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1. Volcker: Risk of Dollar ‘Crisis'
2. Home Prices, Sales Plunge
3. Leading Indicators Buoyed by Falling Gas Prices
4. Merger Mania on Wall Street - More to Come?
1. Volcker: Risk of Dollar ‘Crisis'
Former Federal Reserve Chairman Paul Volcker and former Treasury Secretary
Robert Rubin say investors will likely avoid buying U.S. dollars, increasing the
risk of a dollar "crisis."
The two spoke at a dinner hosted by the Concord Coalition, a group that
advocates balancing the federal deficit, reports Bloomberg.
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Volcker said the deficit raises the risk of a "crisis" in the dollar, which
could come as soon as the next two and a half years. Volcker, who was chairman
of the Fed from 1979 to 1987, is known for quelling inflation.
"It's incredible people have gone on so long holding dollars," Volcker said. "At
some point, you will get a situation where people have had enough."
Rubin, in a taped message to the audience, said the U.S. government's inability
to shrink the budget deficit could scare off central banks, hedge funds, and
other dollar buyers. Rubin oversaw the achievement of the first budget surplus
in almost 30 years when serving under President Clinton.
"It seems almost inconceivable that this will continue indefinitely," commented
Rubin, who received the Concord Coalition's annual award for leadership on
fiscal responsibility.
Rubin pointed out that the government is just five years away from "rapid
acceleration" of spending on the nation's entitlement programs as millions of
baby boomers start to retire. Therefore, the government must address the budget
problem now, said Rubin.
The U.S. relies heavily on foreign investment to finance its spending. According
to Bloomberg, foreign investors own about half of the $4.3 trillion of
Treasuries outstanding. If foreign investors stop buying dollars, or much worse,
start selling dollars, the U.S. economy would grind to a halt.
Editor's Note:
2. Home Prices, Sales Plunge
Sales of existing homes fell in 38 states during the summer, led by steep
declines in Nevada, Arizona, Florida and California, as the once-booming housing
market showed further signs of a steep slowdown.
The National Association of Realtors reported that sales dipped to a seasonally
adjusted annual rate of 6.27 million units nationwide, down by 12.7 percent from
the same period a year ago.
The declines were the largest in once-booming areas of the country. Sales fell
by 38 percent in Nevada, 36 percent in Arizona; 34.2 percent in Florida and 28.6
percent in California.
In all, nine states had sales declines in the summer of 20 percent or more
compared to the third quarter of 2005.
The weakness in sales also affected prices with 45 metropolitan areas
experiencing price declines, according to a separate survey the Realtors did of
148 metropolitan areas.
The price survey showed that the median -- or mid-point -- price for an existing
home sold in the third quarter dipped to $224,900, down 1.2 percent from a year
earlier.
Sales rose in 10 states and in two states -- New Hampshire and Vermont -- the
Realtors did not have available data.
The nationwide 12.7 percent fall in sales was from a summer 2005 pace of 7.18
million units, which was the second highest in history. The all-time record
sales pace was an annual rate of 7.19 million units set in the April-June
quarter of last year.
Sales of both existing and new homes set records for a fifth consecutive year in
2005 but have been falling steadily this year as conditions in the housing
market have deteriorated.
The plunge in housing shaved a full percentage-point off economic growth in the
July-September quarter with economists predicting a similar reduction in the
current quarter.
But David Lereah, the Realtors' chief economist, said he believed the decline in
prices in formerly red-hot areas of the country was setting the stage for a
rebound next year.
"With the market in full transition, buyers now have choices and sellers are
more willing to negotiate," he said. "Under these circumstances, it's no
surprise that overall home prices are slightly below a year ago."
© 2006 Associated Press.
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3. Leading Indicators Buoyed by Falling Gas Prices
An indicator of future economic activity inched higher in October, a private
research group said Monday, suggesting that recent weakness in the housing
market hasn't been severe enough to offset lower gas prices and a rising stock
market.
The Conference Board, an industry-backed research group based in New York, said
its Index of Leading Economic Indicators rose 0.2 percent last month. The
increase came in shy of analysts' consensus forecast for a rise of 0.3 percent.
The index stood at 138.3 versus 139.1 in January -- its peak so far this year.
The index is designed to predict economic activity in the three to six months
ahead. October's modest increase fit with economists' view that growth is
moderating. The index fell in both July and August before edging modestly higher
in September. It has been down four of the last seven months.
"The index has basically been about as flat as pancake for the last year, and we
see that as sort of consistent with our view of the slowing economy," said David
Wyss, chief economist with Standard & Poor's.
Six of the 10 indicators that make up the index rose in October -- led by an
increase in real money supply and improved consumer expectations -- but a sharp
decline in housing permits and weaker vendor performance partially offset those
gains.
The housing sector has been a major sore spot for the economy in recent months.
Evidence of the slowdown mounted Friday, when a report of October building
permits showed the slowest pace of annual growth in nine years. Housing
construction plummeted as builders tried to curb swelling inventories of unsold
new and existing homes. On Monday, the National Association of Realtors said
sales of existing homes fell in 38 states and the prices of homes slid in 45
metropolitan areas.
"Economic weakness is skewed toward housing and motor vehicles," said John
Lonski, chief economist of Moody's Investor Service.
"The economy is growing more slowly, but we have yet to have weakness spread
beyond housing and motor vehicles to such a degree that we need to fear the
proximity of a hard landing," Lonski added, referring to when the economy turns
from growth to a recession.
In another sign of moderating economic growth, the Federal Reserve held its
benchmark interest rate steady last month at 5.25 percent for the third straight
session. The Fed had raised interest rates 17 times beginning in June 2004 to
stave off inflation, before halting its campaign of credit-tightening in August.
Strengths and weaknesses in the leading indicators have been roughly balanced in
recent months, according to the Conference Board report. The group's labor
economist, Ken Goldstein, said the October index suggests "the economy is
unlikely either to reheat or to get significantly cooler."
"Instead, the kind of slow growth now being experienced could continue right
through the winter and into the spring."
© 2006 Associated Press.
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4. Merger Mania on Wall Street - More to Come?
Merger and acquisition activity worldwide surged on Monday with a focus on real
estate, mining, media and exchanges sectors as demand by private equity funds
and the push for industry consolidation gathered pace.
In the U.S., private equity fund Blackstone unveiled a real estate deal valued
at $20 billion, excluding debt, while mining group Freeport-McMoRan Copper &
Gold agreed to buy copper miner Phelps Dodge Corp for $25.9 billion.
But big deals were also unveiled from Australia to London and the total
announced globally from early Friday in Europe to 1200 GMT on Monday is around
$88.5 billion (including debt), according to financial research firm Dealogic.
The surge is being driven by profitable companies which have large amounts of
cash for investment, and by the flood of money into private equity funds that
also needs to be put to work.
"If you quantify the boom so far, we haven't seen anything yet," said Teun
Draaisma, head of European equity strategy at Morgan Stanley.
Draaisma calculates that European M&A this year is on track to hit $1.2
trillion, matching the record in 2000, but relative to the size of the overall
market, the volume of new deals is still below previous peaks.
At the time of the last peak in M&A activity there were a lot of hostile deals
and many bidders were offering their own stock instead of cash to finance the
deal, he said.
"We haven't seen any of that yet, its been mostly smaller companies, quite
friendly deals and mostly in cash."
Nothing we look at suggests we're seeing a peak in the M&A cycle," Draaisma
said.
Dealogic announced last week the value of global mergers and acquisitions for
2006 had reached a record $3.368 trillion, beating the previous high set in 2000
of $3.332 trillion.
Private equity firms accounted for 22 percent of total global M&A volume in the
first nine months of the year, hitting a new record of $570.1 billion in deals.
Investors Fears Muted
Few investors can see an immediate end to the trend, at least until one of the
recent deals turns sour.
"There's an enormous wall of money that has been raised..and that money needs to
be invested. Maybe the music will stop when we get a significant (deal)
failure," said Ted Scott, director at F&C Asset Management's retail funds arm.
"Increasingly they (deals) are becoming more risky and marginal gains are being
made. Some of the valuations are quite toppy, to say the least," he added.
But amid a benign global macroeconomic environment and low interest rates, which
have created a wide spread between the cost of debt and the return on equity,
deals to consolidate industries and capture cash flows are expected to dominate.
In the mining sector the global consolidation story has been running all year as
companies scramble to add reserves and capitalise on record high metal prices.
Those that don't succeed could become targets themselves.
"The mining sector stocks have all got so much cash on their balance sheets
there is a risk they are getting vulnerable," said Chris Tinker, equity
strategist at inter-dealer broker ICAP.
The Blackstone bid for U.S. office building owner Equity Office Properties sets
a benchmark for a takeover by a single private equity fund. The deals values the
company at $20 billion, excluding debt, just shy of the $21 billion paid earlier
this year for hospital operator HCA Inc but that deal involved three buyout
firms.
Among other U.S. deals unveiled on Monday, the U.S. stock exchange Nasdaq
launched a $5.1 billion deal for the London Stock Exchange, and Bank of America
agreed to buy U.S. Trust Corp, the private banking unit of Charles Schwab Corp,
for $3.3 billion.
Canada's TD Bank Financial Group agreed to buy the 43 percent stake in its U.S.
retail banking arm TD Banknorth Inc. it does not already own in a deal worth
$3.2 billion.
Private equity firm Apax Partners won a tender valued at between $1.04 billion
and $1.25 billion to acquire control of Tnuva, Israel's largest food company,
according to Israeli media reports.
In the media world, private equity giant Kohlberg Kravis Roberts unveiled a $3.1
billion deal in Australia to set up a joint venture with Seven Network Ltd to
enter the TV magazine and online media businesses.
© 2006 Reuters.
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