Will the Debt Ceiling Be Catastrophic?

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With the government partially shutdown and the nation moving closer to the debt ceiling, how bad will this mess get? The Treasury Department released a report, which noted, “The United States has never defaulted on its obligations… a default would be unprecedented and has the potential to be catastrophic.”

Catastrophic is a pretty scary word, so what exactly will happen on October 17th, when the nation can no longer juggle the books and needs to borrow more than the statutory limit of $16.7 trillion?

Treasury expects it would still have about $30 billion cash on hand to cover its bills. Between money coming in and obligations, we can make it to the end of the month, but then things gets dicey. On November 1st there is $25 billion bill for Social Security and on November 15th, a $30 billion interest payment on government bonds is due. Without an increase to the debt ceiling, neither will get paid on time, which would qualify as a technical default.

The mere whiff of a default could throw financial markets into disarray. Treasury says that “credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

Most traders agree that if a default were to occur, it could make the August 2011 debt ceiling swoon look like child’s play. In August 2011, Congress came to a last-minute deal to avert hitting the debt ceiling, but it was too late: ratings agency Standard & Poor’s downgraded the credit rating of the United States by one notch and the S&P 500 stock index subsequently dropped by more than 17 percent. Given the bad memories of 2011 and the credit freeze of 2008, there is widespread belief on Wall Street that not even the most extreme members of Congress would allow a default to occur.

Some legal experts have said that the President could invoke emergency powers if Congress could not come to an agreement. According to the New York Times, there are three options: “One is grounded in an aggressive understanding of presidential power, the second in an interpretation of an obscure provision of the 14th Amendment and the third on a choice among three irreconcilable constitutional obligations.” But White House officials maintain that the President will not act alone and that Congress must provide the authority to borrow money.

What about Treasury’s claim that “even the prospect of a default can be disruptive to financial markets and American businesses and families”? There is some evidence that we are already seeing the ill effects of both the government shutdown and the debt ceiling: stocks have dropped about 3.5 percent in the past two weeks and confidence could erode as the negotiations drag on. That’s why the National Retail Federation said that Congress could blow a hole in its holiday sales forecast. “Our forecast is also somewhat hinging on Congress and the Administration’s actions over the next 45 days; without action, we face the potential of losing the faith Americans have in their leaders, and the pursuant decrease in consumer confidence.”

As the battle on the debt ceiling nears, it’s important to underscore that Congress has already agreed to spend a certain amount of money, by virtue of the annual budgets that come to the floor for a vote. After budget resolutions are passed, if the government cannot meet its obligations from revenue, it borrows money by selling bonds. Increasing the debt limit does not authorize new spending commitments; rather it allows the government to finance existing obligations that Congresses and presidents have made.

For decades, lawmakers increased the debt ceiling as a course of business. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit under both Republican and Democratic presidents.

So what’s an individual investor to do? Stick to your long term balanced approach. Looking back to 2011, the year felt like a roller coaster, but it ended more like a merry go-round. The S&P 500 was up by over 8 percent in the spring, was down 12 percent over the summer and finished the year nearly unchanged at 1257.60, a drop of -0.003 percent for the year, the smallest annual market move for the S&P 500 since 1947. While we are rooting for Congress to do something, the best prescription for investors may be to do nothing!

Debt Ceiling

on . Posted in News Flash

Now Even China Is Lecturing Us About The Debt Ceiling Crisis

            
John Boehner

AP

John Boehner, House Speaker, who appears ready to force the US to default.

BEIJING (Reuters) - China urged Washington on Monday to take decisive steps to avoid a debt crisis and ensure the safety of Chinese investments, as a deadlocked U.S. Congress confronted a looming deadline to increase the nation's borrowing power or risk default.

China, the U.S. government's largest creditor, is "naturally concerned about developments in the U.S. fiscal cliff", Vice Finance Minister Zhu Guangyao said in the Chinese government's first public response to the Oct 17 deadline in the United States for raising the debt ceiling.

"The United States is totally clear about China's concerns about the fiscal cliff," Zhu told reporters in Beijing, adding that Washington and Beijing had been in touch over the issue.

"We ask that the United States earnestly takes steps to resolve in a timely way before October 17 the political (issues) around the debt ceiling and prevent a U.S. debt default to ensure safety of Chinese investments in the United States and the global economic recovery," Zhu said.

"This is the United States' responsibility."

The U.S. government moved into the second week of a shutdown on Monday with no end in sight, as Congress also confronted an October 17 deadline on raising the debt ceiling.

"We hope the United States fully understands the lessons of history," Zhu said, referring to a deadlock in 2011 that led to a downgrade of the U.S. credit rating to "AA+" from "AAA" by agency Standard & Poors.

The last big confrontation over the debt ceiling, in August 2011, ended with an eleventh-hour agreement under pressure from shaken markets and warnings of an economic catastrophe if a default were allowed to happen.

Republican House Speaker John Boehner vowed on Sunday that there was "no way" Republican lawmakers would agree to a measure to raise the debt ceiling unless it included conditions to rein in deficit spending.

The comment raised fears that the U.S. Congress and Obama could fail to reach a deal on raising the ceiling by October 17, when the Treasury has estimated it will have run out of cash.

(Reporting by Ben Blanchard; Writing by Sui-Lee Wee; Editing by Clarence Fernandez)

This post originally appeared at Reuters.  Copyright 2013.

Imperial Holdings

on . Posted in Investment general

     

       

UNDICTATED: Change of Imperial CEO provides window of opportunity

by Alec Hogg, 07 October 2013, 09:23
 
 
 
   
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A wall in my den is for memories. It is dominated by a collage from an evening in Monaco with the late Bill Lynch, architect of the R50bn Top 40 company Imperial Holdings.

I knew Lynch for many years. Mostly on a superficial level. We saw each other biannually in the radio studio to discuss Imperial’s financial updates. Occasionally he would pop in for a special focus on entrepreneurship or another topic close to his heart. We were associates. Friendly, not close.

Then seven years ago, that changed when fate threw us together for a spectacular few days.

Bill had won the South African leg of the World Entrepreneur of the Year competition. My company was the media partner. So we ended up in Monaco together for the grand finale of the event’s 20th renewal.

There were contenders from 32 countries that year. Among them a Taiwanese whose company built one of every three laptops worldwide. Another strong contender was the co-founder of then high-flying US giant The Home Depot. As usually happens when South Africans travel, we were a tight unit, eight of us, including Bill’s wife Ann, supporting our champion.

A small group, easy to get lost in a crowd of 700. Especially as reality dawned that this was a competition won by business rock stars such as Google’s founders Larry Page and Sergey Brin; Amazon’s Jeff Bezos and Starbucks founder Howard Schultz.

In spite of the odds, this was Bill Lynch’s night. The only hint was when African Rainbow Minerals’ Patrice Motsepe and wife Precious joined us at Table 31. Motsepe does not just pitch. He had won the South African leg in 2003, but did not crack the big one. Neither did other leg winners such as Bidvest’s Brian Joffe, Naspers’ Koos Bekker or Aspen’s Stephen Saad.

The only South African to put his hands around the World Cup for Businessmen was the man I sat with that night in June 2006.

After the glare of TV cameras and crush of reporters had ended, we walked back together to our hotel. Bill, with his Springbok green bow tie that matched Ann’s dress, talked calmly and quietly as always.

The way he handled it all, you would think this humble 62-year-old was born to it. He was not. Lynch grew up dirt poor in rural Ireland. He arrived in Johannesburg in 1971 with a young wife, a farm school education and only enough in his pockets to buy food for a couple of months.

Lynch knocked on many doors before the owner of a failing motor dealership, Percy Abelkop, took a chance on him.

I never did ask, but on the night he was crowned the world’s best entrepreneur it’s unlikely Bill and Ann were aware of the brain tumour that would kill him 18 months later.

Even if they had been, that night they would surely have believed anything was possible.

Lynch regarded the award an honour for his adopted country. He wanted to use the recognition to inspire others. He was determined to pass along what he had learnt.

And he spoke passionately about a great future for his homeland.

Just a year after Monaco, in July 2007, Lynch’s health problems became public when he stepped down from a business he had grown from a market cap of R35m to more than R35bn. He passed away six months later.

Lynch was succeeded by Hubert Brody, a largely anonymous former banker hidden inside Imperial for the previous eight years. At first blush, he typified those living in shadows of larger than life characters. Tall and slim, Brody is reserved, private.

A polite family man and, to boot, a chartered accountant.

Investors rushed for the exit. Especially once this "bean counter" started talking about dismantling the house Bill built. Few listened when Brody tried to explain it was not his brainwave, how the team had already decided during Lynch’s tenure to sell or unbundle its capital-heavy parts.

On Lynch’s big night in Monaco, the Imperial share price was R130. By the time his retirement was announced, it had risen to R160. Just one year into Brody’s stewardship, the stock traded under R45.

Mr Market, jittery after the financial crisis, had judged Imperial’s newcomer and found him wanting.

But as Benjamin Graham taught us 80 years ago in The Intelligent Investor, the share market is a voting machine. Price is what you pay. Value is what you get.

Those who backed Brody got their value in meaty chunks. Five years later the share price has quadrupled. More importantly, the surge to R220 comes off solid earnings growth, as our table illustrates so clearly.

The outgoing Imperial CEO is only 49. He will leave next year after helping find a successor for the R50bn group. Headhunters will be licking their lips. They should not bother.

Imperial’s outgoing boss is not in the market for another corporate assignment. He will be devoting more time to his family.

Also, like Brody, Imperial’s next CEO will almost certainly come from inside.

Brody says what makes the group work is the way it has retained much of the Lynch DNA. Managers are encouraged to be entrepreneurial. Performance is measured on how they allocate resources. Power is decentralised. All of which is difficult for most outsiders to absorb.

Perhaps Mr Market has learnt his lesson. Probably not. So if he slaps the share price around when another Imperial unknown is named CEO, take advantage. It could be telegraphing one of the clearest buy signals you are likely to get.

Hogg is a financial writer and broadcaster and the founder of Moneyweb. He runs biznewz.biz

Tradewise Report

on . Posted in Uncategorised

The Nikkei index has extended Friday’s 0.9% loss into a fourth trading session on Monday with the U.S. budget standoff leaving investors frustrated due to the market uncertainty, while exporters such as Toyota Motor came under a lot of pressure.

While markets on mainland China remained closed on Monday for a week-long National Day holiday, the market in Hong Kong slipped lower to underperform their Asian peers with investors taking a risk-off stance as the U.S. budget impasse shows no signs of being resolved.

According to Reuters, European markets are expected to open lower on Monday with investors preferring to be cautious by moving to the side lines until such time as a solution is found to the U.S. federal budget and debt ceiling.

Reuters reports that U.S. futures are suggesting that U.S. stocks will open lower on Monday, after a weekend where little progress was made in either resolving the budget dispute or raising the debt ceiling.

Business Day reports that the JSE ended off its intraday lows but still in the red on Friday, with platinum and gold mining shares dropping 1.46% and 0.90% lower, respectively, due to a weaker Dollar that fell on the uncertainty around the US fiscal, as well as the debt ceiling that is around the corner.

The Rand is trading slightly lower at R10.0098 against the Dollar, while it is slightly firmer at R13.5805 against the Euro, and at R16.0164 to the Pound.

The gold price has edged higher in Singapore trading on Monday as the near-week long U.S. government shutdown increased investor concerns that Congress may also battle to raise the debt ceiling in time, polishing the precious metal's safe-haven appeal. Gold was last trading at $1 314.40 with the platinum price quoted at $1 388.00, while the palladium price was at $699.55.

Brent crude oil was last trading higher at $109.08 a barrel.