesses like trading get undercut by a spate of new regulation. The asset management business reported net income of $487 million for the quarter, up 26 percent from a year earlier.

JPMorgan continued to gain business in private banking, accumulating $2.2 trillion in assets under management, up 8 percent from a year earlier.

Some of the strength in earnings, however, were helped by JPMorgan’s decision to reduce reserves for mortgages and credit-card loans. By moving money from the reserves, which cushion the bank against potential loses, the bank got a net 18 cent gain a share.

Addressing questions on Friday about whether the earnings are deceptively strong, Mr. Dimon said in a conference call that even after the reserve reductions, “we had really good numbers everywhere.”

Another quarter of earnings offers JPMorgan another chance to move beyond the multibillion-dollar trading loss that has dogged the bank. During the bank’s quarterly earnings call in January, for example, Mr. Dimon said that the latest quarter signaled the end of the trading debacle. “We are getting near the end of it,” he said.

Since announcing the trading loss last May, JPMorgan and its influential chairman, Mr. Dimon, have struggled to reassure skittish investors and defray a series of federal investigations related to the bungled wagers on complex-credit derivatives. Mr. Dimon has testified before Congress, vastly reshuffled its executive ranks and fortified risk controls. In January, JPMorgan’s board slashed Mr. Dimon’s compensation by 50 percent to $11.5 million.

More recently, Senator Carl Levin, Democrat of Michigan, grilled current and former senior executives at the bank about lax oversight policies and gulfs in risk management. The Congressional hearing, which lasted for nearly four hours, renewed pressure on Mr. Dimon and the bank. At times, senior executives floundered as they tried to combat lawmakers’ accusations that the officials misled investors and regulators about the soured bet. The hearing came just a day after a scathing 300-page report into the losses.

Mr. Dimon has struck a more contrite tone, seemingly chastened by the continued fallout from the trading losses. In his annual letter to shareholders, released on Wednesday, Mr. Dimon repeatedly apologized for the losses. He described the losses as the “the stupidest and most embarrassing situation I have ever been a part of,” vowing to continue to bolster risk controls and rout out problems.

Rather than taking a combative tone toward regulations that rein in Wall Street, Mr. Dimon expressed regret for how the trading losses “let our regulators down.”

In his letter, Mr. Dimon also warned shareholders that the bank would continue to face regulatory challenges in the “coming months.” JPMorgan, Mr. Dimon said, will deploy resources to improve firmwide controls on risk and compliance. “We are reprioritizing our major projects and initiatives,” he said.

The earnings on Friday come just a month before JPMorgan’s annual shareholder meeting, where the results of a crucial vote will be announced. Shareholders will decide whether to strip Mr. Dimon of his chairman title, a role he has held since 2006. Ahead of the nonbinding vote, JPMorgan has been working behind the scenes to make their case to shareholders that Mr. Dimon should keep the dual roles.

Article source:

U.S. Assails Pace of Global Trade Talks

GENEVA — The United States made a blistering attack on fellow World Trade Organization member states on Thursday for failing to do more to cut global barriers to trade, criticizing India in particular for trying to introduce a “massive new loophole.”

“The time has come to speak bluntly,” U.S. ambassador Michael Punke told his counterparts at the Geneva-based body. “We must not sit idly by as the W.T.O.’s negotiating function hurtles towards irrelevance.”

Ambassadors to the 159-member organization were meeting to review progress toward a possible deal to be signed in Bali in December that would simplify customs procedures, adding as much as $1 trillion to global trade.

At the insistence of developing countries, which objected to having to shoulder most of the burden of the customs reforms, a Bali agreement would also include limited reforms to rules on food and agriculture and special treatment for poor countries.

While such a deal would help spur the world economy, the scale of the negotiation has been cut back substantially from the far more ambitious “Doha Round” of trade talks, which dragged on for a decade before finally collapsing in 2011.

“The glint of hope today is that we still have time — though only just barely — to adjust our course. The institution we care about is in crisis, and we need to act accordingly,” Mr. Punke said.

“While it is not my intention to throw bricks, I will be frank in our substantive assessment of where various issues stand,” he said, adding that the mood had changed from hopeful to grim over the past three months.

He called on all W.T.O. ambassadors to seek urgent instructions from governments to try to re-energize the negotiations before the end of April.

“If Bali fails, the signal that we will send, in a world full of fruitful trade negotiations, is that the W.T.O. is the one place where trade negotiations don’t succeed,” Mr. Punke said.

As the talks have slowed, many trade ministries have been distracted by more pressing problems, like the global financial crisis, or with less daunting issues, like who should lead the W.T.O. once Director General Pascal Lamy steps down at the end of August.

Mr. Lamy told the meeting there had been a lot of activity, but limited progress on substance, toward the three main areas of a potential Bali agreement.

He said there were still “very significant divergences” about how to change the rules on stockpiling food, as demanded by a coalition of developing countries led by India.

He urged W.T.O. members not to resort to finger pointing, but gave a pessimistic summary.

“The stark reality is that the current pace of work is largely insufficient to deliver successfully in Bali,” he said. “This means that without rapid acceleration and real negotiations, it is highly probable that you will not see the deliverables you desire in Bali.”

The stockpiling proposal would let poor countries buy and store farm produce and would eliminate the existing cap on agricultural subsidies. Supporters say it would help poor farmers and food security, but critics say it would do just the opposite.

Mr. Punke said the proposal became more worrying the more he learned about it and would be a step back, “creating a massive new loophole for potentially unlimited trade-distorting subsidies.”

“This new loophole, moreover, will be available only to a few emerging economies with the cash to use it. Other developing countries will accrue no benefit — and in fact will pay for the consequences.”

He said the proposal would allow governments to pump up food prices by buying commodities for their stockpiles, a policy that would lead to national surpluses later being dumped on world markets and hurting the interests of nonsubsidized farmers elsewhere.

Mr. Punke said the United States was concerned about rumors of yet more proposals on agricultural reforms, which he said would only deepen the impasse.

“Do we really want to watch this movie again?” he asked. “Against this frustrating backdrop, how can we be anything but gravely concerned about the prospects for Bali?”

Article source:

Cuts to Achieve Goal for Deficit, but Toll Is High

But lost in the talk of Washington’s dysfunction is this fact: on paper at least, President Obama and Congress have reduced projected deficits by nearly $4 trillion over a decade — the widely embraced goal for stabilizing the national debt.

The spending cuts that began to take effect Friday, known as sequestration and totaling about $1 trillion through 2023, come on top of $1.5 trillion in reductions that Mr. Obama and Congress committed to in 2011, mainly from the accord that averted the nation’s first debt default.

Nearly $700 billion more will come from tax increases on wealthy Americans, the product of the brawl in December over Bush-era tax cuts, and another $700 billion is expected to be saved in projected interest on the reduced debt.

If the latest cuts stick, the two parties will have achieved nearly the full amount of deficit reduction over the next decade that economists and market analysts have promoted. Yet the mix comes with substantial downsides.

It does not add up to the “grand bargain” that the two parties had been seeking, because it leaves virtually untouched the entitlement programs — Medicare, Medicaid and Social Security — that are responsible for projections of an unsustainably rising federal debt in coming decades.

“This is not a result that deals with our long-term debt problem,” said Vin Weber, a Republican former congressman. “The fact we’ve gotten to a $4 trillion deficit-reduction deal without tackling entitlements is almost a bad thing,” he added, if it lulls the public and the politicians into thinking the problem is solved.

The progress on deficit reduction over the past two years will also probably hamper job creation and the economic recovery. Private and government forecasters project that sequestration alone will cost about 700,000 jobs this year and will shave at least a half percentage point from economic growth. The Congressional Budget Office now forecasts a falling deficit but stubbornly high unemployment in coming years.

For Democrats, at least, the mix of spending cuts and tax increases in the package is another reason for disappointment. The deficit deals to date would yield $4 in spending cuts for every dollar of new revenue. Mr. Obama, as well as several bipartisan groups, including the commission led by Erskine B. Bowles and Alan K. Simpson, call for one dollar of tax increases for every $2 to $3 in spending cuts.

It remains unclear how long sequestration will last: it was designed to be onerous to force a compromise on an alternative. But Mr. Obama and Republicans indicated on Friday that the cuts would probably remain in place at least until the end of the fiscal year, Sept. 30.

Democrats, led by the president, express confidence that in coming months public pressure will force Republicans to relent on revenue, especially as cuts to the military begin to be felt. But Republican leaders have said they will stand firm against tax increases, suggesting that they have won at least a temporary victory on reducing the size of the government.

In his weekly address on Saturday, Mr. Obama said the Republicans had “decided that protecting special-interest tax breaks for the well off and well connected is more important than protecting our military and middle-class families from these cuts.”

“I still believe we can and must replace these cuts with a balanced approach — one that combines smart spending cuts with entitlement reform and changes to our tax code that make it more fair for families and businesses without raising anyone’s tax rates,” Mr. Obama said.

In the Republican response, Representative Cathy McMorris Rodgers of Washington State, said: “The problem here isn’t a lack of taxes. This year alone, the federal government will take in more revenue than ever before. Spending is the problem, which means cutting spending is the solution. It’s that simple.”

According to the nonpartisan Congressional Budget Office, total government spending is falling compared with the size of the economy but will rise again in the next decade. That growth will be driven by the entitlement programs as more baby boomers retire, not by discretionary spending.

And revenues, while reaching a high in dollar terms, remain below the average of the past 40 years as measured against gross domestic product.

Article source:

Inside Asia: Australian Banks Try to Stimulate Home-Building

SYDNEY — Australian banks are cutting the cost of fixed-rate mortgages to the lowest level in more than two decades as a marked drop in funding costs and fierce competition combine to offer a glimpse of light in a moribund housing market.

Any easing in financial conditions, or use of lower interest rates or increased money supply to stimulate activity, will be welcomed by the Reserve Bank of Australia. The central bank is counting on a revival in home building to help cushion the economy as a long boom in mining investment cools this year.

The banks’ generosity has not extended to variable rates, however, which cover the vast bulk of the country’s 1.3 trillion Australian dollars, or $1.3 trillion, in home loans, putting pressure on the central bank to cut official rates if it is serious about a housing recovery.

“The banks are not going to cut variable rates on their own,” said Brian Redican, a senior economist at Macquarie. “And first-home buyers need to know that rates are going to stay down for them to have the confidence to jump into the market. Only the R.B.A. can do all that.”

Although the central bank did ease rates in both October and December, the effect on borrowing has been all but imperceptible.

Data released Monday by the Australian Bureau of Statistics showed that the number of home loans taken out in December had dropped 1.5 percent, the third straight month in which that number fell, and a five-month low.

Annual growth in housing credit slowed to an all-time low of 4.5 percent at the end of 2012, a long way from the double-digit pace common in the previous two decades. Indeed, growth peaked at no less than 22 percent in 2004.

That could be one reason that the central bank struck an unusually mournful tone in its quarterly report card on the economy last week, lamenting the life missing from investment spending outside mining.

The outlook for tame inflation and gradually rising unemployment fueled expectations that not only would the Reserve Bank probably have to cut the cash rate again, it would also have to keep it low for longer.

In recent weeks, it is that dawning realization in the markets that has dragged down key swap rates, which are the fixed portion of an agreement for cash flow in a particular market. The rate on three-month swaps hit an all-time low early in February at 2.92 percent, lower even than during the global financial crisis.

That is important for banks, as fixed-rate mortgages are priced off the swap curve, which identifies the relationship between swap rates at varying maturities, giving them scope to ease independently of any move in official rates.

The average fixed-rate mortgage at the end of January was already the lowest in two decades at 5.52 percent, but the latest cuts by banks mean it is even lower now.

The Westpac bank lopped 0.4 percentage point off its packaged two-year fixed rate, taking it to 4.99 percent. Another bank, St. George, cut its entire fixed-rate suite, from one to five years. Rates for a three-year fixed loan from Commonwealth Bank of Australia, National Australia Bank and Australia New Zealand Banking are all at 5.29 percent.

Still, although fixed-rate mortgages have been coming down for months, their popularity lags. Late last year, 14 percent of new loans had fixed rates, up from 10 percent six months earlier.

Lower variable rates would have a much bigger effect on housing demand, and there are signs that intense competition is driving banks to offer better deals.

Although the average standard variable rate is about 6.44 percent, a couple of phone calls to banks will get a discount of 0.75 to 1 percentage point.

But the banks are reluctant to ease any further on their own, because much of their funding comes from deposits, rather than markets, and rates on those accounts remain relatively high.

Deposits now make up 54 percent of the banks’ total funding, a marked increase from precrisis levels of about 40 percent — driven in part by tougher regulations.

But the competition for that money is fierce, making it costly. Rates on bonus saver accounts, with higher interest rates, have increased by 2.5 percentage points relative to the cash rate since 2009.

That shift in the funding mix is one reason the cash rate may have to fall further than in the past.

Shane Oliver, chief economist at AMP Capital, said that at this stage of the easing cycle in 2009, house prices were rising 12 percent annually, while approvals for new homes were up 41 percent on the year. The latest comparable numbers are 1.8 percent and 13 percent.

“Most economic indicators remain far weaker than they normally are this far into an interest rate easing cycle, suggesting monetary conditions are still too tight,” Mr. Oliver said.

Article source:

European Leaders Struggle to Bridge Budget Gaps

BRUSSELS — European Union leaders on Friday morning edged closer to agreeing a budget worth nearly €1 trillion, or $1.3 trillion, to support farming, transportation and other infrastructure, as well as big research projects for the 27-nation bloc.

But after 15 hours of talks, the leaders were still seeking unanimity while also attempting to satisfy the wide array of national interests demanding attention.

The budget is negotiated every seven years and involves furious horse-trading as leaders focus on getting the best deal for their own countries’ citizens, rather than emphasizing pan-European considerations.

The marathon session was the second attempt to reach a deal on the funding package, which should run from 2014 to 2020, after the first attempt collapsed in November.

Another failure to strike a deal on a sum of money that represents only about 1 percent of the Union’s Gross Domestic Product would be a severe embarrassment for the leaders, who already have spent years bickering over how to save the euro.

The European Commission, the bloc’s policymaking arm, had sought an increase in the overall budget of around 5 percent to more than €1 trillion.

Herman Van Rompuy, the president of the European Council, which represents E.U. leaders, pruned that sum to about €973 billion at the previous summit in November.

On Friday morning, Mr. Van Rompuy presented further revisions lowering the overall sum to about €960 billion but holding down the amount of cash governments pay up-front to around €908 billion.

That formula was designed, in part, to satisfy countries like Britain and the Netherlands that pay more into the budget than they receive, while also accommodating the demands of countries like France and Italy that want to maintain generous payments for agriculture and infrastructure.

Some of the deepest cuts would be made to pan-European projects to improve transport, energy, and digital services that are overseen by the commission. About €1 billion in cuts would be made to the part of the budget used to employ 55,000 people, including 6,000 translators, most of them in Brussels, who run the Union’s day-to-day affairs.

Expert national advisors were reviewing the proposals on Friday morning, and leaders were expected to reconvene for further talks.

Leaders also were wrestling over demands by some countries to renew a system of rebates that raises the costs for other countries.

One of the complications in the current round of negotiations has been the call for budgetary rigor from leaders like David Cameron, the British prime minister, who says the Union should tighten its belt at a time when many European governments have been compelled to impose stringent budget cuts.

Mr. Cameron, in particular, has earned the enmity of some European leaders by demanding a renegotiation of Britain’s treaty with the Union and promised a referendum on his nation’s membership in 2017.

Reflecting growing irritation with Britain among a number of European leaders, Martin Schulz, the president of the European Parliament, told a news conference late on Thursday night that leaders should not go out of their way to appease Mr. Cameron.

Because Britain could be outside the bloc by later this decade, there was little need to make concessions to Mr. Cameron that potentially jeopardized “the security of our financial planning,” Mr. Schulz suggested.

Mr. Van Rompuy, the president of the European Council, had intended to start the session during the mid-afternoon on Thursday to force leaders to make their complaints clear in a roundtable session rather than being allowed to break into small groups.

But his plan was derailed, and the first roundtable session was delayed until late in the evening, as leaders formed the kind of pre-summit huddles that he seemingly wanted to avoid.

President François Hollande of France was an hour late to a meeting during the afternoon with Mr. Cameron, Angela Merkel, the German chancellor, and Mr. Van Rompuy.

Mr. Hollande’s lateness was a sign of French displeasure with British demands that included strict limits on agriculture spending cherished by French farmers, according to an E.U. diplomat, who spoke on condition of anonymity because of the sensitivity of the talks.

Even if leaders eventually agree to a deal, it faces still more hurdles before it becomes law at the European Parliament, which has the power to veto the budget.

Some of the most influential figures in Parliament have already signaled that they are prepared to reject a budget that foresees spending less on Europe in the years ahead.

Guy Verhofstadt, the head of the alliance of liberals in the Parliament, called on Thursday for a full-revision clause to be inserted into the budget, so that it could be increased after three years if economic conditions improved.

Mr. Schulz, the president of the Parliament, said on Thursday that he would not approve a budget that ended up widening the overall gap between the amount of cash paid up-front by governments and the somewhat higher amounts known as commitments, which make up the overall budget.

Article source:

Toyota Raises Profit Forecast on Rebounding Sales

Toyota said net profit came to ¥99.9 billion, or $1.1 billion, in the three months through December, a 23.5 percent increase from a year earlier, when the effects of Japan’s tsunami disaster still weighed on its business.

Sales for the quarter climbed 26 percent from a year earlier to ¥16.2 trillion, helped by an almost 50 percent surge in sales of the company’s fuel-efficient vehicles in the United States. Meanwhile, cost reductions at an automaker already known for its lean production saved the company ¥320.0 billion during the quarter, Toyota said in a statement.

Now Toyota, whose Super Bowl ad “Wish Granted” topped viewership rankings, is set to get a wish of its own: the weaker yen brought about by the economic policies of Prime Minister Shinzo Abe, who took office late last year, is set to lift Toyota’s bottom line even further.

A weak currency helps Toyota because it lowers the cost of producing in Japan, and inflates the yen value of overseas profits. Toyota is poised to get a particularly big boost from the weak yen, because it manufactures more cars at home than its domestic rivals. Last year, Toyota made 53 percent of its vehicles in Japan, and exported over half of those cars.

Toyota shares have risen by almost 50 percent since mid-November, when the yen started to weaken. The currency has weakened by about 15 percent over the same period.

In 2013, Toyota expects to sell 9.91 million vehicles, improving on its record of 9.75 million for last year, which helped it regain its crown as the world’s top-selling automaker from General Motors. Those sales figures include Daihatsu Motor and Hino Motors, which are part of the Toyota Group.

Such a performance could help Toyota climb back closer to the ¥1.7 trillion in net profit it booked in 2008, before the global financial crisis decimated its earnings. Since then, a recall scandal, natural disasters and a strong yen had hindered a full comeback. But the combined challenges have also forced executives at the 75-year-old automaker to revamp quality control, cut costs and take more risks with design to attract new audiences.

“We believe that our efforts have been bearing fruit,” Toyota senior managing officer Takahiko Ijichi said in Tuesday’s statement. “We are finally on the road to sustainable growth.”

Article source:

DealBook: An Argentine Parallel

If a corporation or an individual pays some creditors, but not others, bankruptcy lawyers call that a voidable preference. The preference allows the creditor to get more than it would in the collective bankruptcy process, so the extra bit can be recovered by the bankruptcy trustee.

Preferences are also at issue in the Argentine debt litigation. The Federal District Court in Manhattan has ruled that Argentina can’t pay cooperative creditors while stiffing the uncooperative ones.

Considered in this broader context, the suggestion that the United States should prefer some creditors over others seems somewhat problematic, to put it politely. But that is precisely what some, particularly House Republicans, have suggested the government should do if the $16.394 trillion debt limit is not raised and the United States runs out of cash to pay its bills.

The idea is that bondholders should be paid above all others, to avoid a default.

In Debt
View all posts

I’m on record as saying a default is a really bad idea, the consequences of which are vastly understated by those who seem to approach the idea with an alarming degree of casualness.

But in any event, why is it O.K. for the United States to do something that many of the same people have suggested is wrong when done by Argentina?

And the mere suggestion that any debtor will engage in preferences itself has consequences.

In the case of the United States debt, if I know that (a) the government is going to prefer bondholders when it begins to run short of cash and (b) that the government will run short of cash in mid- to late February, then I think I’ll file my tax return and get my refund A.S.A.P.

I suspect a lot of other people will have the same idea, too. That, of course, will accelerate the date at which the government will run out of cash.

Then there are government contractors, who might think about submitting invoices a bit early.

Stephen J. Lubben is the Harvey Washington Wiley Chair in corporate governance and business ethics at Seton Hall Law School and an expert on bankruptcy.

Article source:

Economix Blog: Bruce Bartlett: Accounting for a $1 Trillion Platinum Coin


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Washington had been buzzing about the idea of minting a $1 trillion platinum coin in the event that Republicans block an increase in the debt limit (as they did in 2011), until the Treasury and the Federal Reserve rejected the idea.

Today’s Economist

Perspectives from expert contributors.

But whether or not creating a $1 trillion coin to avoid defaulting on the debt was reasonable, in accounting terms it would have been no big deal — simply a larger scale of what the Treasury and the Fed do every day.

The United States Mint, a division of the Treasury, would have had to create a $1 trillion coin of platinum — though it would not have had to contain $1 trillion of platinum — to meet the letter of the law, and the Fed would have taken ownership.

The Fed would then have credited the Treasury’s account with $1 trillion of cash that could be used to make payments authorized by the Treasury. The Fed is, in effect, the Treasury’s bank, accepting deposits and clearing payments on a daily basis.

While some people worried aloud that the creation of $1 trillion of cash would be dangerously inflationary, this is nonsense. The coin would not affect monetary policy. The Treasury and Fed constantly coordinate their actions so that tax receipts don’t reduce the money supply and Treasury payments don’t lead to an increase.

If Treasury payments threatened to raise the money supply more than the Fed would like, it would simply sell bonds from its portfolio to absorb the excess liquidity. Possessing close to $3 trillion of Treasury securities, the Fed could easily offset all the cash created by the platinum coin.

In effect, rather than the Treasury selling securities to the public to pay for spending in excess of revenues, the Fed would do so. Bonds in the Fed’s portfolio already count against the debt limit, so that is not a constraint.

Nor would the creation of a $1 trillion coin have led to higher spending. The Treasury could still spend only what has been authorized by Congress.

As a matter of accounting, the Treasury would book the $1 trillion paid by the Fed as “seigniorage.” Technically, that is the difference between the cost of creating coins and their face value. When the Fed obtains coins from the mint to distribute through the banking system, it pays the face value of the coins. According to Table 6-2 in the Analytical Perspectives volume of the 2013 budget, the mint breaks even on coinage, providing no net seigniorage to the government.

In reality, the Treasury gets a lot of revenue from seigniorage, but it shows up in a different part of the budget. Although the Fed pays the face value for coins, that is not the case with bills. The Fed pays the Treasury 5.2 cents a bill for dollar bills to 12.7 cents for $100 bills because they require more security. In 2012, the Fed paid the Treasury $747 million for currency production by the Bureau of Engraving and Printing, which approximately offset its costs of operation.

The difference between the cost of bills and their face value is also seigniorage, but the profit accrues to the Fed. It also gets revenue from the Treasury on its vast holdings of Treasury securities. These securities are a byproduct of monetary policy; when the Fed buys them on the open market – it is prohibited by law from buying them directly from the Treasury – it expands the money supply, and when it sells securities the money supply shrinks.

The Fed makes an enormous profit from interest paid to it by the Treasury, from seigniorage on currency and other services for which it charges banks. By law, the Fed subtracts its costs of operation and, annually, gives the rest back to the Treasury. On Jan. 10, the Fed made its annual payment to the Treasury, of $88.9 billion.

As the chart indicates, this is two or three times the revenue historically received by the Treasury from the Fed. But the Fed’s unprecedented actions, in coping with the financial crisis that began in 2008, led to a vast expansion of its portfolio, which generates much additional interest income.

Data for 2003-11 from annual report of the Board of Governors of the Federal Reserve System

This accounting raises some interesting issues of which even economists are generally unaware. For example, although it is part of the federal government, the Fed is treated as a private bank for the purposes of calculating the gross domestic product. The data can be found in Table 6.16D of the national income and product accounts. They show that in 2011, the Fed generated a profit of $75.9 billion – 18.6 percent of all the profits generated by the financial sector of the United States economy and 5.6 percent of the total profits of all domestic industries.

Since the Fed’s profits come primarily from interest on Treasury securities, its payment to the Treasury in effect offsets much of the net interest portion of the budget. In 2013, net interest is expected to be $229 billion. But actually it is $89 billion less than that because of the Fed payment. It would make more sense, as a matter of accounting, to treat the Fed payment as an “offsetting receipt” that would lower the net interest outlay, rather than as a “miscellaneous receipt” in the budget. This has implications for calculating the burden of the national debt.

With the idea now off the table, we may never be able to assess how the coin would have played out. But most likely it would have been business as usual between the Treasury and the Fed.

Article source:

Political Economy: It’s Too Soon to Be Sure of a Euro Zone Happy Ending

Mario Draghi, the president of the European Central Bank, did not quite coin a new phrase last week, but he certainly popularized the expression “positive contagion.” After years in which the euro zone has been suffering from plain old contagion, Mr. Draghi now thinks a positive dynamic is in play.

The term contagion has tended to be used in financial markets to refer to the way that problems in one country (like Greece) can so unnerve investors that they cause difficulties in other countries (like Italy, Portugal and Spain). Mr. Draghi, though, seems to be using the word more broadly to cover the whole panoply of vicious cycles that had been sucking the euro zone into a whirlpool.

The E.C.B. president is right that the vicious cycle in financial markets has given way to a virtuous one. The best measure of this is how peripheral governments’ bond yields have dropped since he said last July that the E.C.B. would do whatever it took to preserve the euro — “and believe me, it will be enough.” Spanish 10-year yields have fallen to 4.9 percent from 7.4 percent, while Italian ones are down to 4.1 percent from 6.4 percent. The Stoxx 50 index or euro zone stocks, meanwhile, is up 12 percent.

But vicious cycles do not apply only to financial markets. They also affect the real economy and politics — and flip back into the world of finance. Until the economies of Italy and Spain stop shrinking, the risk of tipping back into negative contagion remains.

Remember, too, how financial markets can be fickle. Only a year ago, confidence was buoyed by the central bank’s decision to lend struggling banks €1 trillion, or $1.3 trillion, in low-cost, three-year loans. But then Greece’s indecisive first election and Spain’s dithering over its banking overhaul led to the most dangerous episode yet in the euro crisis.

Still, before looking at the remaining risks, it is important to acknowledge progress in the underlying situation and in confidence.

The fundamental causes of the crisis were uncompetitive economies, excessive government borrowing and weak banks.

All three problems have been partly remedied. For example, labor costs in Spain and Greece have been falling, improving their industries’ competitiveness — so much that Spain has had a current account surplus for the past three months. Meanwhile, fiscal deficits across the periphery of the euro zone have been cut, although they are still too high. Finally, Irish, Greek and Spanish banks have been stuffed with capital.

Confidence, too, is returning. It is not just the sovereign debt yields that have fallen. Capital flight has reversed and banks depend less on the E.C.B. for funding.

Positive contagion could set in when there is a growing conviction that the euro zone is addressing its problems and will not break up, which could strengthen confidence in financial markets. As borrowing costs in peripheral countries fall and their banks feel they are no longer on the precipice, companies and individuals will face less of a credit squeeze. Ultimately, businesses would invest and individuals would spend. Measures taken to restore competitiveness would also encourage investment and increase exports.

All this would bring the recession to an end, which would further bolster the confidence of investors, businesses and consumers. With interest rates falling and tax revenue rising, fiscal deficits would fall — kicking off another virtuous circle, as governments would no longer be under pressure to tighten their belts with further rounds of austerity.

Unfortunately, it is still too soon to be sure of such a happy ending — largely because the measures taken to improve competitiveness and the effect of the better mood in financial markets on the real economy both operate with a lag. Meanwhile, the austerity measures are still crushing activity. The concern is that, in the interim, as unemployment continues to rise, the political situation in one or more countries could get nasty.

The political outlook is fairly benign because the two most vulnerable countries — Greece and Spain — have recently had elections and are not supposed to have new ones for several years. The German election this year could even be positive, if it leads to a grand coalition with Angela Merkel as chancellor, but including the Social Democrats, who may be more willing to help their struggling southern partners. The same could be true if the Italian election in February results in a stable coalition led by the center-left Pier Luigi Bersani and involving Mario Monti’s centrist movement.

There are, admittedly, short-term risks. One is that Greece’s fragile coalition does not survive an intensification in the economic gloom. Another is that the former Italian prime minister, Silvio Berlusconi, somehow pulls off a victory in the Italian elections.

But the biggest risk is that Spain, Italy and Greece, in particular, might be still mired in recession this time next year. Deficits would remain stubbornly high and debt-to-gross domestic product ratios would still be rising, as would unemployment. Markets might then start worrying again about the sustainability of both public finances and governments’ reform policies, kicking off a vicious cycle.

The euro zone is witnessing the early stages of positive contagion. But politicians should not be complacent. They must do everything in their power to maximize the chances of this virtuous cycle’s taking hold. This means keeping up their long-term structural reforms while trying to do whatever they can to mitigate the short-term austerity.

Hugo Dixon is the founder and editor of Reuters Breakingviews.

Article source: