But ratings agency sees little threat to dollar’s preeminence in next few years.
Selected excerpts from US Dollar to Remain Undisputed Global Reserve Currency for Foreseeable Future (Premium)
Recent speculation about the future of the dollar as the world’s reserve currency is, in Moody’s view, unfounded. Despite the US’s external deficits and dollar depreciation, we believe that the likelihood of the dollar losing its prominent role as a reserve currency remains very low for at least the next three to five years:
- Regardless of the current state of US public finances, the economic and political factors underpinning the dollar’s reserve currency status are still aligned in favour of the dollar and are likely to remain so for some time.
- There are no plausible alternative currencies that are ready to take the US dollar’s place as the global reserve currency. We do not consider the Chinese renminbi and the IMF’s Special Drawing Right (SDR) to be credible alternatives.
- Inertia and the interconnectedness of financial markets, not to mention the size of the global market for dollar denominated debt, highlight the difficulties of a global switch from the dollar to another currency – and thus help to preserve the dollar’s status.
Our view that the dollar is unlikely to lose its role as the reserve currency represents an important element of the debt metrics that support the US’s Aaa rating.
However, despite Moody’s views about the dollar’s undisputed status, this report nevertheless considers the unlikely scenario of the dollar declining in importance or even losing its reserve currency status.
The main impact of such a loss is likely to be felt through an increase in yields as the market for US paper diminishes – a reduced degree of “debt finance-ability”. Estimates of the likely increase vary widely depending on circumstances and are by their nature highly speculative, but we estimate that yields would rise by 120bps on average.
From a ratings perspective, such a (hypothetical) increase would have its main impact on the US’s debt affordability, i.e. the ratio of interest payments to general government revenues and one of the key metrics that determines the boundary between Aaa and Aa sovereigns.
Technorati Tags: dollar, reserve currency, US sovereign debt
“Financial genius” Lenny Dykstra sues JPMorgan for lending him too much (Reuters)
Comparative Effectiveness Research Could Pose Barriers to Medical Development (Stanford)
Free white paper from Catherine Sherwood on FINRA Guidance on Use of Social Media by Financial Services
Revealing chart of the makeup of US federal spending in David Leonhardt’s Economic Scene column (NYTimes)
EU fails to agree on fresh restrictions on American hedge funds doing business in Europe (Washington Post)
Private credit demands are poised to rebound (Morgan Stanley)
Technorati Tags: financial-regulation, government spending, Hedge-Funds, medical research, pharma, private-equity, social-media
It may be coincidence but both the World Bank and the International Monetary Fund and the today called on China to play its part in increasing global financial stability and rebalancing the world economy.
In its Quarterly Report on China the World Bank projects 9.5% GDP growth for this year and worries about a housing fueled bubble.
The World Bank’s policy recommendations for China:
The monetary policy stance needs to be tighter than last year and the case for exchange rate flexibility and more monetary independence from the US is strengthening.
- Ensuring financial stability includes mitigating the risk of a property price bubble and ensuring the sustainability of local government finances.
- Sustained, sustainable growth requires structural reforms.
- The fiscal plans for 2010 rightly imply a broadly neutral fiscal stance.
- Given the remaining uncertainty with respect to global growth, additional fiscal flexibility in implementation would be good.
- Inflation expectations and pressure can be contained by tightening the monetary stance and allowing the exchange rate to strengthen.
- Further on inflation, it would be useful to increase the tolerance for modest inflation to allow useful relative price adjustment.
- In addition to containing inflation expectations, monetary policy has a key role to play in containing risks of asset price bubbles.
- The case for a larger role of interest rates in monetary policy is strong.
- If policymakers remain concerned about interest rate sensitive capital flows, more exchange rate flexibility would help.
- Ensuring financial stability calls for mitigating the risk of a property bubble and avoiding strains on local government finances.
Meanwhile, in a speech to the European Parliament, IMF Managing Director Dominique Strauss-Kahn said for China’s currency must appreciate to help balance trade imbalances.:
“In economies that have been running persistent current account deficits—such as the U.S., but also several European countries—domestic saving must increase. And to support demand, exports will need to contribute more to growth.”
In economies with persistent current account surpluses—such as China, Germany, and many oil-producing countries—domestic demand must go up. Broadly speaking, this means boosting growth in consumption; in some cases, exchange rate appreciation will also play an important role.
And Market News reported that the clash over the value of the yuan heated up again this week with a move by the U.S. Congress that would force the U.S. Treasury to increase the pressure on China to reform its exchange rate policy, even while some economists dispute the charge that Beijing has manipulated its currency.
Technorati Tags: china, exchange rates, fiscal-policy, housing bubble, monetary-policy, renminbi
As McDonald’s Corporation (MCD)continues to deliver impressive results in a difficult economy we are pleased to offer a complimentary download of relevant excerpts from Plunkett Research’s Food Industry Almanac. The Almanac also features a spotlight on Wal-Mart (WMT) and covers topics such as organic and “functional” foods, ethanol and the growing use of RFID technology.
The Almanac includes a spotlight on McDonald’s, highlighting the company’s impressive resurgence after posting losses for 13 consecutive months in 2002-2003.
Selected Excerpts:
Growth continues, with $2.1 billion invested in 2009 to further remodel existing locations and build approximately 1,000 new restaurants around the world. 240 of those were in Europe, 165 in the U.S. and 600 in Asia. This is while most restaurant chains are fighting to keep the doors of their existing locations open. McDonald’s has opened large numbers of locations in China’s major cities with good success, but it has not caught up with China’s fast food leader, KFC.
Perhaps the most lucrative focus adopted by McDonald’s is the extension of operating hours, in many cases staying open around-the-clock. Breakfast has become the biggest moneymaker, comprising 30% of a typical day’s sales.
The market for fast food breakfast in the U.S. reached $25 billion in 2008 annual sales, of which McDonald’s claims one-fourth. The company hopes to expand on its breakfast bonanza by extending hours in which breakfast items are available from seven hours in most all-night locations to 24/7.
The 39-page report has been made available free of charge to Research Recap users for 30 days by special arrangement with Plunkett Research, an Alacra content partner. After 30 days, the report will revert to its regular Alacra Store price of $149.99)
For additional free research reports from the Alacra Store click here
Related Research on McDonald’s from Alacra:
Zacks ( Mar 9 ) “We think McDonald’s provides relative safety for the investor, with moderate growth prospects, being exposed to faster-growing international markets. However, the economic headwind, which has affected consumers’ disposable income, is impeding growth”
David Palmer, UBS ( Mar 8 ) “We view McDonald’s results as one of the most impressive we have seen in a while.” Buy, target $72.
Joseph T. Buckley, BofA Merrill Lynch ( Mar 8 ) “We continue to rate MCD shares Buy as a Sales Leader.” Target $71.
Paul Westra, Cowen & Co (Mar 8 ) We continue to believe shares of MCD will outperform the market by over +15% over the next 12 months.”
Jeffrey A. Bernstein, Barclays Capital ( Mar 8 ) “Our price target for McDonald’s remains $71, or ~16x our calendar 2010 EPS estimate of $4.40.” Overweight.
John Glass, Morgan Stanley ( Mar 8 ) “While MCD faces more difficult compares in the months ahead, we remain confident the company will continue to gain share in the US as the McCafé program expands with frappes hitting mid-to-late Spring & smoothies due out this summer. ” Base Case $67.
Gregory R Badishkanian, Citigroup ( Mar 8 ) “We rate McDonald’s Hold/Low Risk (2L), with a target price of $67.”
Matthew DiFrisco, Oppenheimer ( Mar 8 ) “…we maintain our Perform rating and would become more constructive on the shares below $60.”
John Ivankoe, JP Morgan ( Mar 8 ) “We maintain our Dec 2010 price target of $68 with our target reflecting a 15.5x multiple on our C10 estimates.” Overweight.
Fitch Ratings ( Feb 25 US Restaurant/Foodservice Outlook ) “McDonald’s Corporation Ratings (A/Stable) reflect the company’s geographically diverse revenue base, substantial cash flow generation, and stable royalty stream. Industry leading margins and SSS performance further strengthen the company’s credit profile. Fitch believes operating performance will continue to guide the company’s financial strategy. McDonald’s credit statistics are projected to remain relatively stable in 2010.”
Technorati Tags: (MCD), complimentary, ethanol, food industry, mcdonald's, organic food, Plunkett, PulseCheck, restaurants, RFID
Fitch Ratings maintains its negative outlook for the senior living sector as the fragility in the global economic recovery, combined with such sector-specific negative credit factors as renewal risk on letters of credit (LOCs), weaker liquidity, higher capital costs, and uncertainty in the real estate market, outweighs the surprising resiliency that Fitch-rated, senior living credits have shown in the past year.
The negative outlook reflects Fitch’s expectation that rating downgrades will exceed upgrades in the coming year, with affirmations remaining the most frequent rating action in the sector.
For 2010, Fitch expects the following:
- Cash flow should remain stable.
- Occupancy will remain stable as the financial markets continue to stabilize and potential buyers remain convinced that a bottom has been reached in the real estate market.
- The use of incentive programs will decline, which should lead to modestly improved cash flows as the discounting of entrance fees decreases and the timing of entrance fee collections improves.
“The case of Erickson Retirement Communities provides a good example of the sector’s bifurcation between start-up and mature communities. During 2009, Erickson, one of the pioneers in the development and management of nonprofit continuing care retirement communities (CCRCs), filed for bankruptcy protection due to slower than anticipated sales and occupancies at several start-up communities under development and a very tight credit environment. Within the same period, Fitch affirmed ratings on three mature communities that Erickson had fully developed and continues to manage under management contracts; most recently, in early 2010, Fitch placed one on Positive Rating Outlook. For 2009, each of these facilities maintained high levels of occupancy while reporting solid operating performance. With the very tentative return of start-up new issuance in late 2009, 2010 could prove to be a critical year for the re-emergence of start-up CCRCs.”
For details, see 2010 Senior Living Outlook (Premium)
Technorati Tags: retirement, senior living
Led by China, foreign governments/central banks sold record amount of US financial assets in January (FT Alphaville)
US Bank Failures Threaten Small-Business Lending (WSJ)
Global harmony on financial regulation a distant prospect despite Lehman outrage( FT’s Gillian Tett) Sad but true
Junk Bond Avalanche Looms for Credit Markets (NY Times)
Traders Tapping Social Media to Gauge Market Sentiment using Alacra Pulse (WSJ)
Technorati Tags: bank lending, china, financial-regulation, junk bond, small business, Twitter
U.S. credit card Asset-backed securities trusts are well positioned to offset performance repercussions from changes to U.S. credit card regulations that went into effect on February 22, according to Fitch Ratings. However, credit card companies are set to face more acute pressures.
The impact on card performance variables will be felt most noticeably in gross yield, which will decrease slightly in the short to medium term, Fitch says in its latest Credit Card Movers and Shakers report. The resulting implications for performance measures are not likely to precipitate any rating actions for credit card ABS, Fitch says.
U.S. prime credit card chargeoffs rebounded almost to the near-record levels set last fall, according to the latest Credit Card Index results from Fitch.
Fitch’s prime credit card chargeoff index jumped 112 bps (11%) to 11.37%. The results, which cover the January collection period, pushed the index to its highest level since September 2009’s record 11.52%, and 54% above year-earlier levels. The increase was largely driven by a payment holiday for Chase credit cardholders, which pushed more chargeoffs into the current period.
Meanwhile, TransUnion reported that during the fourth quarter of 2009 the Credit Risk Index (CRI) indicated that risk conditions in the U.S. are beginning to moderate. The Credit Risk Index is a statistic developed to measure the changes in average consumer credit risk within various geographies across the nation.
During the fourth quarter of 2009, TransUnion’s Credit Risk Index increased nationally 38 basis points to 129.67 from 129.29 in the third quarter, the smallest increase of this measure since the early stages of the current recession.
Based upon the Credit Risk Index it appears that we may have possibly reached a plateau for credit risk after five consecutive quarters of significant increases, suggesting that the financial recovery is beginning to take hold as consumers continue to adapt their lifestyle and debt management practices to navigate these difficult economic times.
Technorati Tags: charge-offs, credit card, credit card ABS, Credit Risk Index, delinquencies, TransUnion
Standard & Poor’s today indicated that the Greek government has done enough for now to get its fiscal house in order and preserve the country’s credit rating, but at the same time the ratings agency downgraded the banking system and placed a negative outlook on several banks.
Key comments from S&P:
- We view the Greek government’s total package of deficit reduction measures as appropriate to achieve its 2010 fiscal target, given the deterioration in Greece’s growth prospects.
- We are affirming our ‘BBB+/A-2′ sovereign credit ratings on Greece and removing them from CreditWatch negative.
- The negative outlook reflects our view of the government’s ability to sustain reform momentum in the medium term.
S&P also:
- Revised its Banking Industry Country Risk Assessment (BICRA) classification and economic risk score on Greece to ‘5′ from ‘4′.
- Increased its estimate of gross problematic assets (GPAs) for the Greek banking system to 15%-30% of total credit, from 10%-20%.
- Affirmed its ‘BBB/A-2′ long- and short-term counterparty credit ratings on EFG Eurobank Ergasias S.A.(EUROB), Alpha Bank A.E.(ALPHA), and Piraeus Bank S.A.(TPEIR);
- Affirmed its ‘BBB+/A-2′ long- and short-term term counterparty credit ratings on National Bank of Greece S.A. (NBG).
- Removed the ratings on all four Greek banks from CreditWatch, where they had been placed with negative implications on Dec. 17, 2009. All outlooks are negative.
BICRA rankings summarize the strengths and weaknesses of a country’s banking system compared with those of other countries according to a scale ranging from Group 1 (the strongest) to Group 10 (the weakest). Other countries included in BICRA Group 5 with Greece are South Africa, Poland, Brazil, Malta, Kuwait, Oman, and Bahrain.
We believe that the Greek banking system’s economic risks have heightened, due to low economic growth prospects and structural weaknesses, higher vulnerability to capital outflows, and greater credit risk.
However, the banking system has coped with mounting economic challenges and remained broadly profitable, benefiting from its consolidated and modern structure and strong commercial franchises–which we view as main comparative strengths.
For details, see:
Research Update: Greece Sovereign Credit Ratings Affirmed At ‘BBB+/A-2′ And Removed From CreditWatch; Outlook Negative and
Greece BICRA/Economic Risk Score Revised To ‘5′ On Economic Risks; Bank Ratings Affirmed/Off Watch; Outlooks Negative
Technorati Tags: Alpha Bank, banks, EFG Eurobank Ergasias, Greece, National Bank of Greece, Piraeus Bank, PulseCheck, sovereign-debt
While almost every one says they want more renewable energy, nobody wants to pay more for it, Standard & Poor’s says in a new Q&A on the topic.
Selected excerpts from Q&A: U.S. Utilities Ramp Up Renewable Energy (Premium)
The real challenge for managements at electric utilities is to explain to and help their customers, regulators, and policy makers understand that a shift away from carbon-intensive power production is not going to be fast, it is not going to be easy, and there will probably be substantial cost tradeoffs.
Cost is probably the thing we are most focused on right now. Developments in renewable technology and the subsidies have lowered costs relative to conventional generation, but it is still expensive in most cases. People seem to think that solar is cheap, but it is not. PVs, fully loaded with subsidies and in the best of conditions in terms of sunlight, cost 15 to 25 cents a kilowatt hour. That is more than the average electric retail rate customers pay in the U.S. of about 11 cents. So, it is significantly more expensive, even without the transmission needed to get the renewable energy to the customer.
Related to that, poll after poll shows that customers want greener forms of energy, but they are not paying for it.
Until there is a layer of significant renewable investment, which in most cases is much more expensive than conventional sources, customers will not be tested. But in the best case, customers will someday open their bills and say, “This is a much higher bill, but this has value to me – it is worth it.”
With regard to credit quality, we look at renewables as a very different product. There is no return policy on this. Utilities are making investments with today’s technology, at today’s costs. These investments are going to go on for 20 or 30 years or more, so from our perspective, we are going to focus on utilities’ ability to recoup these costs in rates.
Standard & Poor’s has issued a series of Q&A reports on the utilities industry:
Q&A: Energy Efficiency And “Smart Grid” Initiatives Aren’t Likely To Shock U.S. Electric Utilities
Q&A: What’s Ahead For U.S. Electric Transmission?
Q&A: What’s Ahead For Regulated U.S. Utilities?
Q&A: U.S. Utilities Tackle Rate Challenges
Q&A: U.S. Utilities Tackle Environmental Concerns
Q&A: Energy Legislation And Utilities – What’s In Store?
Q&A: What’s Next For Nuclear Power In The U.S.?
Technorati Tags: electric-utilities, nuclear-power, renewable-energy, solar-energy
Loss severities on distressed U.S. residential mortgage loans are likely to rise this year as several key government support programs expire, according to Fitch Ratings.
Low mortgage rates, homebuyer tax credits and government directed loan-modification programs have led to an improvement in home prices and loss severities since second quarter-2009. But the expiration in the coming months of both the homebuyer tax credit and the Federal Reserve’s $1.25 trillion MBS purchase program will increase negative pressure on home prices and loss severities, according to Senior Director Grant Bailey.
Additionally, an increase in the liquidation of loans with unsuccessful loan modifications is expected to add to the supply of distressed inventory in the housing market. ‘Servicers are further along in identifying borrowers ineligible for modifications and will likely be more aggressive in liquidating those loans this year compared to last,’ said Bailey. ‘Less costly alternatives to foreclosure, such as short-sales, should help stem rising loss severities due to the lower costs and speed of the resolution.’
Loss severities on loans resolved through short-sales are approximately 10% lower than loss severities on loans in which the servicer takes possession of the property. Additionally, the seasonal increase in housing activity through the summer may delay the full impact of the withdrawal of the government support programs until later this year.
In the two years prior to the recent improvement, national home prices dropped approximately 30% while loss severities on loans which incurred losses doubled to record highs of 43% for private-label Prime loans, 58% for Alt-A loans and 72% for Subprime loans.
For details, see RMBS Performance Metrics (Premium)
Technorati Tags: delinquencies, housing, residential mortgage-backed securities, RMBS, structured-finance
