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 29, 2015 08:36 GMT
ECONOMY-THE DAY AHEAD
WASHINGTON (AP) -- The Labor Department will report today on the number of people who applied for unemployment benefits last week. In last Thursday's report, the number of Americans seeking jobless benefits fell for the first time in a month, a sign that layoffs remain low and hiring is probably still healthy.
Also today, Freddie Mac will release its report on average mortgage rates. Last week, the benchmark 30-year rate fell to 3.63 percent, the lowest level since May 2013.
The National Association of Realtors will also issue its December report on pending home sales, which are seen as a barometer of future purchases. In November, the number of Americans signing contracts to buy homes rose modestly as a strengthening economy helped nudge some would-be homebuyers
A number of companies will release their quarterly financial results today. Ford and Alibaba Group will release earnings before the market opens and Amazon, Google and Visa report after the closing bell.
WASHINGTON (AP) -- The Federal Reserve's outlook for the U.S. economy is steadily brightening. Yet the Fed will be "patient" in raising interest rates from record lows.
That was the dual message the central bank sent Wednesday in a statement it issued after its latest policy meeting.
Why is no rate hike likely soon? The main reason, the Fed suggested in its statement, is that inflation remains well below the central bank's target rate.
And it said the pressures holding down inflation -- mainly plunging oil prices -- have intensified. The Fed said it thinks inflation will decline further before eventually reaching the central bank's 2 percent target rate.
SEOUL, South Korea (AP) -- Samsung lost the battle of the big phones last quarter as Apple's copycat large iPhone lured buyers in the crucial Chinese market.
The South Korean company said Thursday its profit sank last quarter, with an improvement in its semiconductor business insufficient to mask its mobile problems.
It was in China, the world's largest market for smartphones, where Samsung's dramatic decline was most evident.
Samsung accounted for nearly one third of global smartphone sales in 2013, twice as much as Apple. This year, it has dropped to about one quarter.
Apple Inc. was behind Samsung's latest reversal in fortune, launching iPhones with bigger screens that robbed Samsung's Galaxy phones of a key selling point. The company was already battling competition in low-end phones from upstart manufacturers such as China's Xiaomi.
WASHINGTON (AP) -- President Barack Obama says the U.S. will work closely with Greece's new government and help Greece pursue long-term prosperity.
Obama spoke by phone Wednesday with new Greek Prime Minister Alexis Tsipras to congratulate him on his party's victory in Greece's recent elections.
Tsipras' new radical left government has vowed to scrap austerity budget cuts, tax hikes and reforms that Greece had promised in exchange for rescue loans from Europe. That's prompted a renewed clash with other eurozone countries about whether to cut Greece off.
The White House says Obama told Tsipras he looks forward to working closely with the new Greek government. Obama and Tsipras also discussed cooperation on security in Europe and counterterrorism.
S&P-Mortgage Rate Settlement
S&P close to $1.37B deal over risky mortgage bond ratings
WASHINGTON (AP) -- Standard & Poor's is close to a $1.37 billion settlement with the Obama administration and U.S. states over allegations it knowingly inflated its ratings of risky mortgage investments that helped trigger the financial crisis.
A person familiar with the matter says the credit rating agency is expected to sign an agreement to settle with the Justice Department and about 20 state attorneys general. The person spoke on condition of anonymity because the settlement isn't finalized and hasn't been announced. It may be completed next week, the person said.
John Piecuch, a spokesman for New York-based S&P, a division of McGraw Hill Financial Inc., says the company is declining to comment.
The settlement would resolve civil charges filed nearly two years ago accusing S&P of failing to warn investors that the housing market was collapsing in 2006 because doing so would hurt its ratings business.
MANILA, Philippines (AP) -- Philippine economic growth slowed to 6.1 percent last year, hampered by natural disasters, but still good enough to outpace most other countries in Asia.
Socio-Economic Planning Secretary Arsenio Balisacan said Thursday that the 2014 performance ranks the Philippines as the second fastest growing Asian country behind China, which posted 7.3 percent growth, and ahead of Vietnam's 6.0 percent growth.
The Philippine economy grew 7.2 percent in 2013.
National Statistician Lisa Bersales says the "robust performance" of industry, particularly manufacturing and construction, lifted growth in the fourth quarter to 6.9 percent from 6.3 percent a year earlier.
She says services contributed 3.4 percentage points, industry 2.5 percentage points and agriculture 0.2 percentage points to the 2014 GDP growth of 6.1 percent.
WASHINGTON (AP) -- The nation's largest prepaid mobile provider, TracFone Wireless, will pay $40 million to settle government claims that it misled millions of smartphone customers with promises of unlimited data service.
The Federal Trade Commission said Wednesday that TracFone's advertising promised unlimited data, but the company then drastically slowed down consumers' data speeds -- a practice known as throttling -- when they had used a certain amount of data within a 30-day period. In some cases, the FTC said, the company cut off customers' data service when they ran over the limit.
TracFone's prepaid wireless service is sold under various brands, including Straight Talk, Net10, Simple Mobile and Telcel America.
Throttling will slow down the ability to open Web pages or stream video. According to the commission, TracFone generally throttled the data flow when a customer used about 1 gigabyte to 3 gigabytes. Data service was sometimes suspended at 4 gigabytes to 5 gigabytes, the FTC said.
NEW YORK (AP) -- McDonald's CEO Don Thompson is stepping down as the world's biggest hamburger chain fights to hold onto customers and transform its image.
The company says that Thompson, who's been CEO for two-and-a-half years, will be replaced by Steve Easterbrook. He's a company veteran who rejoined McDonald's as its chief brand officer in 2013.
McDonald's Corp. has more than 36,000 locations around the world. But it's struggling amid intensifying competition and changing attitudes about food. Customer traffic at established locations in the U.S. fell 4.1 percent last year, following a 1.6 percent decline in 2013. It's also trying to recover after a supplier scandal in China that damaged its reputation.
On Wednesday, McDonald's said Thompson will retire March 1 after nearly 25 years with the company. The 51-year-old Thompson was the first African-American to head the company since it was founded in 1955.
LAS VEGAS (AP) -- A 24-hour White Castle location on the Las Vegas Strip that opened to long lines of the burger chain's fans had to close for more than two hours to restock after its grand opening.
The Las Vegas Sun reports the restaurant reopened at about 3:15 p.m. Wednesday.
The burger slider chain's first location in Las Vegas opened to much fanfare Tuesday afternoon. The nearest location had been more than 1,500 miles away in Missouri.
White Castle is in the Best Western Plus Casino Royale on the Las Vegas Strip between The Venetian and Harrah's Las Vegas.
NORTH DAKOTA SALTWATER SPILL
BISMARCK, N.D. (AP) -- A pipeline that ruptured recently in North Dakota and spilled nearly 3 million gallons of saltwater produced during oil drilling wasn't inspected by the state before being installed, according to state regulators.
Alison Ritter, a spokeswoman for the North Dakota Industrial Commission, which oversees the state's oil and gas industry, says it's common for officials not to inspect such small gathering pipelines before they become operational.
Ritter says the state has struggled to find qualified installation inspectors because candidates are often drawn to lucrative jobs in the oil industry. Instead, the state has to rely on the word of companies, which are required to file an affidavit stating that they've followed state-mandated procedures when implementing the smaller pipelines, which typically run from one well pad to another.
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