Stories by Liz Hester
The decline of big media scoops
by Liz Hester
New York Times columnist David Carr’s piece this week about the decline of big, traditional media outlets breaking news was hardly, well news. But it is interesting that the issue is being raised in one of the oldest papers in the country and he raises some interesting points.
His opening anecdote about New York centric web site Gawker breaking the story of Toronto mayor Rob Ford possibly smoking crack on video and becoming the talk of the Canadian town points out the power of blogs. It also highlights how they’re able to bend journalism standards in pursuit of a story.
The Toronto Star, which had been looking into the story, immediately published its own take after the news broke, but Gawker then initiated a crowdsourced effort to buy the cellphone video. (The site reached its $200,000 goal, but by then the people who had claimed to have the video had gone to ground. John Cook, the editor of Gawker, says he still holds out a slim hope that the video will surface. Gawker will donate the money to an addiction recovery program in Canada if it doesn’t.)
The story got new life on Thursday morning, when law enforcement officials staged a huge raid in the area where the mayor is said to have been taped, and they made a number of arrests. All anybody could talk about was how it might affect the mayor. Mr. Ford has repeatedly denied that such a tape exists or that he uses crack cocaine.
By traditional news standards, what Gawker did was transgressive every which way: it called a sitting mayor of the fourth-largest city in North America a crackhead based on a video that it said it had seen but did not possess. It also asked its readers to chip in to pay for its version of journalism. (“Oh, you mean like The New York Times does every day with its paywall?” quipped Mr. Cook.)
But even though Gawker was working the far edge of journalistic practices, the rest of the press in Toronto was compelled to follow because the story was out there and taking on a life of its own.
It is not a totally new phenomenon. Any number of big stories have started out as untouchable in suspect news outlets like The National Enquirer, but eventually broke into the mainstream. But now information increasingly finds its own digital path, and if the news is big enough, it will be seen by all, regardless of who first puts it out in the world.
When I worked at Bloomberg, we often monitored and followed up on reports on blogs like Dealbreaker, Seeking Alpha and Business Insider. Many times the whole story wasn’t true, but there were parts of it that were and we spent hours chasing down facts.
And it’s hard to compete with platforms that can offer opinion, analysis and facts culled from various sites all in one place. Sources see this and can pick their outlets much easier. Carr makes a similar point.
The business disruption in the media world caused by the Internet has been well documented. But a monopoly on scoops, long a cherished franchise for established and muscular news organizations, is disappearing. Big news will now carve its own route to the ocean, and no one feels the need to work with the traditional power players to make it happen.
Sources and news subjects simply have far more options now. In politics, for instance, people who have had rocky relationships with the news media can just fire up a video camera, upload to the Web and set up their own little news channel. Sarah Palin did it when she retired, as did Michele Bachmann more recently. Anthony Weiner, the disgraced former congressman, announced his candidacy for mayor of New York by releasing a video in the dead of night.
If an abuse of power akin to Watergate happened today, it might not take the might and muscle of The Washington Post to get the story. The Mitt Romney “47 percent” video, arguably a turning point in the last presidential campaign, came out on the Web site of Mother Jones, a relatively small liberal magazine.
The Pew Research Center’s Project for Excellence in Journalism annual State of the News Media 2013 report highlights similar trends.
Efforts by political and corporate entities to get their messages into news coverage are nothing new. What is different now—adding up the data and industry developments—is that news organizations are less equipped to question what is coming to them or to uncover the stories themselves, and interest groups are better equipped and have more technological tools than ever.
While traditional newsrooms have shrunk, however, there are other new players producing content that could advance citizens’ knowledge about public issues. They are covering subject areas that would have once been covered more regularly and deeply by beat reporters at traditional news outlets—areas such as health, science and education. The Kaiser Family Foundation was an early entrant with Kaiser Health News. Now others, such as Insidescience.org, supported by the American Institute of Physics and others, and the Food and Environment Reporting Network with funding from nonprofit foundations are beginning to emerge. In the last year, more news outlets have begun to carry this content with direct attribution to the source. The Washington Post, for example, regularly carries articles bylined by Kaiser Health News and NBC.com runs Insidescience.org stories with a lead-in identifying the source.
For news organizations, distinguishing between high-quality information of public value and agenda-driven news has become an increasingly complicated task, made no easier in an era of economic churn.
All that means that consumers have many more choices and will likely have a harder time wading through all the noise to find the real facts. New media is important and pushing traditional media to stay on its toes is critical. For the sake of everyone, let’s hope that people realize the value of both types of news outlets.
Detroit tries to salvage its finances
by Liz Hester
On Friday, Detroit Emergency Manager Kevyn Orr, a bankruptcy lawyer hired to manage the city’s troubled finances, unveiled his plan to try and keep the municipality out of bankruptcy. And it’s not pretty.
The Wall Street Journal story offered these details:
The city of Detroit told some debtholders on Friday they will have to accept pennies on the dollar or risk getting drawn into the largest U.S. municipal bankruptcy ever.
Kevyn Orr, the bankruptcy lawyer hired by Michigan Gov. Rick Snyder to lead the restructuring of Detroit’s troubled finances, told representatives of the city’s creditors that the city plans to stop making payments on some of its debts, starting with a $39.7 million payment that was due Friday, and won’t make payments in the foreseeable future on at least $2 billion in unsecured municipal debt as part of a move to save cash.
The total bill for the city’s long-term liabilities is nearly $20 billion, and the city is now insolvent, according to Mr. Orr. His decision to suspend debt payments could serve as a trigger for Chapter 9 bankruptcy filing in a matter of months, and the plan for the city of about 700,000 that he unveiled on Friday could serve as a road map under bankruptcy.
Over the next 30 days, Mr. Orr plans to negotiate with dozens of bondholders, insurers, unions and pension funds. If enough of those groups balk at the plan, they could help force a Chapter 9 bankruptcy. It is still possible—but increasingly unlikely, say people familiar with the matter—that a negotiated settlement can be reached outside of bankruptcy court.
At most risk is the $11 billion in unsecured debt. That includes almost $6 billion primarily in health benefits for retired city workers; more than $3 billion for retirees’ pensions; and about $530 million in general-obligation bonds. Retirees are set to get less than 10% of what is owed them under the plan.
The Forbes story led with a bleak quote from Orr on the city’s plight and outlined the five areas he will focus on changing: debt, pensions, water, lower taxes, and parks and parking:
“Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past 45 years have brought Detroit to the brink of financial and operational ruin,” Orr said in a statement.
The restructuring plan sets a timetable of meetings beginning June 17 with creditors, and an evaluation period ending July 19. Most experts think it would take the city at least six weeks to draft a Chapter 9 filing, and the situation is likely to require negotiations with the state, as well. That means a long, difficult summer for the city before any resolution takes place.
The USA Today story offered this interesting historical context for the city’s struggles:
Legal experts say the Detroit case could establish new case law because it would be the largest Chapter 9 petition in U.S. history and municipal bankruptcy has been a last resort used infrequently — fewer than 700 times since the 1930s. The largest bankrupt city so far is Stockton, Calif., with a population less than half Detroit’s and debts that are just a fraction of those here.
“This is foreign territory for everybody,” said Doug Bernstein, who leads the banking, bankruptcy and creditors rights practice for the Plunkett Cooney law firm in Bloomfield Hills, Mich. “The attorneys are in uncharted territory; the judges are in uncharted territory, if (a bankruptcy petition) ever gets filed.”
Among those watching are bond markets, the people who loan money to cities by buying their bonds.
Marilyn Cohen, president of Envision Capital Management in Los Angeles, said Friday that the municipal bond world is on high alert for the outcomes of Detroit’s financial meltdown and how — and at what level — the city’s creditors are repaid. Investors and analysts will look for clues to how what happens might impact future U.S. municipal bankruptcies that she said are inevitable among local governments with debts and retiree liabilities they can no longer afford.
The Reuters story went to great lengths to show the distress of Detroit’s finances and the hard task Orr faces:
Orr told reporters on Friday there was a 50/50 chance of bankruptcy for Detroit, which would be a first for a major U.S. city. At the same time, he insisted this was “not a jaded effort just to go through the process to get to a bankruptcy filing.”
The emergency manager’s proposal went to great lengths to detail the city’s financial ruin, declaring in a stark subheader: “THE CITY IS INSOLVENT” and cataloguing Detroit’s disastrous record of keeping its citizens safe and its streetlights on.
Detroit, the center of the U.S. auto industry, is the poorest large city in the country, with more than a third of its residents living below the official government poverty line.
At a minimum, Orr’s opening move could be seen as part of a checklist he needs to tick off in order to meet legal requirements needed to declare a bankruptcy of America’s most troubled metropolis. But some restructuring experts see in Orr’s approach an attempt to put together a pre-packaged bankruptcy, a strategy that has been adopted for Chapter 11 bankruptcies in the corporate world but never before used for a municipality seeking Chapter 9 bankruptcy protection.
To say that Orr faces a difficult task is quite the understatement. But it remains to be seen if he can keep Detroit out of bankruptcy and if any part of the plan will be acceptable to creditors and pensioners. The world will be watching since whatever happens there will be a lot of eyes watching the outcome.
Gannett to buy local TV stations
by Liz Hester
Gannett is paying $1.5 billion for Belo Corp., doubling its TV operations, and trying to move into the more lucrative world of broadcast as papers continue to lose money.
The New York Times writes that it’s the biggest sale of local TV stations in a decade:
The takeover is a move by Gannett to diversify its media operations at a time when traditional print media continues to struggle. The company said the transaction would increase its television portfolio to 43 stations from 23, while its revenue from digital and broadcasting operations would make up two-thirds of its pro forma earnings before interest, taxes, depreciation and amortization.
The deal is the biggest local television station sale in about a decade and comes amid of a wave of consolidation in the industry. One of Gannett’s rivals, the Sinclair Broadcast Group, is currently acquiring two smaller station owners.
And they offer this rational for the purchase:
Being bigger is also better when the stations turn around and negotiate with the networks that provide them programming. Networks like CBS have been aggressive about receiving a slice of stations’ retransmission fees, something known in the industry as reverse compensation.
Having a presence in more markets across the country — Gannett will have 21 stations in the nation’s top 25 markets when the Belo deal closes — can also help on the advertising front. Local stations in states with competitive elections have looked particularly valuable to investors as a result of the surge in political advertising every two years.
The Wall Street Journal points out that Gannett is on more solid financial footing than in the past:
Gannett—the largest U.S. newspaper publisher by circulation, including its flagship USA Today—has been aiming to build up its digital operations, partly through bolt-on acquisitions, as readers increasingly turn to the Internet and mobile devices for news. The company’s circulation revenue also has been getting a boost from the rollout of the digital subscription program.
In April, Gannett reported that its first-quarter earnings rose 53% as the media company reported a boost from its digital-subscription program, revenue growth in its broadcast business and a tax benefit. The company also reported its broadcast revenue increased 8.7% to $191.6 million, driven in large part by a 59% increase in retransmission revenue.
Bloomberg Businessweek goes even further to highlight the appeal of TV stations versus the dying dinosaur of newspapers:
Newspapers, like 1960s sports cars, are expensive toys these days: costly and usually more trouble than they’re worth. That’s the sentiment behind Gannett’s (GCI) move this morning to buy Belo (BLC) for $2.2 billion in cash and assumed debt. If shareholders and antitrust regulators sign off on the deal, the owner of USA Today and 81 other newspapers will be transformed into a company that earns more than half of its operating profit from TV broadcasts.
Apparently, investors were thrilled with the decision, sending the stock to record highs according to the Bloomberg story:
Gannett Co., the publisher of USA Today, surged the most in almost four years after agreeing to buy Belo Corp. (BLC) for about $1.5 billion, gaining TV stations to reduce its dependence on its shrinking newspaper business.
Gannett leaped as high as 29 percent to $25.69, the most since July 2009. It traded at $25.10 at 9:46 a.m. in New York. The McLean, Virginia-based publisher will pay $13.75 per Belo share in cash and assume $715 million in debt, according to a statement today. The per-share price is 28 percent above Belo’s closing price yesterday.
In addition to Houston, the deal gives Gannett stations in other major markets in Texas as well as in Arizona and in parts of the South and Northwest. The stations, and the broadcast networks they’re affiliated with, are beginning to extract fees from cable and satellite operators such as Comcast Corp. and DirecTV in exchange for distributing local-TV programming.
The pace of mergers has accelerated in the broadcast-TV industry: Last week, Media General Inc. agreed to buy New Young Broadcasting Holding Co., while Sinclair Broadcast Group Inc. has spent more than $1.84 billion on broadcasters in the past two years.
“Consolidation continues in the industry,” Tracy Young, a media analyst at Evercore Partners, said in an interview. “At the end of the day there’ll be a handful of players.”
The transaction also underscores Gannett’s exposure to the weakening newspaper industry. The company’s publishing business declined 23 percent in operating income last year from 2011. Gannett’s broadcast division, meanwhile, gained 47 percent in the same period.
What these stories aren’t pointing out is how consolidation generally leads to fewer jobs, which is terrible news for those continuing to eek out a living in the shrinking media sector. While it might be good for investors, it does shake confidence in companies that continue to get the majority of their income from newspapers.
It also is a counter to the argument for splitting newspaper and television properties as News Corp is doing. It may also be hard to attract investors to the more traditional media companies.
Interest rates turning up
by Liz Hester
As someone in the process of buying a house, I’ve watched interest rates climb steadily during the past couple of weeks. Each little tick up shaves more off my ability to save. Several stories Wednesday highlighted this fact and some of the economic conditions causing it.
The New York Times had this story:
It has been a reliable fact of life for investors, corporations and ordinary borrowers: interest rates, for the most part, keep heading lower.
But all of that may be about to change. For prospective homeowners, the cost of mortgages has been going up in recent weeks. Governments are also facing the prospect of higher borrowing costs down the road, and they are projecting increases to their debt burdens. Savers with money in bank accounts, on the other hand, have the prospect of finally earning more than a pittance on their deposits.
The interest rate charged by lenders, often cited as the single most important factor behind economic decisions, has been steadily going down for most of the time since the early 1980s, and has fallen to historical lows since the financial crisis. Over the last few months, though, investors and banks have been demanding higher payments for their loans, pushing up interest rates and bond yields.
The first tremors have been felt most sharply on investment products that were reliant on low rates, like bonds issued by American companies. But the movement is quickly spreading out into the real economy.
The Wall Street Journal’s David Wessel posted a thorough analysis of some of the underlying causes of volatility:
The tectonic plates of the world economy are shifting, moving the yield on the 10-year Treasury to the highest level in more than a year and shaking financial markets from Tokyo to Mumbai and Johannesburg to São Paulo.
For the past few years, the global economy, struggling to recover from a financial crisis, has relied on a few constants: The U.S. would print plenty of money and keep interest rates very low. China would provide a lot of demand and vacuum up commodities from around the world. And Japan was largely irrelevant.
Suddenly, all three of those are being questioned in markets, triggering paroxysms in stocks, bonds, commodities and—particularly, in the past couple days—the currencies of emerging markets.
The big questions hanging over markets and the global economy now: Is this is the inevitably bumpy beginning of a welcome return to normal—a world in which the U.S. economy doesn’t need big and repeated doses of monetary stimulus, Japan grows again and China’s economy gently slows to a sustainable speed?
Or is it a harbinger of more volatility in financial markets—perhaps the result of a misreading of the Federal Reserve’s policy intentions by the markets or a premature move by the Fed to cut back on easy money—that yields an unwelcome increase in market interest rates before the U.S. economy achieves what Fed Chairman Ben Bernanke once called “escape velocity”?
Answering those questions now is impossible.
I find that last part funny, since he goes on to try and do just that. But Bloomberg said stocks fell on Wednesday on more uncertainty:
Stimulus from the Federal Reserve and better-than-forecast earnings have propelled the bull market in U.S. stocks into a fifth year and driven the S&P 500 up 138 percent from a 12-year low in 2009. The gauge has fallen 3.4 percent from its record high on May 21, the day before Fed Chairman Ben S. Bernanke suggested the central bank could curtail its bond purchases, known as quantitative easing, if the economy improved in a “real and sustainable way.”
Investors get their next look at the health of the U.S. economy tomorrow, when reports may show initial jobless claims were unchanged last week and sales at retailers rose in May. The S&P 500 rallied June 7 after jobs growth in May beat forecasts. At the same time, bigger job and wage gains are needed to move the central bank closer to scaling back stimulus. Fed policy makers next meet June 18-19.
Concerns over economic growth and the pace of central-bank bond buying have led to widening swings in U.S. shares. That has prompted options traders to make unprecedented bets on equity volatility, pushing bullish and bearish contracts to records. Options outstanding on the iPath S&P 500 VIX Short-Term Futures ETN, tracking a gauge of VIX futures, climbed to an all-time high of 3.46 million on June 6, based on data compiled by Bloomberg.
What is certain is that interest rates will rise. That will make it interesting to see if the rebound in the housing market will continue or if potential buyers will be scared off by volatility or rising rates. That could also have hard ramifications for Wall Street as it tries to generate more fees to offset those it has lost.
The only people likely happy about the situation are the volatility traders.
Sorkin calls out tech companies
by Liz Hester
In his June 10 column, New York Times’ Andrew Ross Sorkin raises some pretty interesting issues about the government’s monitoring of personal communications and the role that large technology companies play. Some of his points would make for great questions on executive calls and follow-up stories for others.
Sorkin points out that Facebook’s CEO Mark Zuckerberg and Google’s chief Larry Page both denied that their companies were involved in the government’s spying, but that doesn’t exactly add up with the facts that we know about the program:
Mark Zuckerberg, Facebook’s founder and chief executive, declared: “Facebook is not and has never been part of any program to give the U.S. or any other government direct access to our servers,” adding that, “We hadn’t even heard of Prism before yesterday.”
Larry Page, Google’s co-founder and chief executive, went slightly further. “The U.S. government does not have direct access or a ‘back door’ to the information stored in our data centers,” he said. Apple, Microsoft, AOL andYahoo followed with denials as well.
And yet President Obama and the United States director of national intelligence, James R. Clapper Jr., have publicly confirmed the existence of the Prism system, without providing any details about it.
Of course, the news — as well as the responses — raises doubts about who is telling the truth and about how extensive the spying program really may be.
But perhaps just as important, the episode also raises questions about how publicly traded companies with hundreds of millions of consumers — companies that are regulated by the Securities and Exchange Commission and the Federal Trade Commission — can, and should, react to news when pressed about involvement in confidential government programs.
He writes that the statements are likely true when taken literally, but once one denied involvement, they all had to deny it. But they’re walking a fine line, since they do provide the government with large amounts of data:
But I also don’t doubt another part of his statement that was frequently overlooked: “We provide user data to governments only in accordance with the law.”
In other words, when the government makes a legitimate request — and through Section 702 of the Foreign Intelligence Surveillance Act, which was highlighted by the leak, the government can seek vast troves of information — Google and others comply.
It is possible, for example, that Mr. Page and Mr. Zuckerberg had never been told that the government’s program was called Prism. And it is highly unlikely the government has a password granting access to company servers despite early reports quoting a government document that used the phrase “direct access” and now appears as if it overstated the case.
At the same time, however, companies like Facebook and Google have clearly worked with the government to create systems to transfer vast amounts of private data that is sought by the N.S.A. and other government agencies. The New York Times reported last week, based on people briefed on the matter, that Google and Facebook discussed plans “to build separate, secure portals, like a digital version of the secure physical rooms that have long existed for classified information, in some instances on company servers.”
That is different from the idea that the government has “direct access” to corporate servers, but it still means that the companies are providing the government with enormous amounts of data.
For it’s part, Google has requested to publicize when the government asks for data, according to the Wall Street Journal:
Google Inc. on Tuesday said it had asked the U.S. Justice Department for permission to publicly report on secret federal court orders that require it hand over information about its users to authorities including the National Security Agency.
Google’s request, made in a public letter written by its chief legal officer, David Drummond, comes days after the government on Saturday publicly acknowledged that Internet content companies had received secret Foreign Intelligence Surveillance Act requests about the activities of their users.
It will be interesting if this sparks other companies to make this information public as well. The argument being that because the agency has discussed the matter publicly, then Google should be able to disclose it.
Sorkin points out that most tech companies have “terms of service” agreements that allow them to share personal information and communications. But since most people don’t usually read those, it’s hard to know what you’ve signed up for and who will wind up with it.
This raises interesting angles for business stories. Are there ways to make those disclosures easier for people to read and understand? Is there really a way to safeguard private information?
It would also be interesting to hear if investors are concerned about the risk of losing customers or if many of these sites have become so essential that people will shrug off the privacy concerns in order to keep posting cat photos.
Here is Sorkin’s last paragraph and parting thought:
So while the nation’s biggest technology companies may not be a part of systematic large-scale spying program, it is clear that they are legally required to play a significant role in funneling data to the government. That leaves them on a tightrope balancing what they can say to their customers and investors while complying with their obligations to keep the government’s secrets.
It’s definitely an important issue and one that I’m sure will come up in earnings calls in the next couple of months. Legal departments all over Silicon Valley are gearing up for a few long nights of prepping executives on what they can and can’t say.
Small firms get new accounting rules
by Liz Hester
Small and medium firms may have new, simpler rules for reporting finances in an effort to make accounting for them easier. While most of the business media covers large, publicly traded companies, this is a big deal for entrepreneurial firms and could amount in some much needed cost savings.
Here are some of the details from the Wall Street Journal:
Millions of U.S. small businesses will be able to use simplified, streamlined methods for measuring and presenting their financial results under a new accounting framework announced Monday.
The new guidelines for “small and medium-size entities” come from the American Institute of Certified Public Accountants, the nation’s main accounting trade group.
The guidelines are designed as an alternative to generally accepted accounting principles, or GAAP, the system large companies use in the U.S.
“It is a framework that is tailored for small business—a very relevant, simplified framework,” said Bob Durak, the AICPA’s director of private company financial reporting.
The New York Times added these details and pointed out a drawback of the new rules:
Some private companies have complained that preparing GAAP statements costs too much, with a considerable portion of the cost coming from rules that provided for disclosures that might be irrelevant. The companies say that because owners and lenders generally know one another, it is easy for them to arrange to get only the information they actually need, whether or not the rules require companies to provide it.
In the United States, unlike some European countries, there are no legally required accounting standards for most companies. The Securities and Exchange Commission requires that companies that sell securities in the public markets follow GAAP, but all others can use any form of accounting that the company and its creditors find acceptable. Many smaller companies just use tax accounting, because they must file tax returns like everyone else.
To win widespread acceptance, the institute framework would need support from two groups: accountants and bank lenders.
Any company that chooses to adopt the framework would face new headaches if it ever decided to go public. Then it would have to redo its financial statements for at least two years to conform to accepted accounting principles. “The framework is not intended for companies that are looking to go public,” Mr. Durak said.
The changes being proposed for a new GAAP for private companies might prove less of a problem. Because they are presented as specific changes from the normal rules, it might be easier to reverse them if a company needed to do so to sell securities in public markets.
It’s interesting to note that the new rules are not intended for firms that may go public. So the impact to the business media seems to be small. But it will be important for trade publications and those who work with middle market firms to understand the rules.
The New York Herald outlined the big pieces of the new guidelines:
Small businesses will use the FRF for SMEsTM to prepare financial statements that clearly and concisely report what a business owns, what it owes and its cash flow. Lenders, insurers and other financial statement users will find this new accounting framework helps them clearly understand key measures of a business and its creditworthiness, including:
- Business profitability
- Cash available
- Assets to cover expenses
- Concise disclosures
The framework’s streamlined common-sense requirements are based on traditional and proven accounting methods to ensure consistent application. Specifically, the FRF for SMEsTM:
- Uses historical cost – steering away from complicated fair value measurements
- Offers a degree of optionality – businesses can tailor the presentation of statements to their users
- Includes targeted disclosure requirements
- Reduces book-to-tax differences
- Produces reliable financial statements that can be compiled, reviewed or audited
What will be interesting to see is if some choose to research the outcome of the new rules. For instance, I would love to see if cost savings allow these companies to expand or if they have trouble getting bank loans because they don’t have GAAP financials. While those stories are years off, any time rules are changed, it’s a good idea to pay attention.
Taking a look at China’s economy
by Liz Hester
There were a couple of stories about the state of the Chinese economy during the weekend. Covering this story continues to be one of the biggest for business journalists, but sometimes it’s just hard to make sense of an economy that’s controlled by the state.
Here’s the New York Times story:
After weathering the global financial crisis better than any other large economy, China is now showing signs of slackening growth despite heavy lending from state-owned banks and extensive government investment programs.
Industrial production fell last month to its lowest growth rate since last September, data released over the weekend showed. Imports, mainly materials needed by factories, and fixed-asset investment both fell in May to their weakest growth since last August, when the economy was still mired in a sharp but deep summer slowdown.
Producer prices, typically measured at the factory gate, have declined year-on-year every month for 15 months in a row and have accelerated downward through March, April and May. Chronic overcapacity has set off price wars even as blue-collar wages continue to rise.
The May data “have confirmed that the economy is stuck in stagnant growth again after quite a brief rebound” over the winter, said Xianfang Ren, a senior economist in the Beijing office of IHS, a global consulting firm. “Demand-side indicators are unanimously weak, with extremely weak exports growth and continued slide of fixed-asset investment growth.”
China’s difficulties have global significance because the country has emerged as the world’s largest consumer of many goods, including items like copper, steel, cars and cellphones. Economists from a number of international organizations and banks have been marking down their forecasts for Chinese economic performance this year, predicting growth of about 7.7 percent. That would be a robust pace by most countries’ standards but is weak for China, where many businesses and families had become accustomed to double-digit growth over most of the last three decades.
The Reuters story led with the numbers for the second quarter with a lead that stuck closely to the facts with little embellishment:
Risks are rising that China’s economic growth will slide further in the second quarter after weekend data showed unexpected weakness in May trade and domestic activity struggling to pick up.
Evidence has mounted in recent weeks that China’s economic growth is fast losing momentum but Premier Li Keqiang tried to strike a reassuring note, saying the economy was generally stable and that growth was within a “relatively high and reasonable range”.
China’s economy grew at its slowest pace for 13 years in 2012 and so far this year economic data has surprised on the downside, bringing warnings from some analysts that the country could miss its growth target of 7.5 percent for this year.
Exports posted their lowest annual growth rate in almost a year in May at 1 percent, exposing a more realistic picture of trade following a crackdown by authorities on currency speculation disguised as export trades to skirt capital controls, which had created double-digit rises in export growth every month this year even as world growth stuttered.
The Financial Times lead offered the best wrap up of all the economic information and context at the top of their story:
The Chinese economy is grinding toward its second straight quarterly slowdown after data from May provided fresh evidence of sluggish growth.
Trade growth tumbled, imports fell, inflation slowed, investment weakened and bank lending also declined, putting pressure on the government to do more to prop up growth.
Beijing is aiming for 7.5 per cent growth this year and the anaemic data mean the economy is at risk of slipping below that target in the second quarter. China’s new leaders have vowed to shift the economy away from a reliance on government-led investment, so the slowdown will test their resolve to implement reforms as they try to unleash consumption as a bigger engine of growth.
“The May data is moderate in every way, which does nothing to lift expectations, and introduces greater uncertainty about the direction of policy,” said Ken Peng, an economist with BNP Paribas.
The most dramatic decline was seen in China’s trade figures. Exports rose just 1 per cent in May from a year earlier, down from an increase of 14.7 per cent in April. Imports shrank 0.3 per cent in May after expanding 16.8 per cent in April.
The Wall Street Journal decided to lead with the credit angle:
China is moving to slow a surge in credit that could produce a wave of bad debts and financial failures, but it risks reducing the pace of growth in the world’s second-largest economy.
Total social financing—China’s widest measure of credit—fell by about one-third to 1.19 trillion yuan ($194 billion) in May from April, the second month of substantial decline, the People’s Bank of China said Sunday. New bank loans, a subset of total social financing, also has fallen significantly during the past two months. On Friday, the central bank warned that unconventional lending known as shadow banking was creating increased risks for the financial system.
But putting the brakes on lending risks a further slowing of China’s growth, as companies, government infrastructure projects and real-estate developers find it tougher to find financing. Already, a raft of data for the month of May suggests the current quarter could be a second consecutive quarter of disappointing growth, and many economists have been downgrading their forecasts for this year’s growth.
All the dire news doesn’t bode well for Wall Street or those predicting that the global economy will turn around quickly. What will be interesting is to see if the Chinese government pulls any levers to spark growth. The rest of the world will be watching and waiting.
Wealth back to 2007 levels — or is it?
by Liz Hester
According to the Federal Reserve Board, personal wealth levels have finally climbed back to their 2007 levels, minus the inflation adjustment. So, what exactly does it mean that we’re back where we were and what about those five and a half lost years?
Here’s the Wall Street Journal’s take on the revelation:
Americans have rebuilt much of the wealth they lost during the recession.
The net worth of U.S. households and nonprofit organizations—the value of homes, stocks and other assets minus debts and other liabilities—jumped 4.5%, or about $3 trillion, in the first three months of 2013 to $70.349 trillion. That is the highest in nominal terms since records began in 1945, according to a Federal Reserve report released Thursday.
The report—while tempered by inflation adjustment and a likely uneven distribution of the wealth—represents a milestone for an economy that is slowly returning to health. For the past five years, U.S. consumers have struggled to fix their balance sheets from the damage inflicted by the housing crash and recession, which ran from December 2007 through June 2009. Now the data suggest that recent stock-market gains and a revival in the U.S. housing sector are boosting Americans’ wealth—a trend that over time could make them more inclined to borrow and spend, providing a lift for the overall economy.
But when you factor in that pesky inflation, the story is a bit different:
To be sure, the Fed’s latest figures aren’t adjusted for inflation or population growth. Adjusting for rising costs, Americans’ net worth remains roughly 6% below the peak level in the third quarter of 2007. And on an inflation-adjusted, per-household basis, only 63% of households’ losses have been reversed, according to UBS.
The New York Times story says that the news comes as people are beginning to feel more positive but also comes amid mixed signals for the economy:
The encouraging report from the Fed comes amid other signs that Americans are feeling slightly better about the economy.
In a New York Times/CBS News poll conducted May 31 to June 4, 39 percent of respondents said that the recent condition of the economy was very or fairly good, the highest share saying this not only since President Obama took office but also since the recession officially began in December 2007.
About a third of respondents said that the economy was getting better, similar to what the trend had been in the previous six months. (Another 24 percent said that it was getting worse and 42 percent said the economy was staying about the same.)
Nearly half of respondents — 46 percent — rated the job market in their areas as very good or fairly good, with a third saying that they thought their local job markets would improve over the next year.
The poll has a margin of sampling error of plus or minus three percentage points.
Despite newfound optimism in some quarters, the economy continues to send mixed signals. Even as consumer spending remains healthy and the housing market rebounds, the labor market has been much slower to recover and many Americans at middle and lower income levels remain worse off than before the downturn.
USA Today points out that most people haven’t actually regained all their lost wealth, indicating that the increase has been disproportionate:
The gains aren’t translating into a quick boom in consumer spending, Moody’s Analytics economist Scott Hoyt said. One reason is that Americans are still 11% poorer than in 2007, after adjusting for inflation and population growth.
With those adjustments, the average household has recovered only about 63% of the wealth it lost, according to calculations by the Federal Reserve Bank of St. Louis. Affluent households have benefited most because most of the recovered wealth has come from higher stock prices. The wealthiest 10% of Americans own about 80% of stocks.
The recession cost Americans $15.6 trillion in wealth.
Average household wealth, adjusted for inflation, was $539,500 at the end of last year, according to the St. Louis Fed. Yet most households own less than the average, which is skewed by how much wealth belongs to the most affluent.
“Most families have recovered much less than the average amount,” the St. Louis Fed report says.
It’s interesting how conflicting the picture is for the average consumer. Home prices are rising, but jobs aren’t being created as quickly as anticipated. While is seems wealth is increasing, many signs point that it’s being created for some and not across the board.
The business media will have a lot of conflicting information to shift through in the next several weeks as more economic data comes out. But the $15.6 trillion in lost wealth is a staggering number, especially when you think of all the debt still to be paid off.
SEC moves on money market reforms
by Liz Hester
In a move meant to curb runs on money funds, the Securities and Exchange Commission agreed to a set of reforms. While changes in the industry have been debated since the 2008 financial crisis, they’ve been a while coming.
The Wall Street Journal story offered the most concise and easy to comprehend lead of the stories I read on the topic. Excerpts are below:
The Securities and Exchange Commission voted in favor of overhauling the $2.6 trillion money-market mutual fund industry, targeting the types of funds seen as most prone to investor runs during the financial crisis.
The SEC’s proposal, which is likely to divide the industry, would require “prime” funds catering to large institutional investors to abandon their fixed $1 share price, allowing the funds’ prices to float like those of other mutual funds. Prime funds invest in short-term corporate debt and are considered more risky than funds that buy only government securities.
In targeting prime institutional funds, the SEC s focusing on the roughly 37%, or $1 trillion, portion of the industry considered most likely to lead to trouble. Institutional investors’ concerns about prime funds’ exposure to Lehman Brothers debt caused them to withdraw about $300 billion from the funds in the week after the firm collapsed in September 2008.
As the market works now, all money funds target a stable share price of $1. During the crisis, investors worried that the value of shares in certain prime funds would fall below $1, and rushed to get their money out. Supporters say switching to a floating share price would accustom investors to fluctuating values, making runs less likely.
Reuters offered a good explanation of both parts of the new rule. Here is the second aspect of the proposal:
The SEC said that retail and government funds, which are not considered to be at the same risk for runs, would not be forced to move to a floating net asset value. Retail funds are defined as those that limit shareholder redemptions to $1 million per day.
Crane Data estimates that prime funds account for 55 percent of money market fund assets, with 31 percent institutional and 24 percent retail.
The second alternative in Wednesday’s proposal would allow funds to maintain a stable share price, but they could utilize so-called “liquidity fees and redemption gates” during times of stress. That is an idea that the SEC’s two Republican commissioners last year said they might be able to support.
The SEC said a 2 percent liquidity fee on redemptions could be imposed if a fund’s level of weekly liquid assets fell below 15 percent. Boards could opt, however, not to impose the fee if they felt it was not in the best interest of investors.
The SEC said the redemption fee and gate measures would apply to non-government institutional and retail money market funds, but government funds could voluntarily impose them.
If a fund crossed this threshold, its board of directors would be allowed to impose the gates, or temporarily suspend redemptions.
But what isn’t clear is how this will help consumers. Most of the stories read to me like the reforms are targeted at funds that are primarily held by institutional investors. It took USA Today to offer a good explanation of the outcome for ordinary investors:
If adopted after a 90-day public comment period, investors could theoretically lose principal from their investments in money market investment funds that suffer market losses. But that risk would largely affect institutional rather than mom and pop investors.
This seems like important information to have in every story so people won’t be alarmed if they see principal drop with the market. Apparently CBS News agrees with me, leading its story with this information and then providing this consumer related context high in their story:
Allowing values to float would make some money funds more like bonds, whose principal changes with increases or decreases in interest rates. That’s a fundamental shift because it means investors could lose principal if the value falls below $1.
Proponents say it is necessary change because it would show money funds, while safer than stocks and many other investments, still carry some level of risk. They say more awareness of the risk would reduce the potential for runs on money funds.
The SEC proposal would limit the floating-value requirement to those money market funds known as “prime.”
Prime funds attract mainly big institutional investors, as opposed to retail customers, and are considered more risk prone because they invest in short-term corporate debt. They represent roughly half of the total $2.9 trillion assets held by all money market mutual funds.
Exempt from the floating-value requirement would be money market funds that hold at least 80 percent of their assets in cash or government securities and retail funds limiting an investor’s withdrawals to a maximum of $1 million per business day.
Because many people hold these types of investments, I think it’s important to put the information most relevant to consumers at the top of the story. Some in the business media would be well served to remember the audience when writing these types of stories. While they’re relatively straightforward and routine, it’s important to remember the readers and not just regurgitate facts from the press release.
Looking at patent trolling coverage
by Liz Hester
President Obama issued executive orders Tuesday in an attempt to stop firms that abuse patents, or so-called patent trolls. The issue is one that’s been championed by the technology industry, according to the press, making it an interesting business angle.
Here are some of the details from the Los Angeles Times story:
Taking aim at so-called patent trolls that use the threat of lawsuits to obtain licensing fees, President Obama issued executive orders to crack down on abuses and called on Congress to take tougher steps to protect innovative high-tech businesses.
The moves have been pushed by the high-tech industry, which has complained for years about companies that acquire rights to patents for some of the numerous components in computer software and electronics.
Those firms, which don’t manufacture products, use their sometimes questionable patents as leverage to obtain licensing fees. The companies say they are simply exercising their rights as patent holders.
Obama has criticized such firms. Asked about them by an entrepreneur during a Google hangout in February, Obama said “they essentially leverage and hijack someone else’s idea and see if they can extort some money out of them.”
The New York Times offered these details of the president’s orders:
The administration ordered the Patent Office to begin writing rules requiring patent applicants and owners to make clear who owns the companies – which are often little more than legal shells – that file for patents or that assert patent-infringement claims.
The administration also instructed the Patent Office to tighten scrutiny of overly broad patent claims and said it would aim to curb patent-infringement lawsuits against consumers and small business owners who are simply using off-the-shelf technology.
In 2011, Congress passed and the president signed legislation updating the patent system, but it quickly became clear that the effort failed to address what has become the country’s leading patent problem: legal battles initiated by patent-assertion entities, also known as patent trolls, that have no material business other than filing patent infringement claims.
“What we need to do is to pull together additional stakeholders and see if we can build some additional consensus on smarter patent laws,” Mr. Obama said in February and repeated Tuesday.
The White House also recommended seven ways that Congress could address the issue through new legislation, including better disclosure, more discretion for courts to assess sanctions for abusive court filings and stronger International Trade Commission patent-enforcement standards.
Interestingly, the Wall Street Journal story had a small response from the firms high up in its story:
The Obama administration’s actions are intended to target firms that have forced technology companies, financial institutions and others into costly litigation to protect their products. These patent-holding firms amass portfolios of patents and focus on pursuing licensing fees rather than using the patents to build new products.
The firms say they are doing nothing wrong, just defending patents that were legally granted by the U.S. Patent and Trademark Office. They say they promote a fair market by protecting smaller inventors.
Reuters offered some excellent context about what the suit means for technology firms and why the administration is tackling the issue:
Cisco Systems Inc, Apple Inc, Google Inc and other big technology companies have been pushing for legislation that would reduce the number of times each year that they are sued for infringement.
Among other steps, the White House called on Congress to pass legislation to make it easier for a federal judge to award legal fees to the winner of a patent case if the judge deems the lawsuit abusive.
It also asked lawmakers to take up the issue of companies going to the U.S. International Trade Commission to request sales bans for products made with technology that infringes upon an existing patent because that panel’s standard for ordering such an injunction is lower than a U.S. district court’s.
The disparity has led to a tidal wave of patent infringement complaints filed at the ITC.
Obama also asked lawmakers to require companies that sue for infringement to have updated ownership information on file with the U.S. Patent and Trademark Office. He urged the patent office to write a similar regulation.
Obama’s actions were aimed at improving incentives for high-tech innovation, a major driver of economic growth, the White House said in a statement.
“Stopping this drain on the American economy will require swift legislative action, and we are encouraged by the attention the issue is receiving in recent weeks,” White House spokesman Jay Carney said in a statement.
What was most interesting about the coverage Tuesday was that I had to read just about every news outlet to make sure I understand exactly what was at stake and who was advocating for it. All the stories took slightly different angles and focused on slightly different parts of the statement. This is obviously a complex problem, but no one wrote the definitive story on the news.
