Monday, 26 January 2009

News of the Day: 70,000 People Lose Their Jobs Around the World

As if economic fate wanted to show that the situation is far from improving, click here to read this interesting analysis by Reuters reporter Brian Moss on the wave of dismissals that hit the wires today. We had at MM some correct judgement about the news today and wrote a quick posting with the layoffs that were announced this very morning. But the Reuters story has all the background and size and scope that our short story lacked of.

Fitch Sees Challenging Year for Latin America Structured Finance Industry. Nothing New

Fitch Ratings issued a report dated Jan. 23 on regional structured finance trends, focusing on Mexico, Brazil and Argentina -- the big three in the region. According to the ratings company, in the past three or four years, Latin America witnessed significant credit growth in most segments of the economy, from consumers to corporate lending. ''The 2008 market turmoil that followed and the ensuing liquidity crisis created dislocations to varying degrees across the major structured finance markets,´´ says the report.

Fitch asserts that no sector will be immune to fallout in credit markets. ''Certain individual market sectors´´ will remain resistant ''such as cross border future flows and Mexican bank originated residential mortgage backed securities,´´ Fitch said.

Last year, Fitch affirmed approximately 616 tranches from its securitisation portfolio, upgraded 44 and downgraded 61 -- defining it as a ''balanced year´´ for the region. ''Overall, recognizing the regional challenges exacerbated by a subdued capital market, lower commodity prices and limited growth, Fitch expects Latin America to have an increase in the ratio of negative to positive rating actions in 2009 compared with 2008.´´ So, dear reader, be ready for the wave of downgrades in FIDCs, mortgage-backed bonds, securitisations of loans and credit card receivables etc., especially in Brazil and Mexico. We will try to write more about these actions when we have access to ratings decisions.

The Weekly Agenda for Latin Markets: Brazil Copom Minutes, Colombia Rate Decision; Fed Monetary Policy Meeting

The last week of January will be quite busy in terms of economic releases and policy decisions. Tomorrow the U.S. Federal Reserve announces its decision on interest rates. The day after, Ben Bernanke, the Fed's chief, (photo) will likely announce the purchase of long-term Treasury securities to boost liquidity and drive down yields. This week we will also have the preliminary report for fourth-quarter gross domestic product in the U.S. In Latin American markets, two main events will gather attention from investors. One is Thursday's release of the monetary policy minutes for last week's decision by Banco Central do Brasil to cut its benchmark lending rate target to 12.75 percent. The other is the Colombian rate decision for Friday afternoon.

The Copom minutes may indicate that the central bank has already carried out a "relevant portion´´ of its easing cycle, and that such event won't put at jeopardy its inflation target for this year.
On the other hand, the committee will play up recent data pointing to growth weakness. This will be relevant, for it will also help ease political pressure on central bankers -- who have been under attack by entrepreneurs, unions and government officials over their stance on interest rates.
About the Colombian rate decision, the market consensus points to the Repo Rate being cut to 9 percent. The bank is certainly worried about the rapid deterioration of economic data -- the same Friday a report on the December unemployment rate will be out.

U.S. Existing Home Sales Rebound, in Reaction to Low Prices

Click on this link to read a story by my old friend and former colleague Bob Willis. While there was an increase in sales of existing homes, the trend remains negative, as the story seems to suggest. While cheap prices might be luring some purchasing activity, the increase is far from signaling a revival in the U.S. housing market, which as some media stories have said, is at its worst recession since WWII.

Chinese Horoscope ... Jodidos Pero Contentos (Poor But Happy)

Jodidos, pero tratando de estar contentos ...

Well, this comes courtesy of one of our most faithful readers at MM. Thanks to you, dear reader!

I have to say my horoscope for this year looks simply awful. Nine unfavourable months, three neutral (out of 12 months obviously,) the outlook for love and new relationships doesn't look too promising, I will be on a restricted budget throughout 2009 and job opportunities will be scarce this year. Sounds like I am the U.S. equivalent of the Year of the Ox, innit? I was born in 1974, so I was born in the year of the Tiger (???) ... ''The year of the Ox presents an overwhelming influence upon the Tiger to maintain a steady and well disciplined pace.´´ At least I am getting to run and bicycle every morning -- discipline is my motto these days! Because we are not to discuss my love life, here is the horoscope's prediction for ''Tiger Wealth:´´
Tiger Wealth

''Take caution when it comes to your finances this year, as it is not a time to speculate or take any unnecessary risks. Plan your large purchases carefully and avoid impulse buying. The best advice is to monitor your spending throughout the year and you won't have any problems. This may sound like simple advice, but due to your generous nature, it may not be as simple as it sounds.´´

More Job Cuts in the U.S. Spring Nextel, Caterpillar, Pfizer-Wyeth

The following companies announced more job cuts in the U.S. and around the world. The situation is only getting worse.

1) CATERPILLAR -- It today announced the dismissal of 17,000 employees and the early termination of contracts for another 2,500.
2) PFIZER-WYETH -- As some of you might know, Pfizer agreed to acquire rival Wyeth for about $68 billion. The company will trim 10 percent of the workforce, or about 19,000 employees, to proceed with the merger.
3) SPRING NEXTEL -- The company today announced a plan to eliminate up to 8,000 jobs, or about 14 percent of its workforce.
4) SÃO PAULO, BRAZIL -- The São Paulo State's Industrialists Federation informed today that more than 130,000 job posts were lost in December across the state.
5) CORUS -- The steelmaker will cut 3,500 jobs, with 2,500 of those only in the U.K.
6) PHILLIPS -- It will cut 6,000 jobs.
7) ING BANK -- After reporting a 1 billion euro loss, it said it would cut 7,000 jobs and close its Argentina pension business.

Folha Says Votorantim Group Rushing to Raise Cash After Derivatives Crisis

Folha de S. Paulo, the Brazilian newspaper, reported Jan. 21 that Grupo Votorantim, the most-diversified private industrial group in Brazil, has raised 4.8 billion reais in cash from asset sales and may fetch another 2.4 billion reais through the divestiture of units including its technology arm Tivit and CPFL, the energy company in which it holds a 14 percent stake. The newspaper unfortunately gives no nut graph, or a reason why the company is doing this. We assume that this has to do basically with the serious losses the group's cellulose unit (Votorantim Celulose) posted for bad bets on currency derivatives contracts. The group, controlled by the Ermirio de Moraes family, sold a couple of weeks ago almost half of its stake in Banco Votorantim for 4.2 billion reais to state-controlled Banco do Brasil.

Venezuela's León Let The Cat Out of the Bag: Public Finances Are in a Bind

Central Bank Director Armando León (photo) is probably the most respected economist working for the Hugo Chávez administration. I met him 2 1/2 years ago in Singapore, during an IMF/World Bank meetings; we had coffee a few times, chatted at the airport, took the same flight from Singapore to Paris. León is criticised by some of his peers for his allegiance to the regime: to me, he simply refused to flee the boat while it started sinking. At the time of our meetings, oil was flying high and he sounded confident that the president's economic policies wouldn't go beyond rhetoric. He, like most of us, was wrong.

León, sources told me at the time, was a key advisor to Chávez during his decision to nationalise telecom and oil and electricity companies in Jan. 2007. He basically prevented things from getting worse.
In an interview with Últimas Noticias, the newspaper owned by the Capriles group, León voiced some discontent over the current course of the Chavista economic policies: ''State policies should be revisited. We can't afford buying companies that, in a three-month period, soak up their own resources and trigger losses, or are simply unable to honour their payrolls,´´ León told the newspaper. The translation is mine. The link takes you, dear reader, to El Nacional news summary on the UN story.

Even as Venezuela has a cash cushion that we estimate at around $70 billion, its public finances have suffered structural damages -- as León seems to suggest -- due to the president's obsession with nationalising anything he deems
strategic from dairy producers to oil joint ventures. The expected purchase of Banco Santander SA's Venezuela unit is one example of the many pending nationalisations that will take their toll on the national budget. Let me add something else -- the budget was elaborated assuming oil above $60 a barrel. Yet, last week, the price for the Venezuelan oil basket dropped to $37 a barrel.

León dropped a bombshell, days before the referendum that Chávez is desperately seeking to win so he can run again in 2013. Not that none of us didn't smell a rat, we all know that the fiscal situation in Venezuela is a mess.
But by ringing the alarm bells, León is signaling that the government is considering devaluing the currency or raising taxes, instead of cutting spending, which would be the proper thing to do. If Chávez wins the referendum, the probability of a currency devaluation will rise. The economy needs a valve of scape, and it might need it sooner than we imagine.

Important Economic Releases Out This Week in Brazil Will Tell Us About Extent of Economic Downturn

This week, the central bank will release current account figures and budget data for the month of January and December respectively (click on the link for the central bank's Web page.) The trade deficit will probably come narrower than expected by most economists, as imports are declining fast. And budget numbers will likely show a decline in tax collections plus the impact of rising spending earmarks to fight the crisis.

The data will probably impact the currency markets. The currency, said one trader who wanted to remain anonymous, will probably suffer from high volatility. The recession that is afflicting the U.S., some European countries and Japan, which together buy almost half of Brazil’s exports, is hurting exports. The plunge in commodities will also hurt dollar inflows. The real has also been taken hostage by fluctuations in global sentiment, said the trader. A deterioration in fiscal numbers may also put more pressure on the currency -- Brazil is still the biggest debtor in Latin America.

Emerging Market Debt Funds Experience $355 Million in Outflows. Recovery Trend Seen in Early January Seems Over.

According to EFPR, in the week ended Jan. 21, emerging market debt funds saw outflows of $355 million, or the equivalent to 0.82 percent of assets under management, compared with an outflow of $181 million in the previous week. Assets under management for emerging market debt funds declined by $882 million during the week, a significant amount. Fluctuations in the price of the U.S. dollar hampered the value of assets, resulting in a reduction of $229 million in assets value during the week. A drop in asset prices cut the value of assets under management by a further $299 million.

Earlybird, Jan. 26, 2008

And these are the headlines:

MARKETS -- The Era of Big Government to Be Discussed at Davos Forum (WSJ): The risks of big government in the current scenario, as much as the need for it, should be extensively debated and told to the public. No one says more effective regulation isn't needed. But the type of distorting intervention in private affairs, the way Brazil's government is doing, should be discussed, understood and fiercely attacked. No government should use the crisis to increase their grip on the economy nor offer taxpayers' money to help badly managed companies, nor use state companies to house political appointees and endorsers of the regime.

U.S -- Obama Plans Fast Action to Tighten Regulation on Wall Street (NYT): We have to see what type of solutions they will come up with to problems that range from conflicts of interest between banks and rating agencies to the crisis in the investment-bank model. Good news they are moving quick on these regulatory overhaul.

BOLIVIA -- Evo Morales Wins Referendum on New Constitution (Estado): The approval of the constitution by an overwhelming 58 percent is an important victory for Morales, who in the past year has been under fire due to a feud with opposition governors, declining gas exports and political uncertainty. The new constitution will allow more access to power to indigenous communities, which should be very welcome. One good friend of mine told me at lunch Sunday the importance of this type of ''revolution´´ in Bolivia, where the majority never had real access to power. On the other hand, the government will have almost full control of the economy. The U.S. new administration's reaction to this result is one aspect of interest -- it would be very encouraging to see the U.S. accepting the 'Yes´ victory and congratulating Evo and the Bolivian people for the process.

VENEZUELA -- Chavez Seen Garnering More Support for His Plan to End Presidential Term Limits (Nacional): Well, people are sovereign. But in any case the 'Yes´ victory won't be an overwhelming one. A call on this is quite a tough job. Chavez is doing quite a clever move by enticing his regional supporters to work for the 'Yes´ option. On the other hand, we see a dormant opposition, a bit lazy and perhaps fractured again after the electoral wins obtained in the recent regional elections.

BRAZIL -- Crisis is Leveraging the Clout of Unions (Estado): Good story by Estado. We have been saying this along the past month. It doesn't mean that unions will get what they want, but Brazil need stronger unions, less dependent on state aid, independent, protective of the interests of Brazilian workers.

COLOMBIA -- Uribe, Venezuela's Chavez Agree to Create $200 Million Fund for Small Companies (Tiempo): Another populist move that will end up in nothing. Instead of creating these funds, both countries should work on issues ranging from trade problems (Venezuelan companies are squeezed by little access to foreign exchange to pay for their Colombian imports) to contraband. Another item in the agenda should be oil investment by the Venezuelans in Colombian projects and vice versa. Ah! One more thing: Hugo Chavez believes that bilateral trade will reach $10 billion by 2012 ... That can be possible only if Venezuela stops imposing barriers on Colombian imports.

MEXICO -- Drug Dealer Dissolved 300 Rivals in Acid (London Times): Jesus Christ! No comments.

IDEAGlobal Expects 'Turbulent´ Week for Latin American Bond Prices

IDEAGlobal, the New York-based market intelligence company, said in a report out today that Latin American debt paper ''finished off a turbulent week (last week) with losses of 1.5 percent on a category-wide basis,´´ which the shop deemed as ''a positive when compared to the 3.5 percent drops observed in the U.S. equity markets.´´ U.S. stocks will remain a major external price-driver for Latin bonds.

Risk is to the downside for the regional debt markets, said the company, adding that buying Brazil on breaks to the downside would be an interesting alternative for the time being; IDEA views ''Panama and Peru as preferable alternatives to Colombia and Mexico under such scenario of weakness.´´

According to IDEA, ''price drift in Latin America is very subject to the evolution of´´ the U.S. Treasury market in exactly opposite direction to when the drive to lower yields forced by the Federal Reserve rallied the Latin America camp. The shop also warned that comments made by Treasury Secretary Nominee Timothy Geithner about the overvaluation of the Chinese yuan and that country's alleged manipulation of its currency opens space for protectionist actions and ultimately a trade war (IDEA says that ''chatter coming from Davos starting Wednesday might filter into this confrontation.´´) U.S. Treasury yields will therefore remain quite sensitive to the China subject -- remember that the Chinese are the biggest holder of Treasury bonds,) ''pushing the skew to the upside for U.S. rates in detriment to the outlook for Latin bonds.´´