Today's Tidbits

IMF Says China Now World’s Engine of Growth, Not U.S.
From Dow Jones: “Global economic output is growing even faster than expected just a couple of months ago, fueled by demand in China, India and other developing countries, the International Monetary Fund said. The IMF slightly lowered its 2008 forecast for the U.S. economy, the engine of growth for the world for many years, to 2.0% this year, and 2.8% for 2007. China, whose economy should expand 11.2% this year and another 10.5% next, has for the first time become the largest contributor to global growth with output measured both in terms of purchasing power and at market exchange rates, the IMF said. These latest forecasts are about a percentage point higher for both years than the IMF had predicted in April. China alone will account for about a quarter of global growth this year, IMF officials said. China, Russia and India together are likely to contribute about half of world output growth, they said.”

Health Care Premiums Likely to Eat-Up Wage Gains in 2008
From CNN: “Compensation experts are predicting average base pay increases below 4 percent next year - and a lot of that may go to higher health insurance costs, according to early estimates. If you want to fatten your paycheck in 2008 without changing jobs, your best bet rides on the bonus….Base pay increases are expected to be modest at best, even for star players. Since base pay is one of a company's largest expenses, there's a big push to keep a lid on fixed costs…Hewitt and Mercer Human Resource Consulting each are surveying up to 1,000 companies, and their preliminary findings suggest base pay will increase by an average of 3.8 percent…Typically, Abosch sees bonuses ranging from 5 percent of pay up to 40 percent, and not just in sales jobs. The lower end of the range is usually reserved for entry-level employees, the mid-level range (15 percent to 20 percent) for middle managers and professionals, and the high end (30 percent to 40 percent) for upper-level management. Of course, not every company makes their bonus program transparent. They just announce what you got when they pay it out, as if they just discovered an extra pot of money and decided to dole it out. That doesn't do a very good job of communicating the tie between your performance and your pay. If at this point in the year, you're not clear what is expected of you to earn the maximum base pay increase and bonus, talk to your manager about it. If you need added incentive, consider this: Your share of health care costs at work very likely will rise and eat up a significant portion of your base pay bump. "In general we're still seeing double-digit increases in healthcare costs. And most employers are passing the majority of that increased cost directly to employees," Abosch said. Last year, for instance, premium costs grew at more than twice the level of wage growth and inflation - and that was the slowest rate of growth since 2000, according to the Kaiser Family Foundation. Looking ahead, a Hewitt analysis of HMO rates at 160 large companies found that initial 2008 rate increases for HMOs were averaging 14.1 percent …”

Leveraged Buy-Out Financing Under Stress
From Dow Jones: “The sale of $12 billion of loans to support the main auto division of Chrysler was delayed for a second time Wednesday in the biggest deal yet to stumble amid slackening investor demand for leveraged loans and high-yield debt.”
From Bloomberg: “Deutsche Bank AG, JPMorgan Chase & Co. and six more banks are stuck with …$10 billion) of loans for Kohlberg Kravis Roberts & Co.'s purchase of Alliance Boots Plc. The banks will keep the senior loans after failing to find investors to buy them…KKR, Blackstone Group LP and other private equity firms will need to make further concessions to borrow the $300 billion Bear Stearns Cos. says they need to pay for buyouts already agreed. ``It's certainly a bad signal to the market,'' said David Watts, a strategist in London at research firm CreditSights Inc. ``It not only makes private equity more reluctant to do deals but also the banks. Banks don't want to be stuck with the bridge loans. You're not going to want to stick your neck out.''”
From Merrill Lynch: “With the debt markets quickly moving to ration credit, the probability of companies being "taken out" is plummeting…”
From RBSGC: “For those who ponder the Fed, we have to note that a steady 5.25% funds rate for a year masks what else has been going on. To wit, with wider credit spreads the market has given the Fed a hike or two and that process is clearly having some repercussions; witness Expedia cutting back on its buyback and Chrysler's debt issuance postponed as bankers provide the loan themselves. These are the ripple effects of what started in the US housing market over a year ago and in its most basic form translates to rising risk premium… If it were only a story of the economic data, yields would be higher for sure…”

MISC

From Goldman Sachs: “No major surprises [in Fed’s Beige Book Report]--consumers slow, manufacturing activity firm, price and wage trends manageable despite commodity pressures on the price side and shortages of skilled workers on the wage side. Nothing here to change our view that Fed policy will remain on hold.”

From Dow Jones: “The lower-rated risky slices of the ABX index hit record lows as data on subprime loan performance were released by banks who hold the loans. The BBB- slice of the index based on loans made in the second half of 2006 was quoted at 40 cents on the dollar,…”

From The Financial Times: “Foreign earnings came to the rescue of a slew of US multinationals on Tuesday, offsetting weakness in the domestic economy and highlighting their growing reliance on the rest of the world… the results season has been characterised by the increased importance of US companies’ international operations, which have been helped by the weakness in the dollar and rapid growth in emerging markets.”

From The Wall Street Journal: “The freight slowdown that began last year is rippling through the second-quarter results of big transportation companies, whose largely disappointing profits indicate the weak housing and manufacturing markets, on top of high fuel prices, remain a drag on economic growth.
Growth in revenue and delivery volume continue to slow at United Parcel Service Inc., the world's largest package handler in terms of daily shipments. UPS reported its lowest profit growth in nearly three years -- 4% on net income -- and for the second quarter in a row showed essentially no volume growth.”

From The U.S. Treasury: “The vast majority of the Latin American population functions exclusively in a cash and barter economy. More than 70 percent of the residents of most Latin American economies do not use basic financial services such as deposit and transaction accounts, according to World Bank estimates.”

From Market News: “China's insurance regulator said insurers will be allowed to invest up to 15 pct of their total assets in overseas markets…the China Insurance Regulatory Commission (CIRC) said insurers will be able to invest in equities products, including options.”
From Bloomberg: “Japan's trade surplus …expanded 53.4 …from a year earlier… Exports climbed 16.2 percent…The yen fell to a record against the euro in June and 6.5 percent versus the dollar from a year earlier…Exports to the U.S. advanced 6.7 percent …in June… after barely rising in May and falling in April for the first time in two years…Shipments to China surged 22.6 percent to a record …and exports to Asia gained 15.8 percent…Exports to the European Union climbed 16.3 percent … the second highest on record…Half of Japan's exports were traded in dollars in the first half of 2007 compared with 38 percent in yen and 8.7 percent in euros…Export volumes, which don't take into account price and currency fluctuations, rose 6.1 percent in June.”

End-of-Day Market Update
Treasuries rallied a little more today, causing yields to decline by a basis point on the wings (2s and 30s) while better buying caused yields in the belly of the curve to drop 1.5bp (5s and 10s). Ten year Treasury yields are closing at 4.90% (down 1.2bp).
Equities rallied +.5%, recovering approx 30% of yesterday’s losses in the case of the Dow, which gained 68 points. The S&P is settling up 7 points, for a recovery of 17.5% of the prior day’s slump. The VIX index of equity volatility hit a new high, on the open this morning since the Chinese stock market panic of March, when it spiked to almost 19.5. Nervousness faded as equities rallied, and the index closed .5 lower at 18.1. Volatilities for most financial instruments have risen recently.
The Dollar rebounded strongly, from multi-year lows, in the overseas markets overnight. The dollar index opened 50bp higher in NY and held the gain throughout the day settling at 80.61.
Oil rallied over a dollar after government reports indicated inventories fell for the third straight week. Refinery utilization is at a ten month high, indicating rising demand for gasoline. The UK has also had a major refinery shut down.