Financial thoughts

Time is running out for California residents wanting to take advantage of a $10,000 tax credit. The state set aside $100 million to help home buyers purchasing newly built homes, hoping to jump start the moribund residential-construction market. But only about 20% of the pot is left.

"We’re less than four months into it, and all the tax credits authorized are gone, or practically gone," said Tim Coyle, a senior VP with the California Building Industry Association (CBIA).

The program launched in March and by June 3 nearly $24 million in tax credit certificates had already been issued, according to the state’s Franchise Tax Board.

That leaves nearly $76 million in credit available - but there are already numerous claims on that money. In fact, if all the submitted applications are approved, only $17.5 million will be left in the fund. And it has a run rate of about $10 million per week.

"The program is working better than intended," said Coyle. "It’s really pushing people off the fence."

How it works

The credit is available on a first-come first-served basis and was supposed to last through March 2010. Almost any newly built home qualifies, as long as it’s an owner-occupied, principal residence on which property tax is paid. It could be a single-family home, a condo, a coop, a manufactured home or mobile home — even a houseboat. Only owner-built housing does not qualify. There is no cap on the home price or buyer’s income.

The credit reduces taxes dollar-for-dollar up to $3,333 a year for three years, or 5% of the purchase price of a home, whatever is less. Unlike the federal first-time homebuyers tax credit, which is $8,000 or 10% of the home price, whichever is less, the California credit is not refundable. That means the credit will only wipe out taxes up to the full amount paid or owed but no more.

For example, if the buyer’s tax bill came to $2,000 for the year, a buyer claiming the full $3,333 would owe nothing but couldn’t claim the extra $1,333 back from the state.

First-time, new-home buyers in California can claim both the federal credit and the state if they qualify cash loan till in one hour. That could reduce taxes by $11,333 for the first year of ownership.

More money coming?

Because the money has gone so quickly, the state legislature is considering adding another $200 million to the program. That may be difficult to accomplish right now, however: The state is worse than flat-broke; it’s running a $24 billion budget deficit and has the lowest bond rating of any state.

But Coyle argues that the credit is a net win for state coffers and it puts people to work. "Every time you build a home in California, you’re generating $16,000 in taxes," he said.

During the boom years, developers were building about 200,000 housing units annually and supported about a half million jobs. Now, only about 50,000 new homes will go up this year and industry employment has shrunk to a fraction of its peak. From 2006 to 2007 alone, industry employment dropped by about 220,000 jobs, according to the CBIA.

Passage of an extension of the program has a good chance, according to Assemblywoman Anna Caballero (D-Salinas), who supports a new bill that already won Assembly approval and has gone to the state Senate.

There has been little opposition, she said, but the program has to be "revenue neutral," which could limit how much is made available as funds would have to be cut from other areas to pay for it.

There is also one big change from the original offering: People buying homes under construction - not just those already finished - will qualify, which should help put projects back on track.

"It creates a reservation system that was absent in the first bill," said Caballero. "Buyers only received a credit when they closed escrow. Now, they would get it with a signed contract."

"Contractors in Southern California were reporting no housing starts last January," she added. "Now, they have new crews out on the job. That’s significant for California." 

Source

British bank Barclays confirmed on Friday that it had agreed to sell its BGI investment arm to U.S. firm BlackRock for $13.5 billion, creating the world’s biggest asset manager.

Barclays (BCS) said in a statement that a net gain of $8.8 billion would be used to bolster its capital strength, boosting its core Tier 1 capital adequacy ratio by 1.5 percentage points.

The cash and shares deal for Barclays Global Investors (BGI), unveiled in the United States late on Thursday, will see Barclays take a 19.9% stake and two seats on the board of the enlarged group, to be called BlackRock Global Investors.

Shares in Barclays were trading down 1.5% by 0725 GMT on Friday, having risen earlier this week ahead of confirmation of the widely-anticipated deal.

BlackRock (BLK, Fortune 500) is paying $6.6 billion in cash and the rest in stock and said it is raising $2.8 billion from the sale of 19.9 million shares to a group of unnamed institutional investors.

Shares in BlackRock last traded up 2.3% in New York on Thursday at $182.60.

For Barclays the deal will strengthen its balance sheet after the bank refused aid from the British government that some of its rivals accepted as the global financial crisis engulfed the industry cheapest car insurance.

Including the impact from the conversion of mandatory convertible notes issued in November 2008, Barclays said its core Tier 1 ratio would have been 8% at the end of 2008.

Barclays also said its trading performance up to the end of May had been "generally consistent" with trends reported at the time of its interim statement on May 7.

Barclays has agreed not to sell any of its BlackRock shares in the first year without the asset manager’s consent, and no more than half its holding in the second year.

The bank’s Chief Executive John Varley and President Bob Diamond will each get a seat on BlackRock’s board.

Diamond will receive a net consideration of $36 million before any deductions from shares he holds in BGI. He will have paid $10 million to acquire the shares since 2003, Barclays said.

Other BGI staff are in line for a windfall from a lucrative employee share ownership plan. If they exercise options staff will own 9% of BGI.  

Source

The 10-year Treasury yield soared to 4% for the second day in a row Thursday - before backing off later in the session — heightening inflation fears and threatening to upset the nascent signs of an economic recovery.

Just six months ago, the yield on the 10-year note hovered around the 2% level, as investors opted to park money in government-backed debt rather than higher risk equities.

The bond market typically takes a back seat to the stock market, which offers higher rewards but also higher risk. As the economy slogged through the recession, investors have remained cautious and plugged into bonds.

Prior to Wednesday, the benchmark yield had not reached 4% since mid-October. But Wall Street’s tectonic plates have started to shift.

The Dow Jones industrial average has surged 30% since hitting its 12-year low on March 9. Investors have been shrugging off bad economic news and seeing ‘less bad’ news as good news. As investors grow more optimistic about the "green shoots" of recovery, the bunker trade into the Treasury market has waned.

And historically, a 10-year yield at 4% is low. "Getting back over 4% is just one step in the right direction," said said William Larkin, portfolio manager at Cabot Money Management. "It is a sign that the economy is recovering and that people are starting to look at the other side."

The sharp drop off in debt prices is also a result of the massive amount of supply hitting the market. The government has been spending at a breakneck pace and has been selling an unprecedented amount of debt to finance its rescue efforts.

Housing. Rising interest rates have been pulling the rug out from a housing recovery.

The 30-year fixed mortgage rate moves in tandem with the benchmark 10-year Treasury yield, which has been on a tear. Mortgage rates hit 5.95% last week, according to a Bankrate.com’s most recent national survey.

To try to keep a cap on mortgage rates, the Federal Reserve unveiled a program in mid-March to buy back $300 billion of its own debt. The so-called quantitative easing program was launched to jolt the Treasury market with demand, boost prices. The program worked for a while: Mortgage rates fell and refinancings surged.

But the benefits of the Fed’s program were short-lived. And the debt buyback program is beginning to look a lot like the government using a soup ladle to keep a river from overflowing its banks.

Just this week, the government had three auctions lined up to sell $65 billion in debt: $35 billion of 3-year notes were sold Tuesday, $19 billion in a reopening of the 10-year note was sold Wednesday and $11 billion in the reopening of a 30-year bond hit the block Thursday.

Waning support. Other countries have started to doubt the creditworthiness of the U.S. Russia and China have both indicated that they are concerned about the unsustainable pace of spending. Russia said Wednesday it would consider shifting assets to other safe havens, like International Monetary Fund bonds cash loans for bad credit.

"Longer term, the concern over foreign interest is a wake up call to Congress and the president," said Nick Kalivas, vice president of financial research at MF Global, in a daily research note. "The idea that the IMF bond is getting attention is a sign of investor worry over the U.S. fiscal situation."

What’s next? With inflation fears rising and an economy still breathing on the lifeline of the government, the future of the bond market is murky. Some investors are looking for the Fed to try to increase its commitment to the debt buyback program. The Federal Open Market Committee is slated to meet June 23 and 24.

"There are some people speculating that they will expand their Treasury buyback program," said Craig Ziegler, managing director of Broadpoint Securities Group. "But I just don’t know how much that helps when you are still issuing $150 billion in Treasurys in a month, not including bills."

Going forward, Larkin expects there will be more conversations about being fiscally conservative. When the rhetoric changes, that will help other foreign central banks feel more confident in U.S. debt, he said.

While Larkin does not expect the Fed to hike rates any time soon, he does expect the Fed to use aggressive language in coming statements to hint to the market that a rate hike is coming. "They are going to try to change the expectation so people can get used to the change."

Debt prices. Bond prices had been lower early in the day, sending yields soaring, but prices rallied into the 30-year bond auction. After a healthy auction, with nearly $30 billion bid for $11 billion in debt sold, the longbond led a charge forward, adding to earlier gains.

The 30-year bond rallied 1-29/32 to 92-22/32, and its yield fell to 4.25%. Earlier in the session, the long bond yield reached 4.83%.

The benchmark 10-year note rose 21/32 to 93-31/32, and its yield dipped to 3.86%. Earlier in the session, the benchmark Treasury touched 4%. Bond prices and yields move in opposite directions.

The 2-year note rose 3/32 to 99-6/32 and its yield dipped to 1.33%. The yield on the 3-month note held steady at 0.18%.

Lending rates. One key bank-to-bank rate continued to move lower. The 3-month Libor edged to 0.63% from 0.64% the day prior, according to Bloomberg.com.

The overnight Libor rate held steady at 0.26%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money. The closely-watched benchmark is used to calculate adjustable-rate mortgages. More than $350 trillion in assets are tied to Libor. 

Source

Australia’s government gave cautious support on Friday for BHP Billiton’s and Rio Tinto’s planned iron ore joint venture, as a newspaper reported that China had threatened sanctions against the two if the deal went ahead.

The venture, announced last week, has provoked an angry reaction in China where press commentaries voiced suspicions that Canberra quietly encouraged the deal as a way of sinking an alternative Chinese investment in Australia’s biggest iron ore province.

But Australian Resources Minister Martin Ferguson said he saw benefits in the deal, assuming it would receive all the required regulatory approvals.

“I actually think the joint venture has synergies of benefit to Australia, in terms of improving productivity, which represents a better return on our natural resources to the Australian community,” he told Australian radio.

Last week, Rio walked away from a planned $19.5 billion equity tie-up with China’s state-owned Chinalco and instead outlined the iron-ore joint venture with BHP.

The proposed venture could be a threat to China, the world’s biggest steel making country, as the combination of the world’s second and third largest iron ore producers would leave only two main suppliers alongside Brazil’s Vale.

Rio, BHP and Vale control about 70 percent of global iron ore trade, while China consumes more than half of globally traded iron ore.

In the face of this, China may impose trade sanctions against BHP and Rio if they carry out the merger without the approval of Chinese competition agencies, the Sydney Morning Herald newspaper said on Friday free online credit report.

“According to China’s anti-trust law, we can veto such a merger agreement if the concentration of overseas business operations will affect domestic market competition,” Ma Yu, the director of the foreign investment department at the Ministry of Commerce, was quoted as saying in the report from Beijing.

The paper said China’s new anti-trust law empowers it to block offshore deals, but enforcement mechanisms remain unclear.

BHP declined to comment on the report.

One analyst said that the tie-up need not worry the Chinese as BHP and Rio already operate joint ventures elsewhere.

“China’s comments are misdirected given the synergies that exist between Rio and BHP in iron ore,” said DJ Carmichael & Co mining analyst James Wilson.

“These two companies already cooperate in joint ventures, such as Escondida copper in Chile.” BHP holds 57.5 percent and Rio 30 percent in the world’s biggest copper mine, located in northern Chile’s Atacama Desert.

BHP shares slipped 0.5 percent to A$38.08 on Friday, while Rio was up 1.4 percent at A$78.10 in a broader market .AXJO up 0.35 percent.

Resources minister Ferguson also played down the threat of any sharp reaction from China. 

Read more

Brazil’s central bank signaled policy makers may slow the pace of future interest-rate cuts after lowering borrowing costs to a record last night.

Board members, led by bank President Henrique Meirelles, reduced the so-called Selic rate by 1 percentage point to 9.25 percent. Analysts had expected a 0.75-point cut, according to the median estimate of 48 economists surveyed by Bloomberg.

Policy makers said they will be more “parsimonious” in future rate cuts and keep in mind the potential impact of lower borrowing costs on inflation. Slower inflation and a “moderate recovery” mean Meirelles can further reduce interest rates to spur the economy, said Guilherme da Nobrega, an economist at Itau Unibanco Banco Multiplo SA, Brazil’s biggest bank.

“Cuts to the benchmark interest rate have to be smaller from now on,” Nobrega said in a telephone interview from Sao Paulo. “Brazil’s economy performed better than expected in the first quarter and we have to reassess the room for rate cuts.”

Nobrega, who expects the central bank to cut the Selic rate by 0.50 point in July, said he may raise his projection for rates to end the year at 8.25 percent based on the bank’s statement. Brazil’s policy makers have lowered the rate by at least 1 point at each of its four meetings this year.

Gross domestic product shrank 0.8 percent in the first quarter from the previous three months, pushing Latin America’s largest economy into its first recession since 2003 after a record 3.6 percent contraction in the last quarter of 2008. Economists expect the $1.3 trillion economy to contract the most in 19 years this year, according to the median forecast in a June 8 central bank survey.

Bank Statement

“The committee agreed that any additional monetary easing must be implemented in a more parsimonious way,” policy makers said in a statement accompanying their decision. The monetary policy committee “will closely follow the evolution of the prospective scenario for inflation until its next meeting to then decide the next steps of the monetary policy strategy.”

Brazil’s annual inflation slowed to 5 cheap payday advance.2 percent in May, the lowest rate in 12 months. Nobrega forecasts consumer-price increases will slow to 3.8 percent by year-end.

“The central bank may slow down the pace of cuts at the next meeting,” said Cristiano Souza, an economist at Grupo Santander Brasil. “But the rate cuts haven’t come to an end yet.”

Economic growth is likely to rebound in the second quarter as companies step up production to meet demand, Finance Minister Guido Mantega said this week.

Data Show Recovery

Some economic data also point to a recovery. Brazil’s car output nearly tripled since touching a nine-year low in December. Companies such as Positivo Informatica SA, Brazil’s largest computer maker, started rehiring workers in February after the country saw a record 655,000 dismissals in December. Positivo added a third shift last month at its Curitiba-based plant to boost production.

Electric-equipment maker Weg SA, based in Jaragua do Sul, dropped plans to cut wages and working hours last month for its 7,000 employees after sales rose.

President Luiz Inacio Lula da Silva’s administration has injected almost $100 billion into money and currency markets and cut taxes on cars, home appliances and construction materials in a bid to revive growth.

Meirelles said this week that the first-quarter economic report shows Brazil has “solid fundamentals.”

In the first quarter, household consumption rose 0.7 percent from the previous three months, compared with a 1.8 percent drop in the fourth quarter. Investments plummeted 12.6 percent, the biggest drop since the series began in 1996.

Mantega reiterated this week that the government is targeting 1 percent economic growth this year.

“The government will need to keep implementing anti- cyclical monetary and fiscal policy to achieve a positive result by the end of the year,” the finance minister said in Brasilia.

Source

second cut in three months.

EMAIL  |   PRINT  |     |  

• TWITTER
• DIGG
• FACEBOOK
• DEL.ICIO.US
• REDDIT
• STUMBLE UPON
• MYSPACE
• MIXX IT

NEW YORK (CNNMoney health insurance quotes.com) — The dollar rallied against the euro, as a credit downgrade for Ireland pushed the euro lower, and was mixed against other major currencies.

Early on Monday, credit-rating agency Standard & Poor’s downgraded Ireland’s credit rating to AA from AA-plus — its second cut in three months.

S&P’s statement said Ireland’s credit outlook remained negative, noting the nation’s suffering banking system.

The euro was down 0.5% against the dollar, at $1.3899, after reaching as low as $1.3806 earlier in the session.

The rating cut helped the greenback extend Friday’s gains, coming off a report that job losses slowed dramatically in May. Employers cut 345,000 jobs from their payrolls in the month, down from the revised decline of 504,000 jobs in April. Economists surveyed by had forecast a loss of 520,000 jobs.

The report sparked speculation the U.S. Federal Reserve may lift interest rates early next year, in turn pushing bond yields higher Monday.

An increase in yields tends to lead to higher demand for bonds, boosting the greenback because U.S. assets must be purchased in dollars.

But Jessica Hoverson of MF Global warned "the economic recovery theory has already been priced into the market," although the jobs data were better than expected.

"The unemployment rate was 9.4%," she observed in a research note. "Though the pace of job loss is slowing, there is no hiring activity."

With so much government intervention and consumers still struggling, residual uncertainty "will likely prolong high levels of unemployment," weighing on the dollar, she wrote.

The British pound gained on the dollar, up 0.5% by the end of the session, to trade at $1.6053.

The dollar edged down 0.1% against the Japanese yen, buying ¥98.53 near the end of the session. Both currencies are considered safe havens in an uncertain economy. 

Source

With Hannah Montana and the newest American Idol in the house, Wal-Mart’s CEO touted the retailer’s improved performance at the annual shareholder meeting Friday, saying he expects new customers to stick around even after the recession is over.

"Our customers will stay with us when this economy turns around. I promise you that," Mike Duke told the thousands of attendees at the Bud Walton Arena in Fayetteville, Ark.

Friday’s gathering marked the first shareholder meeting as CEO for Duke, who took over the reins from former CEO Lee Scott on Feb. 1.

Wal-Mart once again trotted out some big starpower at the gathering. Besides "Hannah Montana" star Miley Cyrus — who will launch a new clothing line at the story — and recent "Idol" winner Kris Allen, actor Ben Stiller and former basketball star Michael Jordan were in attendance.

Rally cry: The meeting began with executives’ rally cry of "Who’s time is it? It’s Wal-Mart time."

"Winning feels good, doesn’t it? Eduardo Castro-Wright, vice chairman of Wal-Mart Stores, asked

That’s because while most of its peers are struggling to survive in a recession, Wal-Mart (WMT, Fortune 500), the world’s largest retailer with annual sales of more than $400 billion, is one of few merchants that’s actually boosted its market share.

Not only are Wal-Mart’s sales at its stores open at least a year — a measure known as same-store sales — increasing during the downturn, it’s also registering an uptick in the number of people shopping at its stores as more consumers across all income levels shop for its low-priced products.

According to sales tracker Thomson Reuters, Wal-Mart’s same-store sales have risen 3.4% so far this year. By contrast, there’s an average 4.6% decline in the firm’s same-store sales index for 30 large retail chains, including Target (TGT, Fortune 500), J.C. Penney (JCP, Fortune 500) and Macy’s (M, Fortune 500).

"Our results are loud and clear. We have improved our comparable sales again and again," Castro-Wright said. "For five consecutive quarters we have had better same-store sales growth than the market."

That trend, however, has not yet helped boost Wal-Mart’s shares. Wal-Mart’s stock has shed 9.3% of its value so far this year and has lost about 12% of its value over the past 12 months.

Wal-Mart also announced a new program to repurchase $15 billion of its shares. The plan replaces a two-year-old $15 billion repurchase plan that had bought $11.6 billion in stock.

New "normal" in shopping behavior: One concern, according to industry analysts, is whether or not Wal-Mart will be able to hold on its new customers when the economy rebounds no teletrak payday loan.

Craig Johnson, president of retail consultant Customer Growth Partners, said two of Duke’s biggest challenges will be how to retain the "new Wal-Mart Moms" it has gained over the past year and identifying its next major growth engine versus incremental growth opportunities over the next decade.

Duke, who headed Wal-Mart’s international operations before taking the reins as CEO, indicated his company is ready for the challenge.

"We are not going back," he said. "I do believe that this economic crisis worldwide has brought a fundamental shift in consumer behavior.

"There is a ‘new normal,’ in which people want to save money and are getting smarter about saving money," he added. "People appreciate the values at Wal-Mart."

He also cautioned against becoming complacent. "This is not a time to slow down and take comfort in our success," Duke said." We need to be obsessed with understanding customers however they shop, whether it’s on a mobile phone, a laptop, or in a local store."

"We have to conduct ourselves not as a giant but as a nimble and innovative competitor in every market," he said. "So this is not a time to slow down."

Employee plans: In addition to comments about Wal-Mart’s business performance, Castro-Wright said the retailer was going to focus on improving competitive pay and benefits for its workers.

As the nation’s largest private-sector employer, the company employs 1.45 million workers in the United States and more than 2 million workers globally in 16 countries.

On Thursday, the retailer said it plans to hire more than 22,000 new workers this year for its domestic stores.

However, Wal-Mart continues to come under fire from its critics, including labor unions, for its pay and benefits policies.

Castro-Wright said Wal-Mart will implement a "new diversity strategy" that puts more women and people of color in leadership positions. Currently, about 40% of the company’s regional general managers and senior vice presidents are people of color and more than 20% are women, he said.

"How can we build a 21st century workforce? We may not find all the answers, but we will lead," he said.

The annual meeting concluded with shareholders re-electing all 15 of Wal-Mart’s board of directors. Six shareholder proposals, including one making executive compensation tied to performance and another involving recognition of gender identity, were defeated. 

Source

Miner Rio Tinto scrapped a planned $19.5 billion tie-up with China’s Chinalco struck at the height of a global financial crisis, turning instead to an iron ore joint venture with rival BHP Billiton and a share sale to slash its debts.

The collapse of the Chinalco deal, put together in February in a bid to halve Rio’s $38 billion of debt, leaves the world’s biggest steel making nation vulnerable to just two suppliers — a Rio/BHP combination and Brazil’s Vale — controlling 70% of global iron ore trade.

Shares in Rio (RTP) jumped as much as 13% to a 7-month high, while BHP (BHP) rose 10%, as investors welcomed an alternative route to resolving Rio’s big debt burden.

"Rio has effectively been talking to BHP behind Chinalco’s back and Chinalco is entitled to feel like a two-timed lover this morning," said Paul Bartholomew at Steel Business Briefing in Shanghai. "This is a big slap in the face for China."

The new plan represents a victory for Rio shareholders who had argued the Chinalco deal favored the Chinese state firm and could give China greater influence over pricing of key resources.

"We were not supporters of the Chinalco transaction. We’re happy to see this alternative approach to solving Rio’s issues with its debt," said Ross Barker, managing director of Australian Foundation Investment Co, Rio Tinto’s sixth-largest shareholder in Australia and a BHP shareholder, according to Reuters data.

"A deal like this was really essential from Rio’s point of view. And it’s a good deal for BHP," he said.

Rio said it would pay Chinalco a $195 million break-up fee.

Rights offer

Rio and BHP, the world’s second- and third-largest iron ore miners, agreed to combine their operations into a 50-50 joint venture, generating savings of at least $10 billion.

A Rio/BHP combination would supply around 270 million tons of ore a year, while Vale supplies around 240 million tons.

BHP will pay Rio Tinto $5.8 billion to take its equity interest in the venture to 50%, but stressed the agreement was non-binding at this stage.

"This deal has been 10 years in the making and well worth the wait," BHP Chief Executive Marius Kloppers told reporters.

To cut debt, Rio said it was raising $15.2 billion through a 21-for-40 rights offer, the fifth-largest rights issue on record, according to Thomson Reuters data.

Rio and BHP agreed to keep their iron ore marketing separate, a key factor designed to win approval from competition regulators, especially the European Commission, which last year raised concerns about BHP’s proposed takeover of Rio due to the impact on iron ore markets personal business cards.

Chinalco said it regretted Rio’s decision after it had worked hard to try to revise the deal to reflect changed market conditions as well as shareholders’ and regulators’ concerns.

"As a result, we are very disappointed with this outcome," Chinalco President Xiong Weiping said in a statement.

Australia and China, which are trying to start free trade talks, played down the impact of the collapse of the deal, which would have been China’s largest foreign investment, on diplomatic ties or the future of Chinese offshore investment.

"It is a commercial matter, and I think it’s very important that our friends in China focus on that fact," Australian Prime Minister Kevin Rudd said.

In China, an official at the State-owned Assets Supervision and Administration Commission characterized the deal’s failure as "normal market behavior", and state banks said they stood ready to back any future foreign investments by Chinalco.

Massive savings

"My initial reaction is that it will be overwhelmingly positive for both companies because of the cost savings (and) the synergies," said Michael Bentley, resources portfolio manager at Northward Capital.

The cost of insuring Rio Tinto’s debt fell by more than a third, with the spread on its credit default swaps (CDS) narrowing to around 190 basis points from 290 bp.

"We consider these initiatives are a superior outcome for Rio’s credit quality as opposed to the Chinalco deal," Monaural International said, adding it was better for Rio to sell equity instead of convertible bonds, maintain greater ownership of its assets and gain joint venture savings.

The prospects for Chinalco were less clear.

Chinalco Vice President Lou Outing said the firm had not decided whether to participate in the rights offer.

"This is a big thing and is not determined by a single person," Lou told Reuters, adding the decision not to revise the deal with Rio Tinto was made by both sides.

Under the deal agreed in February, Chinalco would have paid $12.3 billion for stakes in Rio’s key iron ore, copper and aluminum assets and $7.2 billion for convertible notes that would have doubled its equity stake in Rio to 18%.

BHP launched a 3.4-for-1 share swap to take over Rio in February 2008, which Rio rejected saying it vastly undervalued the firm and its prospects. BHP dropped the deal last November after commodity markets collapsed.  

Source

Australia’s unexpected economic growth last quarter, driven by government cash handouts and record interest-rate cuts that fueled consumer spending, may mask a bleaker picture.

Gross domestic product rose 0.4 percent from the previous three months, the statistics bureau reported yesterday in Sydney, buoyed by the government doling out A$12 billion ($9.9 billion) to lower-income earners. Prime Minister Kevin Rudd said without the payments, the economy would have shrunk about 0.2 percent.

Not so positive was a measure of corporate investment, which showed outlays on machinery and equipment tumbled by the most since the economy was last in a recession in 1991. Miners BHP Billiton Ltd. and Rio Tinto Group have cut spending, fired workers and closed mines in Australia as the worst global slump since the Great Depression curbs demand for commodities.

“Australia has been lucky so far, but that good fortune appears set to evaporate when examining the underlying data,” said Robert Cunneen, Sydney-based senior economist at AMP Capital Investors, which manages about $95 billion. “There was an ominous warning sign that business investment is in rapid decline.”

Exports tumbled 11.3 percent in April from March, the biggest drop since July 1997, on a decline in shipments of coal, iron ore and wheat, the statistics bureau said today.

Boom Ends

Rio Tinto has slashed its global spending by $5 billion to $4 billion this year and BHP shut its $2.2 billion Ravensthorpe nickel mine in Western Australia.

The West Australian state economy, home to a mining boom that helped drive the nation’s expansion over the past decade, contracted 2.3 percent in the first quarter from the previous three months, the first decline since the fourth quarter of 2000, yesterday’s report showed.

“Despite the positive GDP result, the data provide clear evidence that the global recession is hitting the Australian economy,” Treasurer Wayne Swan told reporters in Canberra. “The collapse in business investment” may threaten Australia for some time to come, he said.

Production in the mining industry fell 1.5 percent in the first quarter, manufacturing slipped 3.3 percent and construction dropped 3.3 percent.

As companies pared spending, imports fell 7 percent, the GDP report showed.

‘Long, Hard Slog’

The fall in imports “suggests that domestic demand remained very weak,” said Heather Ridout, chief executive of Australian Industry Group, an organization representing businesses overnight pay day loans. “We still face a long, hard slog to restore our economic health.”

Imports of intermediate goods, which include fuel and raw materials, plunged 10.3 percent in the quarter. Imports of capital goods, including trucks and machinery, slipped 7.1 percent.

“There is no guarantee that GDP won’t fall in future,” Rudd said yesterday. “Regrettably the unemployment rate will go up. The global recession is out there and unfolding. Difficulties and obstacles lie ahead.”

The jobless rate reached 5.7 percent in March, the highest level since 2004, before falling to 5.4 percent in April. The government said in last month’s budget unemployment will climb to 8.5 percent, which would be the worst reading since 1997, as the jobless queue swells to 1 million within two years.

“When the unemployment rate skyrockets to 8 percent by early next year or sooner, it will feel like a recession to many,” said Annette Beacher, a senior strategist at TD Securities Ltd. in Sydney.

Interest Rates

Reserve Bank of Australia Governor Glenn Stevens, who left the benchmark interest rate unchanged at a 49-year low of 3 percent this week, noted that factory usage will keeping falling as “companies postpone investment plans and seek to reduce leverage in an environment of tighter lending standards.”

Australia has scope to cut interest rates further if needed, he said on June 2.

Spending by businesses on machinery and equipment tumbled 9.6 percent in the first quarter, the biggest plunge since March 1991, the GDP report showed.

Non-residential construction fell 4.3 percent, the biggest drop since September 2003. Total business investment decreased 6.1 percent, the worst slump since the final quarter of 2000.

To make up for the shortfall in investment, the government last month unveiled a A$22 billion program of spending on roads, rails, ports, hospitals and schools.

“That really kicks in from about mid year,” Swan said yesterday. “It’s in that vital area of direct investment: in shovel-ready projects plus those over the longer term.”

“What the cash payments to consumers have done is filled the gap that was caused when the global economy contracted sharply and demand fell through the floor,” he said. “There is very significant stimulus still to come” from the infrastructure program.

Source

BEIJING — As the federal budget deficit soars into the stratosphere, Treasury Secretary Timothy Geithner is reassuring the Chinese — the largest holders of U.S. government debt — that President Barack Obama’s administration is serious about restoring fiscal discipline once the current economic crisis is resolved.

Geithner, making his first trip to China as Treasury secretary, used a major economic policy address Monday as well as separate meetings with top Chinese officials to deliver that message.

"As we recover from this unprecedented crisis, we will cut our fiscal deficit, we will eliminate the extraordinary government support that we have put in place to overcome the crisis," Geithner said in a speech to students at Peking University, which Geithner attended as a young college student learning Chinese nearly three decades ago.

The Chinese officials did not comment publicly on Geithner’s reassurances, but judging from the reaction of the college students, Geithner still may have some explaining to do.

The students peppered the Treasury secretary with questions about the debt, the administration’s massive amounts of support to the banks and U.S. auto companies and the recent rise in interest rates on Treasury securities.

Some students wanted to know whether China’s holdings of $768 billion of U.S. Treasury securities — which makes China America’s biggest creditor — were safe, given projections by Obama’s administration that the deficit for this year will soar to an astronomical $1.84 trillion, four times the previous single-year record.

China’s investments in the United States "are very safe," Geithner told the students instant payday loan. "We have the deepest, most liquid financial markets in the world."

The recent rise in long-term rates for Treasury securities was not a reflection of worries about rising U.S. budget deficits but a reflection of the view by investors that the global economy is improving, which lessens demand for U.S. Treasuries as a safe haven, Geithner explained.

As far as spending large amounts of money to support Chrysler and General Motors as they go through bankruptcy, Geithner said the administration was optimistic that government support would only be temporary. "We want to have a quick, clean exit," he said.

Geithner also stressed to the students that the administration would soon unveil a comprehensive overhaul of financial system regulations designed to fix the flaws exposed by the current economic crisis. "We have a lot to do, but we are going to fix this."

Later, Geithner and other Treasury officials met at the Great Hall of the People with a team of economic officials from China led by Vice Premier Wang Qishan for discussions about the high-level talks in Washington this summer between the two nations.

Wang called the talks, which will replace the Strategic Economic Dialogue begun in the Bush administration, an "important initiative in growing the China-U.S. relationship."

Geithner will wrap up his visit Tuesday with meetings with Chinese President Hu Jintao and Premier Wen Jiaboa.

Source