Monday, April 3, 2017

Monday, April 3, Night Wall Street Roundup: Wall St. Down On Weak Auto Sales, Doubts About Trump Agenda

By Sinead Carew
Reuters
April 3, 2017

Wall Street closed slightly lower on Monday as March auto sales disappointed and investors questioned whether the Trump administration would deliver on its pro-business economic stimulus.

Stocks had risen to record highs on Trump's promises to cut taxes, ease regulations and spend heavily on infrastructure, and investors hoped that his policies would boost the economy.

General Motors was one of the biggest drags on the S&P 500 .SPX after automakers' sales figures for March came in below market expectations, an early signal America's long car sales boom may finally be losing steam.

"The disappointing auto sales are something people are keeping an eye on and that's meaningful news," said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.

The major indexes pared losses. They had fallen sharply in morning trade after some U.S. states accused President Donald Trump's administration of illegally suspending energy efficiency standards.

The challenge came barely two weeks after Republican's had to pull healthcare reform bill due to a lack of support.

Also on Monday, Democrats amassed enough support to block a confirmation vote for Trump's Supreme Court nominee.

"If there's not one big reason (for the market decline), there's many little reasons. Right now I think it's a little reason day," said Brad McMillan, Chief Investment Officer for Commonwealth Financial in Waltham, Mass.

While investors still hope Trump can deliver on some of his agenda, they "are getting nervous and starting to discount some of the benefits they expected to see" said McMillan.

Adding to nerves was news of a explosion in a St Petersburg train tunnel that killed ten people on Monday in what Russian authorities called a probable terrorist attack.

Trump held out the possibility on Sunday of using trade as a lever to secure China's cooperation against North Korea, in comments that appeared designed to pressure Chinese President Xi Jinping ahead of their first meeting this week.

The Dow Jones Industrial Average .DJI fell 11.38 points, or 0.06 percent, to 20,651.84, the S&P 500 .SPX lost 3.8 points, or 0.16 percent, to 2,358.92 and the Nasdaq Composite .IXIC dropped 17.06 points, or 0.29 percent, to 5,894.68. Eight out of 11 major S&P 500 sectors were lower, led by the consumer discretionary index .SPLRCM 0.5-percent. The top three drags on that sector were auto stocks.

GM (GM.N) finished down 3.4 percent while O'Reilly Automotive Inc, a car parts retailer, fell 4 percent. Fiat Chrysler (FCAU.N) sank 4.8 percent and Ford (F.N) fell 1.7 percent.

Two indexes that gained were telecommunications .SPLRCL and real estate .SPLRCREC - defensive sectors whose predictable slow growth are popular in times of uncertainty.

The S&P 500 is trading at about 18 times earnings estimates for the next 12 months, above its long-term average of 15 a few weeks before earnings seasons starts.

Declining issues outnumbered advancing ones on the NYSE by a 1.32-to-1 ratio; on Nasdaq, a 2.56-to-1 ratio favored decliners.

The S&P 500 posted 18 new 52-week highs and 6 new lows; the Nasdaq Composite recorded 80 new highs and 33 new lows.

About 6.8 billion shares changed hands on U.S. exchanges on Monday, about matching the average for the last 20 sessions.


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Monday, April 3, Morning Global Market Roundup: Stocks Start Second Quarter On Firm Note

By Hideyuki Sano
Reuters
April 3, 2017

Asian shares started the week modestly higher on Monday after a bumper quarter as investors look to the shape of U.S. trade and economic policies and how they could affect global growth.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.3 percent, while Japan's Nikkei gained 0.4 percent after hitting a seven-week low on Friday.

Ex-Japan Asia MSCI had gained 12.3 percent in the last quarter, its biggest quarterly gain in 6-1/2 years and almost double the 6.4 percent rise in MSCI's broadest gauge of the world's stock markets covering 46 markets.

The rally was primarily underpinned by signs of a pickup in momentum in the global economy, led by China.

South Korea's trade data for March released over the weekend added to the evidence of improving global demand, with exports rising more than expected.

While a private survey on China's manufacturing on Saturday came in below market expectations it still showed a healthy expansion after a similar survey by the government on Friday pointed to strong growth in the sector.

"The Chinese economy is likely to stay firm at least until the Communist party congress (later this year). The hi-tech sector is doing well, supporting Korean and Taiwanese shares," said Yukino Yamada, senior strategist at Daiwa Securities.

In Japan, the Bank of Japan's tankan survey showed that business sentiment improved, albeit slightly less than expected.

The main focus for markets this week centers on U.S. payroll figures on Friday and U.S. President Donald Trump's first meeting with counterpart Xi Jinping on Thursday and Friday.

"If we get strong reading in U.S payrolls data, the markets will try to price in a rate hike in June," said Minori Uchida, chief currency strategist at the Bank of Tokyo-Mitsubishi UFJ.

Markets are currently pricing in around a 58 percent chance of another rate rise in June, which would mark the second of three hikes expected this year.

On the other hand, investors are on guard for the possibility the U.S. administration may adopt protectionist measures.

In a tweet on Thursday, Trump said he expected the meeting with Xi "will be a very difficult one."

On Friday, Donald Trump sought to push his crusade for fair trade and more manufacturing jobs back to the top of his agenda by ordering a study into the causes of U.S. trade deficits and a clampdown on import duty evasion.

And on Sunday, Trump held out the possibility of using trade as a lever to secure Chinese cooperation against North Korea.

The executive orders came a week after Trump's promise to replace Obamacare imploded in Congress, adding to concerns he may struggle to pass highly-anticipated tax cuts and infrastructure spending bills.

"After his failure to push through his healthcare reforms, investors increasingly think that his tax reforms will take time. And given the China-U.S. summit, trade issues could come to the fore this week," said Masahiro Ichikawa, senior strategist at Mitsui Sumitomo Asset Management.

Any hints that Washington may name some of its trade partners such as China, Japan and Germany, as currency manipulators could dent the dollar. The U.S. Treasury will release its next currency report on April 15.

"The Trump administration is not necessarily seeking to reduce the trade deficit through a cheaper dollar. But it has strong intentions to do that and it could use a weaker dollar as a bargaining tool in trade negotiation," said Uchida of the Bank of Tokyo-Mitsubishi UFJ.

The dollar was slightly softer at 111.33 yen, but kept some distance from its four-month low of 110.11 touched a week ago.

The euro ticked up 0.2 percent to $1.0673, rebounding from Friday's two-week low of $1.0651 hit after data had shown inflation in the currency bloc had slowed by far more than expected in March.

Oil prices stood near three-week highs on a growing sense that OPEC and nonmember Russia would extend their production cut, seeking to drive the market higher, though high U.S. rig count capped their advance.

Brent crude futures hit a three-week high of $53.63 per barrel early on Monday and last stood at $53.43, down 0.2 percent from U.S. close.

U.S. West Texas Intermediate crude futures was little changed at $50.56 a barrel.


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Oil Prices Fall As U.S. Rig Count Stokes Oversupply Worries

By Keith Wallis
Reuters
April 3, 2017

Oil futures dipped on Monday as a higher U.S. rig count indicated rising shale output and stoked worries about global oversupply, while a stronger dollar also pressured prices.

International benchmark Brent futures had slipped 7 cents to $53.46 a barrel. The March contract closed the previous session down 13 cents at $52.83 a barrel.

U.S. West Texas Intermediate crude futures fell 3 cents to $50.57 a barrel after settling 25 cents higher in the previous session.

Both contracts posted their worst quarterly loss since late 2015 in the March quarter. U.S. futures fell nearly 6 percent from the previous quarter, while Brent lost 7 percent as rising inventory levels outpaced output cuts by OPEC and non-OPEC members.

Crude prices staged a three-day rally last week amid expectations members of the Organisation of the Petroleum Exporting Countries (OPEC) and non-members such as Russia would extend production cuts beyond June.

But prices fell on Friday after energy services firm Baker Hughes said the U.S. rig count increased by 10 to 662 last week, making the first quarter the strongest for oil rig additions since mid-2011.

"We could be getting close to the end of the rally. Today's pause may be significant in terms of market direction - we'll see what happens in Europe and the U.S. later today," said Ric Spooner, chief market analyst at Sydney's CMC Markets.

"We've had a pretty significant rally in the past week, driven by Libya's production not doing as well due to disruptions, good utilization rates by U.S. refiners and talk of OPEC and non-OPEC members extending production cuts for another six months," Spooner said.

"Now the market may have priced all those factors in and investors are waiting for additional indicators to give oil prices direction," he added.

That could come later on Monday when Europe and the U.S. release purchasing managers' index (PMI) data.

PMI data from China on Saturday showed the country's factories expanded for a ninth straight month in March but at a softer pace as new export orders slowed.

"The China PMI figures were pretty positive - they provide background support for oil prices," Spooner said.

The U.S. dollar index rose against a basket of currencies on Monday. A strong dollar makes greenback-denominated commodities including oil more expensive for holders of other currencies.

Iraq plans to increase its oil output capacity to 5 million barrels per day before the end of the year, but Baghdad has assured OPEC it will fully comply with the pact to cut oil supply, Oil Minister Jabar al-Luaibi and OPEC Secretary General Mohammed Barkindo said on Sunday.


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A Squabble At Iraq's Oldest Oil Field Could Rock Global Supplies

Giant Kirkuk field producing at less than half its capacity; Local rivalries bubble up as Islamic State militants retreat.


By Sam Wilkin
Bloomberg
April 3, 2017

A territorial dispute in northern Iraq threatens to disrupt oil output at a field containing as much crude as Norway, even as U.S.-backed forces prepare what could be a decisive blow against Islamic State militants in the nearby city of Mosul. Kirkuk, where Iraq first discovered oil in 1927, can produce more than 1 million barrels a day but is pumping at less than half its capacity while competing ethnic and political groups scramble to control its 9 billion barrels of reserves.

1. What’s behind the tensions in Kirkuk?


Lying near a disputed city of the same name, the Kirkuk field is a tinderbox for potential conflict between the central government and Iraq’s semi-autonomous Kurds, both of whom have for decades claimed it as their own. More recently, it also became became a flashpoint for rival Kurdish political parties and their heavily armed supporters. “As Islamic State becomes less of a pressing threat, a lot of these tensions that had been subsumed into the common fight are inevitably going to come back to the surface,” says Richard Mallinson, an analyst at consultant Energy Aspects Ltd.

2. Who controls the Kirkuk field?

Iraq’s central government and the Kurdistan Regional Government both pump oil from different wells at the field, which straddles their respective areas of control. Kurdish forces took control of territory around Kirkuk in June 2014 after the Iraqi Army fled from Islamic State militants, but the federal government in Baghdad doesn’t recognize Kurdish control of the area. The Patriotic Union of Kurdistan party, which leads Kirkuk’s local government and maintains the city’s security, is a rival to the Kurdistan Democratic Party that dominates the KRG and controls most of its oil revenues.

3. How much oil is Kirkuk producing?

Kirkuk and nearby fields are producing about half a million barrels of oil daily, according to data supplied by the Oil Ministry and the KRG in September 2016. Most of the crude is exported through a Kurdish-controlled pipeline to the Turkish port of Ceyhan. The KRG produces about 350,000 barrels a day, and the state-run North Oil Co. approximately 150,000. The two sides reached a deal in August 2016 allowing North Oil to export through the Kurdish pipeline. In return, the KRG takes a cut of the revenue and gets to export its own share of crude from Kirkuk. Iraq, the second-biggest OPEC member, pumped a total of 4.44 million barrels a day in February, data compiled by Bloomberg show. Oil prices fell more than 2 percent after the agreement as it was expected to increase exports by about 150,000 barrels.

4. Why is the deal at risk?

The export deal doesn’t address the competing claims to Kirkuk’s oil, or the larger dispute over the KRG’s right to produce and export oil independently of the central government. The deal also left out Kirkuk’s PUK-led provincial government, stoking tensions between the two main Kurdish parties. On March 2, soldiers loyal to the PUK stormed North Oil’s main pumping facility at Kirkuk and briefly halted exports of more than 100,000 barrels a day. They threatened to cut off those exports permanently unless Iraq’s Oil Ministry agreed to share revenue from crude pumped there and to develop local energy projects.

5. Why the chilly relations between the two Kurdish parties?


The KDP and PUK are uneasy coalition partners in the KRG, having fought a civil war with each other in the 1990s. They mobilized independently against Islamic State in 2014, a year when oil prices plunged by half, straining the KRG’s budget. Tensions between them are at their highest level since the U.S. invasion of Iraq in 2003, says Shwan Zulal, managing director of Carduchi Consulting: “Since the money ran out, there’s been a bit of a fight for resources.”

6. How is Iraq’s government handling the dispute?


Prime Minister Haider Al-Abadi reached an agreement with the PUK in emergency talks on March 7, prompting the party to lift its immediate threat of shutting in exports. PUK officials said the prime minister had promised to implement an accord reached in January under which the Oil Ministry would give Kirkuk a share of oil revenues, develop local refineries and power plants, and also supply them with oil.

7. What happens if the deal collapses?


A collapse of this accord could cut off North Oil’s access to the KRG’s export pipeline and immediately remove at least 100,000 barrels a day from world markets. Perhaps more importantly, it could push the central government back into open dispute with the KRG, throwing up legal hurdles for anyone wanting to produce or transport crude from the Kurdish region itself. “If the government doesn’t abide by its commitments to Kirkuk, people across all communities and parties could rise up again,” says Ahmed Al-Askari, head of the Kirkuk assembly’s energy committee and a PUK member.


Article Link To Bloomberg:

Venezuela's Maduro Wins Power Over Oil Despite Court Reversal

By Alexandra Ulmer
Reuters
April 3, 2017

The Venezuelan Supreme Court may have amended part of its explosive decision to take over the opposition-led congress, but it still gives embattled leftist President Nicolas Maduro broad new powers over the OPEC nation's vast oil wealth.

The reversal on Saturday came after political leaders worldwide and street protesters at home accused the pro-government court of effectively making Maduro a dictator.

While the court backed off its Wednesday decision to fully take over the legislative branch, it left in place sweeping new authority for Maduro to cut oil deals on behalf of PDVSA, the state-run oil company, without congressional approval.

Maduro's cash-strapped government now has the autonomy to sell stakes in Venezuela's oil fields, which contain the world's largest reserves, or launch new joint ventures with foreign firms.

The court action sets the stage for a protracted legal and political fracas that could spook foreign investors and further undermine the nation's efforts to stabilize PDVSA, said opposition lawmakers and industry experts. The state-run firm is already reeling from lower oil prices, a cash-flow crisis and chronic operational problems that have crippled its ability to serve customers worldwide.

The fight centers on a constitutional requirement that the National Assembly approve PDVSA contracts of "national public interest" with outside companies. In addition to Maduro's legislative opponents, Venezuela's attorney general - a longtime government ally - has called the court decision to bypass the assembly unconstitutional.

The legislature - which has been controlled by members opposing Maduro's government since late last year - has warned investors that oil deals would be invalid without assembly approval.

Opposition lawmakers slammed state-run Russian oil major Rosneft (ROSN.MM), for instance, after it paid $500 million last year to increase its stake in the Petromonagas joint venture, to 40 percent from 16.7 percent, without legislative approval.

Rosneft - a major PDVSA partner at a time when relations between Caracas and Moscow have grown increasingly cozy - said the deal was legal. But the episode underscored the potential legal quagmire for investors.

Following the court's action on Saturday, opposition leaders vowed to continue challenging the validity of oil deals it has not approved.

"This is desperation for dollars," opposition lawmaker Elias Matta, the vice-president of the congressional energy and oil commission, told Reuters. "Let it be clear that any company created under this scheme will be null - totally null."

Venezuela's Information and Oil Ministries, along with PDVSA, did not immediately respond to a request for comment.

Nervous Investors

The imbroglio could hamper investments from wary multinational companies, especially those that are subject to stricter regulatory scrutiny at home.

On Thursday, National Assembly head Julio Borges tore up the Supreme Court order on the steps of the legislature, an image likely to unsettle corporate boardrooms. Other major oil players in Venezuela include U.S. major Chevron Corp (CVX.N) and China's state-owned CNPC.

Investor uncertainty, in turn, could further undermine Venezuela's ravaged economy, which depends on PDVSA for more than 90 percent of export revenue as millions face food shortages and runaway inflation.

In theory, the court's decision would allow Maduro's government the power to do anything short of privatizing PDVSA without approval of the National Assembly, said Francisco Monaldi, a fellow in Latin America energy policy at the Baker Institute in Houston.

"But the legal ground could not be shakier if there is a change in government," he said. "As a result of all this international scandal, foreign investors will be less likely to invest."

$3 Billion In Bond Payments

Firebrand Hugo Chavez, president until he died in 2013, led a wave of oil nationalizations in Venezuela as part of his self-styled "21st century Socialism." The policies have left many oil fields less productive and lacking investment.

National oil output tumbled last year on the back of constant refinery outages, an outflow of talent, and shortages of basic equipment in oil fields and imported diluents needed for blending with Venezuela's heavy crude.

Amid mounting debts, Venezuela has sought to sell stakes in oil fields to bolster its dwindling coffers before a deadline to pay about $3 billion in bond obligations this month, sources say.

On Friday, Venezuelan bonds tanked on worries about the impact of the latest crisis on the country's credit-worthiness.

It is unclear if the initial Supreme Court decision - the one that sparked global outrage - was prompted by an imminent plan to sell an oil field stake or create a new oil venture.

Reuters reported in March that PDVSA was negotiating a business deal with Rosneft and had offered the state-led company a stake in the Petropiar joint venture.

The offer has not been confirmed, and it remains unclear if Rosneft, which has become an increasingly key source of financing for PDVSA, is interested.

PDVSA is also relying on Rosneft to help it meet its looming bond payments, Reuters reported on Friday. It is unclear if the deal will go through or what Rosneft might get in exchange.

Late last year, Venezuela used 49.9 percent of its shares in U.S. subsidiary Citgo as collateral for loan financing from Rosneft. The move enraged opposition politicians who argue a desperate government is mortgaging prized national assets.

PDVSA and the Oil Ministry have not responded to repeated requests for comment on potential deals with Rosneft. Rosneft has declined to comment.


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Tesla Delivers Quarterly Record Of 25,000 Vehicles In First Quarter

By Devika Krishna Kumar
Reuters
April 3, 2017

Tesla Inc (TSLA.O), the U.S. luxury electric car maker, said on Sunday first-quarter vehicle deliveries jumped 69 percent from a year ago to a quarterly record of 25,000 vehicles, bouncing back from delays in the previous quarter.

The company said of the total vehicles delivered, about 13,450 were Model S sedan and about 11,550 were Model X sports utility vehicle.

Tesla has said it expects to deliver 47,000 to 50,000 Model S and Model X vehicles combined in the first half of 2017.

In the fourth quarter, deliveries had fallen 9.4 percent due to short-term production hurdles from the transition to a new autopilot hardware.

Tesla had said production challenges, which started at the end of October and lasted through early December, shifted vehicle production towards the end of the fourth quarter, resulting in delayed deliveries.

Ultimately, about 2,750 vehicles were missed being counted as deliveries in the fourth quarter either due to last-minute delays in transport or because the customer was unable to physically take delivery.

In addition to the first quarter deliveries, about 4,650 vehicles were in transit to customers at the end of the quarter and will be counted as deliveries in the second quarter, Tesla said in a statement on Sunday.

Production in the first quarter also hit a quarterly record at 25,418 vehicles.

Tesla Chief Executive Elon Musk has taken big risks repeatedly since going public in 2010, but investors got spooked after he said in February the electric car company could get "close to the edge" as it burns cash ahead of its crucial Model 3 launch.

China's Tencent Holdings Ltd (0700.HK) bought a 5 percent stake in Tesla last week for $1.78 billion, providing the company with a deep-pocketed ally as it prepares to launch its mass-market Model 3.

The midsize, high-volume Model 3 sedan is due to go on sale later this year in the United States.

Shares of Tesla closed up slightly at $278.30 on Friday on the Nasdaq and have soared more than 30 percent so far this year.


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In Self-Driving Car Race, Winners Get All The Way Around Track

By Peter Henderson 
Reuters
April 3, 2017

Nine self-driving cars did not quite zoom around a 2-mile (3.2-km) course in Northern California over the weekend in a race involving students and entrepreneurs from startup companies where the real goal was just to make it around the track.

Alphabet Inc's Waymo, Uber and major auto companies are competing to create the technology for an autonomous revolution that could reorder the car industry and transform transportation.

The goals were more modest for contenders at the Thunderhill West race course, about a two-hour drive north of San Francisco, in the second challenge of Self Racing Cars. All cars competing had a driver behind the wheel to intervene if necessary, and only four of the nine made it around the curvy course without human help.

Location services startup Point One was the unofficial winner when its car got around the track in three minutes and 37.9 seconds.

The cars took individual turns on the track over the course of the event on Saturday and Sunday.

"Someday you will be able to see machines do things that people aren't able to do. Today we are just trying to catch up with your teenage child's first drive," said Self Racing Cars organizer Joshua Schachter, a tech entrepreneur. He saw the race as a chance to push the envelope of new technology.

For the small companies and students, the race course offered a large, safe testing environment. Deciding how to slow down for a turn, for instance, is a big question for a car that drives itself, and startups cannot necessarily afford access to a major testing facility without pedestrians.

Some cars used GPS and other location tracking to follow digital maps to get around the course. That was the strategy for Point One, which is making a business of determining location more precisely than GPS.

Students from online education organization Udacity used artificial intelligence to teach driving on the fly, using a car owned by software company PolySync. On a ride around the track on Sunday, the car navigated a few turns on its own, but the human driver regularly yanked the wheel to keep it on the asphalt.

The Bay Area is the center of corporate efforts to build a commercial self-driving car, and test vehicles navigate San Francisco streets with a human behind the wheel.

Some are doing well. Recent state data showed that Waymo cars were traveling about 5,000 miles (8,000 km) between interventions by the person in the driver's seat.


Article Link To Reuters:

Zombies Are Eating Asia

By Michael Schuman
The Bloomberg View
April 3, 2017

Any horror aficionado knows that the only good zombie is a dead zombie. Don’t risk trying to bring one back to life. It'll just come back to bite you.

Apparently, policymakers haven’t watched enough B-movies. Worried about layoffs and soured loans, governments and banks across Asia continue to dole out cheap financing and other support to keep failing firms -- corporate zombies -- alive. The hope is that they'll become sustainable businesses again if growth revives. But in fact, these same companies are undermining the global economy, wasting resources, stifling productivity gains -- and thus forestalling the very recovery they're hoping will save them.

Look, for example, at what’s happening right now in South Korea to troubled Daewoo Shipbuilding & Marine Engineering Co. Ltd. On March 23, the Korea Development Bank and Export-Import Bank of Korea, both state-run, agreed to lend the ailing shipbuilder $2.6 billion and swap debt for equity to prevent a likely default. In a statement, KDB warned that if Daewoo were to go bankrupt, “the loss to the country’s economy could be vast as the whole shipbuilding industry could collapse and financial institutions could face further losses.”

It's true that Daewoo is suffering amid a terrible slump in the entire shipbuilding and shipping industry, hit hard by the slowdown in global growth and trade. Another Korean giant, Hanjin Shipping Co. Ltd., sank into bankruptcy last year. Daewoo’s creditors are probably hoping a bailout now can sustain the company until conditions in the sector improve.

This is a familiar movie, however. Less than two years have passed since Daewoo Shipbuilding received an earlier bailout of fresh loans and a debt-for-equity swap. In fact, the company began life -- if you can call it that -- as a financially strapped, unfinished shipyard that the government foisted onto a reluctant Daewoo business group in 1978. Then, when the Daewoo conglomerate collapsed in the wake of the Asian financial crisis in the late 1990s, Daewoo Shipbuilding was yanked out of the wreckage and spun off into an independent firm in 2000 with -- wait for it -- another debt-for-equity swap.

Certainly, there’s a price to be paid for forcing a company like Daewoo into bankruptcy. Workers will probably be laid off. Banks will rack up bad loans. But there's an even larger cost to keeping zombies around. A January study by the Organization for Economic Cooperation and Development blamed zombies -- defined here as old firms that have had persistent difficulties paying interest on debt -- for contributing to slow productivity gains, and thus sluggish growth, in the developed world.

Zombie companies deprive healthy firms of expansion opportunities and create barriers to entry for new, young companies -- all of which suppresses investment. For OECD countries, the authors link the increase in zombies compared to the period before the 2008 financial crisis to a 2 percent cumulative loss in investment and a 0.7 percent loss in employment. In light of the meager growth and persistent unemployment that were features of the poor, post-crisis recovery, such missed opportunities to create jobs and encourage investors are clearly meaningful.

“The results show that the prevalence of and resources sunk in zombie firms have risen since the mid-2000s and that the increasing survival of these low productivity firms at the margins of exit congests markets and constrains the growth of more productive firms,” the study's authors contend.

Yet somehow policymakers remain convinced that they can defy the market. In China, top government officials have repeatedly broken promises to kill off zombies in sectors with excess factories and large debts. In steel -- one of China’s premier economic zombielands -- operating capacity, by one estimate, actually increased in 2016. Though bankruptcies are also on the rise, the number of ailing firms remains huge. He Fan, an economist at Renmin University in Beijing, recently calculated that roughly 10 percent of listed companies in China qualify as zombies -- a figure he believes underestimates the extent of the problem.

By wasting money on dying enterprises -- and adding to the corporate sector’s massive debt load in the process -- Chinese officials are saving jobs today only by sacrificing the growth, employment and innovation the economy will need in the future. “Zombie enterprises are holding back economic recovery in China,” Renmin's He wrote. “Their existence prevents resources from being reallocated to more productive industries, resulting in an uneven playing field.”

There are lessons here for the U.S. In his quest to revive American manufacturing, President Donald Trump must be careful not to use big government to overturn the verdict of the market -- say, by imposing high tariffs or taxes to counteract the cost benefits of producing goods outside the country. Factories that can only survive under such protection wouldn't technically be zombies, but they'd have a similar effect on the economy. By preventing offshoring -- a different sort of “exit” -- Trump could save a few jobs, but only by placing a burden onto consumers, in the form of higher prices, and shareholders, in reduced corporate profits. Watch your horror movies: Zombies always create more zombies.


Article Link To The Bloomberg View:

Is The American Dream Killing Us?

By Robert J. Samuelson 
The Washington Post
April 3, 2017

It isn’t often that economics raises the most profound questions of human existence, but the recent work of economists Anne Case and Angus Deaton (wife and husband, both of Princeton University) comes close. You may recall that a few years ago, Case and Deaton reported the startling finding that the death rates of non-Hispanic middle-aged whites had gotten worse — they were dying younger.

The results were startling because longer life expectancies have been a reliable indicator of improvement in the human condition. In 1940, U.S. life expectancy at birth was 63 years; by 2010, it was 79 years. The gains reflect medical advances (drugs, less invasive surgery), healthier lifestyles (less smoking) and safer jobs (less physically grueling factory work). These trends were expected to continue.

But in a new paper, Case and Deaton confirm and extend their findings. In the new century, mortality — that is, dying — has increased among middle-aged non-Hispanic whites, mainly those with a high school diploma or less. By contrast, life expectancy is still improving among men and women with a college degree. It’s also increasing among blacks and Hispanics, whose mortality rates have traditionally exceeded whites’.

The conclusions largely corroborate the work of conservative scholar Charles Murray. In a 2012 book — “Coming Apart: The State of White America, 1960-2010” — he argued that the country was splintering along class lines as well as racial and ethnic lines. Like Case and Deaton, he focused on people without a college degree. Some political analysts have attributed President Trump’s victory to support from this angry group.

The main causes of rising death rates among non-Hispanic whites 50 to 54, men and women, are so-called “deaths of despair” — suicides, drug overdoses and the consequences of heavy drinking. Since 1990, the death rate from these causes for this group has roughly doubled to 80 per 100,000. These deaths offset mortality gains among children and the elderly, leading to a fall in overall U.S. life expectancy in 2015, Case and Deaton say.

Why? That’s the mystery. Trying to answer takes us afield from economics to questions usually left to literature. How do people judge themselves? What do they expect from life? How do they deal with disappointments and setbacks?

One theory attributes the spike in deaths of despair to growing income inequality. There would be fewer suicides, drug overdoses and alcohol-related deaths if incomes were distributed more equally, the argument goes. People take out their frustrations and anger by resorting to self-destructive behavior.

Although this sounds plausible, Case and Deaton are skeptical. They don’t discount it entirely but think the argument is oversold. They point out that, in many places and among many populations, growing income inequality has not increased death rates. For example, American blacks and Hispanics are living longer despite growing economic inequality. In Europe, slow economic growth and more inequality have not led to higher death rates.

Instead, Case and Deaton advance a tentative theory — they emphasize tentative — that they call “cumulative deprivation.” The central problem is a “steady deterioration in job opportunities for people with low education.”

One setback leads to another. Poor skills result in poor jobs with low pay and spotty security. Workers with lousy jobs are poor marriage candidates; marriage rates decline. Cohabitation thrives, but these relationships often break down. “As a result,” write Case and Deaton, “more men lose regular contact with their children, which is bad for them, and bad for the children.”

To Case and Deaton, these “slow-acting and cumulative social forces” seem the best explanation for the rise in death rates. Because the causes are so deep-seated, they will (at best) “take many years to reverse.” But even if their theory survives scholarly scrutiny, it’s incomplete. It misses the peculiarly American aspect of this story.

The proper question may be: Is the American Dream killing us?

American culture emphasizes striving for and achieving economic success. In practice, realizing the American Dream is the standard of success, vague though it is. It surely includes homeownership, modest financial and job security, and a bright outlook for our children. When striving accomplishes these goals, it strengthens a sense of accomplishment and self-worth.

But when the striving falters and fails — when the American Dream becomes unattainable — it’s a judgment on our lives. By our late 40s or 50s, the reckoning is on us. It’s harder to do then what we might have done earlier. We become hostage to unrealized hopes. More Americans are now in this precarious position. Our obsession with the American Dream measures our ambition — and anger.


Article Link To The Washington Post:

Coming Up This Week In Business: Where The Jobs Are, Market Fears, And A Trump-China Fight

By Jeff Cox
CNBC
April 3, 2017

Good morning. Good Monday. Good markets. Welcome back to the week ahead on Wall Street and a look at what investors need to know for the next five days.

March was a weird month for the market. We started out riding the wave of the "Trump Bump" before things got derailed. A mid-month blizzard in the East sent things into disarray, and we closed out with a whole lot of uncertainty.

What's an investor to do? Or, more to the point, to watch?

Where The Jobs Are

The economy is at a crossroads. Are things as good as everyone seems to think, or as ho-hum as the actual data show? A couple economic reports will help discern hope from reality.

Most importantly, of course, we'll see where the job market stands when the monthly payrolls report comes out Friday.

Economists expect to see 177,500 new jobs for March, which would be consistent with the longer-term trend but a step down from the 227,000 in February. Wages also will be watched closely, with the annual trend expected to show a 2.7 percent increase. The unemployment rate is likely to hold steady, according to estimates compiled by FactSet.

Be forewarned: The March numbers could be a little fuzzy because of distortions from the storm. Still, the market will be watching closely.

Not Much Is At Risk Except...

The Trump presidency stakes much of its legitimacy on the ability to get the economy cranking again after a long run of lackluster growth since the Great Recession. There was much ballyhoo after the February numbers came out well ahead of expectations, but a miss this month could halt that momentum.

If expectations for economic growth start to slow, that could well take the air out of the stock market, at least in the United States. Those growing predictions for a coming "correction" — which technically is defined as a 10 percent drop in the market — could start to look a little smarter.

Nearly 1 in 3 market pros now think a near-term correction is in the cards, according to last week's Investors Intelligence survey. One respondent to a separate sentiment gauge, the American Association of Individual Investors, had this to say:

"A large correction is very likely in the coming months and is the reason that I am currently neutral over the next six months rather than bullish. Bullish is my current long-term position, however."

There's more economic data out this week that will help paint the picture as well: Manufacturing on Monday, durable goods orders and the trade balance on Tuesday and growth in the non-manufacturing sector Wednesday.

Also, we'll get a little better look inside the Federal Reserve's collective thinking Wednesday when the central bank releases the minutes from its March 14-15 meeting. As you'll recall, Fed officials hiked rates a quarter-point, and the minutes will help give some insight into why they did what they did.

Elsewhere


President Donald Trump meets with Chinese President Xi Jinping Monday and Tuesday. Trump already has predicted a "very difficult" meeting, which is almost always a self-fulfilling prophecy. The markets may not like it if things get too testy.

Cowen and Co. hosts its "Future of the Consumer" conference Tuesday in New York. It's an event filled with some pretty interesting presentations about what leading companies have in store down the road.

And across the pond, the European Parliament will be debating a resolution on Brexit negotiations Wednesday. The market hasn't reacted much to Brexit talk since a mild implosion last summer when the UK vote to leave the European Union actually took place, but it's always worth keeping an eye on.


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Illiberal Stagnation

By Joseph E. Stiglitz
Project Syndicate
April 3, 2017

Today, a quarter-century after the Cold War’s end, the West and Russia are again at odds. This time, though, at least on one side, the dispute is more transparently about geopolitical power, not ideology. The West has supported in a variety of ways democratic movements in the post-Soviet region, hardly hiding its enthusiasm for the various “color” revolutions that have replaced long-standing dictators with more responsive leaders – though not all have turned out to be the committed democrats they pretended to be.

Too many countries of the former Soviet bloc remain under the control of authoritarian leaders, including some, like Russian President Vladimir Putin, who have learned how to maintain a more convincing fa├žade of elections than their communist predecessors. They sell their system of “illiberal democracy” on the basis of pragmatism, not some universal theory of history. These leaders claim that they are simply more effective at getting things done.

That is certainly true when it comes to stirring nationalist sentiment and stifling dissent. They have been less effective, however, in nurturing long-term economic growth. Once one of the world’s two superpowers, Russia’s GDP is now about 40% of Germany’s and just over 50% of France’s. Life expectancy at birth ranks 153rd in the world, just behind Honduras and Kazakhstan.

In terms of per capita income, Russia now ranks 73rd (in terms of purchasing power parity) – well below the Soviet Union’s former satellites in Central and Eastern Europe. The country has deindustrialized: the vast majority of its exports now come from natural resources. It has not evolved into a “normal” market economy, but rather into a peculiar form of crony-state capitalism.

Yes, Russia still punches above its weight in some areas, like nuclear weapons. And it retains veto power at the United Nations. As the recent hacking of the Democratic Party in the United States shows, it has cyber capacities that enable it to be enormously meddlesome in Western elections.

There is every reason to believe that such intrusions will continue. Given US President Donald Trump’s deep ties with unsavory Russian characters (themselves closely linked to Putin), Americans are deeply concerned about potential Russian influences in the US – matters that may be clarified by ongoing investigations.

Many had much higher hopes for Russia, and the former Soviet Union more broadly, when the Iron Curtain fell. After seven decades of Communism, the transition to a democratic market economy would not be easy. But, given the obvious advantages of democratic market capitalism to the system that had just fallen apart, it was assumed that the economy would flourish and citizens would demand a greater voice.

What went wrong? Who, if anyone, is to blame? Could Russia’s post-communist transition have been managed better?

We can never answer such questions definitively: history cannot be re-run. But I believe what we are confronting is partly the legacy of the flawed Washington Consensus that shaped Russia’s transition. This framework’s influences was reflected in the tremendous emphasis reformers placed on privatization, no matter how it was done, with speed taking precedence over everything else, including creating the institutional infrastructure needed to make a market economy work.

Fifteen years ago, when I wrote Globalization and its Discontents, I argued that this “shock therapy” approach to economic reform was a dismal failure. But defenders of that doctrine cautioned patience: one could make such judgments only with a longer-run perspective.

Today, more than a quarter-century since the onset of transition, those earlier results have been confirmed, and those who argued that private property rights, once created, would give rise to broader demands for the rule of law have been proven wrong. Russia and many of the other transition countries are lagging further behind the advanced economies than ever. GDP in some transition countries is below its level at the beginning of the transition.

Many in Russia believe that the US Treasury pushed Washington Consensus policies to weaken their country. The deep corruption of the Harvard University team chosen to “help” Russia in its transition, described in a detailed account published in 2006 by Institutional Investor, reinforced these beliefs.

I believe the explanation was less sinister: flawed ideas, even with the best of intentions, can have serious consequences. And the opportunities for self-interested greed offered by Russia were simply too great for some to resist. Clearly, democratization in Russia required efforts aimed at ensuring shared prosperity, not policies that led to the creation of an oligarchy.

The West’s failures then should not undermine its resolve now to work to create democratic states respecting human rights and international law. The US is struggling to prevent the Trump administration’s extremism – whether it’s a travel ban aimed at Muslims, science-denying environmental policies, or threats to ignore international trade commitments – from being normalized. But other countries’ violations of international law, such as Russia’s actions in Ukraine, cannot be “normalized” either.


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