Wall Street Week ahead

Monday, 10 September, 2012

NEW YORK

AGENCIES

The S&P 500 has surged 14 percent thisyear and is at its highest level in morethan 4 years. Not counting 2009 whenequities rebounded from their crisis lows,this could be the best year for stocks since2003 - nearly a decade.

A report showing hiring in the UnitedStates in August was again much slowerthan expected and warnings of a slow-down at Intel and FedEx this week, whichwill likely foreshadow a very weak earn-ings season, have not been enough to

deter investors buoyed by aggressive cen-tral bank action.

After the European Central Bank’spledge to buy the debt of troubled euro-zone countries this week the Fed is widelyexpected to introduce new stimulusmeasure in the form of more bond buyingwhen it closes its two-day meeting onThursday. “Good news in good news andbad news is good news, largely because ofthe Bernanke put,” said Eric Kuby, chiefinvestment officer, North Star Invest-ment Management in Chicago.

The S&P 500 is now trading at 13.3time its forward earnings estimates,

meaning investors are willing to pay justover $13 for a dollar of expected earningsfrom S&P 500 companies.

Although that is below a median for-ward price-to-earnings ratio of 13.7 since1976 - according to Morgan Stanley - it isclose to the upper end of the range in thelow-growth post crisis era of the last 5years. During that time there has been amedian price-to-earnings ratio of 12.9,according to Thomson Reuters data.

In fact, the recent price-to-earningshigh was 13.5 in February 2011, justabove current levels. If you are of theview that little has changed since then,there is no reason for the ratio to go muchhigher. That combined with a slowingearnings picture inevitably means lowerprices. “our view is that the next doubledigit move in the market is down not up,”said Morgan Stanley in a research note.

The analysts, led by equity strategistAdam Parker, believe the S&P 500 will fin-ish the year at 1,214, 15 percent belowwhere it is now. At current levels the risk-reward skew is starting to look less attrac-tive then it did. That is especially true giventhe uncertainty the November presidentialelections are likely to generate, as well asthe potential for more slip-ups in Europe.

“We put a 1,450 target on the S&P foryear and so I’m encouraged,” said JackAblin, chief investment officer at HarrisPrivate Bank in Chicago. “But I will say,if this trend continues, I’m inclined to de-clare victory and move to the sidelines(and) start taking profits.”

The average analyst estimate for theS&P 500 this year is 1,383 according to aReuters poll from the middle of the year.That shows Ablin is not alone. The S&P’sperformance has already outstrippedmost expectations.

Another negative factor is the rapidlydeclining earnings outlook for the re-mainder of the year, as well as for 2013.Analysts are now expecting a 2.1 percentdrop in third quarter earnings year-on-year. About a year ago they were lookingfor growth of nearly 15 percent.

This week Jonathan Golub, UBS’schief U.S. equity strategist, cut his S&P500 earnings outlook due to a weakerU.S. economic outlook, conversion dis-

tortions from a stronger dollar, as well asweaker oil prices.

For 2012 Golub cut his S&P earningsforecast to $102.50 from $103.50 and to$107.00 from $110 for next year.

Golub believes third quarter earningswill be just $25.10, 2 percent below thesame period last year. on an annualizedbasis that would translate into an S&P500 level of just over 1,300 given a price-to-earnings ratio of 13.

Signs are that those forecasts are al-ready starting to come true.

on Tuesday, FedEx Corp (FDX.N),the world’s second-largest package deliv-ery company, cut its profit outlook for thecurrent quarter, saying weakness in theglobal economy was hurting demand forovernight international shipments.

Three days later, Intel Corp(INTC.o) cut its third-quarter revenueestimate due to a decline in demand forits chips, as customers reduce invento-ries and businesses buy fewer personalcomputers. A revision of Intel targetshad been expected by some analystsafter PC makers Hewlett Packard Co(HPQ.N) and Dell Inc (DELL.o) warnedof slow demand last month.

Golub is now talking about an earn-ings “drought” and even an earnings “re-cession.” “While investors are focused onmonetary policy, we believe these weakearnings results will contain a market ad-vance,” he said in a research note.

Golub has a year end S&P targetlevel of 1,375, 4.3 percent below Friday’sclosing level. The latest leg of the rallywas a 2 percent surge on Thursday thatpushed the S&P 500 to its highest inmore than four years and the Nasdaq toits highest in 12 years. The move wascourtesy of the European Central Bankand its pledge to act as an unlimitedlender of last resort to troubled Euro-pean nations. But it is not a done deal.

The German constitutional court willrule on Wednesday whether the Euro-pean Union’s new ESM rescue fundshould come into being. If it vetoes it, theECB’s plans could be left in tatters sinceits intervention requires a country to seekhelp from the rescue fund first.

Dutch elections on the same day look

to have been robbed of some of their po-tential drama, with the hard-left social-ists now slipping in the polls. Instead, thefiscally conservative Liberals are set towin most seats with the center-leftLabour party also polling strongly.

But there are no guarantees and Ger-many could yet be robbed of one of itsstaunchest pro-austerity allies in the debtcrisis debate. “While we got some mone-tary solutions we still need more answers(on) the underlying European economy,”said Ablin. “I don’t think bond buyingsolves the euro crisis.” Europe is not theonly concern for investors. A slew of Chi-nese data on Sunday will provide an in-sight into how the world’s secondeconomy is faring amid concerns of aslowdown. The data includes inflation,retail sales and industrial production.

The Baltic Exchange’s main seafreight index .BADI, which tracks ratesfor ships carrying dry commodities, fellfor the eighth straight session on Friday.Some of the weakness is blamed on col-lapsing iron ore demand from China.

Shipments of iron ore account forabout a third of sea-borne volumes. Spotiron ore prices just hit their weakest innearly three years, extending a marketrout that began in July, while Poor de-mand drove Shanghai steel futures to arecord low this past week.

But even with the less than stellarfundamental picture, the old saying ‘don’tfight the Fed’ has proven to be true onceagain. The chances of the Federal Reserveembarking on another round of bondpurchases next week have jumped afterthe disappointing August U.S. employ-ment numbers on Friday, according to aReuters poll of economists.

The median of forecasts from 59economists gave a 60 percent chance theFed will announce another round ofquantitative easing, or QE3, on Thursday.

For the last 40 years the MSCI worldindex .MSCIWo has lost 0.9 percent onaverage in September, making it theworst performing month for the stockmarket, according to data from ThomsonReuters. So far the index, a broad meas-ure of global equities, is up 2.6 percentthis month.

CERNOBBIO

AGENCIES

MoNTI had proposed an EUsummit in Rome to discuss therise of anti-European pop-ulism, divisions between northand south and nationalistic

prejudices that have been fostered by resentmentagainst austerity measures, he told journalists atan economic conference in northern Italy.

“old stereotypes and old tensions have re-emerged,” Monti said. “There are many manifes-tations of populism that are aimed at disunity innearly all the member states.”

Monti’s remarks at a joint news conferencewith European Council president Herman vanRompuy underlined the urgency of overcoming acrisis that has lasted close to three years.

Van Rompuy said he supported Monti’s ideaand favored bringing forward a meeting to fosterEuropean integration from its originally scheduleddate in late 2014. Michel Barnier, the EU commis-sioner in charge of financial regulation, called in aReuters interview at the conference for swift jointoversight of all euro zone banks. Euro zone-widebanking supervision should be introduced by nextJanuary, despite German reservations, he said.That provided a new focal point in the crisis fight-ing two days after the European Central Bank an-nounced a plan to buy bonds of weak memberstates to push down their borrowing costs.

EU Economic Affairs Commissioner olli Rehn

told Reuters the conditions underpinning the ECBplan would be based on existing recommenda-tions for countries like Spain and Italy.

Speaking on the sidelines of the same con-ference on the shores of Lake Como, Rehn ap-peared to be backing remarks by ECB executiveboard member Benoit Coeure who said countriesapplying for bond buying help might not have tomake extra budget cuts. The idea of the programwas not to “pile more austerity on top of auster-ity” Couere told France Inter radio, addressinga major concern in Spain and Italy where belt-tightening programs have aggravated deep re-cessions.CENTRALISED BANK SUPERVISION:

Barnier said the EU Commission’s banking sectorplan envisaged centralized supervision for all6,000 euro zone lenders, though oversight ofsome day-to-day matters such as consumer pro-tection would remain with national authorities.

“We know that all banks can cause problems.For this reason the logic of our proposals and therequests from the euro zone heads of state is tohave a credible oversight of each bank in the eurozone,” Barnier said at the gathering of businessleaders, politicians and EU officials.

“Germany voiced concerns we can under-stand. They are the largest (financial) contribu-tor,” he said, but hoped Berlin would support theplan as it favored sound banking oversight.

EU finance ministers are meeting in Cyprusnext week to discuss centralized banking supervi-sion. German Finance Minister Wolfgang Chasuble

has said the ECB should only supervise big banks,and expressed doubts the EU can put in place sucha mechanism by the January 2013 deadline. ButBarnier said on Saturday creating such supervisionin just over a year was “necessary and do-able.” ECBPresident Mario Draghi unveiled plans on Thursdayfor potentially unlimited purchases of bonds withmaturities of up to three years issued by countriesthat request European aid and fulfill strict domesticpolicy conditions. Rehn said the conditions wouldbe based on existing country-specific recommenda-tions and “would have to include very specific ob-jectives and a timeline” on meeting them. Nocountries have yet appliedfor help from the yieldreduction plan, hesaid. Italian Econ-omy Minister Vit-torio Grilli toldreporters at theCernobbio confer-ence that Italy didnot plan to sign up,while Spain has saidit would discuss con-ditions attached tothe ECB programnext week with its euro zone partners butwas in no hurry toseek interna-t i o n a laid.

A nice rally while it lasted

EU pushes more movesto stem debt crisis

At the start of the historically weakest monthfor equities there are plenty of reasons tobelieve stocks may be just about reaching atop - at least in the short term

European Union officials pushed on Saturday to accelerate moves to stem the bloc’s long debt crisis as Italianpremier Mario Monti warned that economic suffering was fuelling divisive nationalism on the continent

Mexico’s outgoing president

calls for oil reform

VLADIVOSTOK

AGENCIES

Mexico’s oil industry isdominated by statemonopoly PemexPEMX.UL and privatecompanies have limitedaccess to the market. Thecountry faces a key test asproduction has fallensharply in recent years andPemex risks becoming anet importer of crudewithin a decade. Calderon,who will hand over powerto President-elect Pena Nieto at the end of the year, calledon the new administration to reform and modernise theindustry. Nieto has promised “bold steps” to boost outsideinvolvement in oil exploration. “I hope that the newgovernment will have not only the political will but alsopolitical support ... to make such an important change inour law and in our constitution,” Calderon told a briefingat an Asia-Pacific Economic Cooperation (APEC) summitin the Russian city of Vladivostok. Pemex, created in 1938when the country’s oil industry was nationalised, made anew light crude oil find in the Gulf of Mexico in August,which, if confirmed, could provide between 4,000 and10,000 barrels per day. Mexico’s oil output is currently 2.5million barrels per day. “Is that enough for the country? Idon’t think so,” said Calderon. “I still believe that Mexicorequires an important reform in order to allow Pemex tomodernise its processes, to modernise its technology, tomodernise its know-how, getting the experience of globalcompanies.” To discover new fields and increase output,Mexico should consider allowing Pemex to create jointventures with foreign companies, acquiring technologyand know-how from companies like Norway’s Statoil ()and Brazilian Petrobras (), Calderon said. Calderon’spresidential stint ends in December and Nieto, who haspledged a raft of fiscal, labor and energy reforms, will besworn in on December 1.

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Monday, 10 September, 2012

Business

BERLIN

AGENCIES

ECB President Mario Draghi unveiled plans onThursday for potentially unlimited purchasesof bonds of up to three years maturity issuedby countries that request a European bailoutand fulfill strict domestic policy conditions.The German central bank chief was the soledissenting voice in the decision.

Merkel’s center-right coalition remainsbroadly behind her stance of backing help forvulnerable states such as Spain and Italy in re-turn for tough reforms of their national fi-nances. But the outcry from a small but vocaleurosceptic minority among her own parlia-mentary supporters and from influential con-servative media underlined the political risksas the euro crisis builds ahead of a general elec-tion due a year from now.

“The ECB is an independent and verystrong institution,” Merkel told rep-orters in Vi-enna, stressing that help would come withstrings attached in her first public comments onthe plans. “Conditionality is a very importantpoint. Control and help, or control andconditions, go hand in hand,” she said.

But many German conservativesshare the concern of Jens Weid-mann, head of the Bundesbank, thatthe bond-buying plans violate ataboo on financing state deficits, re-move pressure on governments to re-form and will eventually stoke inflation.

“Blank cheque for the in-debted states,” was the head-line of the top-sellingBild newspaper, aharsh, populistcritic of thebailouts forGreece ando t h e rs t r u g -g l i n ge u r ozone na-t i o n s ,

adding that the ECB move could render theeuro “kaput”.

An opinion poll released on Thursday be-fore the bond-buying plan was announcedshowed nearly one German in two has little orno confidence in Draghi, who is Italian.

Several lawmakers vowed legal action toblock the plans. “We should consider makinglegal checks on whether the ECB has hugelyoverstepped its mandate. I am convinced thatthis is the case,” Klaus-Peter Willsch, a leadingeurosceptic member of Merkel’s Christian Dem-ocratic Union (CDU), told German radio. “Asthe largest creditor nation in the whole game,Germany should have a right of veto,” he added.BUNDESBANK ISOLATED: Weidmannwas isolated in Thursday’s meeting of theECB Governing Council, where mighty Ger-many, with 82 million people and Europe’sbiggest economy, has just one vote, the sameas tiny Malta.

In a critical statement, the Bundesbanksaid the decision was “tantamount to financinggovernments by printing banknotes”.

Investors cheered the ECB rescueplan, with the euro and stocks ris-

ing worldwide and the borrowingcosts of Spain and Italy tum-bling. But Die Welt, a conser-vative German daily,headlined the market reactionbitterly: “Financial markets

cheer the death of the Bundes-bank.”

Frank Schaeffler, fromMerkel’s junior

coalition partnersthe Free Democ-rats (FDP), saidGermany shouldfile a lawsuitwith the Euro-pean Court ofJustice, sayingthe ECB wasin danger ofturning into a

“bad bank

for all the junk debt of Europe”.Markus Soeder, finance minister in

Bavaria and a member of the Christian SocialUnion, sister party to Merkel’s CDU in thestate, called for an overhaul of the ECB’s vot-ing structure, with votes weighted according toa country’s size. “Up to now the ECB was a sortof European Bundesbank. Now it is turninginto an inflation bank,” he told the Muench-ener Merkur newspaper.

More worryingly for Merkel, figures closerto the mainstream expressed at least sympathyfor those mulling legal action.

The CDU state premier of Saxony, Stanis-law Tillich, told Die Welt: “As far as I know theEuropean treaties, this measure should belegally scrutinized.”

Rainer Bruederle, the leader of the FDPgroup in parliament, described Draghi’s plansas “borderline” and said it was no surprise theyhad produced “mixed emotions” in Germany.

Speaking in Stockholm on Friday, GermanFinance Minister Wolfgang Schaeuble contra-dicted Weidmann, saying the bond buyingplans did not mark the start of monetary fi-nancing of sovereign debt. He dismissed themedia outcry as exaggerated.

But lawmakers are keeping a nervous eyeon opinion polls that show rising public oppo-sition to bailouts in Germany, where fear ofhyper-inflation is engrained in the nationalpsyche. The collapse of the currency in the af-termath of World War one is seen by many ascontributing to the rise of Nazism.

A poll on the website of Der Spiegel maga-zine showed 54 percent of Germans want theConstitutional Court to block the euro zone’s,separate, permanent rescue fund next Wednes-day when it announces a verdict that is nerv-ously awaited by investors.

Legal experts polled by Reuters expect thecourt to approve the ESM but set conditionslimiting Berlin’s future flexibility.

A study by R+V Insurance released onThursday showed 73 percent of Germans fearthe costs to taxpayers of the euro debt crisisand 65 percent see the continued existence ofthe common currency under threat.

Merkel defends ECB after German outcryChancellor Angela Merkel defended the European Central Bank after its planto buy the debt of troubled euro zone states stirred outrage in Germany andthreats from some in her own party to try and block the scheme

ZAIN KHAN

AS Pakistan pays IMF the third in-stallment of $ 107.6 million of theStand-By-Arrangement, the sus-tainability of its debt raises freshconcerns. The global financial cri-

sis, sovereign debt crisis and balance sheet crisishave ravaged the global economy. Pakistan hasalso been caught in the meltdown and is facingacute problems of a twin deficit, unsustainablepublic debt, massive fiscal imbalances, unem-ployment, erosion of incomes, liquidity crunch,squeezing fiscal space, and drying up invest-ments. Pakistan has to resort to external and in-ternal borrowing to bridge the twin deficits andto fill the financing gap.

Pakistan’s debt-to-GDP ratio is close to 60%.Its debt liabilities crossed Rs. 12 trillion in 2011,resulting in debt servicing (including interestpayments) to the tune of 43.7% of the govern-ment revenue. Rising debt is a drag on macro-economic stability, growth and development. Itis also a major source of fiscal and current ac-count deficits, thus aggravating the fiscal crisiswhich is reflected in such further complicationsas pressure on the exchange rate (widespread ex-change losses in public debt portfolio) and di-minishing private sector investment. Higherindebtedness also translates into low credit rat-ing by credit rating agencies which in turn dis-courages FDI and foreign portfolio investment.Higher debt-to-GDP ratios suppress output, pri-vate consumption and government spending onpublic goods such that welfare costs increasewith every incremental increase in debt.

Pakistan is experiencing a linear increase indebt. With high debts, interest payments also in-crease, thus increasing both debt servicing and in-terest payment burden. Hence, higher debt levelsmake stabilization more costly and induce shirk-ing by governments. Previously, our debt had ahigher dollar component while now rupee compo-nent has increased rapidly due to internal/ bankborrowing. The ‘local’ component has implicationsfor the budget whereas the ‘foreign’ debt compo-nent affects the balance of payments equation, al-though that part is known to be used for budgetarysupport as well. Due to increasing debt stock, themedium term outlook for Pakistan is quite bleak.

IMF’s country report No. 12/35 of February 2012reflects stagnation in country’s debt situation, withbudget deficit close to 7%. External debt is pro-jected to be at 70.3 billion in 2014-15. Economistsargue that debt (both internal and external) has anegative relation with growth. This debt is a resultof structural weaknesses within the economy andthe external account.

The large accumulation of debt has been dueto heavy tilt towards public debt increasing byRs. 6,924 billion in four years, against only Rs.1,784 billion in the 7 years period. our total pub-lic debt liability accumulated during 60 yearswas Rs. 4,802 billion, to which Rs. 6,924 billionwere added in only four years, taking the total toRs. 11,726 billion. External debt and liabilitiesalso increased by app. $20 billion in four yearsagainst an increase of only $1.6 billion in the pre-vious seven years. our domestic debt was onlyRs. 2,600 billion in 2007-08, which increased toRs. 6,864 billion by end 2011. Similarly, the for-eign currency denominated debt has increasedto Rs. 4,861 billion from Rs. 2,201 billion duringthe same period, taking the total public debt lia-bility from Rs. 4,802 billion in 2007-08 to Rs.11,726 billion by end 2011. Exchange rate depre-ciation has contributed substantially to the spikein debt, as the value of rupee plummeted fromRs. 60.6 per $ to almost Rs. 100 per $ as of now.

Pakistan has been almost continuously underan IMF program for over two decades. The IMFis supposed only to make funding temporarilyavailable for emergency relief and not for eco-nomic distress due to un-payable debt. IFIs arepressing for fiscal tightening instead of debt re-lief. Pakistan needs a viable and successful exitstrategy from the debt trap. The strategy has towork on several parameters. The foremost re-quirement is a focus on macroeconomic stabiliza-tion with a close attention to fundamentals,including a resolve to reduce the twin budget andcurrent account deficits through tight fiscal dis-cipline and consolidation. Any further borrowingshould be strictly need based with a strict eye onthe interest rate, maturity period, amortizationpayments and currency fluctuations. Exchangerate volatility, uncompetitive devaluations andinstability of domestic financial markets togetheract to discourage the lenders from extendingloans in times when weaker economies require

greater liquidity through capital injections. Thedebt management strategic has to be a mix ofrescheduling, strict adherence to the Debt Limi-tation and Fiscal Responsibility Act, fiscal con-solidation, and seeking debt at concessional ratesas well as a possibility of debt swaps (e.g. debt re-lief through Paris Club – I, II & III in pursuanceof Paris Club Agreement of 2001 when Pakistan’sentire debt was rescheduled on the basis of an ex-tended repayment period). only such loansshould be negotiated which have a lower cost ofborrowing, with a room for rescheduling and im-proving the maturity profile. our policy makersshould seriously pursue the route of debt restruc-turing, like the Paris Club restructuring. Debt ac-cumulation is basically associated with a lack ofregard to the Debt Limitation & Fiscal Responsi-bility Act. The government should also set for it-self debt reduction targets.

The government needs an effective debtmanagement policy whereby debt obligations areassessed on a five to ten year horizon. Short termmacroeconomic stabilization tools include theuse of monetary policy to control short-termnominal interest rate, fiscal policy to regulatespending decisions on public goods, and deci-sions related to financing public expenditure ei-ther by raising revenue through taxes orincurring debt. Not cutting government spendingleads to further increase in debt, high debt serv-icing and interest payments. Higher debt levelnecessitates higher taxes. If a fiscal policy curtailsexpenditure but at the same time does not in-crease tax collection, the effects of a recessionaryshock linger longer than the shock itself becausegovernments are tempted to use inter-temporalmargins for further fiscal consolidation. Somegovernments, while reducing expenditure also re-duce income tax collection to decrease the impactof economic shocks on households, which is un-sustainable in the long run. This is paradoxicalbecause by not to raising taxes the governmentkeeps the deficit high as before.

More importantly, in the wake of the 18thamendment, the provinces can raise their owndebt. This has the downside of public debt accu-mulation at the sub- national level. It is mostlikely that the provinces will follow the federalgovernment route of resorting to bank borrow-ing which has to be discouraged at all costs.

LG to showcase variety of leadingaudio and video products

LAHORE: LG Electronics (LG) is set to show off a variety ofaudio and video products at this year’s IFA tradeshow inBerlin. Following the strategy that gave LG leadership in the3D TV market, LG is aiming to lead the global audio visualmarket with its strength not only in 3D and Smart TVs, butalso in enhanced smart de-vice compatibility and innovativedesign. PRESS RELEASE

Thunderstorm and heavyshowers play havoc PESHAWAR: Federal Minister for Communications Dr.Arbab Alamgir Khan Khalil rushed to his home constituencyin Peshawar and expressed his deepest sorrow over the deathof three persons due to the roof collapse in Charkha KhelPeshawar. PRESS RELEASE

ZONG launches Student PackageLAHORE: Keeping pace with the ever changing needs andwants of today’s youth, ZoNG – the fastest growing networkof Pakistan is introducing a brand new offer called StudentPackage for its young subscribers. The package will entail 3more tariff plans named Talkie, All Rounder and Texterwhich are targeted at meeting the varying demands ofyoungsters according to their personalities. PRESS RELEASE

CORPORATE CORNER

Samsung Pakistan Business Manager HHP Mr. Roy Chang and Samsung Pakistan& Afghanistan Business Head HHP Mr. Farid Ullah Jan presenting the grand cashprize to Mr. Shahzad Aslam, winner of the ‘EID BANAO SMART’ promotion.

Benazir Income Support Programme, Chairperson, Farzana Raja talking to ADBcountry director Werner Liepach.

Pakistan State Oil, CEO & Managing Director, Mr Naeem Y. Mir distributing giftsamongst the garage school’s children on the occasion of world Literacy Day.

Resolving Pakistan’s debt crisis

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