Financial life in a big town

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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A defiant Irish Prime Minister Brian Cowen vowed Wednesday to push through Europe’s toughest slash-and-tax budget in the face of voter fury, then defy the odds to win re-election despite a debt disaster that has shaken the entire eurozone.

Cowen mounted a vigorous defense of his embattled leadership a day after lawmakers narrowly backed a 2011 budget containing euro6 billion ($8 billion) in cuts and tax hikes that will take an estimated euro3,000 ($4,000) per year out of average Irish households.

The unprecedented scale of the budget-tightening was a key condition for Ireland’s recent agreement of a euro67.5 billion ($90 billion) EU-IMF rescue fund to help Ireland cover its European-leading deficit and revive its debt-struck banks. The Irish were forced to take aid after its two-year struggle to prevent the collapse of Dublin banks proved impossible to finance on their own.

Cowen _ whose public approval ratings have recently fallen to a record-low 8 percent _ insisted he wouldn’t resign, as many lawmakers have expected, and instead would lead his party into an early spring election. All recent polls suggest Cowen’s long-ruling Fianna Fail party faces decimation in any national test.

Tuesday night’s initial passage of the Irish budget package offered temporary relief for the 16-nation eurozone, where Portugal, Spain and Italy have faced mounting questions about their own capacity to keep financing their own debt mountains. European and IMF chiefs sought a bailout for Dublin, in part, to stem investor fears of a debt-default domino effect.

Wednesday’s yields on 10-year bonds were little changed for the eurozone members rated most at risk of an eventual default, particularly Greece, which in May became the first eurozone member to be saved from bankruptcy.

The most significant mover was Germany, whose benchmark bonds suffered a moderate selloff, driving their 10-year yields above 3 percent for the first time since May’s Greek crisis. Traders said the selling reflected investors’ increased appetite for higher-risk bonds versus the Germans’ top-rated and consequently low-yielding debt securities.

The euro common currency also held its ground, rebounding from a day low of $1.3189 to rest at $1.3250 in late trade.

In Geneva, the International Monetary Fund’s managing director Dominique Strauss-Kahn said the euro would not break up but that its rules and governance need improvement.

“I don’t think there’s any threat to the euro. But I think that if the euro zone doesn’t work hard to recover soon, it’s going to have a slow, difficult process of recovery which it could avoid, as long as it improves its governance,” he told diplomats gathered at the U.N.’s European headquarters.

Ireland’s budget faces a series of parliamentary tests this week through February. Losing any single vote would force Cowen from office and Ireland into a snap election. Cowen won Tuesday’s initial votes with the premier’s two-vote majority solid.

Cowen stressed he was confident of winning all the upcoming votes and would call the election only once the brutal budget was passed in full, possibly not until March small personal loans. He insisted he wasn’t trying to delay the end of his government, but was serious about going to the voters on a platform of defending the latest austerity plans.

“It’s not about me trying to get a month or two in office, it’s about giving legislative effect to the budget decisions we’ve made. Then people will know we’re serious about our intent and purpose,” Cowen said in an interview on state broadcaster RTE.

The premier dismissed speculation that lawmakers within his Fianna Fail party could try to oust him in hopes of boosting the party’s weak electoral prospects. Cowen said he expects to lead Fianna Fail _ pronounced “FEEN-uh fall” and meaning Soldiers of Destiny in Gaelic _ to an improbable seventh straight election win dating back to 1987.

Cowen said he was confident that, as the election day neared, voters would not be convinced by opposition leaders’ claims they could reduce Ireland’s deficit _ currently at a post-war European record of 32 percent of GDP, targeted for a reduction to just 3 percent by 2015 _ without enacting the same brutal cuts and tax rises as the government.

“You cannot credibly, honestly say to the people that we can get out of this problem by not raising income tax or cutting welfare,” he said.

But grassroots anger over Fianna Fail’s mismanagement of the economy was evident as Cowen’s finance minister, Brian Lenihan, fielded live telephone calls from citizens on RTE.

“Will you struggle to pay your mortgage? Will you struggle to take care of your family?” asked one caller, who identified himself only as a Dublin hospital worker named Brian who expected to lose euro2,000 from his net household pay next year because of higher taxes.

“I don’t object to paying my pay, but I do object that you refuse to pay your way. You do not live in the real world,” Brian told the finance chief. “Will any (lawmaker) be struggling to put food on the table in January?”

Lenihan _ who has battled cancer while overseeing a string of emergency budgets and bank-bailout efforts _ said he had “spent 2 1/2 years in my office working day and night because of the crisis we’re in.”

And he told the caller how two years of salary cuts to top politicians, with more cuts to be approved in a parliamentary vote Friday, had disproportionately slashed the take-home pay of Cowen, himself and other Cabinet ministers.

He said Cowen’s gross salary two years ago was euro285,000 ($375,000) and euro174,000 net, reflecting deductions of 39 percent. But the latest cuts and tax hikes would leave the prime minister with euro214,000 gross and just euro102,000 ($135,000) net _ reflecting a new effective income-tax rate on higher earners of 52 percent.

“Everyone in this country has to contribute something in the present crisis,” Lenihan told the caller. “We did come to a position where our standard of living was one of the highest in the world _ and our wealth didn’t justify it. We have to face up to that.”

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The stock market recorded its biggest weekly drop in three months as a feeling of malaise took over after the U.S. failed to rally world leaders to come up with plans to strengthen global growth.

“The G-20 wasn’t much of a success for the U.S.,” said Kim Caughey Forrest, equity research analyst at Fort Pitt Capital Group. “There’s a sense that nobody really has the ideas on how to get us out of here.”

On Friday, stocks and commodities took another nosedive on worries that China might put the brakes on its surging economy. Any cooling of China’s economy would slow down demand for raw materials, and that sent prices of oil, metals and grains tumbling.

The Dow Jones industrial average fell 90.52, or 0.80 to 11,192.58, led by sharp losses in energy and materials stocks. Construction giant Caterpillar Inc., which has huge operations in China, fell 1.40 percent to $81.04 and oil company ExxonMobil Corp. fell 0.84 percent to $70.99.

For the week, the Dow was off 2.2 percent, its seventh-largest weekly drop this year and its biggest weekly fall since the week ending Aug. 13.

The Standard & Poor’s 500 index fell 14.43, or 1.2 percent, to 1,199.21, while the Nasdaq composite index fell 37.31, or 1.5 percent, to 2,518.21.

The Chinese government said that the pace of inflation hit a more than two-year high in October. The markets took that as a signal that the China would hike rates to tamp down inflation. It led to a sell off in global markets, from China to the U.S. The Shanghai composite index plummeted 5.2 percent, while Hong Kong’s Hang Seng fell 1.9 percent.

Gold fell $37.80, or 2.7 percent, to $1,365.50 an ounce. Crude oil fell $2.93, or 3.3 percent, to $84.88 a barrel, while soybeans plummeted 70 cents, or 5.2 percent, to $12.69 a bushel.

China’s robust economy has helped offset sluggishness in developed markets like the U.S. and Europe. Many companies, like Caterpillar and McDonald’s Corp. have credited international sales, particularly in China, as a reason earnings have been strong.

The speculation about a rate hike in China came as little headway was made on a plan to strengthen global growth. Leaders from the Group of 20, which includes large developed and emerging economies, failed to agree on policies about trade and currency manipulation that could stoke protectionism and a trade war.

Other nations refused to endorse a plan the U.S. presented to force China to allow the value of its currency to rise. The U.S. argues that China is keeping the value of its currency artificially low because a weak currency makes exports cheaper and more attractive globally. That, in turn, gives China an unfair advantage in global markets, helping its economy at the expense of others.

The dollar resumed its slide against other major currencies. It had rallied in recent days, particularly against the euro, as Ireland’s debt crunch renewed worries about the European financial system. A fiscal crisis in Greece this spring helped bring down stocks around the world, and investors are hoping Ireland can right its own finances without having to seek a bailout as Greece did.

Bond prices fell, sending interest rates higher. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.78 percent from 2.65 percent the previous day.

Intel Corp. was among the few gainers Friday, rising 1.51 percent to $21.53 after the chip maker said it will raise its dividend 15 percent.

Falling shares outnumbered gaining ones five to one on the New York Stock Exchange, where consolidated volume came to 4.2 billion shares.

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Hawaii’s average gasoline price increased 3 cents per gallon to $3.46 in the past week, according to the AAA Hawaii Weekend Gas Watch.

Honolulu’s average price for a gallon of regular unleaded was $3.35, an increase of 4 cents from last week and 20 cents more than the same week a year ago.

Hilo’s average price was $3.48, which is 10 cents higher than a week ago and 18 cents more than last year.

Wailuku’s average gas price rose to $3.82 per gallon, 3 cents more than last week and 20 cents more than the same week a year ago.

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Christmas is not coming early this year for the U.S. Postal Service, after regulators denied a request Thursday that would have raised the price of a first-class stamp by 2 cents, to 46 cents.

The Postal Service argued that it needed the hike in order to cover lost revenue from a decrease in mail volume, stemming from the economic recession.

While the Postal Regulatory Commission agreed with USPS’ argument, they denied the request, saying that the rate hike was an attempt to address long-term structural problems not caused by the recent recession.

The committee wrote in its unanimous decision that the "Postal Service has failed to meet its burden under the law, and the Commission is unanimous in denying its request for an exigent rate increase."

While USPS was able to demonstrate that the recession created the kind of "extraordinary or exceptional" circumstances that would merit the proposed 5.6% average increase on mail costs — the requested increase was due to retiree benefits.

"The documentation provided by the Postal Service demonstrated that the primary cause of the liquidity crisis was structural, and related to an overly ambitious requirement for the Postal Service to pre-fund its future retiree health benefit premiums," the committee said.

Postal rate hikes are usually capped at the rate of inflation. This is the first time USPS has requested a demand for a price increase, an action that is allowed under the 2006 Postal law.

But as the committee noted, the Postal Service reduced costs by $6 billion in 2009 — a sign that the price cap is forcing the organization to improve efficiency.

Postmaster General John E. Potter said the ruling was a disappointment, and that it would require more study.

"We are disappointed to learn that the Postal Regulatory Commission has denied our price filing. But we are encouraged by their acknowledgment and understanding of the larger financial risk we face, through the mandated pre-funding of Retiree Health Benefits," Potter said in a statement.

Meanwhile, business groups long opposed to the rate hike cheered the decision.

"The PRC today has helped countless businesses stay competitive and saved tens of thousands of jobs," said Affordable Mail Alliance spokesman Tony Conway. "The Commissioners recognized that imposing an additional tax on Postal Service customers is not the way to address its financial troubles." 

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Greensboro-based Pace Communications has been selected by Carlson Hotels to launch Hotline The Americas, a quarterly employee magazine.

Carlson is a privately held hospitality and travel company based in Minneapolis. It owns more than 1,000 hotels and restaurant chains, such as Radisson and T.G.I. Friday’s, and employs about 150,000 people in around 150 countries.

“It’s wonderful to be working with a company that is totally committed to such an ambitious internal communications program,” said Craig Waller, chief marketing officer of Pace Communications. “We’re honored to have been selected as the North American partner for the project.”

Hotline The Americas was first mailed to Carlson employees, board members, hotel owners and developers, general managers and strategic partners in July. The second issue will be available in early November.

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Oil giant Exxon Mobil Corp. said it does not comment on market rumors when asked if the Irving-based company has plans to offload its Argentine downstream unit Esso.

Reuters news reported rumors of the sale on Friday direct payday lenders. Esso controls hundreds of service stations and a refinery, the news agency said.

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Birmingham stocks closed a tough week Friday with none of the local companies posting gains for the week.

Book retailer Books-A-Million (Nasdaq: BAMM) took the biggest hit with a 15 percent decrease for the week. It opened Monday at $6.57 to close at $5.57 on Friday.

The stock price for Colonial Properties Trust (NYSE: CLP) dropped around 11 percent to close the week at $13.89. It opened on Monday at $15.66.

Regions Financial Corp (NYSE: RF) ended the week at $6 .24 after opening at $6.95.

Superior Bank (Nasdaq: SUPR) saw its prices fall 10 percent to $2.03 after starting the week at $2.26.

Meanwhile, prices for HealthSouth (NYSE: HLS) were down 8 percent to close the week at $17.71. It opened Monday at $19.43.

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Suburban Journals publisher Tom Wiley is leaving the company to be publisher of the New Haven Register and senior publisher of the Journal Register Co.’s Connecticut media group.

The Suburban Journals is a subsidiary of Lee Enterprises Inc., based in Davenport, Iowa. Lee also owns the St. Louis Post-Dispatch.

Wiley was named publisher of the Journals in February, replacing Bob Williams when he became publisher of The Southern Illinoisan in Carbondale, also a Lee subsidiary.

"This is a fantastic opportunity for Tom," said Kevin Mowbray, president and publisher of the St. Louis Post-Dispatch. "His innovation, energy and creativity have helped us launch new products and improve existing ones."

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