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1. Soros Advisor: U.S., ECB Will Raise Rates
2. Buffett's Berkshire Buys Stake in Lloyd's
3. 5-Year Note: Safe Haven for Wary Investors
4. Caterpillar Misses, Sees Slowing Economy
1. Soros Advisor: U.S., ECB Will Raise Rates
George Soros' chief advisor on globalization issues, Karin Lissakers, says that
she expects the U.S. and the ECB to raise interest rates in the coming months,
according to reports by Irish news sites RTE News and FinFacts.
Lissakers told an audience of the Irish Life conference on the future direction
of pensions that "given underlying conditions" she expects the Fed to "be at the
ready with another interest rate rise or two."
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With the Dow Jones industrial average closing above 12,000 for the first time
ever, Lissakers added, "[If] markets show another burst of exuberance which
feeds into consumer and corporate behavior resuming upward pressure on prices, I
would expect that move to come fast. Most likely, the ECB would follow suit."
Lissakers' comments are contrary to most analysts' view that the Fed will likely
cut rates when it acts again. But Fed members in recent weeks have indicated
that they are not comfortable with the current pace of inflation.
For the near term, Lissakers lamented that investors would have to live with
"continued uncertainty," but that she is in the "soft landing camp" for the
global economy in the short to medium term.
"I just don't see the conditions for a sharp economic reversal. A U.S. slowdown
is highly likely; the Fed will make it happen. And that will probably have some
damping effect in Europe," she said.
But it's no longer a fact that when the U.S. catches a cold the rest of the
world gets the flu. "… I think that global economic linkages are sufficiently
complex that a U.S. downturn will not trigger a domino effect dragging down
other major economies," said Lissakers.
Instead, Lissakers sees emerging markets as having a strong beneficial effect on
the global economy. "On the other hand, global linkages across economies are
sufficiently strong so that autonomous growth, particularly in the larger
emerging markets, will help to cushion the U.S. and European slowdowns."
Editor's Note:
2. Buffett's Berkshire Buys Stake in Lloyd's
Oracle of Omaha Warren Buffett sees an opportunity in taking over the
liabilities of Lloyd's of London's reinsurance arm.
Buffett struck a deal to assume the liabilities of Lloyd's of London's Equitas
division, a company formed to underwrite the liabilities of Lloyd's insurance.
The group is run by Lloyd's so-called names - the wealthy investors who reinsure
Lloyd's insurance.
National Indemnity Company, a division of Buffett's holding company Berkshire
Hathaway, will provide up to $7 billion of additional reinsurance cover to
Equitas. In exchange, National Indemnity will take over Equitas' assets, minus
$323 million, and will receive a premium of more than $210 million.
The deal will happen in two stages. In the first stage, National Indemnity will
provide $5.7 billion of reinsurance cover and will take over the assets and
receive a $135 million premium.
In the second stage, Equitas will transfer all liabilities of its names to
Berkshire Hathaway, pending approval from the High Court, and National Indemnity
will provide $1.3 billion of additional cover for another premium of more than
$75 million.
Equitas has been saddled with asbestos and pollution claims for more than a
decade. In that time, Equitas has reduced liabilities to $8.28 billion from more
than $28 billion in 1996, according to the Financial Times.
"Putting Berkshire Hathaway's Gilbraltar-like strength behind the remaining
problems - which will take many decades to resolve - eliminates any remaining
worries for all concerned," Mr Buffett said in a statement.
Hugh Stevenson, chairman of Equitas, said in a statement: "We believe that
following the completion of Phase I reinsured names will be able to regard the
prospect of the failure of Equitas as extremely remote."
"If, as we hope, a transfer of the liabilities from reinsured names is achieved,
they will no longer have any liability whatsoever under policies reinsured by
Equitas. They will have achieved finality and be able to sleep soundly knowing
that this chapter is closed."
The reinsurance business is the bread and butter of Warren Buffett's Berkshire
Hathaway, which also owns Dairy Queen, GEICO, Fruit of the Loom, and many
others. National Indemnity was Buffett's first foray into the insurance
business. The company also owns reinsurance company General Re.
Editor's Note:
3. 5-Year Note: Safe Haven for Wary Investors
Treasury investors looking to sleep soundly at night may want to hold onto their
5-year notes.
At a yield of 4.75 percent Thursday afternoon, the 5-year Treasury issue
continues to outperform its shorter- and longer-dated cousins. By comparison,
the 2-year yield was at 4.86 percent and the 10-year at 4.78 percent. Since
June, the 5-year note has outshone the 2- and 10-year notes, weathering this
month's sharp price correction in the Treasury market better than the other
government securities.
And although the 5-year, given its lofty valuation, may be currently taking a
bit of a breather, it remains the best-placed security to benefit once clarity
emerges over the Federal Reserve's next policy step.
Treasury yields, which move inversely to prices, have climbed over the last few
weeks from September's multi-month lows as investors digested increasing signals
from policy makers -- backed up by some stronger-than-expected U.S. economic
data -- that the Fed may not lower interest rates as soon as some had expected.
That shift left the 5-year note looking like a "relatively safer and more stable
place to be" as investors wait for further clues as to the future of interest
rates, said John Canavan, market watcher with Stone & McCarthy. While inflation
worries surround the 10-year, and while the 2-year remains the most sensitive to
interest rate changes, the 5-year note is seen by many investors as a safe
investment.
The Federal Open Market Committee left rates unchanged at 5.25 percent at both
its Aug. 8 and Sept. 20 meetings. Investor expectations for an ease have shifted
over the past few weeks, with short-term interest rate futures now predicting
that rates will remain on hold through the end of this year and the beginning of
next year. Expectations for rate cuts in 2007, though still in place, have been
scaled back. The Fed next meets Tuesday and Wednesday.
Last month's hefty price gains in the 5-year note were driven largely by
mortgage bond investors hedging, analysts said. As Treasury yields fell,
mortgage rates declined, raising fears in the mortgages market that
cash-strapped homeowners could refinance their home loans in droves. That would
have led to early redemption of existing mortgage bonds, leaving investors with
funds that would have to be reinvested at lower yields.
"The 5-year is too rich," said TJ Marta, fixed income strategist at RBC Capital
Markets in New York, and "the smoking gun story" could be the mortgage-backed
securities market.
Now that yields have pushed higher though, mortgage-related buying has slowed,
and investors shouldn't expect any drastic moves up for the 5-year note in the
near term.
Still, that doesn't mean that investors should dump their 5-year notes, even if
the uncertainty over the timing and direction of the Fed's next move is likely
to persist.
Michael Cheah, portfolio manager at AIG SunAmerica Asset Management in Jersey
City, N.J., said the 5-year could be boosted if Fed officials were to suggest an
ease in interest rates, as that issue "typically outperforms the wings" when the
Fed starts to eye rate cuts.
For the 5-year note to rally further from here, added Cheah, the market would
have to see data that would "make the Fed take a position either to step up
their hawkishness, or give them a reason to think about cutting rates."
But thus far, "despite all the talk, we haven't seen the data," Cheah said.
Housing data, which has been weak recently, failed to translate into weakness
elsewhere. Falling energy prices have helped overall consumer price inflation --
but core prices, excluding food and energy prices, have remained stubbornly
above the Fed's perceived comfort zone of 1 percent to 2 percent.
Fed officials, for their part, have stressed inflation risks over growth
concerns, but have also indicated that they are willing to wait for the 17 hikes
- that took rates from 1 percent to their current level - to work their way
through the system.
And investors seem to share that view: the March 2007 Eurodollar futures
contracts Wednesday priced just a 40 percent odds of a Fed ease in the first
quarter of 2007.
In light of all that uncertainty, sticking with the 5-year issue for now is a
sound strategy, said Canavan, for those looking to play it safe.
"Inflation concerns have eased," said Canavan, "but there's still so much
uncertainty over what the Fed is going to do." The 5-year's position in the
middle of the curve just "lends itself to a little bit of safety on that front."
© 2006 Associated Press.
Editor's Note:
4. Caterpillar Misses, Sees Slowing Economy
Caterpillar Inc. on Friday reported earnings for the latest quarter rose but
fell short of expectations as sales of earth-moving equipment to both miners and
homebuilders slowed.
The news sent shares down as much as 9 percent in premarket electronic trading.
The heavy equipment maker also forecast that 2007 revenue could be flat to up
only 5 percent, overshadowing strong sales in the third quarter as trucking
companies scrambled to update fleets ahead of tough new emissions rules.
The company said third-quarter profit rose 15.3 percent, to $769 million, or
$1.14 a share, up from $667 million, or 94 cents a share, a year earlier. Sales
rose 17 percent to $10.52 billion.
But that bottom line fell well short of Wall Street's hopes. Analysts, on
average, expected the Peoria, Illinois-based company to report earnings of $1.35
a share on sales of $9.65 billion, according to Reuters Estimates.
Caterpillar said a number of factors dragged on third-quarter results, including
settlement costs related to its settlement of a dispute with Navistar
International Corp. that reduced earnings per share by 8 cents.
But the chief culprits were slowing machinery sales, as the slowdown in the U.S.
housing market discouraged new purchases of smaller bulldozers, graders and
other vehicles, and as "new product introductions and mine permit delays in the
U.S. slowed growth in large machine sales," the company said in a statement.
"The fourth quarter and next year are a lot more muted than most people
expected," said Eli Lustgarten, an analyst at Longbow Research, "and it's going
to go down further next year."
"The lighter end of the construction equipment market is soft," he added.
The company also revised its sales expectation for 2006 slightly lower, blaming
the third-quarter legal settlement, higher input costs and slowing sales.
In early electronic composite trading shares slid to $62.60, down from a close
of $69.02 on the New York Stock Exchange on Thursday.
Looking forward, Caterpillar forecast a "pause " in U.S. economic growth that it
said would create short-term headwinds for the company.
"We're expecting slightly higher sales and revenues in 2007 despite the
prospects of a slowing U.S. economy, a sharp drop in sales of on-highway truck
engines and weaker housing construction," Jim Owens, the company's chairman and
chief executive, said in a statement.
"While next year will likely be a year of slower corporate growth, the
fundamentals for key global industries we serve are strong, and after the 2007
pause, we expect continued solid growth through the end of the decade."
Lustgarten, the analyst, said Caterpillar's assessment in its third-quarter
press release that the economy was "mid-cycle" implied that revenue growth would
be in the "mid- to low single digits" going forward. In such an environment, he
said, investors would be lucky if the company could post earnings-per-share
growth of 10 percent.
Through Thursday, Caterpillar shares had risen about 20 percent so far this
year, outperforming peers on the S&P Capital Goods subindex, which has risen
about 14 percent.
The company trades at about 11 times estimated 2007 earnings, a discount to the
index, which trades at 15 times the estimated 2007 earnings of its 35 members.
© 2006 Reuters.
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