Morning Brief: 1 August 2011

Gov’t to borrow for PSALM

THE COUNTRY could borrow more than what has been set for next year as state-owned Power Sector Assets and Liabilities Management Corp. (PSALM) has secured Development Budget Coordination Committee (DBCC) approval to course its loans through the national government.
“[The borrowing plan for] PSALM has been approved by the DBCC,” Finance Undersecretary Rosalia V. de Leon told BusinessWorld on Friday, adding that this wasn’t included in the 2012 borrowing plan released earlier in the week.

“The only concern of the DBCC was the treatment of the borrowing because they didn’t want it to impact on the national government’s debt or fiscal deficit,” Ms. de Leon added.

The DBCC, she explained, greenlighted the request after consultations with various entities such as the International Monetary Fund and the Department of Justice. The national government would be the borrower on record but the funds would be relent to PSALM so it would not be added to the public debt stock, Ms. de Leon added.

She claimed it would also have no impact on the deficit, which the government is targeting to cap at P286 billion next year or 2.6% of gross domestic product (GDP).

The Department of Finance has proposed coursing the borrowings of select state firms through the national government in a bid to bring down their borrowing costs. Ms. de Leon previously estimated that the government could secure interest rates 50 to 75 basis points lower than what state-owned firms would get.

The government will borrow to finance PSALM’s operations and maturing obligations next year, Ms. de Leon said. There is no final figure yet negotiations are continuing.

PSALM has to settle $3 billion in obligations this year, mainly due to National Power Corp.’s maturing debts, as well as its own contracts with independent power producers.

The state-owned firm already raised P20 billion through five-year and seven-year peso-denominated retail Treasury bonds in April. In 2009, it also issued $1 billion worth of 10-year global bonds.

Ms. de Leon stressed that the Department of Finance would not “open the floodgates” for all state-owned firms to borrow through the national government.

“PSALM has its own revenue stream and they will be paying this debt,” she said, contrasting it to debt-laden National Food Authority (NFA) which was also hoping to course its borrowings through the government.

The grains agency’s proposal was nixed by the DBCC. “In the case of NFA, we would have had to advance their debt payments,” Ms. de Leon pointed out.

The NFA is seeking to raise P75 billion this year to refinance its debts in order to lengthen maturities and lock in lower interest rates. The state firm is already buried in debt amounting to roughly P154 billion.

The government wants to raise P174.8 billion from external sources next year, with roughly P97.9 billion via global bonds. A total of P529.5 billion will come from the domestic market.


Stocks: 'It's one day at a time'

NEW YORK (CNNMoney) -- Investors have a lot to contend with this week: Washington continues to wrangle over the debt ceiling and Friday brings the ever-important monthly jobs report.
"Unfortunately, it's one day at a time," said Mark Luschini, chief investment strategist at Janney Montgomery Scott. "I'm afraid Monday is going to look like every day last week until there's a resolution."

As of Sunday afternoon, a deal still hadn't been reached although it appeared lawmakers were inching toward a compromise that would extend the debt limit through next year and increase the debt ceiling by $2.4 trillion.

Assuming a deal is finalized by the Aug. 2 deadline, Luschini said investors could expect to see a relief rally but it will be a short-lived one since the focus will quickly turn to Friday's jobs report.

The economic recovery has slowed considerably and "job creation is the answer to a lot of things," said Luschini.

The U.S. economy is expected to have created 78,000 jobs in July, according to a consensus of analysts polled by Briefing.com.

In June, a paltry 18,000 jobs were created, a fraction of the 120,000 jobs that a CNNMoney survey of 27 economists had forecast. It also marked the weakest month since September so any further weakness could rattle investors' nerves and send stocks on a wild ride.

Investors will also have another busy week for corporate earnings, with 107 members of the S&P reporting their results.


U.S. stocks had their worst weekly performance in more than a year last week, as investors' concerns about the nation's debt ceiling escalated.

On the Docket

Monday -- Investors will get the Institute for Supply Management's manufacturing report for August at 10 a.m. ET. This closely-watched report is forecast to come in at a reading of 54, according to Briefing.com. That would be down from June's reading of 55.3.

The Commerce Department will release its June construction spending figures at 10 a.m. ET as well.

In earnings, insurance companies Humana (HUM, Fortune 500) and Allstate (ALL, Fortune 500) are scheduled to report before the opening bell.

Tuesday -- Before the bell, Dow component and pharmaceutical giant Pfizer (PFE, Fortune 500) will report its quarterly results. Analysts surveyed by Thomson Reuters expect the drugmaker to post a profit of 59 cents per share, down 4.7% from a year ago.

Other names reporting Tuesday include CBS Corp (CBS, Fortune 500)., agricultural products company Archer Daniels Midland (ADM, Fortune 500) and NYSE Euronext (NYX, Fortune 500), the parent company of the New York Stock Exchange.

The Commerce Department will release personal income and spending figures at 8:30 a.m. ET. Economists are looking for a 0.1% rise in incomes for June and a 0.1% rise in spending.

Later in the day, the major automakers' will issue their July sales numbers starting at around 11 a.m. ET

Wednesday -- Investors will get the ADP private employment report at 8:15 a.m. ET. Economists expect the private sector hired 95,000 fresh workers in July, down from the 157,000 the sector hired in the prior month.

In other economic data, the Commerce Department will release June factory orders data and the Institute for Supply Management's will put out its service sector index at 10 a.m. ET. Economists are looking for factory orders to fall 1% and the ISM's service sector index to fall to a reading of 53.1.

Time Warner (TWX, Fortune 500), the media giant and parent company to CNNMoney, is expected to report a profit of 56 cents per share when it reports before the bell on Wednesday. Other notable companies reporting results include Clorox (CLX, Fortune 500), MasterCard (MA, Fortune 500) and Prudential (PRU, Fortune 500).

Thursday -- The Labor Department's closely-watched weekly initial jobless claims data comes out at 8:30 a.m. ET, with economists expecting claims to rise to a reading of 405,000 claims from last week's 398,000 claims.

Food company and Dow member Kraft (KFT, Fortune 500) will report its earnings after the closing bell. Analysts are looking for Kraft to post a profit of 58 cents a share.

Southwest Airlines (LUV, Fortune 500), CVS Caremark (CVS, Fortune 500), First Solar (FSLR) and insurance company AIG (AIG, Fortune 500) are also scheduled to report their financial results.

Friday -- The week culminates with the Labor Department's July jobs report, which comes out at 8:30 a.m. ET.

Outside of the government's non-farm payrolls report, investors will also have earnings from Dow member Procter & Gamble (PG, Fortune 500) as well as the Washington Post Co. (WPO, Fortune 500) and Viacom (VIA).


Oil Climbs on Prospect of U.S. Debt-Limit Deal; Funds Bullish on Gasoline

Oil advanced from a two-week low in New York on optimism that lawmakers and President Barack Obama are close to agreement to raise the federal debt limit and avoid a default in the world’s biggest crude consumer.
Futures surged as much as 1.5 percent after Senate Majority Leader Harry Reid approved a tentative deal with House leaders and the Obama administration to raise the borrowing limit. Congressional negotiators and Obama are “very close” to a deal, having made “dramatic progress” on July 30, said Senate Republican leader Mitch McConnell.

“The news of the day is that we’re coming close to a decision in terms of the increase of the debt ceiling,” said Jonathan Barratt, a managing director of Commodity Broking Services Pty in Sydney, who predicts oil will average $100 a barrel this year. “I expect the market to be relatively euphoric over it, which will open the way for more demand.”

Crude for September delivery rose as much as $1.40 to $97.10 a barrel in electronic trading on the New York Mercantile Exchange and was at $96.98 at 9:53 a.m. Sydney time. The contract slipped $1.74 to $95.70 on July 29, the lowest settlement since July 14. Prices gained 0.3 percent last month and are 19 percent higher the past year.

Brent oil for September settlement climbed $1.19, or 1 percent, to $117.93 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract was at a premium of $20.99 to New York futures, compared with a record close of $22.63 on July 14.



Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com

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Jonathan Ravelas
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Rhys Cruz
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