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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.
More Business News
Last Update on April 24, 2014 07:31 GMT
TOKYO (AP) -- Asian shares lacked a clear direction today as players took a mostly wait-and-see view ahead of talks between Japan's prime minister and visiting President Barack Obama.
The focus is on what Obama and Prime Minister Shinzo Abe may say about negotiations on a wide-reaching trans-Pacific trade agreement, despite resistance from local interests on both sides to wiping out tariffs.
Sentiments on Asian markets were dampened by worries about the U.S. economy, highlighted by a surprise drop in new home sales as well as dismal earnings.
The pessimism overshadowed confirmation from the European Union that Greece achieved a primary surplus in 2013 -- what's left when interest payments are stripped out.
The dollar fell against the euro and was little changed against the yen.
Benchmark crude oil fell but remains above $101.50.
ECONOMY- THE DAY AHEAD
Major business and economic reports scheduled for today
WASHINGTON -- The government's weekly jobless claims report comes out today.
Also, the government will release March durable goods numbers and Freddie Mac will report weekly mortgage rates.
A slew of quarterly earnings reports will be released today.
Before the market opens, investors will hear from Aetna, Starwood Hotels & Resorts Worldwide, Altria Group, General Motors, Southwest Airlines, United Airlines, American Airlines, 3M , Caterpillar, Verizon, and UPS.
After the closing bell, Amazon.com, Starbucks, Visa and Microsoft will report their quarterly financial results.
Facebook 1Q results soar; CFO to step down
NEW YORK (AP) -- Facebook's first-quarter earnings and revenue grew sharply, surpassing Wall Street's expectations thanks to an 82 percent increase in advertising revenue.
The social network says it earned $642 million, or 25 cents per share, in the January-March quarter, up from $219 million, or 9 cents per share, in the same period a year ago. Adjusted earnings were $885 million or 34 cents per share.
Facebook says its revenue was $2.5 billion, up 71 percent from $1.46 billion in the same period a year ago.
Analysts expected adjusted earnings of 24 cents per share on revenue of $2.36 billion.
Facebook says its finance chief, David Ebersman, is leaving on June 1 after five years. He'll be replaced by David Wehner, currently vice president of corporate finance and business planning.
DALLAS (AP) -- Texas Instruments is giving an upbeat forecast for the current quarter after the chipmaker's first-quarter profit rose 35 percent.
Texas Instruments makes semiconductors used in consumer devices and industrial equipment and is reducing its reliance on chips used in smartphones and tablets. The company said that revenue from chips that convert analog signals to digital ones and from embedded technology such as microcontrollers accounted for 84 percent of first-quarter sales. Both segments grew by double-digit percentages.
Meanwhile, revenue from everything else tumbled by 28 percent.
Net income was $487 million, or 44 cents per share, including a gain of 2 cents per share from a sale that the company had not included in previous guidance to investors. The results compared with year-ago profit of $362 million, or 32 cents per share. Revenue grew 3 percent to $2.98 billion.
For the second quarter, the company predicted that earnings would be between 55 cents and 63 cents per share on revenue of $3.14 billion to $3.40 billion.
BEIJING (AP) -- China's government says it will open 80 projects in eight state-run industries to private and foreign investors as part of efforts to make its slowing economy more efficient.
The Cabinet announcement is the latest in a series of policy changes aimed at carrying out the ruling Communist Party's promises to give entrepreneurs and foreign investors a bigger role in the state-dominated economy.
The statement late Wednesday gave no indication whether private investors would be given any control over the newly opened industries, which include oil and hydro power.
Other industries cited by the statement were wind power, natural gas storage and distribution, solar power, coal, railways and port operations.
LOS ANGELES (AP) -- The Federal Communications Commission is set to propose new open Internet rules that would allow content companies to pay for faster delivery over the so-called "last mile" connection to people's homes.
The proposed rules also call for enhanced scrutiny of such deals so they don't harm competition or limit free speech.
That's according to a senior FCC official familiar with the matter who wasn't authorized to speak publicly and spoke on condition of anonymity. FCC Chairman Tom Wheeler is to present the proposed rules to the other commissioners on Thursday.
The new rules are meant to replace the FCC's open Internet order from 2010, which was struck down by a federal appeals court in January.
While the older rules technically allowed for paid priority treatment, such dealings were discouraged.
TRAIN SAFETY-EMERGENCY ACTION
WASHINGTON (AP) -- The head of the National Transportation Safety Board says the Obama administration needs to take steps immediately to protect the public from potentially catastrophic oil train accidents even if it means using emergency authority.
Deborah Hersman, wrapping up a two-day forum on the rail transport of oil and ethanol, said the Transportation Department shouldn't wait for the usual federal rulemaking process to run its course. She urged regulators to use their authority to issue emergency orders or interim rules to bring about tougher standards for tank cars used to haul oil and ethanol.
She said the risks of such accidents are clear and waiting will only lead to a "higher body count."
Hersman praised Canadian authorities who announced Wednesday that they banning or phasing out older, more dangerous tank cars.
WAL-MART STORES-EXECUTIVE COMPENSATION
NEW YORK (AP) -- The pay of Wal-Mart Stores Inc.'s outgoing CEO fell 73 percent in 2013 because he didn't get stock awards that are given in anticipation of future performance as well as a lower performance-based bonus.
The world's largest retailer gave Mike Duke, 64, a compensation package worth about $5.6 million including a base salary of $1.4 million and a performance-based bonus of $2.8 million for the fiscal year that ended on Jan. 31.
Other compensation totaled $490,090, including retirement contributions and $144,586 for personal use of company aircraft.
The AP's calculation counts salary, bonuses, perks and stock and options awarded to the executive during the year.
NEW YORK (AP) -- Warren Buffett says he disapproves of Coca-Cola's highly contested pay plan for its executives.
Buffett, the beverage maker's largest shareholder, called the plan "excessive" in an interview on CNBC after the plan was approved at the company's annual meeting.
But Buffett said Berkshire Hathaway abstained from voting against the pay plan because he believes in Coca-Cola's management and CEO Muhtar Kent.
The pay plan came under scrutiny after Wintergreen Advisers took public issue with it last month. Wintergreen CEO David Winters said the plan was a "raw deal" for shareholders that would transfer roughly $13 billion to management over the next four years. He urged Buffett to vote against the plan.
In a statement, Coca-Cola Co. says it respects Buffett's "philosophical stance on equity-based compensation."
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