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Nothing is certain but debt and taxes (and maybe gold)

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Debt and taxes. And gold Nothing seems certain today except debt and taxes. And maybe gold.

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Markets are nervous as the players in the U.S. budget saga remain deadlocked, as the Aug. 2 deadline to raise the debt ceiling looms ever closer.

"Up until now the markets have given U.S. politicians the benefit of the doubt with respect to passing a package, taking the view that despite all the posturing neither side would be stupid enough to risk a run on U.S. Treasuries, as well as the likelihood of a damaging default," said CMC Markets analyst Michael Hewson.

"Treasuries have so far been largely immune from the turbulence in financial markets as a result of the turmoil in Europe. As the Aug. 2 deadline looms ever closer without any agreement, this could well change and push yields higher."

There could be a twist in all this, though, said Sal Guatieri of BMO Nesbitt Burns.

"It's still unknown how badly Treasuries would get hurt (if at all) if the ceiling is not raised and the U.S. loses its triple-A rating (S&P says even odds of such in next three months)," Mr. Guatieri said.

"Investors would surely demand more compensation to lend to the government, but Treasuries could benefit, ironically, from safe-haven demand given the lack of deep, liquid alternatives and from the likely negative impact on the still-fragile U.S. economy. "

Many still believe that U.S. politicians will reach a deal to raise the debt ceiling in time, and, further, that there would be no default.

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"But if it did," said Julian Jessop, chief international economist at Capital Economics, "the implications would potentially be far more serious than those that would follow a one or two notch downgrade of its credit rating from the current AAA."

But what could happen if the worst came to pass and the U.S. did eventually default? Here's what Mr. Jessop thinks:

  • "By this point, public spending would presumably have been cut to the bare minimum and the economy would be sliding back into recession. More generally, the damage to sentiment in global financial markets caused by the prospect of default by the Greek government would presumably be multiplied many times over if it were the U.S. that could not service its debts."
  • U.S. debt would be downgraded to "selective default" under Standard & Poor's terminology because government debt carries no risk under international banking rules if rated AA- or greater, financial institutions would face "significantly" higher capital charges. But U.S. bank regulators could temporarily change that.
  • The Treasury might also move to protect debtholders with some sort of IOU.
  • "Meltdown should be avoidable. A rating of 'SD' would mean that S&P believed that the U.S. government had selectively defaulted on a specific issue or class of obligations but 'will continue to meet its payment obligations on other issues or classes of obligations in a timely manner.' We would expect the key players to make the most of the wiggle room that this would allow."
  • Foreign debt holders probably would dump their holdings because of one delayed payment. "And while the price of gold would be one of the few clear winners, Treasury yields might drop back on increased safe haven demand, especially if the economy is being hit hard by spending cuts and the Fed has to inject more liquidity to keep the markets moving."

As the uncertainty raged today, gold hit a fresh record amid the market anxiety.

"The only thing that is not confusing is that in this state of confusion gold has gone violently bid and is rising on all fronts and relative to all currencies everywhere," said Dennis Gartman, publisher of The Gartman Letter. "That is the only certainty that we can and will deal with."

How the U.S. fared The United States losts 168,000 businesses, and 6 million jobs, in 2008 and 2009, the U.S. Census Bureau said today. The latest statistics don't include the ranks of the self-employed, railroad workers, and those in agriculture and government.

"For most, it would not come as a surprise to learn that the last couple of years have been a time of economic hardship for our nation," William Bostic Jr. wrote in the agency's blog. "Headlines have depicted a troubling job market and communities have faced the reality of deep budget cuts."

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Losses were "universal" among the states, he wrote. All states lost in 2009, and only Alaska and the District of Columbia actually gained workers in 2008 and 2009.

RIM cuts deep Research In Motion Ltd. , dogged by concerns about its outlook, is slashing 2,000 positions throughout its global work force. The cuts are the biggest in RIM's history, and more than many observers had expected, Globe and Mail technology writer Omar El Akkad reports.

The BlackBerry maker, which also announced some management changes today, said the cuts were "in line" with estimates it gave in mid-June.

The work force reduction is believed to be a prudent and necessary step for the long term success of the company and it follows an extended period of rapid growth within the company whereby the work force had nearly quadrupled in the last five years alone," the company said.

"As part of this broad effort, RIM is reducing its global work force across all functions by approximately 2,000 employees. RIM intends to notify impacted employees in North America and certain other countries this week. The remainder of the global work force reductions will occur at a later date subject to local laws and regulations."

After the cutbacks, RIM will employ some 17,000 people. The impact on its financials will be outlined when RIM reports its second-quarter results in mid-September, though RBC Dominion Securities analyst Mike Abramsky estimates a quarterly hit of $200-million to $250-million.

Whither Bombardier? Plans by Bombardier Inc. for its fast-growing high-speed rail business in China could be dealt a blow if the country's aggressive expansion of the network slows down following the deadly train crash over the weekend.

Montreal-based Bombardier Transportation - the rail unit of the global plane and train manufacturer - has over the past few years been building up a significant presence in China's high-speed rail sector.

Reports say one of the trains in the weekend wreck was built by state owned China South Locomotive, while the second one was manufactured in a joint venture with Bombardier.

Moody's cuts Greece again Not that it matters all that much at this point, but Moody's Investors Service has slashed Greece's credit rating again, to Ca, which is just shy of default. What matters more is that the U.S. credit rating agency, which now assumes a Greek default, warned that Europe's troubles appear far from over.

"Looking further ahead, the EU program and proposed debt exchanges will increase the likelihood that Greece will be able to stabilize and eventually reduce its overall debt burden," Moody's said in a statement.

"The support package for Greece also benefits all euro area sovereigns by containing the severe near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greek debt. However, Greece will still face medium-term solvency challenges: its stock of debt will still be well in excess of 100 per cent of GDP for many years and it will still face very significant implementation risks to fiscal and economic reform."

There's an odd component to all this, with concern over Italy and Spain, Scotia Capital currency strategist Eric Theoret notes. Together, they account for about 30 per cent of the contribution to the bigger bailout fund, which is known as the EFSF.

"Though their bond yields have fallen ... some observers have voiced concern over their ability to act as both contributors to, and potential recipients of support from, the EFSF," he said. "Additionally, law makers in Germany still need to approve the new EFSF once parliament resumes following a summer recess."

UBS keen on Precision Drilling UBS Securities Canada has boosted its price target on shares of Precision Drilling Corp. after the company's second-quarter results last week.

"Despite reporting broadly in-line Q2 results, Precision demonstrated strong pricing growth in Canada and the U.S.," said analyst Chad Friess. "Further pricing gains are expected over the next few quarters which, along significant new builds opportunities will result in explosive EBITDA growth in 2011 and 2012.

He hiked his 12-month price target to $17.50 from $16, and held his rating at "neutral."

"Going forward management is expecting continued rig rate gains, particularly in the U.S. where sequential US$500/day increases are expected over each of the next few quarters," Mr. Friess said in a research note.

"While overall market tightness is the main driver, the uplift from rigs rolling off contract and into the better priced spot market is also a contributor. In addition, the company's new build rigs will drag up the overall average as they enter service."

RBC cuts Yellow Media RBC Dominion Securities has again cuts its price target on shares of Yellow Media Inc. , and predicts the company will cut its dividend.

Having earlier cut his price target to $3.75 from $5, analyst Drew McReynolds cut it again, this time to $2.75, in advance of the company's second-quarter results next week.

"We believe the business transformation at Yellow Media demands a more conservative balance sheet," Mr. McReynolds said in a research note.

"Other companies in business transformation within the Canadian publishing industry (such as Torstar and Transcontinental) have acted aggressively to pay down debt since the 2008-2009 recession, which in our view has significantly 'de-risked' these stories in the face of rising secular headwinds."

He projected Yellow Media will slash its annual dividend to 15 cents a share from 65 cents.

In International Business today Japan's auto makers are reporting mixed vehicle production figures as the industry pushes toward recovery from the March 11 earthquake and tsunami, The Associated Press reports.

In Economy today The Case-Shiller housing index for May will be released tomorrow, and the news will be bad, Globe and Mail real estate writer Steve Ladurantaye reports.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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