An Ocean of Red Ink
President Obama on Feb. 1 presented a bad-news 2011 budget featuring a three-year freeze on nonsecurity discretionary spending and the expiration next year of Bush-era tax cuts for families earning more than $250,000. Even if Congress accedes, the White House projects red ink exceeding $10 trillion through 2020. Sluggish growth is exacerbating the problem; although the economy grew at a handsome 5.7% annual rate in the last quarter of 2009, economists surveyed by Bloomberg News expect it to slip back under 3% this year. In one attempt to fire up hiring, Obama called for using $30 billion in TARP money for loans to small businesses that increase employment.
Psst! Bank Info for Sale
Crime supposedly doesn't pay, but a banker who stole data on Swiss bank accounts held by 1,500 Germans will be rewarded with a $3.5 million payout. German authorities on Feb. 2 agreed to buy the illegally obtained information. The country is eager to prosecute the potential tax evaders, who moved funds to neighboring Switzerland. Experts reckon the info could bring a $279 million windfall in tax revenue.
Thumbs Up for Greece
Many question whether debt-ridden Greece can tame its raging deficit, but the European Union on Feb. 3 backed the country's ambitious plan to chop spending and round up more tax revenue. The belt-tightening is supposed to cut the current 12.7% deficit to below 3% of GDP by 2012, though EU officials want regular updates after widespread auditing errors were found in Greece's national accounts last year.
Thunder from China
Enraged by U.S. plans to sell $6.4 billion worth of helicopters and antimissile systems to Taiwan, Beijing on Jan. 30 canceled military exchanges and threatened retaliation against United Technologies (UTX), Boeing (BA), Raytheon (RTN), and Lockheed Martin (LMT). All four manufacture munitions intended for Taiwan, but UTC, which is supplying Blackhawk helicopters, and Boeing, which makes Harpoon missiles, have the most at stake. UTC sells elevators, air conditioners, and fire security systems in China, and builds the frames for its helicopters on the mainland, too.
Toyota in Trouble
Skeptical about its recall of 5.6 million cars to either replace floor mats or repair a faulty gas pedal system, members of Congress have demanded that Toyota (TM) back up its repeated claim that electronic systems are not to blame for unintended acceleration incidents. Transportation Secretary Ray LaHood on Feb. 2 said he was pondering civil penalties and advised owners of the recalled cars to stop driving them until Toyota replaces the accelerator pedal, but later backed off the statement. Separately, the U.S. and Japanese governments ordered investigations of the brakes on the carmaker's popular Prius hybrid after some owners complained about their lack of responsiveness.
The Little Movie That Could
Director Kathryn Bigelow's The Hurt Locker may already be this year's big Oscar winner. Tied with mega-blockbuster Avatar at nine nominations, the gritty Iraq War film is expected to see the biggest box-office bounce in the weeks before the Mar. 7 awards ceremony. Encouraged by the nominations, Summit Entertainment will likely add to the mere 535 screens on which the movie is currently playing. Avatar is playing on 3,400 U.S. screens.
The Battle for MGM
Ukrainian-born billionaire Len Blavatnik, a New York-based industrialist with TV holdings in Britain, is among the finalists in the auction to buy debt-ridden MGM. He joins Hollywood players Time Warner (TWX) and Lions Gate Entertainment (LGF) and cable baron John Malone's Liberty Media (LINTA) in the second round of bids, which could come in the next month. Another contender is hedge fund Elliot Associates, which bid for itself and Relativity Media, a film financing company headed by venture capitalist Ryan Kavanaugh. MGM's top assets are its 4,000-film library and its rights to distribute the James Bond films.
An E-Book Fracas
Amazon.com (AMZN) played rough for two days—then capitulated. After briefly suspending all sales of Macmillan books, Amazon on Jan. 31 said it would allow Macmillan, one of the largest publishers of e-books, to set its own prices for titles on the Kindle and keep 70% of sales. The New York publisher intends to offer new best sellers for $12.99 to $14.99, a big bump up from the $9.99 that Amazon usually charges. Anticipating pressure from Apple's (AAPL) iPad, which will connect to an Apple digital bookstore and reading application, other publishers are expected to push Amazon to match Macmillan's terms. "We don't like the Amazon model," said Rupert Murdoch, whose News Corp. (NWS) owns HarperCollins, on Feb 2.
See "Amazon's E-book Price Reversal: A Mixed Blessing"
Boston Scientific Pays Up
A nasty patent fight over heart stents, the tiny mesh tubes that prop open clogged arteries, came to an end on Feb. 1 when Boston Scientific (BSX) agreed to pay $1.73 billion to Johnson & Johnson's (JNJ) Cordis unit. The spat, during which the two companies lobbed a dozen lawsuits at each other, dates back to 2003 and involves three separate patents. The rivals haven't quite buried the scalpel, however: J&J points out in a statement that it is pursuing patent litigation over Boston Scientific's Promus stents.
Behind the Decline of Boston's Investment Firms
Boston hosts an impressive array of mutual fund firms, and the dean of local stockpickers used to brag that he could do better than his brethren in New York. Peter Lynch of Fidelity's Magellan Fund (FMAGX) wrote a book in 1989, One Up On Wall Street, that became a best seller. During Lynch's tenure, from 1977 to 1990, Magellan gained 29% a year, compared with the 15% return on the S&P 500. Yet a Feb. 2 Bloomberg News report shows that mutual fund stalwarts such as Fidelity Investments, Putnam Investments, and MFS Investment Management have seen their overall share shrink over the past decade as traditional stockpicking has lost favor among retail investors and returns trailed some rivals. The three held 12% of the $6.9 trillion in equity and bond funds in December, down from 21% a decade earlier. Don Phillips, managing director of Morningstar (MORN), the Chicago outfit that tracks the industry, believes the bear markets of 2000-02 and 2007-09 dimmed the appeal of Lynch's style. "The stockpickers didn't do a very good job of sidestepping the two bubbles we had," says Phillips.
Investors pulled $37 billion from actively managed stock funds last year, according to Morningstar. Much of that money found its way into bonds, index-tracking funds, or exchange-traded funds—categories where Boston's big firms have never been strong. The damage has been more than reputational, with the city's fund companies cutting employment and moving jobs out of state to lower costs.
Lynch, for one, is not prepared to admit defeat. "Finding money managers who can effectively pick stocks has long been a good way for investors to build wealth, and I think that will be true for the future," wrote Lynch in a Jan. 29 e-mail to Bloomberg. (Bloomberg News)
The Optimism Meter: Expansion Under Way?
The Meter clocked in at 45 on Feb. 2, up from 37 one week earlier as a survey of Americans showed that only 36% still believe the economy is getting worse. Economists now forecast that GDP will grow by 2.7% in 2010. Developed by Bloomberg BusinessWeek using data from pollster YouGov, the Meter is a proprietary measure of sentiment and expectations, economic statistics, and market forecasts. It evaluates shifts in outlook among individuals, professional investors, and economists in the areas of U.S. economic growth, jobs, equity markets, and real estate. (Calculated using consumer polling, economic forecasts, and financial markets data; 0=lowest and 100=highest)
Data: YouGov, Bloomberg BusinessWeek