Archive for July, 2011

Markets to rally if debt deal reached, downgrade eyed

Sunday, July 31st, 2011 | Finance News

NEW YORK (Reuters) – If debate in Washington over raising the U.S. debt ceiling finally ends with a deal on Sunday, the last-minute reprieve could spark a relief rally when global markets open.

U.S. lawmakers were close to a last-gasp $3 trillion deal to raise the borrowing limit and avoid a potentially catastrophic default. Markets have been tumultuous throughout the protracted discussions, with Wall Street finishing its worst week in a year on Friday.

"A deal of $2.8 trillion looks like the outcome and the mechanism is in place, and no default. That is enough to rally markets," said David Kotok, chief investment officer of Cumberland Advisors in Sarasota, Florida.

But the White House stressed that no deal had been reached yet. Communications director Dan Pfeiffer sounded a note of caution, saying in a tweet on Sunday that "a lot of bad info is floating out there".

Wayne Kaufman, chief market analyst at John Thomas Financial in New York, said that after five down days on Wall Street the stock market was primed for a bounce. But he warned that options traders, who have been betting a deal will be struck, may get caught out.

"There is the possibility this could go on for another few weeks," he said. "It would probably be devastating for markets, but the possibility does exist."

Even if a deal is struck soon, markets remain nervous, and a relief pop in equities may be short-lived. This year, Wall Street has been quick to move from crisis to crisis. And those seem to be in almost endless supply.

The United States still faces a possible downgrade to its gold-plated AAA rating in the near future and that is likely to hit markets if it does eventually happen.

"The initial shock of the downgrade will rattle the markets," said Peter Cardillo, chief market economist at Avalon Partners, New York. "The chances of a downgrade are certainly greater now than a month ago."

Trading activity in the last few weeks suggests U.S. equities have been restrained by the paralysis in Washington.

Fears that a hamstrung government could be a deadweight on growth rose on Friday after a report showed the U.S. economy grew much more slowly than thought in the first half of the year.

A number of prominent investors have indicated they are holding larger-than-usual cash positions, and yields on some short-term U.S. debt maturing in August have soared.

Meanwhile the dollar, the world's safe haven during the 2008 financial crisis, hit a record low against the Swiss franc and a four-month trough against the Japanese yen on Friday. Both are now seen as a safer place to store cash than the United States.

A lack of a U.S. budget deal would also ratchet up the pressure on the dollar against the yen so much that it raises the prospect that Japan might intervene to stop its currency from strengthening.

The dollar fell on Friday to its lowest since coordinated intervention to weaken the Japanese currency in mid-March. It is now in striking distance of its all-time low of 76.250 yen, which it hit just before authorities intervened then.

Short-term money markets have been roiled, making it more costly for banks and companies. If that persists, consumers and small businesses may also find it harder to access credit. Those who can get loans will likely pay more for them.

Companies, meanwhile, are hardly likely to ramp up hiring if funding costs are on the rise. That became even more of a worry after data showed the U.S. economy grew at a plodding 1.3 percent pace in the second quarter and produced nearly flat growth in the first quarter.

"This is exactly what the market does not need as economic conditions waver," Jim Caron, head of global interest rate strategy at Morgan Stanley, said in a research note.

Ironically, longer-dated Treasury debt has rallied, partly in reaction to the weaker-than-expected data, but also reflecting a "flight to safety" as investors move out of the way of the consequences a default may have on global markets.

(Additional reporting by Angela Moon and David Gaffen; Editing by Chris Sanders and Dale Hudson)

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Analysis: Gas engines at center of fuel efficiency drive

Sunday, July 31st, 2011 | Finance News

WASHINGTON/DETROIT (Reuters) – Automakers have agreed to produce by the quarter-century mark the most fuel- efficient cars and trucks ever that will leverage new designs and technology, but still rely heavily on gasoline engines.

A blueprint announced on Friday by President Barack Obama would boost fuel economy requirements 53 percent by 2025. This target is unlikely, as some suppose, to prompt a dramatic ramp up in production of electric cars and hybrids, which are only a fraction of the U.S. sales market.

"Automakers will meet the standards by improving technology on the road today," said Brendan Bell of the Clean Vehicles Program at the Union of Concerned Scientists.

Bell, automakers and other experts say industry will accelerate development of cleaner burning gas engines, enhanced transmission systems, lighter materials -- like stronger steel and alloys -- and more aerodynamic designs.

These changes are already taking place as is a shift toward production of small cars to meet consumer demand and new government mandates in an era of high gas prices.

In particular, U.S. automakers, led by Ford Motor Co, have been working feverishly on making those changes after long over-relying on gas-guzzling trucks, SUVs and minivans. Big trucks, including full-size pickups, will have the hardest time meeting the new goals.

"The Detroit Three have finally and really discovered fuel economy and it's a real focus for them," BorgWarner Inc Chief Executive Tim Manganello told analysts.

Manganello, whose company makes turbochargers and other engine technologies, noted that getting better fuel economy, undoubtedly comes at a higher cost to automakers.

The backdrop for Obama's announcement at the Washington Convention Center included a General Motors Co Chevrolet Cruze, a 4-cylinder compact that is the resurgent U.S. automaker's best-selling car. Not present was GM's mostly electric Volt sedan, a production novelty GM promotes in Washington to draw attention to its efforts on fuel economy.

Obama is especially interested in more electric car production and developing improved battery technology as part of a green jobs initiative and a bid to reduce oil use.

Environmentalists warn of potential loopholes that could skew the new fuel standards program away from the most efficient fleet possible. But overall, industry has made good- faith efforts so far to focus on fuel saving improvements.

The emphasis has been to not subtract from many of the features that U.S. motorists want in their cars and help them sell, like engine performance, smooth handling, cargo space, and extras like motorist assist services and systems that enable mobile phone compatibility and GPS.

The strategy is built around a number of advances, some of which can be described as "low-hanging fruit," that alone offer incremental gains but in total can be game changers.

"You're eating that elephant one bite at a time," said Vince Muniga, a product spokesman at Chrysler.

GM has the 4-cylinder Cruze and the Volt, and Ford Motor Co boasts Ecoboost technology -- a combination of fuel injection and turbocharging aimed at giving smaller gasoline engines more power and better efficiency. The popular F-150 pickup equipped with Ecoboost was rolled into the Convention Center on Friday for Obama's event.

Automakers and suppliers are also investing hundreds of millions of dollars in transmissions made more efficient with additional gears that lower RPMs to increase engine productivity.

Chrysler, which is run by Italy's Fiat, is using this technology in upcoming editions of the Chrysler 300 and Dodge Charger.

Jake Fisher, a senior engineer with Consumer Reports auto test division, said there be more high-strength steel and other metals and materials that are lighter but offer good stability and crash protection -- although they can be more expensive.

Aluminum, which is very expensive for major auto construction, may find its way into suspension systems and other components to reduce weight. Less clear is the role of composites, like carbon fiber materials, that are being used more in the aircraft and other industries.

Overseas automakers, like Toyota Motor Corp and Honda Motor Co, will continue with signature hybrids. Ford has also pushed ahead with its hybrid production. European carmakers like Volkswagen AG want to push more clean diesel on the U.S. market.

Boston Consulting Group estimated in June plug-in hybrids and other electric cars could make up 5 percent or less of U.S. sales by 2020. The forecast is tied to oil price increases and improvements in engines that come at a lower cost.

(Additional reporting by Ayesha Rascoe and Emily Stephenson; Editing by Maureen Bavdek)

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Amazon flies high, may rise 25 percent more: Barron’s

Sunday, July 31st, 2011 | Finance News

NEW YORK (Reuters) – Amazon.com Inc shares, just below their all-time high, could rise 10 percent to 25 percent if its capital spending translates to fast growth in its retailing, Kindle e-readers and cloud-computing businesses, Barron's said in its August 1 edition.

On July 26, the online retailer posted a 51 percent jump in quarterly revenue to $9.91 billion, while saying profit fell 8 percent to $191 million, or 41 cents per share.

The profit decline was smaller than analysts expected, however, and Amazon shares reached an all-time high of $227.20 the next day. They closed Friday at $222.52. A 25 percent increase from their projects to a $278.15 stock price.

Barron's said investors often worry about a disconnect between higher revenue and lower profit.

But it said Seattle-based Amazon has a 14-year history of driving higher revenue at the expense of margins by investing aggressively in technology, distribution and real estate.

It said Amazon was now spending money to build fulfillment and distribution centers, build data centers for its Amazon Web Services cloud unit, and expand its Kindle franchise.

The newspaper said that while Amazon stock trades at close to an "unthinkable" 107 times expected 2011 profit, it may be "pragmatic" to compare Amazon with Wal-Mart Stores Inc 20 years ago, when the latter's revenue grew 35 percent to $44 billion.

It quoted an analyst as saying Amazon's revenue could in 2011 increase 43 percent to $49 billion, but that "it's better" than Wal-Mart because its storeless business model could result in higher long-term economic returns.

(Reporting by Jonathan Stempel, editing by Maureen Bavdek)

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