Financial life in a big town

Normally, it would have been ignored. In the lull after Christmas, however, an account of how Research In Motion Ltd. was blindsided by Apple

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Shoppers came back in force for the holidays, right to the end. After two dreary years, Christmas 2010 will go down as the holiday Americans rediscovered how much they like to shop.

People spent more than expected on family and friends and splurged on themselves, too, an ingredient missing for two years. Clothing such as fur vests and beaded sweaters replaced practical items like pots and pans. Even the family dog is getting a little something extra.

“You saw joy back in the holiday season,” said Sherif Mityas, partner in the retail practice at A.T. Kearney.

A strong Christmas Eve augmented a great season for retailers. The National Retail Federation predicts spending this holiday season will reach $451.5 billion, up 3.3 percent over last year.

That would be the biggest increase since 2006, and the largest total since a record $452.8 billion in 2007. The holiday season runs from Nov. 1 through Dec. 31, so a strong week after Christmas could still make this the biggest of all time. Spending numbers through Dec. 24 won’t be available until next week and final numbers, through Dec. 31, arrive next month.

The economy hasn’t improved significantly from last year. Unemployment is 9.8 percent, credit remains tight and the housing market is moribund. But recent economic reports suggest employers are laying off fewer workers and businesses are spending more. Consumer confidence is rising.

“I was unemployed last year, so I’m feeling better,” said Hope Jackson, who was at Maryland’s Mall in Columbia on Friday morning. Jackson bought laptops and PlayStation 2 games for her three daughters earlier in the season but was at the mall on Christmas Eve to grab $50 shirts marked down to $12 at Aeropostale.

Some spending growth online has been driven by free shipping offers and convenience. From Oct. 31 through Thursday, about $36 billion has been spent online, a 15 percent increase over last year, according to MasterCard Advisors’ SpendingPulse.

Taubman Centers and Mall of America have reported strong clothing sales, which was a hard sell last year. Jewelry sales sparkled throughout the season.

Stores expect solid profits because they didn’t have to slash prices as Christmas neared, analysts say.

Some habits adopted during the recession lingered. Shoppers used cash more and credit cards less.

The final six days of the holiday shopping season are Sunday through next Friday. They’re only 10 percent of the 61 holiday shopping days but can account for more than 15 percent of spending.

For the economy, the key question is whether strong spending this holiday season will continue into the new year.

Still, stores were encouraged by what they saw in the final stretch of the holiday season.

Even pets made it back onto gift lists this year. Three Dog Bakery, a pet-supply chain in Clinton Township, Mich., whose specialties include $15.99 jars of banana-nut dog cookies, opened three years ago at the start of the recession.

“We opened at the worst possible time in the world. Everyone was pulling back,” owner Chad Konzen said.

Wednesday, the store had its best day ever. “Gourmet, all-natural dog treats are not a necessity,” Konzen said. “But now people are feeling more comfortable. You can only be thrifty for so long.”

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HSBC Holdings Plc and Standard Chartered Plc, the biggest foreign underwriters of yuan bonds sold in Hong Kong, say sales will double in 2011 as demand outstrips supply and the yuan appreciates.

New issues may increase to a record 80 billion yuan ($12 billion) next year, with as much as 30 billion yuan of sales in the first quarter, according to HSBC, the No. 2 underwriter of so-called dim sum bonds. Standard Chartered, the fourth largest this year, says sales could top as much as 100 billion yuan as Moscow-based United Co. Rusal and BP Plc plan issues. Offerings in 2010 total 40.7 billion yuan, data compiled by Bloomberg show.

“We’re likely to see strong growth to around 80 billion yuan in 2011,” Sean Henderson, HSBC’s head of Asia debt syndicate, said in a telephone interview. The dim sum market has grown 10-fold since 2008 as China seeks to use the city as an international center to promote the use of the yuan beyond its borders for trade and finance.

Forecasts of currency gains spurred a 29 percent month-on- month jump in yuan deposits in Hong Kong to a high of 279.6 billion yuan in November, according to a statement from the Hong Kong Monetary Authority yesterday, creating an investor base seeking yuan-denominated securities. Bond issuers can save about 220 basis points, or 2.2 percentage point, in interest payments selling yuan bonds in Hong Kong rather than in Shanghai.

Cantonese Food

Dim sum bonds, named after the Cantonese brunch food, pay an average yield of about 1.6 percent, according to Treasury Markets Association data, which tracks 30 outstanding issues including notes sold by China Development Bank Corp. and Bank of China Ltd. The average yield paid on three- to five-year bonds sold by government-linked companies in China is 3.8 percent, according to Bank of America Merrill Lynch’s China Quasi- Government Index.

Investment-grade companies in Asia pay an average 4.76 percent to sell dollar-denominated bonds, according to JPMorgan Chase & Co.’s Asia Credit Index.

China Development Bank’s dim sum bonds due November 2013 yield 1.9 percent, according to TMA prices. The lender’s dollar- denominated bonds due in October 2014 yield 2.82 percent, according to BNP Paribas prices, while its yuan bonds due October 2013 pay 3.7 percent, according to Chinabond prices.

Bank of China, the No. 1 underwriter of dim sum bonds this year, said this week it plans to set up an index tracking the performance of the most actively traded dim sum notes, according to an e-mailed statement from the bank on Dec. 20. Nobody at Bank of China was able provide a dim sum bond forecast yesterday, said Clarina Man, a spokeswoman.

Issuer Pipeline

Haitong Securities Co.’s Hong Kong unit set up a 5 billion yuan fixed-income fund in September that invests in offshore renminbi bonds.

“The pipeline for issuers is still pretty strong,” Kong Weipeng, head of fixed-income investment at Haitong International Asset Management, said in an interview in Hong Kong on Dec. 22. “A stable appreciation would be helpful for the development for the offshore yuan bond market. In the long run people expect the yuan to appreciate.”

The yuan may rise as much as 6 percent next year against the dollar, Zhang Ming, the Beijing-based deputy chief of the International Finance Research Office of the state-backed Chinese Academy of Social Sciences, said in an interview this week. The median forecast of 21 analysts surveyed by Bloomberg is for a 5.9 percent advance to 6.28 yuan against the dollar by the end of next year online pay day loans.

China’s currency is the best-performing among those of the so-called BRIC economies over the past decade. The yuan has strengthened 25 percent against the dollar in the past 10 years, outperforming gains of 15 percent by the Brazilian real, 3.4 percent in India’s rupee and an 8.7 percent slide in the Russian ruble, according to data compiled by Bloomberg.

BP, Rusal

The yuan gained 0.11 percent to 6.6358 per dollar today in Shanghai, according to the China Foreign Exchange Trade System. Non-deliverable forwards show traders are betting on a 2.1 percent advance in the coming 12 months.

Rusal planned to hire banks to sell yuan-denominated bonds and conduct a sale as early as the first quarter of 2011, the company’s head of capital markets Oleg Mukhamedshin said on Dec. 17 in Moscow. A sale of 1 billion yuan would be a “reasonable” amount, he said.

BP, based in London, was considering selling bonds denominated in yuan, Gary Admans, the company’s manager of debt capital markets, said at a conference in London on Dec. 7. International Finance Corp., the World Bank’s private investment arm, aims to offer about 100 million yuan of five-year notes, Nina Shapiro, IFC’s Treasurer said Oct. 20.

Galaxy, VTB

China’s government and China Development Bank led issuance in the dim sum bond market this year, with 14.6 billion yuan of sales between them, according to data compiled by Bloomberg.

Casino operator Galaxy Entertainment Group Ltd. sold the first speculative-grade dim sum bond this month. The 1.38 billion yuan of three-year bonds were priced to yield 4.625 percent.

VTB Group, Russia’s second-largest bank, became the first company from an emerging market outside Asia to sell bonds denominated in yuan on Dec. 10. The three-year bonds were priced to yield 2.95 percent, compared with a yield of 5.9 percent for VTB’s five-year bonds in dollars, according to Bloomberg data.

Elsewhere in China’s credit markets, five-year credit- default swap contracts on the nation’s bonds fell 0.5 basis point to 67.5 basis points yesterday, CMA prices show. The contracts rose 17 basis points in November after falling in October and September. Credit-default swaps typically decline as investor confidence improves and rise as it deteriorates.

‘Demand Imbalance’

The yield on the 3.67 percent government bond due October 2020 rose 3.5 basis points yesterday to 3.83 percent, Interbank Funding Center data show. One-year interest-rate swaps, the fixed cost needed to receive the floating seven-day repurchase rate, climbed eight basis points to 3.15 percent yesterday.

“The current imbalance between demand from investors and supply of bonds out there is such that we could lead to 100 billion yuan to 150 billion yuan of issuance,” Daniel Mamadou, co-head of Asian capital markets and treasury solutions at Deutsche Bank AG, said in a telephone interview. “But all the market players have by now understood that this is going to be a process that is carefully observed and managed by both the People’s Bank of China and the Hong Kong Monetary Authority.”

Deutsche Bank, which helped arrange the first high-yield dim sum bond, is the seventh-largest underwriter.

HSBC’s forecast for new issuance is achievable should regulators let borrowers repatriate proceeds and cross-currency swap markets develop further, Henderson said.

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FORT MCMURRAY, ALTA.

Pacific Investment Management Co., which manages the world’s biggest bond fund, is buying Australian notes backed by home loans in the secondary market to profit from higher yields as European investors dump the bonds.

Pimco’s Australian unit, which manages about A$32 billion ($32 billion), this month bought AAA rated residential mortgage- backed securities yielding as much as 165 basis points more than the bank bill swap rate, Robert Mead, Sydney-based head of portfolio management, said in an interview. New bond sales pay about 110 basis points, or 1.1 percentage points, he said.

“We think the cheapest asset across Australian fixed- income is secondary market RMBS,” Mead said. “Distressed areas of Europe are now net sellers of Australian RMBS, which we are benefiting from.”

As much as a quarter of the RMBS sold annually by Australian lenders between 2002 and 2007 was denominated in euros to attract European investors, according to data from Standard & Poor’s. The region is now battling a sovereign debt crisis that’s seen Greece and Ireland accept financial bailouts and forced the European Union to create a 750 billion-euro ($987 billion) emergency fund.

Moody’s Investors Service lowered Ireland’s credit rating five levels to Baa1 from Aa2 on Dec. 17, with further downgrades possible, as the government struggles to contain losses in the country’s banking system. Moody’s said last week it may lower Spain from Aa1 and also placed Greece’s Ba1 rating on review for a possible downgrade.

‘Selling Priorities’

When institutions are undercapitalized and don’t have access to new sources of funding, they “need to sell assets to reduce their balance sheet size,” Mead said. “They often focus on high dollar price, liquid assets as selling priorities.”

Many offshore structured investment vehicles, which made up a “sizeable share of the international investor base” for Australian RMBS before the 2007 credit freeze, were forced to liquidate their portfolios during the crisis and sell the notes on the secondary market, Reserve Bank of Australia Assistant Governor Guy Debelle said in a Nov. 30 speech.

Secondary market RMBS spreads widened to as much as 450 basis points amid the financial crisis, from 20 basis points before the U.S. subprime collapse roiled markets, according to the speech.

Wide Bay Australia Ltd., a non-bank lender, paid 105 basis points more than the bank bill swap rate on A$138 million of AAA rated RMBS, with a weighted average life of 1.5 years, according to an e-mailed statement last week from Australia & New Zealand Banking Group Ltd., which helped manage the sale.

ANZ Bank, Australia’s third-largest bank by market value, paid a 70 basis-point spread to sell A$100 million of three-year bonds last month, according to data compiled by Bloomberg.

House Prices

Pimco bought Australian mortgage bonds denominated in U.S. and local dollars and the euro, Mead said. The bond investor prefers to buy RMBS in the secondary market because home owners who borrowed the underlying mortgages which back the notes have proven they can meet repayments, he said.

“The nice thing about those securities is that house prices have gone up since, so already conservatively structured loan to valuation ratios have become even more conservative,” he said. “Our strong preference is the seasoned secondary market opportunities.”

House prices in Australia have risen 20 percent since the start of 2009, according to the statistics bureau.

Even as Gerard Minack, a Sydney-based developed markets strategist at Morgan Stanley, warned in August that homes are about 40 percent overvalued, the Reserve Bank of Australia said in a June report no rated portions of the nation’s mortgage bonds have suffered a default.

Australian Dollar

Pimco also sees Australian financial bonds as attractive, and maintains an overweight position to the nation’s dollar, Mead said.

The currency has gained 10 percent against the greenback this year, the second-best performer of 16 major currencies tracked by Bloomberg. Financial debt has returned 7.03 percent this year, according to a Bank of America Merrill Lynch index. The benchmark S&P/ASX 200 Index of stocks has returned 1.3 percent including reinvested dividends, according to data compiled by Bloomberg.

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Express Scripts Inc. said Friday that it will move about 1,500 workers from Maryland Heights and hire 150 new employees to occupy a $73 million headquarters expansion in north St. Louis County.

Workers in leased space in the Riverport area of Maryland Heights will make up most of the work force at the company’s new facility. They will be joined by new employees at the four-story building to be completed in about a year. Site work is under way next to the company’s mail-order drug distribution plant that opened in June at the NorthPark business park.

George Paz, Express Scripts’ chief executive, said further headquarters expansion is possible.

“We are committed to growing in this area,” he said. “We consider St. Louis home.”

The project is getting about $10 million in public incentives that state and St. Louis County officials approved this month. The County Council approved a 10-year tax abatement on half of the company’s real and personal property taxes. The Missouri Development Finance Board approved about $1 million in bonds Express Scripts can use to offset income taxes and $3 million to add jobs.

Gov. Jay Nixon, who took part in the announcement Friday, said, “We want this major employer to continue growing right here in Missouri.”

The new building will house an information technology center. Also planned at the headquarters complex is the addition of a pharmaceutical dispensing line at the distribution center that opened this year.

Express Scripts on Friday released a study by Edward Lawrence, a finance professor at the University of Missouri-St. Louis. The study done with company data said Express Scripts produced more than $986 million in economic activity this year in Missouri.

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The latest look at the labor market could sway Wall Street Thursday.

Before the opening bell, the Labor Department said first-time claims for unemployment benefits fell last week to 420,000, the third drop in four weeks. That’s roughly in line with what economists expected but is another sign of an economy slowly gaining its footing.

A shift in the figure often has an outsize impact on markets. Last Thursday, a drop in claims to 421,000, the second-lowest level this year, helped give stocks a lift in early trading. But the enthusiasm tapered off in the afternoon.

The ranks of those applying for unemployment benefits have steadily declined over the past two months. Claims dropped to 410,000 in late November, the lowest level in more than two years. Economists say the figure has to stay below that level for much longer before it will put a dent in the country’s 9.8 percent unemployment rate.

A bill to extend Bush-era tax cuts along with unemployment benefits is headed to a vote in the House of Representatives Thursday afternoon. The Senate passed the bill Thursday. The tax package, a compromise worked out between President Barack Obama and Senate Republicans, is expected to boost economic growth next year but also widen the budget deficit.

House Democratic leaders say they’ll pass the bill, but only after first voting whether to raise the proposed rate for the estate tax.

Before the opening bell, Dow Jones industrial average futures are up 5 points, or 0.04 percent, to 11,483. S&P 500 index futures are up 0.6, or 0.05 percent, to 1,232. Nasdaq 100 futures are up 3.25, or 0.15 percent to 2,204.

In corporate news, FedEx Corp. said its fiscal second-quarter earnings tumbled 18 percent on rising costs and one-time charges, but raised its prediction for the full-year. Its results missed Wall Street estimates, and its shares fell more than 2 percent in pre-market trading.

General Mills Inc. reported higher net income in the second quarter, but earnings and revenues were below what analysts expected. Higher commodity costs weighed on earnings.

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The International Air Transport Association says airlines will see net profits of $15.1 billion in 2010 due to a better-than-expected economic recovery and strong growth in Asia.

In September, IATA had predicted an $8.9 billion industry profit this year.

IATA chief economist Brian Pearce says “2011 is going to be a much more challenging period” as heavy debts and added taxes weigh on consumer travel spending in North America and Europe.

The Geneva-based group representing some 230 international airlines forecasts net profits of $9 creditreport.1 billion for the industry in 2011.

IATA Chief Executive Giovanni Bisignani told a news conference Tuesday that profit margins remain low and pose a threat to the industry in case of another economic shock.

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