Election Day Financial News

Finance at First Light
Good morning! Here’s what you need to know:

Republican Victory Day
Voters “in a foul mood” over government spending and persistently high unemployment are expected to repudiate President Barack Obama’s Democratic party today by putting Republicans back in control of the U.S. House, and in stronger position in the Senate. Stuart Rothenberg of the Rothenberg Political Report said, “It’s going to be one of those elections that 10 to 15 years from now people look back and point to as a midterm bloodletting.” Kevin Drum disagrees and considers the situation to be “entirely normal.”

Australia Surprises With a Rate Increase
Worried about strong growth leading to inflation, the Reserve Bank of Australia unexpectedly raised its benchmark interest rate by a quarter percentage point to 4.75%, strengthening its currency toward parity with the U.S. dollar. The move was predicted by only seven of 24 economists surveyed by Bloomberg News. Australia’s jobless rate of 5.1% in September is about half the level of unemployment in the U.S. and euro zone, which helps explain why its currency is up some 11% against the U.S. dollar this year.

Canada Set to Approve BHP’s Bid for Potash — With Conditions
BHP Billiton’s (BHP) $39 billion bid for Potash Corp. (POT) is set for approval by Canadian officials, but only on condition that BHP spend billions of dollars on Canadian infrastructure. Potash is the world’s largest producer of fertilizer. BHP, the world’s largest miner, believes a growing world population will pay dearly for fertilizer. Former Canadian defense minister Paul Hellyer thinks Canada should oppose the deal because investment “under the guise of free trade, has been devastating for us.”

Premium Bid For Exco May Indicate Higher Natural Gas Prices Ahead
Exco Resources (XCO) CEO Douglas H. Miller has teamed up with billionaire oilman T. Boone Pickens and two private investment firms to make a $4.36 billion takeover bid for the firm, which derives more than 90% of its business from natural gas. At $20.50 per share, the offer represents a 38% premium to Exco’s closing price last Friday, and hints that at least some insiders think the future for natural gas is brighter than its recent past, which has been plagued by a supply glut and falling prices. Last night, Pickens said in Dallas: “Natural gas is selling below coal. That can’t go on.”

Mortgage Insurer Ambac May Be Underwater
Ambac Financial Group (ABK), a bond insurer that sold protection on mortgage securities, decided yesterday to skip an interest payment on senior notes due in 2023 and said it may declare bankruptcy by the end of the year. The move may be an attempt to force Ambac’s debtholders to negotiate a prepackaged bankruptcy in order to avoid a drawn-out court battle over the firm’s assets. Ambac is unable to make payments it guaranteed on mortgage-based debt that is defaulting as homeowners struggle in the difficult economy.

JPMorgan and Magnetar Under SEC Investigation
The Securities and Exchange Commission is investigating whether JPMorgan Chase (JPM) allowed hedge fund Magnetar Capital to improperly choose assets for a $1.1 billion subprime mortgage deal called “Squared.” It’s possible that JPMorgan did not fully disclose to investors considering Squared that Magnetar had a role in picking the securities that went into the deal while also betting against segments of the deal. Colin Barr thinks JPMorgan may avoid the fate of Goldman Sachs (GS), which paid $550 million in July to settle a similar probe, because it can’t “match Goldman for sheer villainy” and itself “managed to lose $880 million on Squared,” which is about ten times what Goldman lost on its shady deal.

Personal Income Fell in September
Personal income has been flat for a few months, but slipped slightly in September, according to the Bureau of Economic Analysis. More disturbing is that spending edged higher, meaning that people spent more only by saving less of their diminished resources. That suggests that consumer spending growth, which is what the economy needs, is unlikely in the near term.

Manufacturing Grew in October
For the first time in six months, the Purchasing Managers Index expanded. In October, it rose to 56.9% from 54.4% the previous month. Economists surveyed by Briefing.com expected a slip to 54%.

QE2 Will Total $500 to $700 Billion, Economists Say
A survey conducted by Blue Chip Financial Forecasts of leading economists showed 47.9% expect the Federal Reserve to buy between $500 billion and $750 billion of government bonds in the plan it announces tomorrow. An overwhelming 93% say the market impact is largely priced in, however. Edward Chancellor reviewed opposition to the plan, calling financial gains from QE “fool’s gold” to spur consumers into spending more when their net savings rate is already negative. Thus, QE postpones “the necessary rebalancing of the U.S. economy.”

McKesson to Buy U.S. Oncology
Pharmaceutical company McKesson (MCK) announced that it will buy privately held U.S. Oncology in an all-cash deal worth $2.16 billion. Analysts are debating McKesson’s motives in buying the physician practice management company serving 1,300 cancer doctors, with some suggesting that it hopes to sell more of its equipment and drugs to doctors offices while others doubt whether the “headaches associated with employing doctors and taking care of patients” is worth the privilege of selling to 1,300 new accounts.

BP’s Profits Tarred by Gulf Spill Woes
BP (BP) reported in London today that its third-quarter net profit fell 66.5% after paying another $7.7 billion in charges related to last summer’s Gulf of Mexico oil spill. The spill’s overall tally is now almost $40 billion. Still, the company believes its 2011 capital expenditure will not be derailed by the high cost of the spill and should “exceed the $18 billion previously indicated.” Third-quarter replacement cost profit was $1.9 billion. Douglas McIntyre found it notable that the company could make a profit at all less than a quarter after stopping the leak.

Have a great day!
Jason Kelly

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