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No cut in U.S. debt rating despite deficit-deal failure, S&P says

Standard & Poor's signaled Monday that it has no plans to further cut its rating on U.S. debt, despite the inability of the congressional "super committee" to reach a deficit-cutting deal.

S&P, which in August triggered a global market meltdown with its initial downgrade of U.S. debt to AA+ from AAA, said the super committee’s failure was “consistent” with the August rating cut.

In other words, it was already baked into the lower rating.

Stocks had fallen sharply worldwide on Monday, in part on fears that the U.S. could be facing another debt downgrade without a deficit deal. S&P made its announcement after markets had closed.

Later in the day, Moody's Investors Service affirmed its Aaa rating on U.S. debt, although it kept its “negative” outlook on the rating.  Moody’s had previously said that a failure by the super committee would not be a “decisive” factor in its rating assessment.

Although S&P kept its rating unchanged, it warned that it expected Congress to abide by the automatic caps on discretionary spending that are supposed to fall into place without a super committee agreement.

“If these [spending] limits are eased, downward pressure on the ratings could build,” S&P said.

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Corporate power grows stronger as government wanes

Europe mess gives U.S. a reprieve on debt comeuppance

-- Tom Petruno

 

Dow falls to five-week low as global gloom deepens

Trader1121
Investors signaled a lack of faith in markets nearly across the board on Monday as stocks and commodities fell on unrelenting fears about the global economy and financial system.

The Dow Jones industrial average closed with a loss of 248.85 points, or 2.1%, at 11,547.31, nearly a five-week low. The Dow now is back in the red year to date, off 0.3%.

The tone was set at the outset after it appeared that the congressional “super committee” on deficit reduction would fail to reach an agreement by Congress’ Wednesday deadline.

Given Europe’s financial crisis, the super committee’s stalemate was viewed as another sign of governments’ inability or unwillingness to deal with their spiraling debt loads.

“There is just no good news,” said Dave Rovelli, head of equity trading at brokerage Canaccord Adams in New York.

He said some of the selling in stocks stemmed from fear that the U.S. could soon face another downgrade of its bond rating. Shares worldwide plunged in early August after Standard & Poor’s cut the U.S. rating to AA+ from AAA.

Stocks fell sharply in Europe overnight as Spanish government bond yields jumped to new euro-era highs. Voters' decision to throw out the Socialist government failed to make investors feel more confident about holding Spanish debt. The 10-year Spanish bond yield rose to 6.55% from 6.38% on Friday.

Spain's stock market lost 3.5% and French stocks slid 3.4%. The Italian market dropped 4.7% to a seven-week low.

Investors also were unnerved by the German Bundesbank’s new forecast of a sharp slowdown in the German economy in 2012.

Prices of most commodities fell on economic jitters, and as some investors and traders sold what they could to raise cash. Near-term oil futures in New York fell for a third straight day, down 75 cents to $96.92 a barrel. Gold futures slid $46.40 to $1,678.30 an ounce, a four-week low.

Unlike the stock market, oil and gold still are up for the year.

The day’s only real winner: Treasury securities, as some investors stashed cash in something they still believe will repay them in full, despite the lack of a deal to pare the deficit. Treasury bond yields were lower across the board.

“Clients are telling us that preservation of capital is their primary concern,” said Bruce Bittles, chief investment strategist at brokerage Robert W. Baird & Co.

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'Super-committee' is all but admitting defeat

Corporate power grows stronger as government wanes

Europe mess gives U.S. a reprieve on debt comeuppance

-- Tom Petruno

Photo: On the New York Stock Exchange floor on Monday. Credit: Spencer Platt / Getty Images

No deficit deal? No problem ... for Treasury bonds

Treasury yields slid Monday morning despite the apparent failure of the congressional "super-committee" to come up with more than $1 billion in deficit cuts over the next decade.
So hopes for Congress to show some spine on deficit reduction have been crushed.

Let's show them how outraged we are: Buy more Treasury bonds!

That's the market reaction on Monday, as Treasury yields slide despite the apparent failure of the congressional "super-committee" to come up with more than $1 trillion in deficit cuts over the next decade.

While stocks dive, the yield on the 10-year T-note slid to 1.95% by about 11 a.m. PST, down from 2.01% on Friday.

In another sign of strong demand for government paper, the Treasury sold $35 billion worth of two-year notes at a yield of 0.28%, slightly below expectations.

If investors took the opposite tack -- dumping Treasuries and driving yields higher -- it might send a powerful message to lawmakers to get their act together on the nation's spiraling debt load.

But in times of fear, Treasuries still are the world's favorite haven. At least you know you'll get back the bonds' face value, because the government can always print more money.

This is smelling like August, when Standard & Poor’s surprise downgrade of America's credit rating to AA+ from AAA triggered massive selling in stocks, commodities and other assets -- and, ironically, drove Treasury bond yields sharply lower as investors ran for cover.

Stocks tumbled in Europe on Monday, with the German market down 3.4%, Italian stocks down 4.7% and the Spanish market off 3.5%. It didn't help the mood that Spanish government bond yields continue to rise after voters threw out the Socialist government: The 10-year yield rose to a new euro-era high of 6.55%, from 6.38% on Friday.

On Wall Street, stocks were broadly lower in thin trading. The Dow Jones industrial average was off 316 points, or 2.7%, to a five-week low of 11,479 at about 11 a.m. PST. The Dow slumped 2.9% last week.

Commodities also were hit hard Monday, with gold futures dropping $46.40 to $1,678.30 an ounce, a four-week low.

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"Super-committee" is all but admitting defeat

Corporate power grows stronger as government wanes

Europe mess gives U.S. a reprieve on debt comeuppance

-- Tom Petruno

Photo: The Capitol in Washington. Credit: Associated Press

Jon B. Lovelace, who led American Funds group, dies at 84

Jon B. Lovelace, long-time head of the Los Angeles-based American Funds mutual fund company, has died. He was 84.

His family said Lovelace died of natural causes at his home in Santa Barbara on Wednesday.

Lovelace is credited with some of the key innovations that helped set the stage for American Funds' explosive growth from the 1980s through the mid-2000s, as it became synonymous with successful buy-and-hold stock investing.

LovelaceThe funds' parent firm, Capital Group Cos., now manages about $1.2 trillion in all, most of that in 33 mutual funds owned by tens of millions of Americans. The company’s huge flagship funds include Growth Fund of America and Investment Co. of America.

Lovelace also nurtured an egalitarian environment at Capital, the polar opposite of the authoritarian regimes of many Wall Street firms.

His daughter, Carey, once referred to him as a “Buddhist businessman” who disdained hierarchy and personal aggrandizement.

Although Lovelace ultimately held the title of chairman of Capital's fund business until he retired in 2005, “he liked the symbolism of not having titles,” said Paul Haaga Jr., a Capital executive who joined the firm in 1985. “He led quietly, and he led through influence.”

In 1958, Lovelace launched a new approach to mutual fund management: Rather than having a single individual manage a portfolio, Lovelace created a “multiple counselor” system, whereby four or more managers would independently run slices of a fund.

It fit with Lovelace's dislike of the traditional Wall Street “star” system. “Because of the nature of our structure, we're not highly dependent on one person as some organizations are,” Lovelace told The Times in 1990.

The multiple-counselor system produced powerful long-term investment returns on many of American's stock funds, which in turn made the company a favorite of brokerages eager to sell winning products.

Go here for Lovelace’s full obituary in The Times.

-- Tom Petruno

Photo: Jon B. Lovelace. Credit: Capital Group Cos.

 

Stocks, gold hit by broad sell-off on global jitters

Gold-blog

Raise cash, head for the sidelines.

That was the guiding sentiment in stock and commodity markets Thursday, as some investors and traders sold what they could and looked for a hiding place amid fresh doubts about the global economy.

Commodities took the heaviest hit: Gold futures dived $54.00, or 3%, to $1,719.80 an ounce in New York, the biggest one-day drop since Sept. 23.

The ThomsonReuters/Jefferies CRB index of 19 commodities slumped 2.5%, the biggest decline since Sept. 30. Corn, wheat, oil, cotton and copper all were sharply lower.

“There is liquidation across the board,” said Frank Cholly Sr., a senior commodities broker at RJO Futures in Chicago.

On Wall Street, stocks ended broadly lower for a second day. The Dow Jones industrial average, which tumbled 190 points on Wednesday, fell 134.86 points, or 1.1%, to 11,770. That cut the index's year-to-date gain to 1.7%.

Broader indexes were weaker. The Standard & Poor's 500 fell 1.7%; the Nasdaq composite lost 2%.

Some investors ran back to U.S. Treasury bonds, pushing the yield on the 10-year T-note down to 1.96% from 2.00% on Wednesday.

Many traders blamed continuing fears that Europe is headed for a major blow-up as its debt crisis worsens. Spain and France sold new bonds and were forced to pay yields far above the levels of a month ago.

General Motors Chief Executive Dan Akerson told the Detroit Economic Club that the European crisis is "much more serious" than the 2008 bursting of the credit bubble. GM shares fell 86 cents, or 3.8% to $21.79, a six-week low.

Still, Europe wasn’t a complete disaster Thursday: Italian bond yields pulled back from recent highs. And European stock markets were mostly down between 1% and 1.5%, relatively modest declines compared with the worst days of the last few months.

Meanwhile, markets seemingly ignored upbeat U.S. economic data, including a drop in new claims for jobless benefits to the lowest level since early April.

As they did in late September, some investors and traders may just be cashing out of whatever’s easiest to sell. That would include U.S. blue-chip stocks. The Dow is down 3.2% since Friday.

With so much uncertainty about Europe, and with the U.S. congressional deficit-cutting panel facing a Nov. 23 deadline to come up with a plan, some market players may just be calling it quits on 2011 early.

“I think it’s, ‘Just get out of things and wait til next year,’ ” said Frank Lesh, futures analyst at FuturePath Trading in Chicago.

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-- Tom Petruno

Photo: Gold jewelry, coins and bars are arranged for a photograph at a GoldMax store in Atlanta. Credit: Bloomberg News

U.S. banks face rising risk from European crisis, Fitch warns

Spainprotest
Big U.S. banks have cut back their financial ties to Europe over the last year or more but still could be “greatly affected” if the continent’s debt crisis spreads, credit rating firm Fitch Ratings said in a new report.

The five-page report, issued about an hour before Wall Street’s closing bell Wednesday, helped trigger a sudden plunge in bank shares that dragged down the stock market overall.

The Dow Jones industrial average ended the day down 190.57 points, or 1.6%, to 11,905.59. Among the banking titans, shares of Bank of America slumped 3.8%, JPMorgan Chase also fell 3.8%, Citigroup lost 4.1% and Goldman Sachs dropped 4.2%.

The Fitch report doesn’t suggest that U.S. banks will need another government bailout anytime soon but uses language that brings back memories of how quickly things went bad in 2008.

“Currently, Fitch’s rating outlook for the U.S. banking industry is stable, reflecting improved fundamentals at most banks, coupled with generally lower ratings versus pre-crisis levels,” the firm said. But “Fitch believes that, unless the Eurozone debt crisis is resolved in a timely and orderly manner, the broad outlook for U.S. banks will darken.”

That’s the problem: No resolution appears in sight, and in recent days worried investors have been dumping bonds of even the financially strongest countries, including France, Austria and Finland.

Some of the key issues Fitch raises:

-- The six biggest banks (the four named above, plus Wells Fargo and Morgan Stanley) have total net exposure of about $50 billion to the five most financially stressed markets -- Greece, Ireland, Italy, Portugal and Spain. “Exposure” includes amounts on deposit, loans outstanding, securities held and other items.

That exposure averaged 0.5% of the banks’ assets and less than 9% of their so-called Tier 1 capital, Fitch said. “Overall, net exposure appears manageable but not without financial costs,” the firm said.

-- The banks have hedged part of their European exposure with credit default swaps, which are insurance contracts that pay off if a debtor defaults. But swaps may not be triggered if creditors agree to voluntary losses by forgiving a portion of an issuer’s debt, which is what has happened with Greece.

Hence, the tactic of hedging with swaps “could prove problematic if voluntary debt forgiveness becomes more prevalent and CDS contracts are not triggered,” Fitch said.

-- Some of the banks also are exposed to Europe’s woes because they are parent companies of money market mutual funds, which invest in short-term debt issued by banks and companies worldwide.

“While not contractually required, banks oftentimes offer support to affiliated money market funds in the event of a need,” rather than risk reputational damage, Fitch said.

-- The banks’ revenue from capital market activity, such as trading securities and advising on mergers, could be hit if Europe’s situation worsens. For banks that disclose regional breakdowns, “Revenues generated from European capital markets activities generally hover around one-third of total capital markets revenue,” Fitch said.

Overall, the report didn't tell Wall Street anything it didn’t already know. But in a market that just trades from headline to headline, Fitch gave investors and traders an excuse to sell first and ask questions later.

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-- Tom Petruno

Photo: Pensioners in Barcelona, Spain, protest against public health system cutbacks forced by Spanish austerity moves. Credit: David Ramos / Getty Images

 

Eurozone bond yields rise again despite ECB buying

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European government bond yields mostly continued to rise Wednesday, even as the European Central Bank apparently ramped up purchases to try to calm investors.

The jump in interest rates in recent days signals a further spreading of the debt-crisis contagion from Italy to other countries, as investors grow increasingly fearful about governments' abilities to pay their debts.

The ECB’s purchases did help push Italian bond yields modestly lower. The 10-year Italian bond slipped to 7.00% from 7.07% on Tuesday.

But 10-year bond yields rose in France, Spain, Austria and Finland. The French 10-year yield edged up to 3.71%, the highest since April, from 3.68% on Tuesday.

Market yields rise as bond prices fall. Over the last week, nervous investors have been dumping Eurozone bonds, even those of countries still rated AAA, such as France and Austria.

Financial markets have been looking to the European Central Bank to halt the contagion. In theory, the ECB could commit to buying unlimited quantities of bonds to try to hold down rates. But the bank has seemed reluctant to act aggressively, and Germany and France apparently are clashing over how big a role the ECB should play.

Separately, Reuters reported that the head of Italian banking giant UniCredit had urged the ECB to increase access to borrowing for Italian banks, pointing up funding issues for the lenders.

The euro currency slipped for a third day, off 0.1% to $1.353. The euro has tumbled from $1.42 three weeks ago.

European stock markets rallied off their lows for the day, closing higher after two days of losses. The Italian market rose 0.8%, French stocks rose 0.5% and the Swiss market added 0.4%.

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Photo: The euro symbol outside the European Central Bank's headquarters in Frankfurt. Credit: Bernd Kammerer / Associated Press


Millionaires group to lobby for higher taxes -- on themselves

Supercom
As the deadline nears for the congressional “super committee” to come up with a deficit-slashing plan, a group of people who have made $1 million a year or more is pressing lawmakers to raise tax rates on the nation’s highest income earners.

Patriotic Millionaires for Fiscal Strength, an organization formed in 2010, said it’s sending a delegation of 21 members to Washington on Wednesday to seek meetings with super committee senators and representatives.

The group’s message: “Any super committee deal that does not include higher taxes for millionaires should be killed.”

Among those in the group heading to Washington for the lobbying effort: Leo Hindery Jr., former chief executive of AT&T Broadband; Frank Jernigan, a former senior software engineer for Google Inc.; and Garrett Gruener, founder of Ask.com.

Republicans and Democrats have been far apart on the issue of boosting tax revenue as part of any deal to pare the deficit. The super committee faces a Nov. 23 deadline to reach agreement on how to cut $1.5 trillion from deficits over the next decade.

Patriotic Millionaires was formed a year ago as Congress debated whether to extend the personal income tax cuts that took effect during President George W. Bush’s first term. Ultimately, Congress and President Obama agreed on a two-year extension of the cuts.

But Obama in September called for a new tax on millionaires as a way to raise revenue.

At a minimum, the millionaires group wants the top tax rate for the highest earners to return to 39.6%, from the current 35%, according to Erica Payne, a spokeswoman for the organization.

“Many would like the tax rate to be higher” than 39.6%, she said. The higher rate should apply to anyone grossing more than $1 million in income, she said. IRS data show that 235,000 households reported adjusted gross income of at least $1 million in 2009.

The group says it has about 200 members in all, including more than a dozen current and former Google employees, actress Edie Falco and economist Nouriel Roubini.

The delegation heading to Washington also will meet with anti-tax activist Grover Norquist, the father of the “no tax increases” pledge that most Republicans in Congress have signed.

"They asked to meet. I said, ‘sure,’” Norquist told the Associated Press. “I suppose somebody told them the only thing standing in the way of their wonderful act of charity is me.”

Norquist has an alternative revenue-raising plan: He says those making $1 million a year or more who want to pay higher taxes are free to make direct contributions to the U.S. Treasury, over and above whatever taxes they owe.

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-- Tom Petruno

Photo: The congressional "super committee" for budget cuts, seated in the front row, meets in Washington last month. Credit: Mark Wilson / Getty Images

 

Bond yields jump in France, Belgium, Austria as crisis spreads

A new selling wave swamped government bond markets in Europe
More dominoes may be about to fall in Europe.

A new selling wave swamped government bond markets on the continent Tuesday, driving yields sharply higher in France, Belgium, Austria and Spain, among others.

Despite its AAA-credit rating, France's 10-year bond yield soared to 3.68%, up from 3.42% on Monday and the highest since April. The yield has surged from 2.50% in early September.

Belgian 10-year bond yields rose to 4.91%, from 4.59% on Monday.

The jump in interest rates signals a further spreading of the debt-crisis contagion from Italy to other countries, as investors grow increasingly fearful about governments' abilities to pay their debts.

"The respite from Eurozone issues was ephemeral at best as changes in leadership in Italy and Greece [last week] were not enough to convince markets that the debt issues were any closer to resolution," George Goncalves, interest rate strategist at Nomura Securities, wrote in a note to clients.

Making matters worse, a new European recession seems increasingly likely, which will only make it more difficult for governments to dig out of their debt holes.

Rocketing yields on Italian bonds over the last two months opened a new and more dangerous chapter in the debt crisis. Italy's woes led to the departure of Prime Minister Silvio Berlusconi over the weekend.

On Monday, Italy paid a yield of 6.29% to issue $4 billion in new five-year bonds. The rate was the highest in 14 years. By contrast, the U.S. Treasury pays just 0.90% on five-year debt.

Financial markets have been looking to the European Central Bank to halt the contagion. In theory, the ECB could commit to buying unlimited quantities of bonds to try to hold down rates. But the ECB has seemed reluctant to act aggressively.

"In the prophetic words of Sting, the market is sending out an SOS to ECB policymakers," Goncalves said. "However, a good response from the ECB does not seem forthcoming."

European stock markets ended mostly lower for a second straight session. The Italian market fell 1.1%. French shares slid 1.9%. But stocks remain above their September lows.

The euro currency slipped 0.6% to a one-week low of $1.355.

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Europe's mess gives U.S. a reprieve on debt comeuppance

-- Tom Petruno

Photo: A depiction of Belgian cartoon hero Tintin and his dog Snowy is seen atop the Lombard Building, backdropped by the Brussels skyline. Credit: Geert Vanden Wijngaert / Associated Press

When will the market say 'no more' to U.S. debt binge?

Treasurybuild
Soaring interest rates on Italian government bonds over the last five weeks show how quickly the market can send a powerful message to debtor nations: You've borrowed enough.

So where is that market comeuppance for the U.S. Treasury, the world's single largest debtor, with nearly $15 trillion borrowed?

It now appears that the congressional "super committee" set up to rein-in the government's massive deficit spending could fail to arrive at an agreement by its Nov. 23 deadline.

Yet that seems unlikely to trigger a surge of selling in Treasury bonds that would drive up interest rates from their current near-record-low levels.

As I note in my weekend column in The Times, the U.S. is benefiting from Europe's unrelenting debt crisis by looking like the best house in a deteriorating neighborhood. And there are other factors as well that are likely to hold U.S. bond yields down for the time being.

From the column:

It's wrong to take comfort in the suffering of others.

But for millions of Americans who've sought refuge in bond investments since 2008, it's hard not to be appreciative of Europe's grinding financial crisis.

The threat of a meltdown across the Atlantic has kept money pouring into high-quality U.S. bonds, particularly Treasury issues, as a haven. That has held interest rates near generational lows since early August, in turn boosting the value of older bonds issued at higher rates.

Much of Europe, meanwhile, has faced just the opposite situation: Government bond yields have surged -- most recently in Italy -- as global investors continue to fear that the ultimate solution to the continent's debt debacle will be widespread defaults.

Yet many Americans also sense that Europe's woes are a warning. As total U.S. Treasury debt outstanding has mushroomed to nearly $15 trillion now from $10.6 trillion three years ago, a day of reckoning must be out there for Washington too.

Read the full column here.

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-- Tom Petruno

Twitter.com/tpetruno

Photo: The Treasury building in Washington. Credit: Brendan Smialowski / Bloomberg News

 

Italian bond yields dive, but fear still dogs Eurozone debt markets

Italysenate
Battered European markets got some relief Friday, as Italian bond yields tumbled from 14-year highs.

But global markets are just trading from headline to headline, and the Eurozone debt crisis is far from over. Enjoy this while it lasts.

In Italy, the yield on the 10-year government bond dived to 6.45% from 6.89% on Thursday. The yield had reached 7.25% on Wednesday, the highest since 1997, as fears mushroomed about Italy’s creditworthiness.

On Friday the Italian Senate passed an austerity budget, acceding to European Union demands. That should pave the way for embattled Prime Minister Silvio Berlusconi to resign.

The Italian stock market jumped 3.7% for the day, but remains nearly 7% below its recent high reached Oct. 27. The euro rallied 1.2% to $1.377.

Even though Italian bond yields pulled back, the 10-year yield still ended the day above its level of 6.37% a week ago, and well above the level of 5% in late August.

The next big test for Italy: The government will try to sell about $4 billion of five-year bonds on Monday. The current market yield on that debt maturity: a pricey 6.46%.

In a sign that investors remain suspicious about Eurozone debt in general, yields fell only modestly in other key countries. The Spanish 10-year bond yield slipped to 5.85% from a three-month high of 5.86% on Thursday.

And France -- the core of the Eurozone, with Germany -- remains a source of significant concern, after its bond yields also soared this week.

The yield on 10-year French bonds eased to 3.39% on Friday after jumping to a four-month high of 3.47% on Thursday.

The surge in yields on Thursday was fueled by an apparently erroneous report that Standard & Poor’s had cut France’s AAA credit rating. S&P later said the report was a mistake. Yet the French 10-year yield remains well above its level of 3.05% a week ago.

A continuing rise in French yields could be more dangerous for Europe than the surge in Italian yields, because France and Germany are considered Europe’s strongest economies. Without them, there is no possibility of rescuing the continent’s deeply troubled states.

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-- Tom Petruno

Photo: The Italian Senate on Friday, before its vote on austerity measures. Credit: Pier Paolo Cito / Associated Press

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