Investors Keep Faith in U.S. in Crisis after Crisis
By Bernard Condon, AP Business Writer
NEW YORK (AP) -- Global investors have stayed remarkably confident in the U.S. despite one budget crisis after another. But they're starting to wonder if the latest political impasse will tarnish America's Teflon image.
So far, the nation's reputation as the world's best place to invest remains unshaken. The 10-year Treasury note, the bedrock of the government's debt market, has attracted more money in recent weeks, not less, and the stock market is still close to record highs.
Still, the squabbling in Washington over the debt ceiling, which follows squabbling over automatic spending cuts earlier this year, is severely testing investor patience. Many fear a default would be a tipping point, sending bond and stock prices plunging.
The repeated budgetary brinkmanship is making some question their faith in the U.S.
"The more times you give politicians a chance to completely muck something up, the more chance ... they will do it," says Gary Jenkins, managing director of Swordfish Research in London. "If this were to become a regular occurrence, then, who knows?"
The U.S. Treasury has warned it will run out of money if Congress does not agree to raise a $16.7 trillion cap on borrowing by Oct. 17 and allow it to issue more debt. That has raised the specter that the U.S. won't be able to pay interest on its debt. Republicans say they won't allow more borrowing unless Democrats agree to restructure benefits programs or cut the deficit; the White House has ruled out negotiations tied to the debt cap.
The Treasury says a default on bond payments could freeze global credit, spike borrowing costs and trigger a collapse worse than the Great Recession.
Even with such a dire scenario, investors continue to buy Treasurys. On Tuesday, the yield on the 10-year note, which falls when investors buy, was 2.63 percent, near a two-month low.
U.S. stocks fell again on Tuesday, the 11th drop in the last 14 trading days. Still, the Standard and Poor's 500 index reached an all-time high just three weeks ago and is only 4 percent below that peak.
The debt ceiling fight echoes the Congressional standoff over the same issue in the summer of 2011.
Experts say the U.S. attracts money now for the same reason it did back then: Many other countries are faring worse than the U.S. China, India and Brazil are slowing dramatically. Japan is struggling to shake off a two-decade slump. The 17 countries of the eurozone have just emerged from a recession.
"We're the best of worst," says David Sherman, head of Cohanzick Management, a manager of bond funds. He adds that the U.S. tends to "bounce back" from crises.
In the 2011 crisis, for example, U.S. stock prices dropped, but recovered most of their losses by the end of the year.
Many investors think the costs of a default are too high for politicians not to raise the borrowing cap before the deadline. But they're still worried. Congress hasn't agreed on a spending bill for the new budget year that began Oct. 1. A lack of funding led to a partial shutdown of the government, which entered its ninth day on Wednesday.
"If we're having trouble with this government shutdown, and no negotiation, what's going to happen in two weeks?" asks Talley Leger, a strategist Macro Vision Research, an investment consultancy.
Leger thinks it may take a further drop in stocks, perhaps a big one, to force lawmakers to compromise.
The precedent for this is the 778-point drop in the Dow Jones industrial average on Sept. 29, 2008, after Congress rejected a $700 billion bailout bill, known as Troubled Asset Relief Program. The TARP bill was passed within days.
"This whole shutdown could easily drag out to the debt deadline," says Bill Strazzullo, chief market strategist of Bell Curve Trading.
His guess is that the Dow falls to 14,200 - down 576 points from Tuesday's close.
The prospects for U.S. bonds are more complicated.
When investors anticipate a crisis, they tend to buy U.S. bonds. Treasurys are one of the mostly widely held assets in the world, so it's easy to buy and sell them, even when people are panicking.
"People crave Treasurys because it is the most liquid market," says Mark Vitner, a senior economist at Wells Fargo.
After the rating agency Standard and Poor's stripped the U.S. of its top credit rating in August 2011, people bought more U.S. debt. The yield on the 10-year Treasury fell below 2 percent for the first time in a half century.
"For all its theatrical problems, the U.S. is still a haven," says Marshall Mays, director of Hong Kong-based Emerging Alpha Advisors. Mays says money should continue to flow to the U.S. from Asia.
There is another reason to buy Treasurys. The worse things get, the less likely it is that the Federal Reserve will slow its economic stimulus. The Fed is buying $85 billion in Treasury and other bonds each month, driving bond prices up and their interest rates down. The goal is to lower rates on consumer loans, which are pegged to Treasurys.
The Fed extended that program last month, partly because it though the economy still needed help. Now, with the shutdown dragging on the economy, the Fed could keep buying bonds, continuing to make them attractive investments.
Randall Warren, chief investment officer of Warren Financial Service in Exton, Penn., says the Washington standoff might not be bad for another reason.
If Americans are made aware of their large debt, he says, they may be more willing to accept an increase in taxes or a cut in spending. "The easier it will be for Congress to dish out the medicine."
A default on Treasurys would be a step too far, though, says Dariusz Kowalczyk, Hong Kong-based senior Asia economist at Credit Agricole CIB. "People would be just afraid of holding Treasurys and to a smaller degree in holding the dollar."
AP Business Writers Steve Rothwell in New York, Kelvin Chan in Hong Kong and Sarah DiLorenzo in Paris contributed to this report.
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Last Update on January 23, 2015 18:19 GMT
WASHINGTON (AP) -- More Americans purchased homes in December, yet total sales slipped in 2014 as first-time buyers struggled to find houses.
The National Association of Realtors says sales of existing homes rose 2.4 percent last month to a seasonally adjusted annual rate of 5.04 million. But over the course of the entire year, sales fell 3.1 percent to 4.93 million.
Only 29 percent of sales went to first-time buyers last month, compared to a historic average of 40 percent. Prospective buyers were priced out of the market due to rising home values and relatively stagnant incomes. Still, affordability has improved in recent months as mortgage rates have plunged, leading to the possibility of stronger sales in 2015.
Median home prices increased 6 percent over the past 12 months to $209,500.
WASHINGTON (AP) -- An index designed to predict the future health of the U.S. economy posted a fourth straight solid gain in December.
The Conference Board says its index of leading indicators increased 0.5 percent in December after a revised gain of 0.4 percent in November. The index also posted solid gains in September and October after a flat reading in August.
The December increase reflected strength in a number of components of the index. Conference Board economists said this suggested the economy was gaining momentum at the end of last year.
ATLANTIC CITY-WALL STREET
ATLANTIC CITY, N.J. (AP) -- Wall Street is giving a big thumbs-down to New Jersey's effort to tame Atlantic City's finances.
Moody's Investors Service on Friday lowered Atlantic City's bond rating by six steps, from Ba1 to Caa1, which is deep into junk territory.
The move came a day after Gov. Chris Christie appointed corporate turnaround specialist Kevin Lavin as the city's emergency manager and Kevyn Orr, who helped Detroit through its bankruptcy filing, as his assistant.
Christie's executive order appointing the pair indicates a bankruptcy filing is possible to help reduce the city's debt, which Moody's calculated at $397 million.
The agency cited an increased risk of default, and "a rapid, dramatic change" in New Jersey's longstanding policy of preventing a default or bankruptcy of any of its local governments.
FAIRFIELD, Conn. (AP) -- General Electric Co. on Friday reported fourth-quarter net income of $5.15 billion.
The Fairfield, Connecticut-based company said it had profit of 51 cents per share. Earnings, adjusted for non-recurring costs and to account for discontinued operations, were 56 cents per share.
The results surpassed Wall Street expectations. The average estimate of analysts surveyed by Zacks Investment Research was for earnings of 55 cents per share.
The industrial conglomerate posted revenue of $42 billion in the period, falling short of Street forecasts. Analysts expected $42.4 billion, according to Zacks.
GE shares have fallen nearly 4 percent since the beginning of the year, while the Standard & Poor's 500 index has stayed nearly flat. The stock has decreased almost 7 percent in the last 12 months.
NEW YORK (AP) -- The huge cost of ensuring timely deliveries cost UPS during the holidays and the shipping company is now cutting its outlook for the year.
The Atlanta company hired more workers and boosted capacity at its facilities during the busy holiday season to avoid a repeat of 2013, when shippers struggled with a deluge of orders.
UPS Inc. now expects 2014 earnings of $4.75 per share, down from its previous forecast of between $4.90 and $5 per share. Industry analysts had been looking for earnings of $4.96 per share, according to FactSet. For the fourth quarter, UPS expects earnings of $1.25 per share, well below the $1.47 per share analysts had projected.
DETROIT (AP) -- Ford says it will take an $800 million charge in the fourth quarter because of exchange rate problems between the Venezuelan bolivar and the U.S. dollar.
The company says the charge will cut fourth-quarter net income by $700 million, after deferred tax benefits. But the automaker still expects a full-year pretax profit of $6 billion when it reports 2014 earnings Thursday.
In October, Ford cut its full-year pretax profit forecast to $6 billion. That's down from $8.6 billion in 2013.
Ford says in a regulatory filing that the company can no longer exchange bolivars to dollars due to Venezuelan currency exchange controls. The company says the controls have limited auto parts availability and have cut into normal production. But Ford says it will continue operations there for the foreseeable future.
DETROIT (AP) -- Goodyear is recalling about 48,500 SUV tires after finding small cracks in the tread during endurance testing.
The move has forced General Motors Co. to stop selling about 6,300 Chevrolet Traverse, GMC Acadia and Buick Enclave models until the tires are replaced.
The recall covers 18-inch Fortera HL tires made from Nov. 30 through Jan. 10. Goodyear Tire & Rubber Co. says the problem hasn't caused any crashes.
About 32,100 of the tires were made for the GM SUVs, which are produced at a factory near Lansing, Michigan. Another 16,400 were sold as replacement tires.
GM says the 18-inch tires are on about 30 percent of vehicles made at the plant, and the problem has not affected production.
Owners can have the tires replaced for free at any Goodyear store or authorized dealer.
Deere to lay off more than 1,000 workers in Iowa, Illinois
Deere is laying off about 910 workers indefinitely from factories mostly in Iowa and will sideline another 500 employees in Illinois until late summer, as the agricultural equipment maker adjusts to demand for its products.
The Moline, Illinois, company also says it is adding 220 jobs at construction and forestry factories in Iowa. It plans to fill nearly all those positions with workers were laid off at agricultural equipment factories last year.
The latest indefinite layoffs will be at sites that build agricultural equipment.
Employees laid off until summer work at the company's seeding and cylinder factory in Moline. That location is going on an extended inventory adjustment shutdown.
Deere & Co. is the world's biggest farm equipment supplier. It employs about 29,000 in the United States and Canada.
WASHINGTON (AP) -- Union membership in the U.S. is down slightly, making up just over 11 percent of the workforce last year.
That's a drop of 0.2 percentage points from the year before.
The Labor Department says public-sector workers have the highest union membership rate at nearly 36 percent. That's more than five times higher than membership of private-sector workers at less than 7 percent.
Workers in education, training and library jobs and in protective service jobs have the highest unionization rate, at 35 percent.
Earnings were higher for union members last year, at $970 a week versus $763 a week for non-union members.
AFL-CIO President Richard Trumka says the report suggests that with 58 months of consecutive job growth, "workers made great strides and confronted great challenges."
NEW YORK (AP) -- Expedia has acquired travel booking site Travelocity from the Sabre Corp. for $280 million in cash.
The deal adds to Expedia's growing portfolio of websites. The Bellevue, Washington-company already owns nearly a dozen travel sites including Hotels.com, Hotwire and Egencia, the world's fifth-largest corporate travel management company.
Since 2013, Expedia Inc. has been powering Travelocity's U.S. and Canadian websites and providing Travelocity access to Expedia hotel supply and customer service program. So for users, this acquisition will have little noticeable change.
The move allows Sabre to focus more on its back-end system for selling airline tickets, hotel rooms and car rentals. Sabre is one of three global distribution system companies -- along with Travelport and Amadeus -- that handle sales for travel agencies and online booking sites like Expedia.
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It's the company's first such deal with a major professional sports league. While GoPro would not comment on whether other partnerships are in the works, they would make sense.
As part of the NHL deal, footage from GoPro cameras on players, referees and placed around the rink will be shown as part of the live broadcast of this weekend's All-Star events.
Later, prerecorded footage from the players will be incorporated into TV broadcasts of hockey games.
DAVOS, Switzerland (AP) -- French President Francois Hollande is calling for investments in green technology as a way to fight both global warming and poverty.
Hollande, who will host the next crucial round of climate talks, called for "huge investment in the green economy" as he and other world leaders kicked off a year of campaigning to clinch twin deals addressing climate change and poverty.
The interconnected themes took center stage Friday at the World Economic Forum in Davos with urgent calls for nations to support two long-sought deals.
One, slated for talks in September in New York, would establish sustainable development and poverty-cutting goals through 2030.
The other, to be negotiated in December in Paris, would set a legally binding climate pact whose focus is on more near-term emissions cuts from 2020.
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