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Munis--Opportunity knocks?
Closed-end muni funds are trading down dramatically because of the panic over insurers. This *has* to be a transient phenomenon or your local governments and institutions are in big trouble. I bought BFK, which is now yielding a tax-equivalent 9.91%.
Tuning Into The Recession Mindset
Marc E. Babej and Tim Pollak 02.15.08, 6:00 AM ET
http://www.forbes.com/2008/02/14/unsolicited-advice-recession-oped_meb_0215unsolicited.html?feed=rss_news
Welcome to the year of reckoning: Unemployment is on the rise. Home ownership has experienced the biggest one-year drop since tracking began in 1965. The value of homes--most Americans' biggest asset--continues to slide; the Federal Reserve is reporting an abrupt decline in consumer credit-card borrowings.
Little wonder only 19% believe the country is headed in the right direction. The government may not yet have declared a recession, but millions of households have. For marketers, all this adds up to a big question: How do people act differently when they see dark clouds on their financial horizon?
When the economy is strong, consumers are optimistic about their own prospects--and act accordingly. They are willing to spend, invest or run up debt, assuming the future will be better than the past. In a downturn, assumptions about the future are turned on their head, as more and more people fear the foreseeable future could well be worse than the past. Right now, there's plenty of reason for consumers to be pessimistic. Increasingly, their behavior reflects this souring mood.
No two downturns are exactly alike, and neither are consumer reactions. But there are patterns that cut across recessions and generations of consumers. It's time for those of us who battled through the last significant recession in the early 1990s to remember what it was like, and for those of us who were too young to become aware. The pivotal marketing question: How will this recession affect consumer behavior?
First and foremost, economic downturns instill anxiety. Almost no one is immune. Even people who are doing OK themselves will tread more cautiously as they see their peers cutting back on their spending or worrying about losing their jobs.
What's more, in this particular recession, even households with secure incomes will have reason to be on edge. Energy and food prices are likely to remain quite high, while the housing crisis is diminishing almost everyone's net worth. So expect even those who aren't really feeling a lot of pain to act as if they are.
Frugality is standard operating procedure. Every downturn prompts serious belt-tightening--each according to his or her means and emotional needs. From holding on to a car a few extra months to eating out less frequently to buying cheaper cuts of meat, marketers should expect cost to be a bigger part of every consumer decision. Even McDonald's (nyse: MCD - news - people ) is feeling the pinch--same-store sales in December were the worst in five years.
Sometimes the savings are material. Other times, corners get cut just to give people the warm feeling that they're being responsible and in control. But for marketers, the result is the same: Usually, predictable behavior is less so during a downturn.
Pragmatism and escapism are not mutually exclusive. Put another way, fiscal sobriety doesn't always mean literal sobriety. Consumers who are feeling deprived often seek solace in affordable entertainment alternatives. Beer, liquor, movies and home entertainment tend to do well in hard times.
Affordable pleasures that aspire to premium perceptions in good times would do well to consider touting their affordability in a recessionary environment. Mid-market resorts and cruise lines, for example, should make a virtue out of being accessible escapes--all-inclusives can play predictable expense to competitive advantage. And McDonald's might recover some of that lost December traffic as its new lattes lure consumers away from pricier Starbucks (nasdaq: SBUX - news - people ).
Self-image matters. People who are struggling don't want it to show. They will make trade-offs, so they can afford to keep up appearances. This could be bad news for marketers who've justified higher price points, offering convenience or touting image.
On the flip side, people who are unaffected by the downturn don't want to rub it in other people's faces. Some significant number of consumers will be uncomfortable flagrantly flaunting their disposable income. Louis Vuitton, for instance, might be well-advised to emphasize styles that don't boast the LV monogram.
If the trend until recently has been middle class Americans trading up to the trappings of luxury, we might expect a counter-trend of people with means consciously trading down. Remember how grunge got its start in the recession of the early 90s? This could be the moment for a fashion retailer like Steve and Barry's to complete its transition from rock-bottom discounter to cheap chic choice.
No matter what the economic climate, the well-off buy what they want and downscale consumers buy what they need (or can afford). The true marketing battleground will be the broad middle--and chances are they'll trade down.
Wal-Mart (nyse: WMT - news - people ) is making a valiant effort to appeal to them with its new advertising that attempts to drive home how much their customers save. And they're backing it up with even bigger price cuts. Meanwhile, Target (nyse: TGT - news - people ), the retail darling of the last decade, is declining month after month.
Even if Washington's scramble to pump money into the economy with tax rebates and interest rate cuts has its intended effect, 2008 won't be a cakewalk for consumers ... or for marketers. But it doesn't have to be all gloom and doom. As we advise our clients, the first step in formulating a recession strategy is to acknowledge that downturns change consumer behavior, and to understand how, specifically, those changes are likely to impact their business. The biggest risk a marketer can take is to hope to survive doing business as usual.
My income portfolio (if anyone cares). Yields are at purchase price, not current yields. Just went positive for the year (excluding dividends).
AAV 15.2%
AINV 14.0%
ARCC 12.8%
BFK 6.5%
BGF 9.8%
CVP 13.6%
FLY 11.2%
GNV 14.2%
HTE 16.2%
IAF 10.7%
IFN (18.60%; unlikely to be as high next year, though)
ONAV 12.6%
PGH 16.0%
PWE 15.3%
No biotechs right now…sold my VRUS during the frenzy.
Looking at MIC, BEP, CPL, BVF
Picked up 300 shares of ONAV today!
Omega Navigation Enterprises, Inc. Declares Quarterly Cash Dividend of $0.50 per Common Share
Monday February 11, 8:30 am ET
http://biz.yahoo.com/iw/080211/0359748.html
PIRAEUS, GREECE--(MARKET WIRE)--Feb 11, 2008 -- Omega Navigation Enterprises, Inc. (NasdaqGM:ONAV - News) (SGX: ONAV50), a provider of global marine transportation services focusing on product tankers, announced today that its Board of Directors declared a quarterly cash dividend with respect to the fourth quarter of 2007 of $0.50 per common share payable March 3, 2008 to stockholders of record on February 21, 2008. This is the seventh consecutive dividend of $0.50 per share paid to investors since the Company went public in April 2006.
About Omega Navigation Enterprises, Inc.
Omega Navigation Enterprises, Inc. is an international provider of global marine transportation services through the ownership and operation of eight double hull product tankers. The current fleet includes eight double hull product tankers with a carrying capacity of 512,358 dwt. These eight product tankers are chartered out under three-year period time charters. Furthermore, the company also announced the signing of shipbuilding contracts to construct and acquire five newbuilding double hull Handymax product tankers each with a capacity of 37,000 dwt scheduled for delivery between March 2010 and early in 2011. With the addition of these five vessels, the Omega fleet will expand to 13 product tankers with a total deadweight capacity of 697,358 tons.
The Company was incorporated in the Marshall Islands in February 2005. Its principal executive offices are located in Piraeus, Greece and it also maintains an office in the United States.
Omega Navigation's Class A common shares are traded on the NASDAQ National Market under the symbol "ONAV" and are also listed on the Singapore Exchange Securities Trading Limited under the symbol "ONAV 50."
Asian stocks slump on renewed subprime worry; Australia hit by rate fears UPDATE
February 11, 2008: 05:11 AM EST
http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-22917156.htm?section=money_topstories
SINGAPORE, Feb. 11, 2008 (Thomson Financial delivered by Newstex)
Stock markets across Asia fell Monday as investors returned from the Lunar New Year break to continued gloom on Wall Street, while Australian benchmarks fell after the central bank cautioned that high inflation may require further rate hikes.
The S&P/ASX 200 closed down 213 percent at 5,537.6 and the All Ordinaries lost 2.1 percent to 5,603.1 after the Reserve Bank of Australia said there's a strong likelihood that inflation will remain uncomfortably high for some time. Barring a sharp slowdown, monetary policy will probably need to be tightened again, it said in its quarterly monetary statement.
The RBA hiked its target cash rate a quarter percentage point to 7.00 percent last Tuesday following two quarter percentage point rises in August and November last year. The rate is now at the highest level in 12 years.
'The statement on monetary policy released by the Reserve Bank didn't brighten the market at all with warnings of future interest rate rises, which goes down like a lead balloon in the market at the moment,' said Michael Heffernan, a private client advisor at Austock Securities in Sydney.
Adding to the downdraft, Macquarie unit Macquarie Fortress Investments said a leveraged fund it manages may not be able to refinance debt before existing financing arrangements mature, reigniting concerns about the financial sector.
'It looks like people are playing a game of roulette at the moment, putting it on one day and taking it off the next, rather than staying in for the long term,' said Juliette Saly, an equities analyst at CommSec in Sydney.
In other news, the Group of Seven finance ministers and central bankers are expecting losses from securities linked to the US subprime sector to reach 400 billion US dollars, far more than the 100-150 billion dollars that the Federal Reserve has predicted, the Financial Times reported Monday.
G7 officials at a weekend meeting in Tokyo highlighted their concerns about the subprime crisis and subsequent crunch in global credit markets.
'All these problems about economic recession and subprime losses are not yet over,' said Francis Lun, general manager at Fulbright Securities in Hong Kong.
The Hang Seng was down 2 percent at 22,999.99. The South Korean Kospi ended down 3.3 percent to 1,640.67.
The Singapore Straits Times was down 1.6 percent at 2,886.51 and the Philippines Composite was down 1.9 percent at 3,179.48.
The Indian Sensex lost 3.8 percent to 16,801 in early trade.
The Japanese and Chinese markets were closed. The Shanghai bourse will reopen on Wednesday and the Tokyo exchange will resume trade on Tuesday.
Banks in focus
Wall Street set the negative tone when the Dow Jones Industrial Average ended down 64.87 points or 0.5 percent at 12,182.13 on Friday.
Shares fell amid growing concerns about the big US bond insurers which are facing potential downgrades by the major ratings agencies, a move that would trigger a fresh round of writedowns for the big banks.
On Thursday, Moody's lowered its rating on the bond insurer Security Capital Assurance. (NYSE:SCA) On Friday, Fitch Ratings placed a series of mortgage-backed securities insured by MBIA on negative watch.
Meanwhile, soaring commodities prices hit retailers as investors worried that consumers will spend less in the shops if they have to pay more at the pump. Crude oil prices closed up 3.66 dollars at 91.77 dollars a barrel on the New York Mercantile Exchange on Friday on expectations of disruptions in Nigerian exports. Oil was last quoted at 91.99 dollars a barrel in Asian trade.
In Australia, the major banks were sharply lower amid concerns about possible higher provisions for bad debt.
Australia & New Zealand Banking Group (OOTC:ANZBY) closed down 3.1 percent to 24.80 dollars, Commonwealth Bank slipped 2.8 percent to 48.75 dollars and Westpac closed down 2.7 percent at 24.30 dollars.
National Australia Bank (OOTC:NABZY) was off 4.3 percent at 32 dollars.
Trading in Allco Finance Group (OOTC:AOFNF) was halted at the finance and asset management company's request. Allco, which last traded at 3.05 dollars, has been under selling pressure because of margin calls faced by shareholders due to market volatility.
In Hong Kong, HSBC lost 2.6 percent to 111.10 dollars. HSBC is planning to sell half of its 800-branch network in France as it wants to shift its focus to emerging markets, according to media reports.
Bank of Communications slid 4.5 percent to 8.72 and Cnooc lost 6.5 percent to 11.02.
In Seoul, Kookmin Bank (NYSE:KB) tumbled 6.5 percent to 58,000 won and Hana Financial dropped 5.2 percent to 43,500 won. Mirae Asset Securities tumbled 6.4 percent to 131,000 won.
Shipbuilders were key decliners. Hyundai Heavy ended down 4.3 percent at 333,500 won, Samsung Heavy was down 2.7 percent at 28,800 and Daewoo Shipbuilding was down 5.1 percent at 34,450 won.
Hynix edged up 0.2 percent to 26,100 won after Daewoo Securities raised its call on the stock to 'buy' from 'neutral', citing improving market conditions.
Rival Samsung Electronics slid 4.7 percent to 584,000 won.
FYI: Japan is the next sub-prime flashpoint
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/10/ccjapan110.xml
Last Updated: 5:00 GMT 10/02/2008
There is still $300bn of bad debt out there, and Japan could be hiding most of it. Ambrose Evans-Pritchard reports..
Just as battered investors had begun to glimpse signs of recovery in America, the next shoe has dropped with an almighty thud in Japan. Echoes are rumbling across the Far East.
China's Year of the Rat race
The Tokyo bourse has crumbled, suffering the worst start to the year since the Second World War. The Nikkei index is down 17 per cent since Christmas, and the shares of Japanese banks are leading the slide. Mizuho Financial, Mitsubishi UFJ and Sumitomo Mitsui have all been punished as hard or even harder than those US banks at the epicentre of the sub-prime debacle.
The nagging fear is that Japan's lenders - the conduit for the world's greatest stash of savings - have taken on a far bigger chunk of mortgage securities, collateralised loans obligations and other exotica from America's structured credit boom than they have yet revealed.
Americans and Europeans have so far confessed to $130bn of the estimated $400bn to $500bn of wealth that has vanished into the sub-prime hole. Somebody, somewhere, must be sitting on a vast nexus of undisclosed losses. We may find out soon enough whether the hold-outs are in Japan. The banks have to come clean under the country's strict new audit codes by the end of the tax year in March.
"We think this is where the next big problem is going to pop up," said Hans Redeker, currency chief at BNP Paribas.
"We know from Bank of Japan's lending survey that the banks are already tightening hard, so something is brewing. Right now, we are in the lull before the second storm in global markets, and Asia is going to be the source of the nasty surprises," he said.
The iTraxx Japan index measuring default risk of 50 Japanese companies saw its biggest one-day jump ever on Thursday to 77.5. Rightly or wrongly, it is flashing a serious distress signal.
What we know is that Japan's economy - still the second biggest in the world by far - has fallen over a cliff since October. It remains joined to America's hip after all. The decoupling theory has failed its first test.
Japan's machine orders dropped 2.8 per cent in November and a further 3.2 per cent in December. January housing starts fell to the lowest in 40 years, down 18 per cent on the year. Tokyo property was off 22 per cent. Can this still be blamed purely on a change in building rules?
"Recession is a clear and present danger in Japan," said Tetsufumi Yamakawa, chief Japan economist for Goldman Sachs. "The leading indicators are deteriorating very sharply. Inventory is piling up at a rapid pace. There are clear signs of deceleration in exports of steel and semi-conductors to China," he said.
Yes, China. It turns out that the intra-Asia trade that was supposed to immunise the region against a slump is a disguised supply-chain ending up in the US market. American shoppers still make 30 per cent of global demand, just as it did a decade ago. Nothing has really changed.
"We think the Bank of Japan may have to start easing by the middle of the year," said Yamakawa.
There is not much monetary ammo left. Interest rates are 0.5 per cent. So it's back to zero, and helicopters of central bank cash ("quantitative easing"), those peculiar hallmarks of Japan's past battle with deflation. The brief attempt to "normalise" Japan Inc has already failed.
We tend to forget that Japan remains the world's top creditor nation by far, the shy master of fate. The country's net foreign assets of $3,000bn roughly match the net debts of the US.
The yen "carry trade" - borrowing cheap in Tokyo to chase yields from New Zealand, to Brazil, Iceland, and above all Britain - has juiced the global asset boom this decade by $1,000bn. It is perhaps the biggest liquidity pump of them all, yet it stopped pumping in August. Indeed, it is sucking the money back out again. The yen is soaring.
Where have the Japanese recycled the quarter trillion dollars they earn each year from their surplus? Official data shows that their holdings in US Treasury bonds have not risen.
The Swiss offer us a clue, says Redeker. They are Europe's Japanese, champion savers looking for returns abroad. They devoured US sub-prime debt on a much bigger scale per capita than the Americans. Hence the $24bn in write-downs by UBS.
So far, Japan's biggest three banks have admitted to just $4.7bn in total losses between them. The figure is rising. Mitsubishi, the biggest, has just raised its tally to 12 times the sum admitted in November. This looks like a replay of the early 1990s when fear of losing face delayed the awful news.
Hong Liang, Beijing economist for Goldman Sachs, is not much more hopeful about China's prospects this year. "The combination of a US slowdown and monetary tightening in China is never welcome, but the accumulated problems have to be resolved this year," she said.
Inflation at 6.9 per cent is getting out of hand. The root cause of overheating is the weak yuan. The central bank has piled up $1,500bn of foreign reserves trying to stop it rising. The longer this goes on, the more inflationary it becomes. So Beijing has begun to step up the pace of revaluation, letting the yuan rise at an annual rate of 20 per cent in January. There will be casualties. Large chunks of China's manufacturing export industry have wafer-thin margins. A rising yuan tips them into the red.
China's mercantilist drive for export share is a double-edged strategy. The trade surplus has risen at $80bn a year, increasing tenfold since 2002 while the economy has merely doubled. The result is that China is as dependent on the US economy as Mexico.
So the storm spreads East. Haruhiko Kuroda, head of the Asian Development Bank, warned that the region would catch a cold after all as the US sniffles and sneezes. "Asian economies are not totally immune. A significant slowdown in the US economy will most certainly affect the region's growth," he said.
The global watchdogs are scrambling to rewrite the script. The World Bank has cut its China growth forecast from 10.8 per cent to 9.6 per cent in 2008. Private banks are slashing deeper.
Once the striptease starts on the onset of a global downturn, it usually has a long way to run.
Microsoft Makes Bid for Yahoo
By ANDREW EDWARDS
February 1, 2008 7:23 a.m.
http://biz.yahoo.com/ap/080201/microsoft_yahoo.html
Microsoft Corp. Friday offered to buy Yahoo Inc. for $44.6 billion, a move designed to help both companies compete against industry leader Google Inc.
The approach, in a letter to Yahoo's board, comes as Yahoo continues to struggle against Google in the race for online-advertising revenue and Internet-search market share.
The offer, $31 a share in cash and stock, is a 62% premium to Thursday's closing price. Microsoft said Yahoo holders would be able to trade their shares for cash or 0.9509 Microsoft shares a piece, with no more than half of the overall purchase price paid in cash.
The offer may be an attempt to get Yahoo back to the table after the companies held collaboration discussions in late 2006 and early 2007. Those talks included the potential of a merger proposal, but Yahoo told Microsoft in February it wasn't interest in buyout talk.
"While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing," said Microsoft Chief Executive Steve Ballmer in a letter to Yahoo's board.
He noted Yahoo's decision at the time was based on the "potential upside" of its own plans and a "significant organizational alignment," led by the long-awaited overhaul to its search-advertising system dubbed Project Panama.
"A year has gone by, and the competitive situation has not improved," Mr. Ballmer wrote.
Yahoo shares jumped to $29.45 in premarket trading. Microsoft closed at $32.60 and dipped to $32 premarket. Google, which issued weaker-than-projected fourth-quarter results late Thursday and saw its stock fall in after-hours trading, was recently at $517 in premarket activity, down from its closing price of $564.30.
"We have great respect for Yahoo, and together we can offer an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market," said Ballmer in a statement accompanying the letter. "We believe our combination will deliver superior value to our respective shareholders and better choice and innovation to our customers and industry partners."
Microsoft noted the market for online advertising is "increasingly dominated by one player.
Together, Microsoft and Yahoo can offer competitive choice while better fulfilling the needs of customers and partners."
The company added the deal would also result in "combined engineering talent to accelerate innovation," a hint that Microsoft can't alone take on Google with its current staff. Microsoft executive Kevin Johnson said a merger would result in "R&D critical mass to deliver innovation breakthroughs. The industry will be well served by having more than one strong player."
Renewed takeover speculation fired up after Yahoo late Tuesday posted a drop in fourth-quarter net income and issued a 2008 outlook that fell short of analysts' expectations.
Speculation about a Yahoo buyout has swirled since last year, when Microsoft's interest in such a deal was reported. Buying Yahoo would theoretically place Microsoft as significant competitor in the Internet search market, where it has so far lagged behind both Yahoo and Google. Microsoft, which has thriving software businesses that could fund a much deeper foray into Internet markets, hadn't actively dispelled rumors it was considering an acquisition of Yahoo.
The proposal is subject to the negotiation of a definitive agreement between the two companies. Microsoft is saying a deal could close in the second half of the year.
Microsoft will host a conference call to discuss the proposal at 8:30 a.m. EST.
Hedge funds show resilience in thorny times
By Henny Sender
Published: January 28 2008 19:37
Thanks to grandpatb of the BV board..
Hank Paulson, US Treasury secretary, was chairing a lunch in New York this month with luminaries from investment banks, private equity firms and hedge funds to discuss regulation of the financial markets when Michael Novogratz interrupted.
The former Goldman Sachs trader who is now president of Fortress Investments, a hedge fund with $40bn (£20bn, €27bn) under management, pointed out that for years the assumption had been that hedge funds would bring financial disaster. Mr Novogratz went on to observe, according to one participant, that instead it was the banks that “blew up the world”.
The point was undeniable. Indeed, Morgan Stanley managed to lose more money on writedowns and a single trade gone wrong than Long Term Capital Management and Amaranth – the two most prominent hedge fund failures of recent years – combined. To be sure, hedge funds were also hard hit by the market upheavals of 2007. But most funds proved far better at risk management than the banks. They cut their losses more swiftly and ended the year with record profits in many cases.
Last year, in other words, hedge funds left Wall Street in the dust. As a result, the most successful of them have become more powerful than ever before. Indeed, a hedge fund – TPG-Axon Capital, which has some $12bn in assets – was among those contributing to the capital infusion for Merrill Lynch.
“If you are handing out report cards for 2007, the hedge funds are looking like some of the smartest kids in the class at the moment,” says John Coyle, head of the group looking after private equity firms at JPMorgan in New York. “There was a common belief that hedge funds would be the most exposed when the capital markets turned. That has not happened to date.”
Whether the Wall Street business model is terminally flawed or merely poorly executed, hedge fund managers say their own template is superior. “Because it is our capital, we move more quickly to reduce risk,” says the head of risk at a big Connecticut-based hedge fund.
At the banks and brokerage firms, many hedge fund managers argue, there is a weak alignment of interests between staff and shareholders. Incentives are skewed toward uncontrolled risk-taking on the theory that heads, the traders win; and tails, the shareholders lose. They are playing with other people’s money but the bonuses when they bet successfully are all theirs.
The experience of Jeff Larson of Sowood Capital Management in Boston illustrates the discipline that hedge fund managers have, even when the market goes against them. Mr Larson pulled the plug on his fund when debt market trades went wrong last summer, costing him and his investors about 55 per cent of their money. But to his peers, he did the smart thing, swiftly cutting his losses.
“Jeff admitted in five seconds that the market had overwhelmed him and took decisive action,” says the head of prime brokerage at one Wall Street firm with knowledge of the situation. “If it had been a Wall Street firm, everyone would have gotten zero back.”
The best hedge funds have strict loss limits, in many cases, written into their offer documents. By contrast, Morgan Stanley’s senior management knew in August about the huge risk being carried by the proprietary trading desk, where bets for the group’s own books are taken. But it was only towards year-end that the bank unwound this – with disastrous results.
Had Morgan Stanley moved more swiftly, say in October when markets rallied, the losses would have been less. Indeed, one senior executive at Morgan Stanley calculates that speedier action could have kept losses below $1bn rather than the $9.4bn it wrote off last month.
Certainly, there are hedge funds whose managers, beguiled by the 20 per cent of the upside that goes into their own pockets, continue to swing for the fences, reasoning that if the losses are too heavy, they can wind up their funds and in some cases start anew. Even the 20 per cent can be an illusion, because the gains are often only on paper rather than the cash hedge fund managers receive after they close out lucrative trades.
The power of hedge funds is evident in the rise of Fortress itself, which went public last year. Fortress’s deep pockets are serving a variety of needs during the current market turmoil. For example, it is the biggest lender to cash-starved Harry Macklowe, whose property empire is trembling. Private equity firms such as TPG are looking to Fortress and others to raise debt for deals at a time when the bank lending market is frozen.
Or consider Citadel Investment Group. In 2006, the Chicago-based hedge fund gained an investment-grade rating for its debt and raised $500m in the bond market as part of a $2bn medium-term note programme. It is in a better position than virtually any other firm to raise capital quickly. That allows it to take advantage of the troubles of its peers – buying assets at a sharp discount, as it did with Amaranth and Sentinel Management, or acquiring stakes, as it did with E*Trade Financial Corp.
Citadel, with $20bn in assets, produced an investment return of about 32 per cent in 2007. After diversifying within the US, it is looking to expand abroad.
Growth among hedge funds is drawing not only capital but also management talent away from the brokerages, with their bureaucracies and inertia. For example, Bear Stearns held tentative talks with Fortress about a merger, in large part because the troubled brokerage needed management expertise, according to a top executive at Bear Stearns.
One reason for the migration from Wall Street to the hedge fund world is the enormous pay packages of the best and the brightest. Lloyd Blankfein, the chief executive of Goldman Sachs, the best managed of the Wall Street firms, took home a bonus of $67.5m last year. But that sum is likely to have been far exceeded by Dinakar Singh, who worked for Goldman until 2005 (and was probably the third highest paid person there), on the back of a 40 per cent gain last year to $12bn in funds he manages at TPG-Axon.
To be sure, many hedge funds have had disastrous experiences. The lean, mean hedge fund model can degenerate into the sort of “eat what you kill” culture that led to the 2006 implosion of Amaranth. Many so-called quant funds, which use computer models to buy and sell securities, posted big losses last year.
Of course, it is possible that the superiority of the hedge fund template may reverse. Some of the funds that boast that theirs is a superior business model are considering following Fortress by going public, which would reduce the differences between them and brokerages.
“It is stupid to go public,” says the head of prime brokerage who, in the case of Sowood, hailed the need for speed. “By going public, they become distracted; they take their eye off the ball. It’s not their own money any more.”
Copyright The Financial Times Limited 2008
New home sales plunge record 26 percent in '07 By Patrick Rucker
Mon Jan 28, 8:30 PM ET
http://news.yahoo.com/s/nm/20080128/us_nm/usa_economy_newhomes_dc;_ylt=AghqKbNYHpgXXzGgYoJ6EfyyBhIF
WASHINGTON (Reuters) - Sales of new single-family homes plummeted a record 26 percent in 2007 and builders slashed prices by the most since 1970 in a struggle to cope with a housing bust, a government report showed on Monday.
Sales in December fell 4.7 percent to an annual rate of 604,000 -- the slowest pace since 1995 -- from a downwardly revised rate of 634,000 in November, the Commerce Department said.
The report offered little hope for a turnaround any time soon as a record one-month drop in the median home price for December failed to stoke demand and the number of months needed to clear the inventory of unsold homes rose.
"Homebuilders are cutting production but with sales still collapsing they have to run to stand still," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
"We think the downside for activity and prices remains considerable ... There is no sign of a bottom in any of these data," he added.
The weak data weighed on U.S. stock prices in early trade, but prices later rose on expectations the Federal Reserve would lower interest rates aggressively to shore up the economy.
The Dow Jones industrial average closed up 1.45 percent.
The U.S. central bank begins a two-day monetary policy meeting on Tuesday, and many financial market participants expect it will follow-up last week's emergency rate cut in target benchmark short-term interest rates with another half-point reduction.
Prices of U.S. government debt fell as investors shifted into stocks, while the dollar slipped against most major currencies amid expectations for further U.S. rate cuts.
STILL FALLING
Builders have shelved developments and dumped land holdings as the bursting of a U.S. housing bubble two years ago has forced many to scramble to limit losses.
The figure of 774,000 homes sold last year was the lowest since 757,000 were sold in 1996. Sales have tumbled 39.6 percent from 1.283 million at the peak of the market in 2005.
The median new home sales price fell 10.9 percent from November to $219,200, 10.4 percent below the year-ago level.
However, despite those price cuts the glut of houses available continued to swell and put pressure on builders to slow construction below its current crawl, economists said.
The report was much weaker than expected on Wall Street. Economists polled by Reuters were expecting December sales to fall to an annual rate of 640,000 from November's previously reported rate of 647,000.
"It's a pretty big drop and it clearly shows the housing market continues to deteriorate," said Kurt Karl, chief U.S. economist with Swiss Re in New York. "Supply is building up and there's no indication demand will catch up any time soon."
There were 495,000 homes for sale at the end of the December, down 1.4 percent from November.
However, with sales falling faster than inventory, it would take 9.6 months to clear those unsold new homes at the current sales pace, up from the 9.4 months reported for November.
Rate cut hopes lift Wall Street
Mon Jan 28, 2008 6:23pm EST
http://www.reuters.com/article/hotStocksNews/idUSL2871979920080128?sp=true
NEW YORK (Reuters) - Stocks surged on Monday as investors snapped up shares of manufacturers and downtrodden banks after more weak housing data bolstered expectations the Federal Reserve will slash rates this week.
A sharp drop in December new-home sales cemented the view that Fed policy-makers, following last week's emergency rate cut, will make another deep cut in interest rates on Wednesday after the conclusion of a two-day meeting. All three major stock indexes gained more than 1 percent.
While the housing data in itself was unsettling, the prospect of lower interest rates coupled with a proposed $150 billion economic stimulus package helped lift shares of manufacturers like General Electric Co (GE.N: Quote, Profile, Research) and home builders like Hovnanian Enterprises (HOV.N: Quote, Profile, Research).
The S&P financials index rose 2 percent, with index gainers outnumbering decliners by 6 to 1. It was the latest indication that investors are scouring the sector for bargains after months of relentless selling stemming from subprime mortgage losses currently amounting to more than $100 billion.
Shares of Bank of America Corp (BAC.N: Quote, Profile, Research), the No. 1 U.S. bank by market value, ended up more than 4 percent.
EYES ON BERNANKEv
As global stock markets tumbled early last week, the U.S. central bank led by Ben Bernanke chopped rates by three-quarters of a percentage point in an emergency move, bringing the federal funds rate down to 3.5 percent.
"There's hope that Ben Bernanke will do more on Wednesday," said Alan Lancz, president of Alan B. Lancz & Associates Inc., an investment advisory firm in Toledo, Ohio. "Last week's 75 basis-points cut was a nice turnaround, and some kind of follow-through will be good too."
The Dow Jones industrial average .DJI rose 176.72 points, or 1.45 percent, at 12,383.89. The Standard & Poor's 500 Index .SPX shot up 23.36 points, or 1.76 percent, at 1,353.97. The Nasdaq Composite Index .IXIC closed up 23.71 points, or 1.02 percent, at 2,349.91.
Trading was volatile, with the stock market initially struggling to advance after the market opened. Toward the close the Nasdaq briefly turned negative but then immediately rebounded. Bernanke and top officials are scheduled to meet Tuesday and Wednesday to decide rate policy.
Shares of GE, seen as a proxy for the economy because of its diversified businesses, finished up 2.1 percent at $34.72 on the New York Stock Exchange, making the stock the biggest gainer on the S&P 500, while those of Caterpillar Inc (CAT.N: Quote, Profile, Research), also a bellwether, climbed 3.5 percent to $68.21, to be the top advancer on the Dow.
BANKS, HOME BUILDERS LEAP
Among banks, shares of Bank of America Corp jumped 4.4 percent to $41.20 on the NYSE. Standouts among home builders included Hovnanian Enterprises Inc (HOV.N: Quote, Profile, Research), an upscale U.S. home builder, whose shares soared 20.44 percent to $8.78.
Shares of No. 6 U.S. home builder Beazer Homes USA (BZH.N: Quote, Profile, Research) advanced 22.2 percent. The Dow Jones home construction index .DJUSHB gained 5.9 percent.
Government data showing a bigger-than-expected drop in new-home sales last month strengthened the argument for a Fed rate cut, analysts said. Lower rates could ease the strain on mortgage borrowers and ease the cost of money for businesses.
U.S. short-term interest rate futures FFG8 showed perceived chances that the Fed would approve a half-percentage point rate cut on Wednesday rose to 90 percent.
Earnings news was mixed. Fast-food restaurant McDonald's Corp (MCD.N: Quote, Profile, Research) fell 5.6 percent to $51.07 after posting flat U.S. sales in December, but specialty glass maker Corning Inc (GLW.N: Quote, Profile, Research) finished up 3.3 percent at $23.10 after reporting higher profit, boosted by strength in its display business.
After the bell, American Express Co (AXP.N: Quote, Profile, Research) posted a 10 percent drop in fourth-quarter profit and its revenue missed forecasts, sending the credit card company's stock down more than 3 percent from a NYSE close of $47.40. For details, ID:nN28505112
Shares of VMware Inc (VMW.N: Quote, Profile, Research), the leading maker of virtualization software, reported quarterly revenues that fell short of Wall Street estimates after the bell, sending its shares plunging over 23 percent from an NYSE close of $83. ID:nN28493424
On the Nasdaq, shares of Qualcomm Inc (QCOM.O: Quote, Profile, Research) were the top advancer in regular trading, ending up 1.3 percent at $40.50. The mobile phone chip maker extended a climb fueled in part by its upbeat outlook from last week.
Trading was moderate on the New York Stock Exchange, with about 1.64 billion shares changing hands, below last year's estimated daily average of roughly 1.9 billion, while on Nasdaq, about 2.11 billion shares traded, below last year's daily average of 2.17 billion.
Advancing stocks outnumbered advancing ones by a ratio of about 7 to 2 on the NYSE and by 9 to 5 on Nasdaq.
Stocks set to slide
Futures drop as overseas markets retreat on economic worries; investors await Fed policy meeting.
http://money.cnn.com/2008/01/28/markets/stockswatch_ny/index.htm?section=money_topstories
NEW YORK (CNNMoney.com) -- U.S. stocks were poised for a rough start Monday as investors watched most major overseas markets tumble and awaited the upcoming Federal Reserve policy meeting along with President Bush's final State of the Union address.
At 6:16 a.m. ET, Nasdaq and S&P futures were sharply lower, indicating a negative start for Wall Street.
Hanging over investors was another big drop in world markets. Stocks tumbled across Asia, with Japan's Nikkei closing down nearly 4 percent and the Shanghai Composite plunging more than 7 percent. Markets in Singapore, Seoul and Taiwan also all lost more than 3 percent.
European markets also fell in morning trading, with major indexes there down between 1 and 2 percent in the early going.
Oil prices tumbled below the $90 a barrel mark on global recession fears, as a barrel of light sweet crude lost $1.49 to $89.22 a barrel in electronic trading.
Investors worldwide have their focus on the Federal Reserve, which kicks off a two-day policy meeting Tuesday.
Markets are expecting the U.S. central bank to lower rates again after making an emergency cut last week.
Investors also await President Bush's State of the Union address for more comments on the U.S. economy and administration proposals for dealing with the slowdown beyond the deal reached last week.
A bipartisan deal on a $150 billion stimulus package was announced Thursday.
A batch of reports that may offer more clues about whether the U.S. economy is headed for a recession are on tap this week. The key report is the government's closely watched reading on the labor sector, which is due on Friday.
The first economic report due this week is Monday's report on new home sales in December. Economists surveyed by Briefing.com are forecasting the pace of sales in the month fell to a 12-year low, capping a year which is likely to see the biggest percentage drop in full-year sales since the Census Bureau started tracking these sales in 1963. The median price for a new home sold in 2007 is also expected to post the first decline in 16 years.
On the earnings front, Dow components McDonalds (MCD, Fortune 500) and Verizon (VZ, Fortune 500) are set to report results before the market open Monday. Another Dow component, American Express (AXP, Fortune 500), is due to report after the market close. Investors will be watching that report for more details on late credit card payments by U.S. consumers.
Countrywide Financial (CFC, Fortune 500) CEO Angelo Mozilo, facing criticism over the size of his potential payout from the proposed sale of his troubled mortgage company to Bank of America (BAC, Fortune 500), announced early Monday he will not get some $37.5 million in severance pay, fees and perks he was scheduled to receive upon his retirement, although he will still receive retirement benefits and deferred compensation.
Troubled retailer Sears Holdings (SHLD, Fortune 500) announced CEO Aylwin Lewis will leave the company as of Feb. 2. W. Bruce Johnson, the company's executive vice president, supply chain and operations, has been appointed as interim chief executive. Sears Holdings, which includes both the Sears and Kmart brands, has seen shares plunge 40 percent in the last 12 months, badly trailing rivals such as Wal-Mart Stores (WMT, Fortune 500).
AP/Wall Street Braces for More Volatility
Sunday January 27, 2:08 pm ET
By Madlen Read, AP Business Writer
Wall Street Braces for More Volatility Ahead of Fed Rate Decision, Bush Speech, Economic Data
http://biz.yahoo.com/ap/080127/wall_street_week_ahead.html
NEW YORK (AP) -- Investors are exhausted after their whipsaw week, but they're not ruling out another one.
All the assumptions Wall Street made when it recovered from steep losses last week -- that the Federal Reserve will cut rates again, that President Bush's stimulus plan will proceed, and that any recession that occurs might actually be shallow and quick -- are going to be tested.
On Monday night, Bush will make his State of the Union address. If it looks like the proposed $150 billion tax rebate for Americans could hit a snag in Congress, the markets' fears about consumer spending could balloon again.
Then on Wednesday, the Fed -- which helped put a floor under the market last week by making an emergency, three-quarter-point rate cut -- will finish its two-day meeting and release its rate decision. A failure to deliver the quarter-point reduction traders are betting on, or signs that the Fed is hesitant to loosen its policy further, could send stocks sliding.
And Friday, two snapshots of U.S. manufacturing and employment will tell investors how the economy fared in January. Economists expect jobs to increase but manufacturing activity to contract.
Wall Street, which lived up to its fickle reputation last week, could even be disappointed if it gets exactly what it wants but little else.
"If their expectations are met, they quickly ask, what's next?" said Alan Gayle, senior investment strategist and director of asset allocation for Trusco Capital Management.
Last week, after plunging, posting its biggest one-day upswing in five years and then capping the week with a loss, the Dow Jones industrial average finished the week up 0.89 percent. The blue chip index, down 8 percent since the beginning of the year, is on pace to log its worst January since 1960.
The Standard & Poor's 500 index finished the week 0.41 percent higher, while the Nasdaq composite index closed down 0.59 percent.
"If we're not at a bottom, we're probably very close," said Anthony Conroy, managing director and head trader for BNY ConvergEx Group. But, he added, the market is mercurial because there are many questions still unanswered -- a big one being, how risky is the debt on banks' books right now following their bad bets on subprime mortgages?
"Volatility won't be over for a while," Conroy said. "These credit issues don't go away overnight."
And neither do worries of a recession without hard evidence that the United States is not headed for one.
According to Michael Sheldon, Spencer Clarke LLC's chief market strategist, the dramatic lows reached in the stock market last week could make for a multi-week rally, but that more ground may be lost in the coming months. He noted that in the 11 recessions since World War II, on average, stocks fell 26 percent, the recessions lasted 10 months and Wall Street bottomed out six months into them.
One can only determine a recession in hindsight, but investors will try to use what data they can to piece together an accurate picture.
The Commerce Department releases on Monday a report on December new home sales, on Tuesday a report on December durable goods orders, on Wednesday, its first estimate of fourth-quarter gross domestic product, and on Thursday, a report on December's personal spending.
Meanwhile, Dow companies such as American Express Co., McDonald's Corp., Verizon and ExxonMobil Corp. report earnings this week, as well as other major names including the recently acquired Countrywide Financial Corp., Starbucks Coffee Co., homebuilders Centex Corp. and Pulte Homes Inc., and Internet companies Google Inc. and Yahoo Inc.
Emergency rate cut revives talk of "Bernanke put"
Sun Jan 27, 2008
http://www.reuters.com/article/ousiv/idUSN2735782820080127?sp=true
WASHINGTON (Reuters) - An emergency U.S. interest rate cut last week rekindled perceptions the Federal Reserve has a bias to protect the stock market, and a French bank trading scandal has made matters worse.
Deep losses in stock markets around the world last Monday spurred the U.S. central bank into making its biggest rate cut in more than 23 years on Tuesday, but the stocks drop came as 144-year-old Societe Generale (SOGN.PA: Quote, Profile, Research) unwound positions taken by a rogue trader.
"Disclosures that unwinding of rogue trades also contributed to the weekend meltdown have nurtured perceptions that a new 'Bernanke put' has appeared," Morgan Stanley economists Richard Berner and David Greenlaw wrote on Friday, referring to Ben Bernanke, the chairman of the central bank.
The idea of a put reflects concerns that the rate cut shielded investors from a stock sell-off in the same way traders use a "put" option to limit losses on a security.
Former Fed Chairman Alan Greenspan faced long-standing criticism that he pursued a policy of protecting markets, a view that became popular after the central bank cut interest rates sharply in the wake of the collapse of Long Term Capital Management in 1998.
Critics fear that a similar impression of the Bernanke-led Fed could be a costly one to correct, and might mean higher interest rates in the future than would otherwise be required.
BEST PRACTICES
The Fed slashed benchmark interest rates by three-quarters of a percentage point to 3.5 percent on Tuesday before the open of U.S. stock markets, which had been closed for a holiday on Monday. At that time, U.S. stock futures were indicating Wall Street would follow overseas markets in a steep plunge.
The emergency rate cut came just a week ahead of a regularly scheduled Fed policy meeting.
Thursday's disclosure that SocGen dumped stock positions on Monday after discovering that a rogue trader had taken on huge positions has intensified criticism of the Fed for using the equity market as a barometer of the wider economy.
"It is good monetary policy to put some distance between interest rate policy actions and market re-pricing," said Marvin Goodfriend, a former senior adviser at the Federal Reserve Bank of Richmond and now an economics professor at Carnegie Mellon University's Tepper Business School.
Bernanke had taken firm steps at the onset of the current market turmoil in August to bury any idea he would bail out investors, and had labored to separate actions to help markets function smoothly from rate moves aimed at the economy.
"It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions," he told a central bank gathering in Jackson Hole, Wyoming.
"But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy," he added.
DO NO HARM
Four months later, and 10 percent lower on the Dow, the sentiment in the second part of that statement seems to be guiding the Fed, relegating concerns that policy-makers are bailing out investors to the back-seat.
"They are getting themselves deeper into a hole," warned Robert Eisenbeis, former research boss at the Federal Reserve Bank of Atlanta, who argued that the cumulative 1-3/4 points of Fed easing since August posed a clear moral hazard.
"It makes people believe that there will never be a downside. That housing will never go down," he said.
Other observers saw no ground for claiming that the Fed was saving the stock market, but did see scope for problems down the road if the idea of a Bernanke put took hold and it led markets to expect an easy monetary policy and higher future inflation.
"The Fed really does not want to bail out investors. There is lots of money to be lost, there will be lots more blood on the floor before this is done," said James Hamilton, professor of economics at the University of California at San Diego.
"But if the 'Bernanke put' story becomes widespread and people get the idea that we're going back to five percent inflation, then, one, it's not true, and two, it will require a higher interest rate than otherwise required," he said.
THE MONKEY SCAM
Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each.
The villagers seeing that there were many monkeys around, went out to the forest, and started catching them.
The man bought thousands at $10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching monkeys again.
Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!
The man now announced that he would buy monkeys at $50 ! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.
In the absence of the man, the assistant told the vllagers. "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each."
The villagers rounded up with all their savings and bought all the monkeys.
Then they never saw the man nor his assistant, only monkeys everywhere!
Now you have a better understanding of how the stock market works.
Package curbs parties' pet proposals
http://www.usatoday.com/money/economy/2008-01-23-economy-update_N.htm
DEAL DETAILS
Congressional leaders have reached a deal with the White house on a bipartisan economic stimulus package that is expected to move swiftly through Congress and give most tax filers rebates of $600 to $1,200.
WHAT'S IN
-Tax rebates: Checks of at least $300 for almost everyone earning a paycheck, including low-income earners who make too little to pay income taxes, so long as they earned at least $3,000 in 2007. Families with children would receive an additional $300 per child, while those paying income taxes could receive higher rebates.
The full rebate would be limited to people earning below a certain income cap, likely $75,000 for individuals and $150,000 for couples.
-Business tax write-offs: Spurring business investments with so-called bonus depreciation and more generous expensing rules.
-Housing rescue: Raising the limit on Federal Housing Administration loans from $362,000 and caps on loans that Fannie Mae and Freddie Mac can buy from $417,000 to $729,750 in high-cost areas.
WHAT'S OUT
-Permanent tax cuts: Republicans conceded that their top priority would have to be left out.
-Unemployment insurance: Democrats wanted to extend benefits past 26 weeks.
-Food stamps: A boost for benefits.
-Medicaid: Democrats gave up on including Medicaid payments to states.
-Low-income heating subsidies: Democrats are surrendering the fight to include them.
-Infrastructure spending: Spending on transportation or repair projects already underway is off the table.
-Miscellaneous: Republicans' proposal to allow businesses suffering losses now to reclaim taxes previously paid was dropped.
Source: Associated Press
WASHINGTON — The Bush administration and House leaders agreed Thursday on $150 billion in temporary tax breaks for individuals and businesses that they hope will jump-start an ailing economy.
Moving quickly to help avert more stock market losses such as those that unnerved investors last week, Democrats and Republicans scuttled some of their favorite proposals in favor of a pared-down fiscal stimulus package.
President Bush immediately gave the product his blessing. "This package has the right set of policies and is the right size," he said at a White House news briefing. "I urge the House and the Senate to enact this economic growth agreement into law as soon as possible."
The centerpiece of the agreement are tax rebates for anyone who earned at least $3,000 last year. Most individuals will get $600 and most couples $1,200, but the rebates will start at $300 for those who paid no taxes last year.
Eligible families with children will get an additional $300 per child. The rebates will phase out beginning at $75,000 for individuals and $150,000 for families, not counting their contributions to IRAs and 401(k) savings plans.
About two-thirds of the tax relief will go to taxpayers and one-third to businesses in the form of accelerated deductions on equipment. Republicans heralded the business tax breaks as a way to generate jobs.
Many senators who did not take part in the negotiations said they would seek changes when the measure reaches the Senate. Labor unions and liberal groups that had sought spending increases for low-income and unemployed Americans also protested.
"The package is missing the two most effective means of providing an immediate economic boost: a temporary extension of unemployment benefits and a temporary increase in food stamp benefits," said Sen. Joe Lieberman, I-Conn.
The objections — coming after Senate Majority Leader Harry Reid, D-Nev., had pledged to let the House negotiate the package — led administration officials to warn that too many additions could kill the measure. "This thing could easily look like a Christmas tree," Treasury Secretary Henry Paulson said.
House Minority Leader John Boehner, R-Ohio, said he and House Speaker Nancy Pelosi, D-Calif., had to fend off myriad requests for additions. "I can't say that I'm totally pleased with the package, but I do know that it will help stimulate the economy," Pelosi said. "But if it does not, then there will be more to come."
Boehner described the plan as "simple"; and it will get the money back out into the American economy as quickly as possible."
Many economists agreed. "The agreement is timely, it is temporary, and it is fairly well targeted," said Douglas Elmendorf, senior fellow at the Brookings Institution and a former Federal Reserve economist. "It will still be very likely a weak year for economic growth, but by encouraging spending, both the Fed (interest rate) cuts and fiscal policy will help put people to work and keep incomes going."
The package is likely to fly through the House next week before encountering Senate objections next month. Sen. Max Baucus, D-Mont., said his Finance Committee would recommend changes. Sen. Charles Schumer, D-N.Y., while applauding the plan's "bull's-eye right at the middle class," said that should include extending the time for people to get unemployment benefits. Other proposals include new public works spending and a summer youth jobs program.
Reid said the goal is to get a package to Bush's desk by mid-February. He said the $150 billion price tag "is not a magical figure."
LOOK BACK: History offers lessons for economic stimulus
Even after a package is enacted, it will take the Internal Revenue Service several months to send out rebate checks. Paulson said efforts have been made to speed up the process, but that it would still take about two months to get the first checks in the mail and another 10 weeks to complete the rebates to 117 million taxpayers.
Among the critics of the plan Thursday were leading labor unions. "Congress is considering a Band-Aid, half-hearted solution to the economic crisis," said Gerald McEntee of the American Federation of State, County and Municipal Employees. "Rebate checks alone are not going to address the crisis facing families who rely on unemployment insurance, food stamps and Medicaid programs."
Great morning to you all!
Most companies unlikely to disclose executive pay goals.
http://www.usatoday.com/money/companies/management/2008-01-24-exec-pay_N.htm
NEW YORK (AP) — Nearly 70% of companies polled either will not disclose executive performance goals or are unsure whether they will, a study released Thursday by the consulting firm Watson Wyatt Worldwide showed.
The survey comes as companies prepare for the second year of reporting executive compensation under new rules from the Securities and Exchange Commission. The commission wants companies to explain more clearly how much executives are paid and what measures a company uses to decide on pay.
Watson Wyatt asked 135 large, publicly traded U.S. companies about their disclosure plans and found that just 42% plan to give what specific performance goals they used for the 2007 fiscal year.
The poll found that 31% of companies have no plans to spell out goals, while 27% are unsure what they will do.
It wasn't clear why the companies were hesitant to spell out goals, but the survey also found that a majority of companies feel the new rules will not improve company performance.
"They're in agony on this issue because they know the SEC wants it, and they think it will hurt their company and ultimately hurt their investors," said Ira Kay, Watson Wyatt's global director of executive compensation.
Under its rules, the SEC requires companies to disclose performance goals unless they can show that the disclosure will cause them to disclose competitive secrets in the process.
Watson Wyatt examined the proxies filed in 2007 by 100 large companies and found that 55 did disclose at least some information about performance goals.
Hi D of A,
Thanks for the heads-up. I had IWA on my watch list, but have not done the recent research you did. I did buy some yesterday because of your post.
Regards,
Abreis
Strong rally takes out earlier losses
http://money.cnn.com/2008/01/23/markets/markets_0945/index.htm?section=money_topstories
Stocks bounce back as investors jump back in after steep selloff that left the Nasdaq in bear market territory.
Despite beating estimates, the iPod maker's shares slumped in after-hours trading when it warned about the possiblity of a less-than-stellar second quarter.
NEW YORK (CNNMoney.com) -- Blue chips rallied Wednesday afternoon, with the Dow bouncing back from a more than 300-point loss earlier in the session, while the Nasdaq erased losses sparked by Apple's profit warning.
The Dow Jones industrial added almost 300 points, after having fallen more than 300 points earlier in the session. The Standard & Poor's 500 (SPX) index rose 2.1 percent.
The Nasdaq composite gained 1 percent after sinking more than 3 percent earlier in the session.
The three major gauges have slumped for five sessions in a row amid worries that the credit and housing market crises will send the U.S. economy into recession. Global stocks have slipped too.
On Tuesday, the Federal Reserve announced an emergency intermeeting rating cut, a decision that got some mixed ratings from critics, but nonetheless helped the market close off its lows.
After sliding throughout Wednesday's session, stocks rallied near the close, with investors scooping up some of the stocks that were hit the hardest in the recent selloff.
Financial sector: Big banks jumped, with JP Morgan Chase (JPM, Fortune 500) gaining more than 11 percent. Citigroup (C, Fortune 500), Merrill Lynch (MER, Fortune 500), Morgan Stanle (MS, Fortune 500)y and Lehman Brothers (LEH, Fortune 500) all bounced at least 5 percent as well.
The sector also benefited after Bear Stearns upgraded the sector, citing the potential for upside as a result of the Fed's interest rate cut.
Bank of America (BAC, Fortune 500), which reported quarterly earnings that missed estimates Tuesday, also rose.
Techs remained in the red, due to weakness in Apple. The tech-heavy Nasdaq has now tumbled more than 20 percent from its highs in October.
The tech-laden index has now dropped more than 20 percent from the peak it hit in late October, putting it in bear market territory. As of this afternoon, the S&P 500 was down more than 280 points or almost 18 percent off its all-time high hit in October. The Dow had fallen more than 2000 points, or almost 17 percent since peaking in October.
"Although stock prices might fall tomorrow and beyond, the market did just contract more than 2,000 points in three months, and so people are going to be willing to jump in to certain areas," said Gary Webb, CEO at Webb Financial Group.
The Fed rate cut: The turmoil in global markets prompted the Federal Reserve to abruptly cut interest rates three-quarters of a percentage point, to 3.5 percent, on Tuesday. The Dow initially dropped 450 points on the news, but recovered to finish down 128.
Some investors are expecting the Fed to cut rates further when the central bank policy makers meet next week, suggesting that Fed still sees risks to growth.
Harry Clark, founder and CEO of Clark Capital Management, said the markets are still digesting the Fed's action, which he called a "historic event."
"It will come in fits and starts, but we'll eventually get a rally out of this thing," he said in reference to the rate cut.
Earnings reports: After the market closed Tuesday, iPod and iPhone maker Apple (AAPL, Fortune 500) reported strong earnings for the fourth quarter but warned that the current quarter could be pressured by slowing consumer spending.
Shares of the consumer electronics company traded more than 14 percent lower in afternoon trade.
Before the opening bell Wednesday, Motorola (MOT, Fortune 500), the nation's largest cell phone maker, said profit from continuing operations fell in the fourth quarter, but earnings excluding certain charges actually beat estimates. Shares of the company were down more than 18 percent Wednesday afternoon.
ConocoPhillips (COP, Fortune 500), the nation's No. 3 oil company, posted a 37 percent increase in profits for the fourth quarter, thanks to higher energy prices.
Dow component Pfizer (PFE, Fortune 500) reported sales and earnings that beat Wall Street estimates and raised its full-year sales projections. Shares gained 2.5 percent.
Student lender Sallie Mae (SLM, Fortune 500) reported a $1.6 billion loss in the fourth quarter and set aside $575 million to cover expected loan defaults.
Banks are down, but not yet out
In other economic news, the Congressional Budget Office expects the U.S. budget deficit to grow to $250 billion this year, though that number may need to be revised once an economic stimulus package being debated in Washington is released.
President Bush proposed a $145 billion plan to boost the nation's economic activity last week, but details have not been finalized.
Market breadth was positive. On the New York Stock Exchange, winners beat losers almost three to one on volume of 2.8 billion shares. On the Nasdaq, advancers beat decliners by roughly two to one on a volume of 3.6 billion shares.
Treasury prices slipped, giving up early gains. The decline sent the 10-year note yield up to 3.45 percent from 3.42 percent late Tuesday. The yield on the 2-year note briefly reached a four-year low of 1.86 percent during Wednesday's session before recovering.
AP/Oil Prices Fall After Overnight Fed Cut
Wednesday January 23, 7:00 am ET
Oil Prices Drop After Surprise Overnight Fed Cut to Halt US Slide Toward Recession
http://biz.yahoo.com/ap/080123/oil_prices.html
BANGKOK, Thailand (AP) -- Oil futures fell Wednesday in Asia, extending overnight declines despite the U.S. Federal Reserve's surprise interest-rate cut.
Many investors doubted the Fed's emergency measures will stave off a serious slowdown that would dampen demand.
Light, sweet crude for March delivery lost 60 cents to $88.61 a barrel in Asian electronic trading on the New York Mercantile Exchange by midafternoon in Singapore. It fell 71 cents to settle at $89.21 a barrel in the floor session overnight.
The contract for February delivery fell 72 cents in the floor session to settle at $89.85 a barrel. It expired at the close of trade.
The Fed slashed its federal funds rate -- the interest that banks charge each other on overnight loans -- by three-quarters of a percentage point Tuesday to 3.5 percent. It was the biggest single cut in records that go back to 1990.
The U.S. central bank was responding to concerns about a possible recession that have sent global equities markets sharply lower in recent days. Asian stock markets rebounded Wednesday, although the Dow Jones industrials still lost 1.1 percent after the cut.
The benchmark Nikkei 225 index rose 2 percent, while Hong Kong's Hang Seng Index was up nearly 11 percent in late afternoon trade. Both indices -- along with other Asian indexes -- have lost heavily since the beginning of the year on U.S. recession fears.
The Dow industrials might have fallen further Tuesday had the Fed not acted. Oil futures recovered from earlier losses during the day because the Fed move appeared to stabilize stocks, analysts said.
"I think the oil market is now attached to the hip of the equity markets," said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Illinois.
Energy investors often view stocks as a proxy for economic growth, and slower economic growth could cut demand for oil and petroleum products such as gasoline and heating oil.
High energy prices also have been cited as a force pushing the economy toward recession. If oil prices continue to fall, as many analysts now expect, that could relieve some of the pressure on the global economy.
March Brent crude fell 27 cents to $88.18 a barrel on the ICE Futures exchange in London.
Nymex heating oil futures rose 1.01 cents to $2.4625 a gallon (3.8 liters) while gasoline prices dropped 0.81 cent to $2.2725 a gallon. November natural gas futures rose 4 cents to $7.71 per 1,000 cubic feet.
Wall Street bets on more Fed cuts
The market still expects the Fed to cut rates again next week but some economists say not so fast.
http://money.cnn.com/2008/01/22/news/economy/fed_lookahead/index.htm?section=money_topstories
NEW YORK (CNNMoney.com) -- Even though the Federal Reserve slashed its key federal funds rate by three-quarters of a percentage point in an emergency meeting Tuesday, Wall Street is still betting that the central bank will lower rates again next week.
The Fed will hold a two-day meeting that wraps up on Jan. 30. And according to futures listed on the Chicago Board of Trade, investors are pricing in a 100 percent chance of at least a quarter-point cut, to 3.25 percent, and a 66 percent likelihood of a half-point cut, to 3 percent.
"There is a legitimate chance of another cut next week. The Fed wants to stay in front of things and at this stage, they'd rather err on the side of having rates be too easy than too restrictive," said Jack Ablin, chief investment officer with Harris Private Bank.
"The Fed doesn't want to be blamed for making a downturn worse than it already is," Ablin added.
But some market observers said that another rate cut is not guaranteed next week.
"There are already rumors that the Fed may cut more next week but at this point, I would think that they are going to stand pat," said Oscar Gonzalez, economist with John Hancock Financial Services in Boston.
Gonzalez argues that since the Fed took such drastic action on Tuesday, it may not want to make another move so soon but would rather wait and see what economic data for January and February looks like before cutting rates again.
He thinks the Fed could ultimately lower the fed funds rate to between 2.5 percent and 3 percent if the economy continues to weaken.
Cuts are coming, but don't hold your breath. Ed Yardeni, president of Yardeni Research, an independent market research firm, agreed. He sees more rate cuts ahead...but not next week.
"The Fed probably won't do anything next week. They are going to take a break now and see how things unfold," he said.
But Yardeni added that if the global financial markets continue to plunge in the next few weeks, the Fed may be forced to do another emergency rate cut before it meets again on March 18.
Proceed with caution. John Norris, managing director with Oakworth Capital Bank, a private bank in Birmingham, Ala., said he thinks the Fed might cut rates again next week but he is hopeful that the Fed doesn't go much lower.
Norris said that a federal funds rate of 3 percent would be low enough to stimulate growth again without risking too much in the way of inflation. But he is concerned the Fed may cut rates too much.
Some economists have argued that the Fed lowered rates too aggressively during the 2001 recession - the federal funds rate eventually bottomed out at 1 percent - and that those historically low rates helped encourage the type of reckless subprime lending that is the root of the current economic crisis.
"I hope the Fed is not that foolish to jeopardize long-term financial health just for short-term stimulus. So if they cut rates again next week, hopefully that will be it for a very long time," Norris said.
Recession Watch 2008
AP/Fed Cuts Interest Rate
Tuesday January 22, 8:47 am ET
By Martin Crutsinger, AP Economics Writer
Fed Cuts Interest Rate Amid Global Stock Sell-Off and Fears of Recession
http://biz.yahoo.com/ap/080122/fed_interest_rates.html
WASHINGTON (AP) -- The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, cut a key interest rate by three-quarters of a percentage point on Tuesday, the biggest one-day move by the central bank in recent memory.
The Fed said it was cutting the federal funds rate, the interest that banks charge each other on overnight loans, to 3.5 percent, down by three-fourths of a percentage point from 4.25 percent.
The Fed action was the most dramatic signal it can send that it is concerned about a potential recession in the United States. It marked the biggest one-day move by the central bank in recent memory.
The Fed decision was taken during an emergency telephone conference with Fed officials on Monday night. Those discussions occurred after global financial markets had plunged Monday as investors grew more concerned about the possibility that the United States, the world's largest economy, could be headed into a recession.
In a brief statement, the Fed said it had decided to cut the federal funds rate "in view of a weakening of the economic outlook and increasing downside risks to growth."
The central bank said that the strains in short-term funding markets have eased a bit, but "broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."
The move caught financial markets by surprise. Many had expected the central bank would wait until its meeting next week to make any move in interest rates. The Fed made the move before markets had opened in the United States, hoping that the bold move would limit the decline in U.S. stocks.
Before Tuesday's move, the Fed had cut interest rates three times, beginning in September, the month after a severe credit crunch had roiled Wall Street and global financial markets. The Fed cut the funds rate by a half-point in September and then by smaller quarter-point moves in October and December.
In its statement, the Fed said, that "appreciable downside risks to growth remain" and held out the prospect of further rate cuts.
"The committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risk," the Fed statement said.
The Fed's action was approved on an 8-1 vote with William Poole, president the Fed's regional bank, dissenting. The statement said that Poole objected because he did not believe current conditions justified a rate move before the Fed's meeting next week.
Bernanke Ups The Ante
http://www.bcaresearch.com/public/story.asp?pre=PRE-20080121.GIF
10:36:00, January 21, 2008
Last week’s testimony by Fed Chairman Bernanke reiterated the message from his January 10 speech; that the rioting in financial markets and indications of economic slowdown have gotten policymakers’ attention.
The Chairman re-emphasized that the Fed is now prepared to ease aggressively and try to get ahead of the curve.
The testimony upped the ante a notch, by suggesting that carefully-timed fiscal stimulus would be a welcome addition to easier monetary policy. Such a recommendation is difficult for a conservative central banker, which highlights the risks that Bernanke sees in the outlook. A substantial fiscal package aimed at housing could indeed be the catalyst that marks the turning point in the financial crisis, by limiting forced selling and reducing the upside for delinquency and foreclosure rates. In turn, this could help to stabilize the prices of subprime-related financial instruments, which have been at the heart of the crisis. Given current market action, Congress better act quickly.
Abreis, Re: Iowa Telecom...
You mentioned last September that you were watching IWA (Iowa Telecom). I’ve decided to invest in this issue to capture its high yield (at $15-16, the yield is in excess of 9%) .
I believe the dividend to be safe in the near term for the following reasons:
1. Approximately 90% of the debt is fixed rate until November 2011. As of September 30, 2007 IWA had $477.8 million of senior debt outstanding under the term facilities and $8 million drawn from a $100 million revolving credit facility (offset by 7.8 million of RTFC Capital Certificates and 4.5 million of cash). The total debt was 473.5 million for a leverage ratio of approximately 3.6 times... Note, however, that the debt comes due in November 2011 and will need to be refinanced before then.
2. Anticipated capital expenditures should be covered by cash flow (the 2007 capital expenditures will be between 25 and 27 million). I don’t expect much growth, this is primarily a dividend play. A principle driver is the conversion of dial-up modems to DSL. There is new competition in the major cities in the form of VoIP being offered by the local cable company, Mediacom, but I don’t expect this competitive threat to extend into the rural telephony market served by IWA. And, I expect the rural Iowa economy to hold up well in the face of a weakening dollar largely because I expect corn prices to remain strong.
3. Current interest payments are covered by cash flow; albeit, this favorable situation might not last long. Current interest obligations of about $26M/yr will double in 2009-2010(and may be substantially higher when the debt is refinanced in 2011).
4. The tax yield position is strong, driven by continued goodwill amortization at the rate of approximately $40 million per year through June 2015, coupled with an existing net operating loss of approximately 158 million.
All-in-all, I was comforted by the following quote by Craig A. Knock, Vice President, Chief Financial Officer and Treasurer at the Nov 11, 2007 Q3 Earnings Call:
“Now, I’d like to summarize our cash sources and uses for the last 12 months as it demonstrates the strength of our ability to pay dividends. Starting with adjusted EBITDA of 131.3 million and deducting cash interest expense of 31.5 million, capital expenditures of 27.5 million and cash income taxes of 804,000 results in 71.4 million in cash available for dividends. At our dividend rate of $1.62 per share, we paid dividend of 51.4 million. Thus, for the trailing 12 months, our payout ratio of our free cash flow was approximately 72%.... It is also equally important to note, that as on September 30, 2007, with cumulative distributable cash or actual dividend capacity as defined in our credit agreement of 76.3 million. Or said in another way, nearly 1.5 years dividend requirement.”
AP/Wall Street Braces for More Volatility
Sunday January 20, 3:22 pm ET
By Madlen Read, AP Business Writer
http://biz.yahoo.com/ap/080120/wall_street_week_ahead.html
This Week Brings Wall Street More Earnings, but It Could Be Months Before Volatility Subsides.
NEW YORK (AP) -- With Wall Street falling precipitously almost by the day, investors are asking what it will take to revive it. Market experts are increasingly coming to the same answer: Time.
There is no piece of economic data, no corporate earnings report, no move by the Federal Reserve and no government tax plan that will be able to soothe the market's anxiety in the next couple weeks over the weakening economy.
That's not to say the stock market will keep plunging the way it has been. To be sure, bargain hunters will likely see Wall Street's recent slides as buying opportunities, particularly if encouraging news comes along like a hefty interest rate cut or better-than-expected profits at the nation's big-name companies.
Upbeat financial results in the coming week from some of the large, multinational companies that make up the Dow Jones industrials -- Microsoft Corp., AT&T Inc., Johnson & Johnson, Pfizer, Caterpillar Inc. and Honeywell International Inc. -- could lead to some rallies. But no one should be surprised if the gains evaporate as soon as they developed.
Investors simply have too many questions to buy into stocks with confidence -- questions that are not going to be answered until all fourth-quarter results are in, and until Wall Street has a better sense of how the still-young first quarter is going.
"We've baked in a lot of bad news. But we don't know the magnitude of the bad news yet. We don't know if we've overdone it," said Arthur Hogan, chief market analyst at Jefferies & Co. "I don't think there's any combination of things next week that will necessarily turn things around."
The Dow sank 4.02 percent last week, the Standard & Poor's 500 index dropped 5.41 percent, and the Nasdaq composite index fell 4.10 percent.
Last week brought exactly what investors feared: a wretched manufacturing reading from the Philadelphia Fed, dismal home construction data from the Commerce Department, a worse-than-expected profit at Intel Corp. and historic losses at Citigroup Inc. and Merrill Lynch & Co.
Even the more profitable banks, such as JPMorgan Chase & Co. and Wells Fargo & Co., said they were bracing for more problems in a wide swath of consumer credit, from home equity loans to auto loans and credit cards.
This week will bring earnings from more banks, notably Bank of America Corp. and Wachovia Corp. Companies outside the financial sector with a strong global presence might ease some of the anxiety about America's corporate muscle, but it is unlikely they will cure it.
"There is an earnings recession," said Hugh Johnson, chief investment officer of Johnson Illington Advisors, noting that S&P 500 operating earnings growth was lower in the third quarter of 2007 than in second quarter, and is sure to be lower in the fourth quarter of 2007 than in the third.
"The real key question is not whether there's going to be an economic recession. It's not when the economic recession is going to end," Johnson said. "It's when is the earnings recession going to end?"
Martin Luther King Day on Monday is a market holiday and, after that, the government will release only a few economic reports ahead of the Fed's Jan. 29-30 meeting on interest rates.
Wall Street will probe those that do come out more closely than usual for clues about how deflated the economy is and how that might affect business.
The Labor Department's weekly jobless claims data will also be watched, as will the National Association of Realtors' report on December sales of existing homes. Economists expect existing home sales to slip again after inching up in November.
With market pessimism at heights not seen in years, it is certainly possible the market is near its bottom. But there are few investors eager to bet on when stocks will resume their climb, and how long it will be before new records are reached again.
"Maybe by the end of the first quarter, things will line up for the market to find to some stability," said Steven Goldman, chief market strategist at Weeden & Co.
The Dow is now 14.6 percent below its Oct. 9 record close of 14,164.53, and is less than 100 points away from slipping beneath the 12,000 mark, which it first surpassed in October 2006.
Credit Crunch/You Should Worry About Ambac
Liz Moyer, 01.17.08, 4:47 PM ET
http://www.forbes.com/home/wallstreet/2008/01/17/ambac-debt-credit-biz-wall-cx_lm_0117ambac.html
A growing crisis at Ambac Financial, one of the biggest bond insurers, is raising questions about Wall Street's exposure as counterparties to the bond-insurance industry coming off a period in which the big banks are reeling from more than $100 billion in write-downs of mortgage-related securities.
Late Wednesday, Moody's Investors Service said it might downgrade Ambac's (nyse: ABK - news - people ) all-important triple-A financial-strength credit rating after the company forecast significantly higher-than-expected losses from insuring credit derivatives, many of them tied to subprime mortgages.
Raising the level of alarm a notch, Moody's and Standard & Poor's said they will be evaluating their ratings of other bond insurers.
Bond insurers use their top credit ratings to insure bonds issued by municipalities and others against default. That makes it easier for the issuers to sell the bonds at an attractive rate to institutional investors, like pension funds.
In recent years, Ambac, MBIA (nyse: MBE - news - people ) and others have ventured into insuring credit derivatives and other relatively newfangled fixed-income products invented by and peddled by Wall Street. Ambac guaranteed $38 billion of debt linked to subprime mortgages and has exposure to $45 billion of other mortgage investments.
The banks, as counterparties, are on the hook for billions in insurance they bought to hedge credit-derivatives positions. The insurance policies, called credit default swaps, have exploded in popularity in the last few years, with some $45 trillion outstanding.
Closely watched bond guru Bill Gross of Pacific Investment Management calls banks' participation in the CDS market a ponzi scheme that may trigger losses of $250 billion.
Bank disclosure is sketchy, and the market is hard to evaluate for lack of information. Credit default swaps are sold over the counter, are not traded on an exchange and are outside the close scrutiny of regulators.
"The ultimate systemic risk caused by the weakened positions of the monoline insurers is overwhelming and scary," said CIBC World Markets analyst Meredith Whitney in a late-December research note. "The impact will be sizable and very negative for the banks."
On Wednesday, Merrill Lynch (nyse: MER - news - people ) said it wrote down $3 billion of hedges with a counterparty that had slipped to junk grade during the fourth quarter, $2.6 billion of that write-down for hedges to asset-backed collateralized-debt obligations.
The counterparty was the troubled bond insurer ACA Financial Guaranty, which Moody's cut dramatically from A to triple-C one day in December. Canada's CIBC is also on the hook for $2 billion in insurance it bought from ACA to hedge its CDO positions.
On Monday, the Canadian bank said it has bought insurance for U.S. real estate exposure from other financial guarantors. "In the event that the credit ratings for one or more of these financial guarantors were downgraded, or if CIBC's own assessment of the credit status of any of the financial guarantors deteriorated significantly, it is possible that CIBC would make additional fair-value adjustments," the bank said. In other words, more write-downs are possible.
According to Fitch Ratings, Morgan Stanley (nyse: MS - news - people ), Deutsche Bank (nyse: DB - news - people ), Goldman Sachs (nyse: GS - news - people ) and JPMorgan Chase (nyse: JPM - news - people ) were the biggest counterparties in terms of notional value outstanding at the end of 2006, and the market expanded substantially in 2007. Merrill Lynch, Citigroup (nyse: C - news - people ) and UBS (nyse: UBS - news - people ) were the top three underwriters of structured finance CDOs last year.
"There is systemic risk," says Eileen Fahey, managing director at Fitch Ratings and head bank credit analyst. "This could really damage the overall derivatives market."
Shares of Ambac swooned 60% in trading Thursday, and rival MBIA fell 40%. Fitch Ratings, which affirmed MBIA's triple-A rating on Wednesday, is still reviewing Ambac.
The company is struggling to hold on to the top financial-strength rating, as its capital position is severely strained by exposure to subprime mortgage securities that have deteriorated in value, triggering the possibility that Ambac and other bond insurers will have to pay out on the policies they wrote.
That business is unraveling. Earlier this week, Ambac ousted Chief Executive Robert Genader and said it expected a $5.4 billion mark-to-market loss in the fourth quarter, which, coupled with a $143 million loss provision, will bring the quarter's net loss to $32 a share. Ambac announced plans to raise $1 billion by selling equity and equity-linked securities.
Those plans seem seriously in jeopardy now that the stock has been pounded. "Ambac's ability to raise sufficient capital to avoid a downgrade is now in significant doubt," said CreditSights analyst Rob Haines in a research note Thursday.
"In view of the uncertainty generated by Moody's' surprising announcement, Ambac is assessing the impact of this action on the company's previously announced capital plan," the company said in a statement.
The New York State insurance regulator, who said Thursday he continues to monitor the Ambac situation closely, invited other companies to open up for business to ensure that there would be bond insurers to go around in case any of the big ones fell apart. Berkshire Hathaway (nyse: BRKA - news - people ) jumped in last month with a newly formed bond-insurance company. Others are in the works.
AP/Stocks Extend Plunge; Dow Falls 306
Thursday January 17, 6:14 pm ET
By Tim Paradis, AP Business Writer
Stocks Extend Plunge As Manufacturing Index Falls; Bond Insurers Fall Amid Fears of Losses
http://biz.yahoo.com/ap/080117/wall_street.html
NEW YORK (AP)
Wall Street extended its 2008 plunge Thursday, sending the Dow Jones industrials down 306 points and to their lowest level since last March after a regional Federal Reserve report showed a sharp and unexpected decline in manufacturing activity. Downgrades of key bond insurance companies added to the market's black mood, with investors fearing an escalation of months of credit market problems.
The Dow lost nearly 2.5 percent, giving the index its worst three-day percentage decline since October 2002. The Standard & Poor's 500, the index closely watched by market professionals, fell nearly 3 percent Thursday.
The Dow, S&P 500 and the Nasdaq composite index have now given back all of the gains they achieved in 2007.
Stocks opened higher but quickly gave up their gains after the Philadelphia Federal Reserve said its survey of regional manufacturing activity registered a negative 20.9 from a revised reading of negative 1.6 in December. The latest number came in well short of what Wall Street had been expecting and underscored the seriousness of the economic worries that have gripped both Wall Street and Washington in recent weeks.
Credit concerns also dogged Wall Street after rating agency Moody's Investors Service placed bond insurer Ambac Assurance Corp. on review for a possible downgrade. That possibility alarmed investors because it would place all bonds insured by Ambac on review as well. Wall Street are concerned that bond insurers would be unable to absorb a spike in claims.
Investors' fears of a slowing economy, the consequence of a months-long housing and credit market crisis, dominated trading, as they have since the start of the year.
"The Philadelphia Fed just announced dreadful numbers," said John O'Donoghue, co-head of equities at Cowen & Co. He said if you look back at Philadelphia Fed data for similar numbers, it takes you back to the 2001 to 2002 recession.
"It's not rocket science -- the economy is slowing dramatically, and it's being reflected in economic reports."
The Dow, which had been up more than 50 points early in the session, closed down 306.95, or 2.46 percent, at 12,159.21.
The Dow is now off 8.33 percent for the year; there have been just 12 trading days so far in 2008, but the index's frequent triple-digit losses have now forced it to give back its 2007 gains. The Dow had its lowest close since it ended the March 16, 2007, session at 12,110.41.
The Dow's decline also left it about 150 points above 12,000, a level it hasn't closed below since November 2006.
The broader market indicators also plummeted. The S&P 500 index lost 39.95, or 2.91 percent, closing at 1,333.25, and leaving it was a year-to-date loss of 9.2 percent, while the Nasdaq dropped 47.69, or 1.99 percent, to 2,346.90, giving it a 2008 deficit of 11.51 percent.
Thursday brought the lowest close for the S&P 500 since October 2006 and the worst for the Nasdaq since March of last year.
Declining issues outnumbered advancers by more than 5 to 1 on the New York Stock Exchange, where consolidated volume came to a heavy 5.41 billion shares compared with 5.25 billion traded Wednesday.
Bond prices rose as stocks fell and anxious investors sought the safety of government-issued securities. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.63 percent from 3.68 percent late Wednesday. The dollar was mixed against other major currencies.
The Chicago Board Options Exchange's volatility index, known as the VIX, and often referred to as the "fear index," jumped nearly 17 percent Thursday.
Light, sweet crude fell 71 cents to settle at $90.13 a barrel on the New York Mercantile Exchange after Bernanke's prediction of slower economic growth this year. Slowing growth could dampen demand for oil.
The Philadelphia manufacturing reading caught Wall Street by surprise -- igniting fears that the economy is slowing precipitously and that policymakers might be too late in contemplating aid.
Economists had expected the Philadelphia index would come in at a negative 1.5, according to Dow Jones Newswires. Instead, the negative 20.9 figure was the weakest since October 2001 when the economy was reeling from the shock of the Sept. 11 terror attacks.
Jim Herrick, manager of equity trading at Baird & Co., contends that the Philadelphia Fed reading and other recent negative economic reports indicate the economy is likely in a downturn.
Other economic reports added to investors' glum mood. The Commerce Department said housing starts plunged 14 percent to 1.01 million in December, marking the weakest pace of home building in more than 16 years. In addition, permits to build new homes dropped 8 percent last month to 1.07 million, the lowest level since 1993.
The week's steady flow of news, much of which has dented investor sentiment, has led to a growing chorus of calls for the Fed to cut rates. The Fed's monetary policy committee will meet Jan. 29-30 and is widely expected to lower its Fed funds target from the current 4.25 percent level. Bernanke on Thursday reiterated recent signals that the central bank will reduce rates for a fourth straight time.
Some on Wall Street have called for the Fed to intervene sooner with steep rate cuts.
The economic concerns come in a week in which some of Wall Street's biggest names have posted huge losses following bad bets on mortgage investments. Financial shares fell sharply Thursday after the reports have made clear that there is also increasing weakness in home equity and other consumer banking operations.
[b ]Merrill Lynch & Co. on Thursday posted a massive loss that underscored the depth of the economy's credit problems. The world's largest brokerage said it lost $9.91 billion in the fourth quarter, hurt by big write-downs from investments and trades battered by tight credit conditions.
John Thain, the new chief executive at Merrill, said he believes the red ink will constitute the bulk of the company's write-downs from its subprime mortgage exposure.
But he would not speculate about what 2008 might hold in store in other areas. Earlier this week, Merrill secured a new round of capital infusions from foreign funds.
Merrill fell $5.64, or 10 percent, to $49.45.
Moody's announcement that it will review Ambac came after the insurer booked a $5.4 billion write-down on its credit derivative portfolio during the fourth quarter.
Ambac plunged $6.73, or 52 percent, to $6.24, while Ambac rival MBIA Inc. fell $4.18, or 31 percent, to $9.22. First Horizon National Corp. fell $2.43, or 13 percent, to $16.48 after Standard & Poor's Ratings Services lowered its rating on the bank's long-term credit.
The Russell 2000 index of smaller companies fell 19.34, or 2.76 percent, to 680.57.
Overseas, Japan's Nikkei stock average closed up 2.07 percent. Britain's FTSE 100 finished down 0.68 percent, Germany's DAX index fell 0.78 percent, and France's CAC-40 fell 1.31 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
AP/Bush, Bernanke Support Stimulus Package
Thursday January 17, 10:49 am ET
By Jeannine Aversa, AP Economics Writer
Bush and Bernanke Back Package to Stimulate Weakening Economy
http://biz.yahoo.com/ap/080117/economy_stimulus.html
WASHINGTON (AP) -- President Bush and Federal Reserve Chairman Ben Bernanke on Thursday embraced calls for an economic stimulus package to avert recession. Bernanke said such a plan should be quickly implemented and temporary so that it won't complicate longer-term fiscal challenges.
The Fed chief, in testimony to the House Budget Committee, did not embrace any specific provisions or a specific plan. Rather, he spoke to the general concept of an economic rescue package. It is likely that any such package would include tax rebates.
"Fiscal action could be helpful in principle" and may provide "broader support for the economy" than the Fed can furnish alone through reductions in interest rates, Bernanke said. However, "the design and implementation of the fiscal program are critically important," he said.
Bernanke forecast slower growth in 2008 but not a recession.
At the White House, spokesman Tony Fratto said, "The president does believe that over the short term, to deal with the softening of the economy, that some boost is necessary."
Fratto's comments marked the first White House confirmation that Bush, confronting a deepening economic crises that has shaken much of the nation, supports government intervention. Until now, the White House said the president was just considering some type of short-term boost.
Fratto would not divulge the details or what the stimulus would look like, other than to say all options are being considered.
The shaping of a stimulus package was expected to accelerate Thursday during a conference call between Bush and congressional leaders. "I would characterize it as a consultation," Fratto said.
On Wednesday, House Speaker Nancy Pelosi, D-Calif., and Republican leader John Boehner of Ohio promised to craft legislation to energize the weakening economy.
The fragile state of the economy has gripped Wall Street and Main Street and is a rising concern among voters. The situation has galvanized politicians -- including those vying to be the next president -- and poses the biggest test to Bernanke, who took over the Fed nearly two years ago.
The White House spoke up after watching a number of indicators of a battered economy. Consumer confidence has plummeted, economic woes have become the top concern of the American public, and the 2008 presidential contenders have scrambled to get in front of the issue.
Fratto declined to say when the president could announce a package, or whether it would be before or after the State of the Union address later this month.
In his testimony, Bernanke again pledged to aggressively slash a key interest rate as needed to bolster an economy that is weakening under the strains of a severe housing slump and credit crisis.
Many economists believe the Fed will lower its key rate, now at 4.25 percent, by a bold half-percentage point at its next meeting on Jan. 30.
The Fed cut rates three times last year, starting in September. But some critics on Wall Street and elsewhere have been critical of Bernanke for not taking action sooner and more forcefully.
"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," Bernanke told the budget panel Thursday, echoing the same -- and unusually frank -- language he used last week to signal the Fed's next move.
Although Republicans and Democrats differ over what provisions should be part of any economic stimulus package, there's widespread agreement that tax rebates along the lines of the $300-$600 checks provided in 2001 are likely to be part of the measure. The country last suffered a recession in 2001.
"To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months or so," Bernanke told lawmakers. The notion behind the rebates, for instance, is to get money into the hands of consumers quickly so that they boost spending, helping energize the national economy.
"Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving," Bernanke said. "Thus, fiscal measures that involve long lead times or result in additional economic activity only over a protracted period, whatever their intrinsic merits might be, will not provide stimulus when it is most needed," he added.
Moreover, Bernanke said any fiscal package should also be "efficient in the sense of maximizing the amount of near-term stimulus per dollar of increased federal expenditure or lost revenue," he said.
Any such package also must be temporary to avoid making a big boost to the federal government's budget deficits and adding to the country's long-term fiscal burdens.
"The nation faces daunting long-run budget challenges associated with an aging population, rising health care costs and other factors. A fiscal program that increased the structural budget deficit would only make confronting those challenges more difficult," Bernanke warned.
Before Bernanke spoke, there was yet more downbeat economic and financial news.
New-home building plunged last year by 24.8 percent, the biggest drop in 27 years, the Commerce Department reported Thursday morning. It provided stark evidence of the toll of the deep housing slump.
Financial companies, meanwhile, hard hit by the housing and credit crises, continue to wrack up multibillion losses. Merrill Lynch & Co., the world's largest brokerage, said Thursday it posted a fourth-quarter loss of nearly $10 billion after writing down some $14.6 billion worth of investments and trades slammed by the ongoing credit crisis.
Those reports join a recent string of dismal economic reports has raised fears the country could slide into a recession this year. Retail sales have plunged. The nation's unemployment rate has jumped from 4.7 percent to 5 percent, a two-year high. Manufacturing activity has slowed. The nation's major banks are piling up big losses and Wall Street has been mired in turmoil.
Federal Reserve: http://www.federalreserve.gov
AP/Inflation Rate Is Worst in 17 Years
Wednesday January 16, 12:58 pm ET
By Martin Crutsinger, AP Economics Writer
Inflation Up by Largest Amount in 17 Years, Industrial Production Flat in December
http://biz.yahoo.com/ap/080116/economy.html
WASHINGTON (AP)
Higher costs for energy and food last year pushed inflation up by the largest amount in 17 years, even though prices generally remained tame outside of those two areas. Meanwhile, industrial output was flat in December, more evidence of a significant slowdown in the economy.
Consumer prices rose by 4.1 percent for all of 2007, up sharply from a 2.5 percent increase in 2006, the Labor Department said Wednesday. Consumers felt the pain when they filled up their gas tanks or shopped for groceries. Prices for both energy and food shot up by the largest amount since 1990.
In a second report, the Federal Reserve said that output at the nation's factories, mines and utilities showed no growth in December, adding to a string of weak economic reports showing that the economy was slowing at the end of last year.
That weakness has shown up in the biggest one-month jump in unemployment since the 2001 terrorist attacks and billions of dollars in losses at many of the country's biggest financial institutions. Citigroup Inc. reported Tuesday it had suffered a $10 billion loss for the last three months of 2007, reflecting bad bets on investments backed by subprime mortgages.
The Dow Jones industrial average plunged by 277 points on Tuesday and fell even further on Wednesday as Intel reported weak earnings for the fourth quarter. The Dow was down by 26 points in late morning trading.
The unchanged industrial output in December was the poorest showing since industrial output actually fell by 0.5 percent in October. Output had been up by 0.3 percent in November.
The December weakness reflected flat output at U.S. factories, a tiny 0.1 percent rise in the mining industry and a 0.2 percent drop at the nation's utilities.
The Consumer Price Index rose by 0.3 percent in December, slower than the 0.8 percent in November, as food costs were flat for the month and energy prices rose by 0.9 percent after an even bigger 5.7 percent jump in November.
Outside of food and energy, inflation rose a more moderate 0.2 percent in December. This measure of core inflation rose by 2.4 percent for all of 2007, down slightly from a 2.6 percent increase in 2006.
The Federal Reserve is closely watching to see whether the jump in food and energy becomes more widespread and starts pushing core inflation higher.
Analysts said that with core prices generally remaining well-behaved, it will give the central bank the leeway to cut interest rates further to battle a serious economic slowdown triggered by a steep slump in housing and a spreading credit crisis.
The expectation is that the Fed will cut a key rate by a half-point when officials meet at the end of this month. Federal Reserve Chairman Ben Bernanke raised hopes for further rate cuts in a speech last week when he said that economic risks had grown significantly in recent weeks.
The rising risk of a recession has prompted politicians to consider stimulus packages to give the economy a jump-start to either prevent a recession or at least mitigate its fallout. President Bush has said he may unveil a plan around his Jan. 28 State of the Union address. Democrats in Congress and presidential candidates in both parties are putting forward their own plans.
The CPI report showed that the 4.1 percent increase in overall prices was the biggest since a 6.1 percent jump in prices in 1990.
Energy costs rose by 17.4 percent this past year while food costs rose by 4.9 percent. Both were the biggest increases since 1990. Gasoline prices were up 29.6 percent, the biggest increase since they soared by 30.1 percent in 1999.
The 2.4 percent rise in prices outside of food and energy was the smallest since a 2.2 percent rise in 2005.
Clothing costs and the price of new cars actually fell for the year, both dropping by 0.3 percent, while airline fares, reflecting higher fuel costs, were up 10.6 percent and medical care, always one of the leading areas of price increases, rose by 5.2 percent for 2007.
Workers' wages failed to keep up with the higher inflation. Average weekly earnings, after adjusting for inflation, dropped by 0.9 percent in 2007, the biggest setback since a 1.5 percent fall in 2005.
Possible Recession Winner: The Dollar
Matt Swibel, 01.09.08, 6:00 AM ET
http://www.forbes.com/2008/01/08/recession-dollar-taxes-biz-wash-cz_ms_0109beltway.html?feed=rss_news
The Washington talk about what sort of stimulus package might be needed to avert a recession is all pretty predictable stuff. If President George W. Bush decides to propose a plan, word is, he'll call for more tax cuts. A Democratic package would likely include government spending and tax cuts for lower and middle class folks--possibly to be paid for by tax hikes for the wealthy.
So here's something a little more surprising for investors to mull over. Might a U.S. recession actually give a boost to the sinking U.S. dollar, which fell against 14 of the 16 most actively traded currencies in 2007?
Conventional wisdom (and common sense) holds that a U.S. recession will lead to a further loss of confidence in the dollar and push it lower against the euro, the Swiss franc, the British pound and so on.
But Stephen Jen, global head of currency research at Morgan Stanley, suggests a different bottom line. His research shows that, historically, the greenback tends to get a boost when the U.S. economy is either growing at 1.5%-plus a year or shrinking by 1.5% or more a year. Based on Morgan Stanley economists' expectation of a short recession early this year, he's predicting the dollar's performance will be similar to 2005, when it climbed 10% against the largest European currencies. That year it rose 2% against the U.S. dollar index, a basket that includes the euro, the Japanese yen, the Canadian dollar, the British pound, the Swedish krona and the Swiss franc.
An upward path for the dollar isn't a sure thing, of course.
If the Fed cuts interest rates further to try to help stumbling credit markets and stave off recession, that would certainly put the dollar under further pressure.
But Jen argues that an actual U.S. recession will result in ripple effects abroad and, at least in the short run, undercut the popular notion that there are "safe havens" of economic growth elsewhere when the U.S. economy contracts.
Yes, China's growth might hold up if policymakers in Beijing use neutralizing measures. But any drop in U.S. demand will create problems for the U.K., Canada and most other large exporters to the U.S. On Monday, Australian equities plunged 2.1% amid heightened concerns about a recession in the U.S.
So, Jen's argument continues, a U.S. recession-induced slowing of global growth would intensify investors' aversion to risk worldwide. And since the dollar already looks cheap against most other currencies, it will benefit from investors searching for a safe value haven.
Jen isn't the only one predicting a dollar rally. Deutsche Bank (nyse: DB - news - people ), also in the dollar-revival camp, forecasts that by year's end, a euro will be worth $1.30, down from its current $1.47.
But that's hardly a unanimous view. Last month, for example, Scotiabank in Toronto, cited the shaky U.S. economic outlook and ongoing concerns regarding foreign central bank reserves diversification last month, when it said the dollar hasn't reached bottom.
None of this debate is likely to have much influence over the political posturing in Washington. But it's certainly a recession angle for investors to consider.
Any significant upward move in the dollar would, of course, cut into returns on foreign equity funds. And big exporters such as Boeing (nyse: BA - news - people ) and Caterpillar (nyse: CAT - news - people ), whose products now seem cheap to overseas buyers, could see their price advantages narrow.
YO!! They are using the "R" word in da White House...shhhh, don't tell anybody!
Wall Street's terrible Tuesday
Stocks sink again extending rough start to 2008, as major gauges fall 10 percent off recent highs - the technical definition of a market "correction."
http://money.cnn.com/2008/01/08/markets/markets_0500/index.htm?section=money_topstories
NEW YORK (CNNMoney.com) -- Stocks tumbled Tuesday, continuing the abysmal start to the new year, on growing worries that the economy could be headed for a recession amid the credit and housing market fallout.
The Dow Jones industrial average (INDU) lost 1.9 percent. The broader S&P 500 (INX) index lost 1.8 percent and the Nasdaq (COMPX) composite lost 2.4 percent. The Russell 2000 (RUT.X) small-cap index fell 2.6 percent.
Stocks were volatile throughout the session, but then turned lower in the last hour on a mix of news - including AT&T's warning on its consumer business, questions about Countrywide Financial and a report showing a spike in consumer credit.
The market was also at the mercy of technical market factors, with all three major gauges now having fallen 10 percent off the highs hit in November, on a closing level, the technical definition of a market correction. In the next few days, this could spark a much bigger leg down, or bring in a wave of new money as investors seek to buy at lower levels.
"We've gotten very oversold, and we've seen this technical correction, so I wouldn't rule out a short-term rally," said Ryan Atkinson, market analyst at Balestra Capital.
"But I don't think we've put in a bottom here," he said. "We may be at the start of a bear market, which would be typical of a recession."
Although others are less inclined to call the recent selloff the makings of a bear market, it has certainly been a brutal start to the year.
Year-to-date, the S&P 500 has lost about 5.3 percent, the Dow industrials has fallen 5.1 percent and the Nasdaq composite has fallen 8 percent year-to-date.
"Although the year is very young, it's a discouraging start," said Art Hogan, chief market analyst at Jefferies & Co.
He said that investors are being faced with a barrage of issues that makes the market environment extremely challenging right now, including oil price shocks, nervousness around the presidential election and the risk of stagflation - an environment of slow growth and rising inflation.
Stocks have now fallen for four out of the first five trading days in 2008, a bad start to the year, or what the Stock Trader's Almanac calls an "early warning sign" for stocks. According to the Almanac, what the S&P 500 does in the first five trading days of the year can correlate with what it does in the full year.
But that statistic is most accurate when the first five days of the year are positive. When that happens, full-year gains follow 86.1 percent of the time, the Almanac said, looking at results stretching back to 1950. When the first five days are negative, full-year declines followed less than 50 percent of the time.
Bracing for bad bank earnings
Stocks were volatile throughout the session Tuesday as investors considered management shakeups at Bear Stearns and Starbucks, spiking oil and gold prices, more housing market woes and dour comments on the economic outlook from government officials.
Investors tried to push stocks higher in the mid afternoon by scooping up some of the issues that were battered in last week's miserable start to the year, but the gains proved unsustainable.
Helping to cause the late session retreat: weakness in Countrywide Financial, even after the mortgage lender swatted away bankruptcy rumors; a report showing consumer credit card debt spike to the highest level in six months in November; and reports that Dow component AT&T (T, Fortune 500) sees weakness in its consumer business, which sent that stock falling 4.6 percent.
Bad news from the housing sector added to growing worries about the threat of a recession.
The National Association of Realtors said Tuesday morning that contracts to sell existing homes fell in November by a steeper-than-expected margin. The group also pushed back its forecast for a price rebound to 2009.
Treasury Secretary Henry Paulson said in a speech that housing market problems are not easing, Briefing.com reported. Meanwhile, Boston Fed president Eric Rosengren said that if forecasts pan out, the United States will see the longest housing investment decline in 50 years.
And builder KB Home (KBH, Fortune 500) reported a steeper-than-expected quarterly loss, all of which sent homebuilding stocks lower.
With worries that the economy could be heading into recession, Wall Street has been looking to the Federal Reserve to cut short-term interest rates by as much as a half-percentage point at the next policy meeting at the end of January.
Philadelphia Fed President Charles Plosser, speaking Tuesday morning, said that policy decisions are getting harder to make because inflationary pressures are rising and slow economic growth is no longer sufficient to take the edge off pricing pressures. However, he said he wouldn't be opposed to more cuts.
Plosser will be a voting member of the Fed's 2008 policy-setting committee, starting with the January meeting.
Fed chairman Ben Bernanke is due to speak Thursday afternoon in Washington D.C. on the economic outlook and monetary policy.
Bush tax cut guru: Recession likely
In other corporate news, Bear Stearns (BSC, Fortune 500) confirmed that its chief executive is stepping down amid the investment bank's big subprime losses, to be replaced by the bank's current president. Shares slumped after rising in the morning on the rumors of the executive shuffle.
Starbucks (SBUX, Fortune 500) said late Monday that it was replacing its CEO with its chairman and former chief executive, as well as closing under-performing stores. Shares rallied Tuesday.
The Starbucks news followed Monday's announcement that McDonald's (MCD, Fortune 500) will unveil its own coffee bars, complete with baristas, at its nearly 14,000 U.S. locations, taking on Starbucks' dominance in the area.
Market breadth was negative. On the New York Stock Exchange, losers beat winners by close to two to one on volume of 1.82 billion shares. On the Nasdaq, decliners topped advancers three to two on volume of 2.59 billion shares.
Treasury prices rallied, lowering the corresponding yields, as investors sought safety in government debt, lowering the yield on the 10-year note to 3.77 percent from 3.83 percent late Monday. Treasury prices and yields move in opposite directions.
In currency trading, the dollar fell versus the euro and gained against the yen.
U.S. light crude oil for February delivery rose $1.24 to settle at $96.23 a barrel on the New York Mercantile Exchange Tuesday.
COMEX gold for February delivery rallied $18.30 to $880.30 an ounce
Capital Gains Tax Cuts For Middle Income Investors
http://www.investopedia.com/articles/pf/07/capitalgains.asp
Imagine selling a $20,000 investment, purchased five years earlier for only $10,000, and paying no capital gains tax at all.
This dream will become reality for middle-income investors beginning in 2008 and will last for three years when a seldom-discussed provision of the recent tax cuts takes effect, providing middle-income investors with a can't-miss tax-planning opportunity.
Under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) passed by Congress in May 2006, U.S. taxpayers in the two lowest tax brackets will pay no capital gains taxes on long-term investments sold in 2008, 2009 and 2010.
This tax-free bonanza applies to investors within the 10% and 15% tax brackets, which account for the vast majority of American taxpayers. (For more information see the IRS's 2006 Federal Tax Rate Schedules.)
The zero capital gains tax for these taxpayers had already been slated to take effect in 2008, but TIPRA added two more years, significantly expanding the tax-planning opportunity. The years 2008 to 2010 might be the time to sell mutual fund shares in a taxable account if they are worth significantly more than when they were first purchased, but have struggled in recent years. It might also be a time to establish a higher basis in a still-favored investment, or it could be the right time to sell shares in anticipation of a child heading off to college. (To find out more about TIPRA, see TIPRA Helps Convert Your Plans And Save More, A Great Time To Add Roths To Your Retirement Planning and Recent Legislative And Other Updates.)
Capital Gains Tax Basics
Currently, the maximum capital gains tax rate for assets held for more than one year is 15%. Those held for less than one year are subject to the higher tax rates that apply to ordinary income. The 15% capital gains rate applies to taxpayers in the 25%-and-higher income brackets.
In the 10% and 15% brackets, the current tax rate for long-term capital gains is 5%. That is pretty attractive, but it still can't match the 0% rate that will be in effect from 2008 to 2010. This year, taxable income up to $61,300 qualifies a married couple filing jointly for the 15% bracket.
The rates in place for capital gains also apply to qualifying dividends. This means that an investor in the 15% tax bracket currently pays $5 for every $100 in dividend income. From 2008 to 2010, dividend income to middle income taxpayers (again those in the 10% and 15% brackets) would be tax-free.
The first steps toward a zero capital gains tax for middle-income investors were taken in 2003. That is when Congress lowered the maximum capital gains tax rate from 20% to 15% to give Americans an incentive to save and invest. The legislation was called the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). (To learn more, read The JGTRRA: Reducing Dividend Tax Rates.)
For taxpayers in the two lowest tax brackets, under JGTRRA, the capital gains tax rate went from 10% to 5%, and then in 2008 it was scheduled to fall to 0% for just that one year.
Then in 2009, the maximum rate was to return to 20%, and the rate for the two lowest tax brackets was to return to 10%. Dividends would be taxed again at ordinary income rates.
The Tax Increase Prevention and Reconciliation Act of 2005
This is where TIPRA took over. It extended the favorable rates on capital gains and dividends by two more years.
Other TIPRA provisions include relief from the alternative minimum tax, a one-year waiver of income limits on Roth IRA conversions in 2010, the extension of small business expensing thresholds and the expansion of the so-called kiddie tax. (To find out more about these subjects, see Kids Or Cash: The Modern Marriage Dilemma, Don't Forget The Kids: Save For Their Education And Retirement, 401(k) Plans For The Small-Business Owner and Plans The Small-Business Owner Can Establish.)
The Middle-Income Investor
For middle-income investors, however, the best thing about TIPRA may be the opportunity to sell significantly appreciated investments without paying capital gains taxes over a three-year period.
Make no mistake; the pool of investors who stand to benefit from the zero capital gains rate is quite large. According to the Internal Revenue Service (IRS), taxpayers in the 10% and 15% tax brackets accounted for 63 % of all individual income tax returns filed for 2003. More tax was generated at the 15% rate than at any other rate for that tax year, IRS figures show.
Recent U.S. Census Bureau stats indicate that the median household income in the United States was about $46,000 in 2005, suggesting that the majority of Americans fall within the 10% and 15% tax brackets. Among married couples, the median household income is higher, nearly $66,000 in 2005, according to the Census Bureau.
Again, the top-end limit for a married couple filing jointly is $61,300, but that is taxable income - after deductions and exemptions. That means a married couple with two children taking the standard deduction could earn up to $84,800 in 2006 and still fit within the 15% bracket. ($84,800 minus the standard deduction of $10,300 and minus four exemptions for each family member at $3,300 each comes to $61,300.)
According to the data, therefore, the vast majority of Americans will qualify for the zero capital gains and dividend taxes available from 2008 to 2010.
But do these middle-income Americans invest? Yes. The median income of U.S. households that own mutual funds is $68,700, according to the Investment Company Institute, a trade association for the mutual fund industry. The median mutual fund holding among these households is $48,000, the group says. In 2005, according to ICI, about half of all U.S. households owning mutual funds in 2005 had incomes between $25,000 and $75,000.
Tax-Saving Scenarios
Now let's consider some scenarios under which a middle-income investor might take advantage of the zero capital gains period.
Let's return to our first example. Suppose that there is an investor who bought shares of a single stock 10 years ago at an initial price of $10,000. The investor held the stock, reinvested the dividends, and now the holding is worth $20,000. At some point, the investor wanted to sell. Maybe, it was to diversify. Maybe the company's future prospects weren't as bright as they once were. Regardless, the investor wanted out of the stock, but had been reluctant to sell because of the capital gains tax.
Currently, the 15% tax bracket investor would pay $500 on that gain, but beginning in 2008 that same investor would pay nothing at all for the same transaction.
A second scenario might involve a recent retiree who owns highly appreciated shares of a growth mutual fund purchased over the course of his working life. Now retired, he wants to reduce his portfolio's risk, but has been worried about the tax bill. Selling all, or some, of those shares between 2008 and 2010 eliminates the tax worry.
Consider a third scenario. An investor holds a long-term position in a well-managed, low-cost mutual fund that he is happy to stick with. The investor could lower future capital gains taxes on that investment by selling it in the 2008-to-2010 period, pay no capital gains and then repurchase shares of the same fund, establishing a higher basis for future sales and thereby reducing the capital gain that eventually will be taxed.
Waiting to Save
Each scenario above assumes the investments are held in a taxable account as opposed to a tax-favored account like a 401(k) or IRA. Also, given the current capital gains tax for the 10% and 15% brackets is just 5% now, under certain circumstances it may not be worth waiting more than a year for the zero capital gains period to begin. But as 2008 gets closer, middle income investors may want to wait to enjoy the coming tax-free bonanza.
It's time to start planning for next year, now.
By David McPherson
David McPherson is a financial writer and editor based in Massachusetts. He holds a certificate in financial planning from Boston University and has passed the Certified Financial Planner examination. His website is www.davidmcpherson.net.
Market Commentary
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CURRENCIES
The March Dollar closed lower on Thursday as it extended this week's decline below the 20-day moving average. The mid- range close sets the stage for a steady opening on Friday. Stochastics and the RSI remain bearish signaling that sideways to lower prices are possible near-term. If March extends this week's decline, the reaction low crossing at 75.64 is the next downside target. Closes above the 10-day moving average crossing at 76.94 would temper the near-term bearish outlook in the market. First resistance is the 20-day moving average crossing at 76.80 then the 10-day moving average crossing at 76.94. First support is today's low crossing at 75.73. Second support is the reaction low crossing at 75.64.
The March Euro closed higher on Thursday as it extended the rally off December's low. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI remain bullish signaling that sideways to higher prices are possible near-term. If March extends this week's rally, the reaction high crossing at 147.810 is the next upside target. Closes below the 10-day moving average crossing at 145.467 would temper the near-term friendly outlook in the market. First resistance is today's high crossing at 147.690. Second resistance is the reaction high crossing at 147.810.
First support is the 20-day moving average crossing at 145.721 then the 10-day moving average crossing at 145.467.
The March British Pound closed lower on Thursday as it extended this week's decline. The low-range close sets the stage for a steady to lower opening on Friday. Stochastics and the RSI are oversold but are bearish signaling that sideways to lower prices are possible near-term. If March resumes the decline off November's high, the 75% retracement level of this year's rally crossing at 1.9583 is the next downside target.
Closes above the 20-day moving average crossing at 2.0022 are needed to confirm that a short-term low has been posted.
First resistance is the 10-day moving average crossing at 1.9805 then the 20-day moving average crossing at 2.0022.
First support is today's low crossing at 1.9665 then the 75% retracement level crossing at 1.9583.
The March Swiss Franc closed higher on Thursday as it extends the rally off December's low. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI remain bullish signaling that sideways to higher prices are possible. If March extends this week's rally, November's high crossing at .9165 is the next upside target.
Closes below the 10-day moving average crossing at .8807 would confirm that a short-term top has been posted. First resistance is today's high crossing at .9038. Second resistance is November's high crossing at .9165. First support is the 20-day moving average crossing at .8826 then the 10-day moving average crossing at .8807.
The March Canadian Dollar closed higher on Thursday as it consolidated some of Monday's decline. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI have turned bearish hinting that a short-term top might be in or is near. Closes below the 20-day moving average crossing at 100.04 would confirm that a short-term top has been posted. If March renews December's rally, the 50% retracement level of the November-December decline crossing at 103.83 is the next upside target. First resistance is last Friday's high crossing at 102.55. Second resistance is the 50% retracement level crossing at 103.83. First support is Wednesday's low crossing at 100.33 then the 20-day moving average crossing at 100.03.
The March Japanese Yen closed slightly higher on Thursday as it extended the rally off November's low. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI remain bullish signaling that sideways to higher prices are possible near-term. If March extends the rally off last week's low, the reaction high crossing at .9235 is the next upside target. Closes below the 10-day moving average crossing at .8957 would confirm that a short-term top has been posted. First resistance is today's high crossing at .9233. Second resistance is the December 4th high crossing at .9235. First support is Wednesday's low crossing at .9037 then the 20-day moving average crossing at .8990.
ENERGY MARKETS
http://quotes.ino.com/exchanges/?c=energy
February crude oil closed lower on Thursday due to profit taking but not before spiking above $100 per barrel. The low-range close sets the stage for a steady to lower opening on Friday. Stochastics and the RSI are overbought but are neutral signaling that sideways to higher prices are possible. If February extends this week's rally, upside targets will be hard to project now that February is trading into uncharted territory. Closes below the 20-day moving average crossing at 92.75 would temper the near- term friendly outlook in the market. First resistance is today's high crossing at 100.09. First support is broken resistance marked by November's high crossing at 98.12. Second support is the 10-day moving average crossing at 95.25.
February heating oil closed lower on Thursday as it consolidated some of Wednesday's rally. The low-range close sets the stage for a steady to lower opening on Friday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near-term. If February extends this week's rally, upside targets will be hard to project now that February is trading into uncharted territory once again. Closes below the 20-day moving average crossing at 259.77 would confirm that a short-term top has been posted. First resistance is today's high crossing at 274.75. First support is the 10- day moving average crossing at 264.29. Second support is the 20-day moving average crossing at 259.77.
February unleaded gas closed lower on Thursday as it consolidated some of Wednesday's rally but remains above resistance marked by November's high crossing at 249.95. The low-range close sets the stage for a steady to lower opening on Friday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near- term. If February extends this week's rally, upside targets will be hard to project with February now trading into uncharted territory. Closes below the 20-day moving average crossing at 243.14 would confirm that a short-term top has been posted. First resistance is today's high crossing at 261.10. First support is the 10-day moving average crossing at 249.40. Second support is the 20-day moving average crossing at 243.15.
February Henry natural gas closed lower on Thursday as it consolidated some of this week's rally but remains above the reaction high crossing at 7.608. The low-range close sets the stage for a steady to lower opening on Friday. Stochastics and the RSI remain bullish signaling that sideways to higher prices are possible near-term. If February extends this week's rally, the 50% retracement level of the November-December decline crossing at 8.010 is the next upside target. First resistance is today's high crossing at 7.980 then the 50% retracement level crossing at 8.010. First support is Wednesday's gap crossing at 7.540. Second support is the 10-day moving average crossing at 7.373.
FOOD & FIBER
http://quotes.ino.com/exchanges/?c=food
March coffee posted an inside day with a higher close on Thursday as it consolidated some of Wednesday's decline.
The mid- range close sets the stage for a steady opening on Friday. Stochastics and the RSI are turning bullish signaling that sideways to higher prices are possible near-term.
If March extends last week's rally, the 75% retracement level of the October-November decline crossing at 13.900 is the next upside target. Closes below the reaction low crossing at 12.950 would confirm that a short-term top has been posted.
March cocoa closed higher on Thursday as it extended yesterday's breakout above the 10-day moving average crossing at 20.83. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI have turned bullish signaling that sideways to higher prices are possible near-term. If March extends today's rally, December's high crossing at 21.47 is the next upside target. Closes below the reaction low crossing at 20.22 would renew the decline off December's high and would open the door for a larger-degree decline into early-January.
March sugar closed sharply higher on Thursday and above the previous reaction high crossing at 11.19 thereby renewing the rally off November's low. The high-range close set the stage for a steady to higher opening on Friday. Stochastics and the RSI are bearish signaling that a short-term top might be near. If March extends this week's rally, the 25% retracement level of the 2006-2007 decline crossing at 11.37 is the next upside target. Closes below the 20-day moving average crossing at 10.53 would confirm that a major top has been posted.
March cotton closed lower on Wednesday as it consolidated some of this week's rally. The mid-range close sets the stage for a steady opening on Friday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near-term. If March extends this month's rally, the 87% retracement level of the September-December decline crossing at 69.54 is the next upside target. Closes below the 10-day moving average crossing at 67.30 would temper the near-term friendly outlook in the market.
GRAINS
http://quotes.ino.com/exchanges/?c=grains
March corn closed up 3 1/2-cents at 4.66.
March corn posted an inside day with a higher close on Thursday as it extended this week's breakout above weekly resistance crossing at 4.59. The mid-range close sets the stage for a steady opening on Friday. This week's rally sets the stage for additional gains into the January's supply-demand report. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices is possible near-term. If March extends this month's rally, the 87% retracement level of the 1996-1997 decline crossing at 5.07 is the next upside target. Closes below the 20-day moving average crossing at 4.38 would confirm that a short-term top has been posted. First resistance is Wednesday's high crossing at 4.69 1/2 then monthly resistance crossing at 5.07. First support begins with Wednesday's gap crossing at 4.56 3/4 then the 10-day moving average crossing at 4.50 1/4.
March wheat closed up 30-cents at 9.45.
March wheat closed limit up for the second day in a row on Thursday and closed above the 10-day moving average crossing at 9.29 3/4 confirming that a short-term low has been posted. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are turning neutral to bullish signaling that sideways to higher prices are possible near-term. If March extends this week's rally, the reaction high crossing at 9.52 1/2 is the next upside target. Closes below today's gap crossing at 9.15 would temper the near-term friendly outlook in March wheat.
March Kansas City Wheat closed up 29 1/2-cents at 9.65 1/2.
March Kansas City Wheat closed sharply higher on Thursday and above the 20-day moving average crossing at 8.57 3/4 confirm that a short-term low has been posted. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are turning neutral to bullish signaling that sideways to higher prices are possible near-term. If March extends this week's rally, the reaction high crossing at 9.73 1/2 is the next upside target.
SOYBEAN COMPLEX
March soybeans closed up 18 3/4-cents at 12.67 1/2.
March soybeans closed sharply higher for the second day in a row on Thursday as it extended this winter's rally. The high- range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are turning neutral to bullish signaling that sideways to higher prices ahead of the January supply-demand report are possible. If March extends this fall's rally, a test of the all-time high in soybeans posted in 1973 at 12.90 is the next upside target. Closes below the 20-day moving average crossing at 11.85 1/4 are needed to confirm that a short-term top has been posted.
March soybean meal closed up $6.50 at $350.60.
March soybean meal closed higher on Thursday as it extended Wednesday's rally and the high-range close set the stage for a steady to higher opening on Friday. Stochastics and the RSI are diverging but are turning neutral to bullish signaling that sideways to higher prices are possible. If March extends this fall's rally, monthly resistance crossing at 378.50 is the next upside target. Closes below the 20-day moving average crossing at 330.60 would confirm that a short-term top has been posted.
March soybean oil closed up 38 pts. at 51.18.
March soybean oil closed higher on Thursday as it extends this winter's rally. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are oversold but remain neutral to bullish signaling that sideways to higher prices are possible near-term. Last month's breakout above the previous all-time high crossing at 49.40 has opened the door into uncharted territory making upside targets hard to project. Closes below the 20-day moving average crossing at 47.86 would confirm that a short-term top has been posted.
The STOCK INDEXES http://quotes.ino.com/exchanges/?c=indexes
The March NASDAQ 100 posted an inside day with a slightly higher close on Thursday as it consolidated some of Wednesday's rally but remains below the 10-day moving average crossing at 2110.50 confirming that a short-term top has been posted.
The mid-range close sets the stage for a steady opening on Friday. Stochastics and the RSI remain bearish signaling that sideways to lower prices are possible near-term.
If March extends this week's decline, December's low crossing at 2021.00 is the next downside target. Closes above Wednesday's high crossing at 2117.00 would temper the near-term bearish outlook in the market.
The March S&P 500 index closed lower on Thursday and the low-range close sets the stage for a steady to lower opening on Friday. Stochastics and the RSI remain bearish signaling that sideways to lower prices are possible near-term.
If March extends this week's decline, December's low crossing at 1446.00 is the next downside target. Closes above the reaction high crossing at 1511.00 would renew the rally off December's low.
The Dow closed higher on Thursday as it consolidated some of Wednesday's decline but remains below December's low crossing at 13,092. The low-range close sets the stage for a steady to lower opening on Friday. Stochastics and the RSI remain bearish signaling that sideways to lower prices are possible near-term. If the Dow extends the decline off December's high, November's low crossing at 12,724 is the next downside target.
Closes above the reaction high crossing at 13,563 would renew the rally off November's low.
INTEREST RATES
http://quotes.ino.com/exchanges/?c=interest
March T-bonds closed down 5/32's at 117-24
March T-bonds closed lower on Thursday as it consolidated some of this week's rally but remains above the reaction high crossing at 117-00. The mid-range close sets the stage for a steady opening on Friday. Stochastics and the RSI remain bullish signaling that sideways to higher prices are possible near-term. If March extend this week's rally, November's high crossing at 118-27 is the next upside target. Closes below Monday's gap crossing at 116-03 would temper the near-term friendly outlook. First resistance is today's high crossing at 117-31. Second resistance is November's high crossing at 118-27. First support is Monday's gap crossing at 116-03. Second support is the 20-day moving average crossing at 115-19.
LIVESTOCK
http://quotes.ino.com/exchanges/?c=livestock
February hogs closed down $0.70 at $56.47.
February hogs closed lower on Thursday as it extends the decline below November's low crossing at 58.15. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near-term.
If February extends this winter's decline, monthly support crossing at 53.55 is the next downside target.
Closes above the 20-day moving average crossing at 60.02 are needed to confirm that a short-term low has been posted.
First resistance begins with the 10-day moving average crossing at 58.76 then last Friday's gap crossing at 59.25.
First support is today's low crossing at 56.40 then monthly support crossing at 53.55.
February bellies closed down $1.10 at $84.70.
February bellies closed lower on Thursday and below the 62% retracement level of the October-November rally crossing at 84.95. The low-range close sets the stage for a steady to lower opening on Friday. Stochastics and the RSI are oversold but are turning bullish hinting that a short-term low might be in or is near. If February extends the decline off November's high, the 75% retracement level of the October-November rally crossing at 82.91 is the next downside target. Closes above the 20-day moving average crossing at 87.99 would confirm that a short-term low has been posted.
February cattle closed down $1.47 at 94.77.
February cattle closed sharply lower on Thursday and below the 10-day moving average crossing at 95.65 as it consolidated some of last week's rally. The low-range close sets the stage for a steady to lower opening on Friday. Stochastics and the RSI are neutral to bullish signaling that sideways to higher prices are possible near-term. Closes below December's low crossing at 94.52 would renew this winter's decline. Closes above today's high crossing at 96.92 are needed to confirm that a low has been posted.
March feeder cattle closed down $2.57 at $103.92.
March Feeder cattle closed sharply lower on Thursday and below December's low crossing at 104.65 thereby renewing this winter's decline. The low-range close sets the stage for a steady to lower opening on Friday. Stochastics and the RSI are neutral to bullish signaling that sideways to higher prices are possible. If March extends the decline off September's high, June's low crossing at 103.75 is the next downside target. Closes above the reaction high crossing at 108.30 are needed to confirm that a bottom has been posted.
PRECIOUS METALS
http://quotes.ino.com/exchanges/?c=metals
February gold closed higher on Thursday as it extended yesterday's breakout above resistance marked by November's high crossing at 855.00. The mid-range close sets the stage for a steady opening on Friday. Stochastics and the RSI are overbought but are neutral signaling that sideways to higher prices are possible near-term. If February extends this month's rally, weekly resistance crossing at 874.00 is the next upside target. Closes below the 10-day moving average crossing at 830.80 would signal that a double top with November's high has been posted. First resistance is today's high crossing at 872.90 then weekly resistance crossing at 874.00. First support is the 10-day moving average crossing at 830.80 then the 20-day moving average crossing at 818.80.
March silver closed higher on Thursday and as it extends this week's rally and closed above the 62% retracement level of the November-December decline crossing at 15.411. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are becoming overbought but remains neutral to bullish signaling that sideways to higher prices are possible near-term. If March extends this week's rally, the 75% retracement level of the November-December decline crossing at 15.768 is the next upside target. Closes below the 20-day moving average crossing at 14.622 would confirm that a short-term top has been posted. First resistance is today's high crossing at 15.535 then the 75% retracement level crossing at 15.768. First support is the 10-day moving average crossing at 14.796 then the 20-day moving average crossing at 14.622.
March copper closed sharply higher on Thursday as it consolidated some of last week's decline. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are turning neutral signaling that sideways to higher prices are possible near-term. If March renews December's rally, the 50% retracement level of the October-December decline crossing at 330.22 is the next upside target. Closes below the 20-day moving average crossing at 304.79 would confirm that a short-term low has been posted. First resistance is last Thursday's high crossing at 321.00 then the 50% retracement level crossing at 330.22. First support is Monday's low crossing at 302.20 then the reaction low crossing at 297.70.
Economy Is Worse Than The Numbers Say, Analyst Says
January 3rd, 2008-10:30pm
http://news.ino.com/headlines/?newsid=10320081247
(RTTNews) - The ADP estimate for the change in private payrolls in December was +40k. Allowing for a trend-like 20k rise in government payrolls, the ADP data suggests about a 60k rise in total payrolls in Friday's employment report, says UBS analyst Kevin Cummins in the firm's daily U.S. economic comment. Initial jobless claims fell to 336k in the week of December 29 from 357k the previous week. The data can be especially volatile around year-end, but the trend has been upward.
At 344k, the four-week average is up from 341k in the last week of November, 328k in the last week of October, 313k in the last week of September, and an average of 317k in H107.
The trend in continuing claims has also picked up.
They rose to 2761k in the week of December 22 from 2715k in the prior week—pushing the insured unemployed rate up to 2.1% from 2.0%.
Factory orders rose 1.5% in November, thanks to a 3.0% surge in nondurable goods—mainly reflecting a price-related 15.0% surge in the petroleum products component of (nominal) nondurable goods orders. In contrast, durable goods orders remained weak, with continued weakness in core capital goods orders in November after -3.0% in October.
The ABA reported an increase in consumer delinquency rates in Q3. Overall delinquencies were up to 2.44% from 2.27% based on the number of delinquent accounts, and to 1.68% from 1.38% based on the value of the delinquent loans. We estimate light vehicle sales rose slightly to a 16.3M annual rate in December from 16.2M in November. For the year as a whole, sales fell to an estimated 16.1M units from 16.5M in 2006 and 16.9M in 2005. Details in the ABA report showed delinquencies of home equity loans and auto loans increased in Q3, while credit card delinquencies were mixed. The share of credit card accounts with delinquencies fell to 4.18% from 4.39%, but the dollar value of credit card delinquencies increased to 4.00% from 3.73% in Q2.
Gains in total payrolls have averaged 103k during the last three months, below the currently reported 126k per month pace in Q2 this year and 161k per month in the year ended March 2007. Moreover, we suspect the recent pace has been overstated somewhat. The BLS has already indicated that payrolls growth in the year ended March 2007 will be revised down by almost 300k, or 24k per month. That revision will be finalized and reflected in the data on February 1, 2008. However, the December employment report will include the annual re-estimation of the seasonal adjustment factors for the household survey; the payroll data (including hours and earnings) will not be affected. The re-estimation typically results in minor, and offsetting, revisions, extending back five years.
The headline non-manufacturing ISM business activity index is based on a single question about current activity, unlike the headline manufacturing ISM index, which is a composite index based on details of the survey. We calculate a composite non-manufacturing index using the manufacturing ISM weights: that index fell to 51.8 in November (the lowest level since April 2003), from 53.5 in October. Through October, the index had been relatively stable, with little change from the Q3 average of 53.4 or the first-half average of 54.4.
ISM officials are considering publishing a composite non-manufacturing ISM index beginning early next year.
They have indicated they will announce a decision by the end of January.
Our estimated overall all-economy ISM index, which combines the manufacturing and non-manufacturing surveys, fell to 51.6 in November from 53.0 in October and an average of 53.3 in Q3. Even before the decline in November, the level was low enough to signal a much weaker trend in growth than implied by Q3 GDP.
For comments and feedback: contact editorial@rttnews.com
Citi May Write Down $18.7B, Analysts Say
Thursday December 27, 4:39 pm ET
By Madlen Read, AP Business Writer
http://biz.yahoo.com/ap/071227/citigroup_writedowns.html
Citi May Write Down $18.7B, Goldman Analysts Say, Which Could Force Bank to Slash Dividend.
NEW YORK (AP) -- When Citigroup warned in early November that it was likely to write down its portfolio by $8 billion to $11 billion in the fourth quarter because of exposure to bad loans, investors recoiled at the size of the losses. Some now say those early estimates appear drastically understated.
Citigroup Inc. could write off as much as $18.7 billion in the fourth quarter, wrote Goldman analysts William F. Tanona, Betsy Miller and Neil C. Sanyal in a note to investors late Wednesday. If it does, they say, the bank may be forced to lower its dividend by 40 percent.
Citi has about $55 billion in exposure to subprime mortgages, about $43 billion of which are collateralized debt obligations, or CDOs, that have mortgages underlying them.
"We still believe it will be a couple of quarters before the current credit crisis is fully digested by the markets," the Goldman analysts wrote.
Already, Citi has been propped up by a $7.5 billion investment from the Abu Dhabi Investment Authority, a sovereign wealth fund that in late November bought a 4.9 percent stake in the bank.
But if Citi must write down the value of its portfolio by more than it estimated back in early November -- a distinct possibility, given the lack of improvement in the tight credit markets -- Goldman analysts said the bank may need to raise an extra $5 billion to $10 billion in cash.
When Citi said Nov. 4 that its writedown could be between $8 billion to $11 billion, it acknowledged the value could end up being larger. Citi said at the time it would not revise its estimate throughout the fourth quarter as credit conditions change, and spokeswoman Shannon Bell said Thursday the bank does not comment on analyst reports.
Citi shares fell 89 cents, or 2.9 percent, to close at $29.56 Thursday. They have tumbled about 45 percent since the beginning of the year.
A dividend cut is a possibility facing many banks wrangling with their losing investments in subprime mortgages. UBS recently replaced its 2007 cash dividend with a stock dividend, in a cash-raising effort that also included selling a $9.75 billion stake to a Singapore fund, borrowing about $11.5 billion from outside investors and selling treasury shares.
CIBC World Markets Corp. analyst Meredith Whitney has said for months that Citi's dividend should be on the chopping block. Earlier this month, she wrote that along with cutting the dividend, Citigroup should raise at least $30 billion in additional capital and sell at least $100 billion in assets.
Citi's board has said it intends to maintain its dividend, but the new CEO, Vikram Pandit, did not rule out a dividend cut when asked about it on Dec. 11. He also did not rule out more asset sales: "I will undertake an objective and dispassionate review of all the businesses, individually and in aggregate, to make sure we are properly positioned for the future," Pandit said at the time.
Citi has gone through quite the overhaul since the summer. In early November, Citi ousted Chief Executive Charles Prince. About five weeks later, the bank replaced him with Morgan Stanley alum Vikram Pandit. Pandit had been in charge of Citi's investment banking, which has recently been restructured.
Citi has shuffled out other high-level employees, too, but has not announced a big round of layoffs. Some say it's only a matter of time; the bank has confirmed it is looking for ways to cut costs.
Goldman increased its estimate for Citi's fourth-quarter loss to $1.33 per share, from 52 cents per share, based on the higher writedown prediction. Analysts polled by Thomson Financial, on average, predict a loss of 63 cents per share for the fourth quarter, which ends Monday.
The Goldman team also said they expect an additional $11.5 billion write-off from Merrill Lynch & Co., and increased their loss estimate for the broker to $7 per share for its fourth quarter from a loss of $1.50 per share. Wall Street, on average, expects Merrill to report a loss of $2.78 per share, according to Thomson Financial.
Merrill fell $1.34, or 2.5 percent, to $53.20.
Goldman analysts also predict a $3.4 billion writedown at JPMorgan Chase & Co., and cut their profit estimate to 65 cents per share from $1.04. Analysts, on average, see JPMorgan posting a profit of $1.03 per share, according to Thomson Financial.
JPMorgan shares fell $1.30, or 2.9 percent, to $43.64.
Berkshire Hathaway to buy $4.5 billion Marmon stake
Tue Dec 25, 2007 6:26pm EST
http://www.reuters.com/article/ousiv/idUSN2526698020071225
WASHINGTON (Reuters) - Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research), the conglomerate headed by billionaire investor Warren Buffett, said on Tuesday it planned to buy 60 percent of manufacturing and services group Marmon Holdings Inc. for $4.5 billion.
Privately held Marmon is an international association of more than 125 businesses in sectors including wire and cable, transportation services and industrial products. Its collective revenues total about $7 billion.
Berkshire Hathaway said it will acquire the remaining 40 percent through staged acquisitions over a five- to six-year period for consideration to be based on Marmon's future earnings.
Prior to closing, Marmon will distribute a "substantial" amount of cash and certain assets to selling shareholders, Berkshire said in a statement.
Marmon is owned by trusts for the benefit of members of the Pritzker family, which is best known for starting the Hyatt hotel chain. Jay and Robert Pritzker bought Marmon in 1953, and Jay's son Tom became chairman in 2002.
"Our transaction was done just the way Jay would have liked it to be done -- no consultants or studies," Buffett said in the statement.
The deal is subject to closing conditions, including regulatory approvals.
Merry Christmas and may the blessings of God be upon each
and everyone here and their families...
http://holidays.blastcomm.com/holidays03.html
M*E*R*R*Y....C*H*R*I*S*T*M*A*S...E*V*E*R*Y*O*N*E...AND...
~~~~~~~~~~~~~~~~~~~^^^^~~~~~~~~~~~~~~~~~~^^^~~~~~~~~~~~~~~~~~^^^^~~~~~^^~~~~~~~~~~~
><((((º> .¸¸.·´¯`·.¸ ><((((((º> oo o o oo ><((((((º>`·.¸¸.·´¯><((((º>.·´¯`·.¸ ><((((º>
´¯`><((((º>´¯`·.¸ ><((((((º>.¸¸.·´¯`o·.¸¸.·´¯`·.¸ ><((((º> ´¯`·.¸><((((º>´¯`·.¸ ><((((((º> 0 OO O 0
"The LORD bless you and keep you; the LORD make his face shine upon you and be gracious to you; the LORD turn his face toward you and give you peace." Numbers 6:24-26
Numbers 6:24 Yebarechecha HaShem veyishmerecha
Numbers 6:25 Yaer HaShem panav eleicha Vihunekka
Numbers 6:26 Yissa HaShem panav eleicha veyassem lecha shalom......[/B]
SIV is dead... IMO, the PR below is pretty well written for a Friday afternoon.
http://biz.yahoo.com/prnews/071221/clf068.html?.v=44
Press Release Source: Bank of America
Consortium Provides Update on Master Liquidity Enhancement Conduit
Friday December 21, 5:40 pm ET
NEW YORK, Dec. 21 /PRNewswire/ -- Since forging a collaborative effort in the fall, Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. have sought to provide a market-based solution to continued illiquidity in the short-term credit markets. Such a solution was intended to support the return of stable market conditions, an orderly unwinding of structured investment vehicles (SIVs) and the avoidance of a "firesale" of SIV assets.
During the last three months, the bank consortium has gathered broad market participation to discuss and address this shared goal. More than 20 banks, SIVs and investment managers participated in this dialogue. The Master Liquidity Enhancement Conduit (MLEC) was conceived as a "buyer of last resort" for SIV assets, if and when other traditional and nontraditional sources of liquidity did not emerge. The design phase for MLEC was completed, producing a turn-key structure. BlackRock, a recognized leader in global investment management services, was retained as advisor. Bank of America, Citigroup, JPMorgan Chase and BlackRock also thank the US Treasury and other global regulators for their support through this process.
Over this same time period, conditions in the short-term credit markets steadily evolved, as awareness of market pressures and potential impacts dramatically increased and multiple, diverse market-based solutions emerged. In addition to MLEC, these included moves by several bank-owned SIVs to significantly reduce SIV exposure and to develop their own liquidity support, as well as moves by non-bank owned SIVs to sell assets, allow assets to mature without reinvesting, secure other sources of liquidity and/or undertake restructurings. Recent reports show SIV assets have been steadily reduced to less than $265 billion in senior debt outstanding in early December from $340 billion at a summer peak. A continued decline is expected.
This orderly unwinding of SIVs is contributing to improved market stability. Based upon the feedback that the bank consortium and the advisor have received from domestic and global liquidity sources and from prospective SIV participants, they have determined the vehicle is not needed at this time. The consortium will continue to monitor market conditions and remain committed to work collaboratively on any appropriate solutions, including an activation of MLEC, if needed.
--------------------------------------------------------------------------------
Source: Bank of America
Caveat Emptor or Empty??
http://money.cnn.com/2007/12/13/real_estate/payday_lending/index.htm?section=money_topstories
A low, low interest rate of 396 percent
Struggling Cleveland homeowners are taking out payday loans when they fall short. Is it a quick source of cash or legalized loan sharking?
Payday loan shops have sprouted up all over Ohio and 40 other states.
Current Mortgage Rates
Type Overall avgs
30 yr fixed mtg 5.88%
15 yr fixed mtg 5.46%
30 yr fixed jumbo mtg 6.75%
5/1 ARM 5.67%
5/1 jumbo ARM 6.13%
A low, low interest rate of 396 percent
Builders' lobbyist: We made too many homes
Subprime creep: From city to burbs
Americans split on mortgage bailout
NEW YORK (CNNMoney.com)
At the East Side Organizing Project in Cleveland, six home owners recently went in for group foreclosure counseling. When asked if any had taken out payday loans, four hands shot up.
A payday loan is a small-dollar, short-term loan with fees that can add up to interest rates of almost 400 percent. They're generally taken out when the borrower is caught short on cash and promises to pay the balance back next payday.
If it sounds like legal loan-sharking, it's not. "Loan sharks are actually cheaper," said Bill Faith, a leader of the Ohio Coalition for Responsible Lending.
The industry portrays it as emergency cash, but critics say the business model depends on repeat borrowing where the original loans are rolled over again and again.
They're available in 41 states, but they've been particularly troubling in Ohio, one of the states hit hardest by home foreclosures.
"There may be a correlation between not having the means to pay mortgages and payday loan borrowing," said republican state legislator William Batchelder, at a Thursday press conference held with the Center for Responsible Lending (CRL).
Batchelder is sponsoring a bill that would cap payday loan interest rates at 36 percent.
Jim Rokakis, treasurer of Cuyahoga County, which includes Cleveland, said, "I've been to [foreclosure counseling] sessions where almost everyone raised their hands," saying they had payday loans.
One ESOP client said, "You get a payday loan and you take your pay next payday and pay back the loan. Then you don't have enough money to last to the next payday, so you go back. If you don't pay the loan, they call everybody from your employer to your sister."
Faith said he saw a sign in the window of a payday lending shop that read: "The first loan is free." The business evolved from check-cashing services. In Ohio, the number of lender locations jumped from 107 in 1996 to 1,562 10 years later.
"If you want to see what an unregulated market economy looks like," said Rokakis, "come to Ohio." There are now more payday lending shops in the state than McDonalds, Burger Kings and Wendy's restaurants combined, he noted.
Lenders only require borrowers show pay stubs, checking accounts and references. They don't credit-check, except to make sure borrowers haven't defaulted on previous payday loans.
The lenders ask borrowers for post-dated checks for the amount borrowed, plus fees, which average $15 per $100 loan. If the loan goes un-repaid, lenders deposit the checks.
The term is usually two weeks, "Most people believe they're just going to borrow the one time," said Faith. Instead, when the two weeks goes by, they often go back to the shop and roll it over for another two weeks. To do that, they pay another $45 in fees.
"It's not a two-week loan," said Uriah King, of the CRL. "Most loans are rolled over 10, 12 or 13 times. That's the business model even though the industry says it's not."
When the CRL took the average payday loan principal as reported by state regulators and multiplied it by the average number of loan rollovers per year, it found that typical borrowers pay back $793 for a $325 loan.
At least 10 million households get payday loans over the course of a year, according to the CRL. Borrowers are disproportionately minority, female and in the military. They have lower income and education levels than the general population.
Not everyone agrees that payday lending bad. "People are not complaining, CRL is complaining. Go to any state consumer complaint agency and you'll find very few about payday lending," said Steven Schlein of the Community Financial Services Association, a payday lending group.
A paper by Donald Morgan, a research officer with the Federal Reserve Bank of New York, indicates that payday lending may be preferable to some alternatives. In two states where it was banned, he found, consumers were worse off.
They're more likely to bounce checks, he found, which is more expensive than payday loans. Fees on bounced checks can carry an annual percentage rate of 1,000 percent.
But King believes that's a false comparison. "People don't knowingly bounce checks," he said. It's usually an accident, and it's illegal. "How do you take a payday loan to avoid bouncing a check?" he asked.
Most consumers who get caught short have much cheaper alternatives to payday loans, according to the CRL. Many have credit cards that could provide them with cash advances with much lower interest. Others have access to credit union loans, pay advances at work or home equity loans. Debtors can also work out delayed payments plans with creditors.
Federal and state governments have started to take aim at the industry. Last year Congress passed legislation capping interest rates on consumer loans for military personnel at 36 percent. North Carolina and Georgia have both ended payday lending. Other states like Ohio are discussing remedies like Batchelder's bill.
But the CRL doesn't believe changing state laws to fix payday lending is enough. "We've concluded that this is a defective product," said King, "that can't be reformed."
The best stocks for 2008
We've found ten stocks that will thrive despite - or even benefit from - the troubles facing the markets next year.
By Jon Birger, senior writer
http://money.cnn.com/2007/12/10/markets/best_stocks_2008.fortune/index.htm
Genentech is still a standout, and the recent drop in share price makes it a bargain.
Petrobas is celebrating a massive oil discovery which should have investors dancing into the future.
With $40 billion in cash on Berkshire's books, Buffett is primed for a bargain acquisition.
We'll say this for the U.S. economy: It can take a punch.
Consider the blows it has absorbed just this year. The worst real estate crash since the Great Depression. Pow! Oil prices up from $50 to $90 a barrel since last January.
Bam! A subprime mortgage mess metastasizing into a full-blown credit crisis, with banks swallowing billions in losses and cutting back on loans. Baff!
Yet through all the punishment, the economy has barely flinched. "I'm floored by how resilient it has been," says veteran stock strategist Ed Yardeni of Oak Associates. "Had you told me at the beginning of the year this was going to happen, I doubt I would have been very optimistic."
That's why forecasting 2008 is so difficult. History tells us that oil shocks, real estate crashes, and banking crises are harbingers of downturns. Confidence has already plunged as consumers have been pinched by rising energy prices and falling home values.
October saw another bad omen: a decline in discretionary purchases such as books and electronics. Observes Merrill Lynch economist David Rosenberg: "You have to go back to the 1990-91 recession to find a time that this trend has been so weak heading into the holiday shopping season."
Despite all that, the U.S. economy expanded 3.8% and 4.9% in the second and third quarters, respectively - up from 2.4% and 1.1% during the same periods in 2006. That's right: For all the bad headlines, the American economy appears to be getting stronger.
How can that be? The short answer is globalization.
Rapid expansion in the developing world - not just in China and India but in Russia, Brazil, and Turkey, for example - has created new markets for U.S. goods and services, and a weak dollar has made them relatively cheap.
As a result, 44% of the Standard & Poor's 500 companies' revenues comes from abroad, up from 32% in 2001. S&P expects that figure to rise to 50% in 2008. Says Bob Doll, who helps manage some $1.3 trillion as chief investment officer for BlackRock: "The boom in exports is almost as big a positive as housing is a negative."
The bottom line: We think the U.S. economy will slow in 2008 but narrowly miss an outright recession. We expect the overall stock market to bounce around, as it did this year, and deliver anemic single-digit returns.
Of course, some stocks will thrive even when the market as a whole is on the ropes. After interviewing dozens of analysts and money managers and poring over reams of Wall Street research, we've identified ten stocks we believe are poised for big gains in 2008.
Five of our picks are growth companies in noncyclical industries, on the logic that in a slowing economy, investors will pay a hefty premium for superior profit improvement. These five aren't cheap - they trade at an average of 22 times 2008 profits vs. a price/earnings ratio of 14 for the S&P, according to Baseline - but they're worth it. Analysts expect their earnings to increase an average of 29% next year, vs. 6% for the S&P.
We've also identified a handful of opportunistic investments - stocks positioned to exploit the ongoing crises in finance and real estate or to rebound once the panic lifts. These are not for the faint of heart, but the opportunity is just too good to let a little apprehension (okay, a lot) get in the way.
For the record, our past Investor's Guide selections have excelled. Our ten stock picks for 2006 returned an average of 26% that year, vs.13% for the S&P. And through Dec. 3, our ten stocks for 2007 have outpaced the S&P 14% to 6%.
Now on to Fortune's best investments for 2008:
Annaly Capital Management
Annaly is a hedge fund disguised as a real estate investment trust that makes its money by investing in mortgage-backed securities. Sounds like a prescription for disaster, right? In reality, there's probably no company better positioned to profit from the ongoing mortgage crisis than this one.
What distinguishes Annaly from its out-of-favor Wall Street peers is the fact that it doesn't take credit risk, only interest-rate risk. It buys mortgage-backed securities issued by government-sponsored enterprises like Fannie Mae and Freddie Mac; in other words, it has no exposure to subprime mortgages.
The securities Annaly owns are all guaranteed by Fannie, Freddie, or Ginnie Mae, which means they're implicitly guaranteed by the U.S. Treasury. Yes, there have been troubles at Fannie and Freddie, but trust us when we say that the value of Annaly stock would be the least of your concerns if the federal government ever allowed Fannie or Freddie to default.
What makes Annaly's business model so compelling right now is the widening gap between its borrowing costs (which are sinking as the Federal Reserve cuts rates and banks offer Annaly better borrowing terms) and the yields on the mortgage securities it holds (which haven't fallen nearly as far). In the third quarter, that interest-rate spread more than doubled, from 0.32% to 0.67%. A third of a percentage point may not sound like a lot, but it's huge when you've got a $45 billion portfolio.
This widening spread is fueling massive earnings growth - 57% in the third quarter and a projected 53% in 2008, according to analyst estimates. Schneider Value Fund portfolio manager Arnie Schneider thinks more Fed rate cuts are coming, which would juice Annaly's earnings even more.
Best of all, Annaly isn't priced like a growth stock, as it boasts a 5.2% dividend yield and trades at a mere nine times estimated 2008 earnings. Says Schneider: "It's the perfect recessionary stock."
Berkshire Hathaway(B Shares)
Let's dispense with the obvious. Warren Buffett, Berkshire Hathaway's illustrious chairman and CEO, is 77 years old. The line of succession remains murky. Berkshire's insurance businesses have benefited from unusually benign weather- namely, the dearth of U.S. hurricanes.
And Berkshire stock has already risen 22% since August.
So why are we recommending Berkshire now? Simple.
Warren Buffett knows how to exploit panics.
He bought 5% of American Express in 1963, following a financial crisis (involving vegetable oil, of all things) that had cut AmEx's stock price in half. He started buying up shares of Geico in 1976 when claim-cost miscalculations left the auto insurer teetering near bankruptcy. And he picked the pocket of financially troubled energy company Dynegy in 2002, paying $928 million for a natural gas pipeline that Dynegy had bought for $1.5 billion only months earlier.
With $40 billion in cash idling on Berkshire's balance sheet at the end of the third quarter, Buffett looks ready to plunge in should a financial company, bond insurer, or homebuilder with attractive land assets need a white knight. (Indeed, in early December, Buffett bought $2.2 billion in high-yield bonds from Texas power company TXU at a discount.)
"He's going to wait for the fat pitch and pounce," says ace value fund manager Jean-Marie Eveillard, explaining why Berkshire remains the biggest stock holding in his First Eagle Global fund, even though he believes Berkshire's market cap exceeds the value of its businesses. "The current circumstances in the economy and possibly in financial markets are exactly the kind of environment where Buffett will be able to see and seize opportunities."
Dick's Sporting Goods
Retail is tough even in the best of times. Still, if you look at the histories of America's retail category killers- Best Buy, Home Depot, Costco, Staples, etc.- there is always an inflection point at which the chain's geographic reach has not yet caught up with the proven success of its business model.
That's where Dick's Sporting Goods is today, and it's why we think now is the time to invest in this emerging category killer. Though well established in the Midwest and Northeast - the company has grown from 61 stores to 341 in the past decade - Dick's has relatively few outposts in Southern and Western states like Florida and Texas and none in California.
Over the next seven years Dick's plans to more than double its store count, to 800. Another plus: It faces competition mostly from mom-and-pops; the top five U.S. sporting goods retailers account for only 17% of sales.
Dick's emphasizes a store-within-a-store sales approach. Each department has its own look and staff, which appeals to the enthusiast who purchases a lot of sporting goods. Then there is its innovative merchandising. Dick's has been phasing out its no-name, private-label apparel and equipment in favor of deals in which Reebok and Nike put their logos on products sold exclusively at Dick's (a strategy that analysts have dubbed "private brand" rather than "private label").
So now, for example, Nike swooshes can be found on Dick's hats, gloves, and outerwear. "What private brand does," explains Michael Baron, an analyst with Baron Growth fund, which owns 3% of outstanding Dick's shares, "is allow them to charge branded-product prices but with margins seven to eight percentage points higher." Through the first nine months of 2007, Dick's earnings per share rose 73% on sales growth of 28%. Another key barometer: Same-store sales rose at a terrific 8.6% clip in the third quarter.
What happens if the economy tanks? Industry experts say that sporting goods have proven resilient in the past. Indeed, in 2008, analysts expect a 19% increase in earnings per share. Says fund manager Thomas Ognar, who has 3% of his Wells Fargo Advantage Growth fund in Dick's: "People cut back on a lot of other things before not buying cleats for their kids."
Electronic Arts
There's a reason you won't find any major technology companies among our 2008 stock picks. More than 70% of tech purchases are made by businesses, according to tech tracker IDC, and spending is sagging. Cisco CEO John Chambers recently warned of "dramatic decreases" in orders from banks.
Still, if there's one tech niche that should be immune to a slowdown, it's videogames. Fueled by the success of the Nintendo Wii and Microsoft Xbox 360 consoles, videogame sales rose 39% in October, according to the NPD Group, after a 64% rise in September. "I can't tell you if corporate spending falls off a cliff or hangs in there in 2008," says Eric Fischman, portfolio manager of the MFS Emerging Growth fund. "But I can tell you with a high degree of confidence that videogame sales are going to be up."
Fischman's top game pick is a turnaround story - Electronic Arts. The stock has stagnated since 2004, with earnings falling and critics charging that EA was too reliant on aging franchises like Madden NFL. But things started to look up in early 2007 when ex-president John Riccitiello returned as CEO after a three-year stint with a venture capital firm.
Riccitiello reorganized EA into four divisions (trimming 4% of the workforce in the process) and spent $860 million to acquire BioWare and Pandemic, two smaller game studios known for producing the kind of innovative action-adventure and role-playing games (such as BioWare's hit Baldur's Gate) long missing from EA's lineup. "By themselves, BioWare and Pandemic won't make us market leaders in either action-adventure or RPG, but it takes us from nowhere to being in the top two or three," says Riccitiello.
EA has also worked hard at playing catch-up in the red-hot Wii market. It's now the No. 2 developer of Wii games, behind only Nintendo. The result: Analysts expect earnings to rise 76% next year. "Compared to where they were a year ago," says Fischman, "it's like night and day."
Genentech
Once the darlings of biotech investors, Genentech shares have been in a prolonged slump since topping out at $96 in 2005. But the company itself remains a standout, and recent news provides the opportunity to buy the shares at a discount.
On Dec. 5, the stock was pounded, plunging 10% in a few hours. The reason: An FDA advisory panel voted against expanding the use of Avastin - a blockbuster Genentech drug already approved to treat colon and lung cancer- for breast cancer.
The market overreacted. The advisory panel didn't dispute the core claim that Avastin is effective in fighting breast cancer, notes Sanford C. Bernstein & Co. analyst Geoffrey Porges. "What you heard from the panel," says Porges, "is not that this drug doesn't work in this indication but that we had an imperfect study, one with a lot of missing data." (As it happens, that study was enough to persuade the European authorities to endorse Avastin for breast cancer.)
Genentech has two Avastin studies in the works that are more comprehensive and that Porges believes will help it win FDA approval, eventually leading to a doubling of Avastin annual sales, now $2.5 billion, by 2011.
He arrives at that estimate via a recent Bernstein survey of 108 oncologists. The survey suggests that 80% of oncologists are already prescribing Avastin to treat some later-stage breast cancer, and that that percentage would rise to nearly 100% once there is FDA approval (which Porges now expects to come in early 2009).
The survey also indicates doctors' utilization of Avastin will double, from between 15% and 20% of their breast cancer patients today to between 35% and 40%.
Says Porges: "I'd say the valuation upside is even more compelling now than it was before, though you might have to wait until the second half of next year to get that return."
Even with the FDA setback, Genentech is still expected to grow earnings 18% next year. And it's not as if Avastin is the only thing Genentech has going for it. There are early indications that its cancer drug Rituxin holds hope for treating autoimmune diseases like multiple sclerosis and lupus.
Tom Marsico, the growth fund manager whose eponymous firm owns 3.5% of the biotech's shares, is excited about Herceptin - considered a miracle drug for certain types of breast cancers - and Lucentis, which treats macular degeneration and might one day be used for vision loss related to diabetes. "What you're really investing in here," says Marsico, "is the premier pharmaceutical company in the world as far as innovation is concerned."
General Electric
CEO Jeffrey Immelt has been leading a successful makeover at General Electric, though you wouldn't know it from GE's flaccid stock price. Our bet is that in a stormy market investors will gravitate toward the ultimate blue chip and finally give Immelt the credit he deserves.
Since replacing Jack Welch six years ago, Immelt has sold off laggard operations such as insurance and plastics, putting more emphasis on manufacturing and infrastructure businesses. The timing has been excellent. Though achieving double-digit earnings growth will always be a challenge for a company so big and diversified, GE, seems well positioned to slough off whatever economic challenges may exist in the U.S.
The industrial and infrastructure businesses - which include aircraft engines, locomotives, water-treatment and desalinization plants, green energy (wind turbines and solar panels), and not-so-green energy (coal power turbines and coal gasification) - have all been reaping the rewards of the global economic boom. Half of GE sales now come from overseas.
The infrastructure divisions now account for 34% of total GE revenues, and they're growing at a 17% annualized rate. Better yet, from a shareholder perspective, these businesses are exactly the kind of "late cycle" performers that are awarded higher valuations when economic growth slows.
"Power, water, wind - all those infrastructure businesses are coming together a lot faster than anybody anticipated," says Bob Turner, founder and chief investment officer of Turner Investment Partners, a growth-fund shop with some $27 billion under management (including 8.6 million shares of GE as of Sept. 30).
About half of GE's earnings come from lending and investing, a fact that has weighed on the stock. But Immelt- who's quick to point out that GE has no exposure to troubled assets like collateralized debt obligations (CDOs) - sees GE's financial services exposure as an asset in today's market.
"These are classically the times where our financial service businesses do very well," he says. "This is a great time to be triple-A rated. We have a good cost of funds and availability of funds, and there are things that might have been trading for a 10% or 15% return six months ago that are going to be a 25% to 30% return today."
Goldman Sachs analyst Deane Dray argues that GE's business mix merits a P/E of 17 - a 10% premium to the S&P 500 and up from 15 today. Based on Dray's 2008 earnings estimate of $2.45 a share, a 17 P/E translates to a stock price of approximately $45- which also happens to be Turner's GE target. "You've got the best company in the world growing earnings 12% and a stock with a 3% dividend yield," says Turner. "You could be looking at a 25% return."
Jacobs Engineering
Normally we wouldn't recommend a stock that has doubled since the start of '07. But as we said, in a slowing economy, you want to own companies that can demonstrate superior earnings growth regardless of what's happening around them.
Jacobs Engineering is such an enterprise.
Jacobs is one of the fastest growers in an exploding industry: construction and engineering. The company is hired to design and build oil refineries, biodiesel plants, hospitals, bridges, and water-treatment centers.
"These are the strongest markets we've seen in 30 years," says Jacobs CEO Craig Martin. Earnings jumped 39% in the fourth quarter of the fiscal year ended Sept. 30. That makes the company's 26 P/E look reasonable, especially since Jacobs should maintain a 35%-plus growth rate into 2008: It has a $13.6 billion backlog of orders (up 39% from the year before).
"From a global standpoint, the amount of infrastructure spending that's going to occur in coming years is staggering," says David Scott, manager of the Chase Mid-Cap Growth fund, which counts Jacobs as a top-five holding. "As the premier company in its field, Jacobs sits squarely in the middle of that boom."
[u[Merrill Lynch
Question: What do you call it when an $8 billion asset writedown translates into a $30 billion loss in market cap? Answer: an overreaction. Yes, Merrill's shares deserved a punishment for the firm's mortgage-related bungling. But the public flogging has far exceeded the transgression, which is why smart investors should buy this stock before everyone else comes to their senses.
Even if Merrill writes down another $6 billion in the fourth quarter, as S&P analyst Jeff Sexton recently predicted it will, stocks are valued on future earnings. There's little reason to believe this will have a big effect on 2008 profits, which analysts estimate at $7.68 a share. That means Merrill is trading at a mere eight times 2008 earnings (with a 2.4% dividend yield).
Why are we so confident that the mortgage debacle won't bleed into 2008? Two reasons. The first is Merrill's new CEO, John Thain, formerly CEO of the New York Stock Exchange and Goldman Sachs co-president. Thain used to run the mortgage desk at Goldman, and it's hard to believe he would have taken the Merrill job if the problems were worse than they appeared to be. "You know he did his due diligence," says Anton Schutz, manager of the Burnham Financial Services fund.
The second reason is that financial panics are almost always overblown. In the case of CDOs and other mortgage-backed assets, the problem for Merrill, et. al was not that the mortgages underlying the securities all went bad.
What happened is that the secondary market for these securities evaporated, forcing the institutions holding them to mark down their value. When this market bounces back, as surely will happen, Merrill stands to post sizable gains as it writes up the same assets it was forced to write down. "I've seen my share of credit crises," says Larry Puglia, manager of the T. Rowe Price Blue Chip Growth fund and himself a former bank analyst. "And absolutely that could be the case."
Petrobras Energia
We're on record as saying that $95 a barrel is not a sustainable price for oil. Yet The Hottest Fund Manager in America - a.k.a. CGM's Ken Heebner- now has us hedging our bets.
For those unfamiliar with Heebner, understand that his stock picking over the past eight years has been genius (as it has been for much of his 30-year career). He made a bundle short-selling tech and telecom stocks in 2000. He bet big on homebuilders in 2001 only to get out just before they crashed. He plowed his homebuilder profits into energy stocks in 2005 and eventually doubled down on commodities with a big bet on copper.
The result: His CGM Focus fund was up 66% through early December - while juicing his returns with short positions on Indymac and Countrywide Financial, mortgage lenders whose stocks have been circling the drain.
With that kind of track record, we listened when Heebner laid out an argument that $100 oil is not only coming but will be here to stay. "There is still strong growth in Latin America, China, India, and a host of smaller countries like Poland and Thailand," he says.
That means a need for some 1.5 million more barrels of oil a day. The problem, Heebner explains, isn't just finding another 1.5 million barrels; it's finding them even as some of the most productive oil fields in the world are declining.
Heebner, who is a fanatical researcher, questions the conventional view that OPEC has enough spare capacity to fill much of that void. Heebner cites one Saudi Arabian source whom he declines to name who asserts that output at Ghawa r- a legendary Saudi field that produces about 6% of the world's oil - is declining at 9% a year. (The Saudi authorities vociferously dispute this.)
"So I'm connecting all the dots," Heebner says. "It's a tight situation to start with, but add to that a loss of a million barrels a day for the Saudis, and suddenly it gets very interesting on the upside for the price of oil."
That brings us to Petrobras, Brazil's largest oil company and the stock Heebner thinks is the best way to play oil right now. With petroleum prices so high, a big risk for oil companies is that host countries will demand a bigger and bigger share of the profits in the form of taxes or royalties. "One way you can avoid this," says Heebner, "is if the government owns half the company you've invested in. That's Petrobras."
What we like about Petrobras is that it's cheap enough that it can be a winning investment even if Heebner is proven wrong about $100 oil: The stock trades at eight times 2008 earnings (which are expected to rise 32%). And to top it all off, the company just announced a huge find offshore from Rio de Janeiro, a field with up to eight billion barrels of recoverable oil.
St. Joe
We have no idea whether the Florida real estate market has hit rock bottom. What we do know is that eventually it will bounce back. Demographics demand it, with the Census Bureau projecting a 33% population increase for Florida- the equivalent of six million new residents- between now and 2020.
And when Florida real estate does rebound, investors will be kicking themselves for not recognizing today's $28 stock price for St. Joe Co (Charts).- Florida's largest private landowner - as a rare opportunity. The stock traded as high as $82 in July 2005.
At $28, says Third Avenue Real Estate Value fund manager Michael Winer, whose firm owns 20% of St. Joe shares, "this is a fire-sale price that basically assumes the Florida market will never come back."
The way to value St. Joe isn't on its current earnings (which are awful) but on its land holdings. The company owns 710,000 acres of Florida real estate, mostly in the Panhandle region, 310,000 of which are situated within ten miles of the coast. The stock market is now valuing St. Joe's property at the equivalent of $3,700 an acre. Winer says a "fire-sale value" would be $5,000 an acre. Keefe Bruyette & Woods analyst Sheila McGrath puts the fair value at $7,200, "at least."
Moreover, St. Joe's Panhandle stronghold looks as though it will recover faster than the overall Florida market. In Panama City, for example, the number of home sales increased 4% between October 2006 and October 2007, vs. a 29% decline statewide.
McGrath sees another bullish indicator in the just-begun construction of a new airport in Panama City that, unlike the old one, will support commercial jets. The airport will give a huge boost to the local economy, she contends, much as the opening of Fort Myers's new airport in 1983 boosted real estate and tourism in southwest Florida. "In the short term, there is some headline risk," she says. "But all in all, I think St. Joe is ridiculously cheap."
Citi plugs $49 billion in leaky funds
Financial giant's new CEO strikes fast, brings assets of troubled investment vehicles onto its balance sheet.
http://money.cnn.com/2007/12/13/news/companies/citigroup_siv.ap/index.htm?section=money_topstories
NEW YORK (AP) -- Citigroup Inc. said Thursday it plans to assume control of the seven "structured investment vehicles" the bank advises to help them repay their debts.
Citigroup (C, Fortune 500) will provide a "support facility" for its seven SIVs with investments totaling $49 billion and incorporate them onto its balance sheet. The bank previously said it had no plans to bring the SIVs onto its books.
SIVs are complex investment funds established by banks like Citigroup and sold to investors. SIVs borrow money by selling short-term debt like term notes and commercial paper, then using the borrowed money to buy bank, mortgage and credit card debt that yield higher returns.
The funds profit off management fees and the spread between how much they collect on the investments and how much it costs them to borrow.
SIVs jumped to the forefront of this year's credit crisis when many of the investments they held, particularly mortgage investments, lost a lot of value as demand for risky debt shriveled.
This triggered concern that lenders would be unwilling to keep lending to SIVs. The viability of a SIV hinges on its ability to continue borrowing short-term money. If it is unable to renew loans, it has to find new sources of cash or liquidate its investments to repay lenders.
Moody's Investors Service and Standard & Poor's - two of the three major credit-rating agencies - were considering downgrading the ratings on several of the world's roughly 30 SIVs, including the seven Citigroup created.
Citigroup will bring the SIVs onto its balance sheet in order to protect their credit ratings and give them time to sell their assets, the bank said.
After Citi's announcement, Moody's downgraded Citigroup's long-term credit rating to "Aa3" from "Aa2," and lowered Citibank's Bank Financial Strength Rating to "B" from "A-," citing the view that Citigroup's capital ratios will remain low.
The company's Tier 1 capital ratio - its ratio of cash to debt for regulatory purposes - was about 7.3 percent as of Sept. 30. Citi said adding the SIVs to the company's balance sheet would reduce the ratio by 0.16 percentage point but it still expects to return to its targeted ration of 7.5 percent in the first half of 2008.
The bank said it expects its SIVs to be able to meet their liquidity needs, which total $35 billion, through the end of next year. Citigroup expects to provide "little or no" financing.
"After considering a full range of funding options, this commitment is the best outcome for Citi and the SIVs," said Vikram Pandit, who was named Citigroup's chief executive officer Tuesday.
Other banks have made similar moves. HSBC Holdings PLC said last month that it would put two funds with mortgage exposure on its balance sheet and spend $35 billion to bail them out.
Freddie Sees $5.5B-$7.5B More Losses
Tuesday December 11, 12:30 pm ET
By Marcy Gordon, AP Business Writer
Freddie Mac Chief Says Business Will 'Get Tougher Before It Gets Better' As Defaults Rise
http://biz.yahoo.com/ap/071211/freddie_mac_mortgages.html
WASHINGTON (AP) -- The chief executive of Freddie Mac estimated Tuesday the mortgage finance company will lose an additional $5.5 billion to $7.5 billion over the next few years as the housing crisis worsens and home-loan defaults rise.
The government-sponsored company has already logged about $4.5 billion in projected losses during the first nine months of this year.
"I honestly think it's going to get tougher before it gets better," Richard Syron, the company's chairman and CEO, said in a discussion with financial analysts in New York.
Freddie's shares fell $2.09, or 6 percent, to $32.95 in morning trading.
While the mortgage crisis has brought a rising wave of foreclosure notices into public view, less evident have been "pictures of people standing with furniture on the lawn" after being forcibly evicted from their homes, Syron said. "As that begins to happen, and it will happen, I am afraid of the impact that this has."
Syron's remarks came a day after Freddie Mac and its larger government-sponsored rival Fannie Mae said they are changing their criteria for purchasing delinquent home loans they've guaranteed, in order to reduce the number they buy from investors.
On Tuesday, McLean, Va.-based Freddie Mac announced it was imposing a 0.25 percent fee on all new home loans it buys or guarantees with settlement dates starting March 9, matching an earlier move by Fannie Mae. Both companies have begun adding surcharges on loans to borrowers with credit scores below 680 and who are borrowing more than 70 percent of the home's value.
Fannie and Freddie, which together own or guarantee around two-fifths of U.S. home-mortgage debt, have cut their dividends and sold billions of dollars of special stock recently to buttress their finances after posting stunning third-quarter losses. They have been forced to set aside billions of extra dollars to account for bad home loans, eroding their profits at a time when home prices are falling and defaults are spiking on high-risk mortgages made to borrowers with weak credit histories.
Fannie's shares declined $1.85, or 5 percent, to $35.06.
The two companies traditionally have been a major source of funding for the home-loan market by buying up mortgages made by banks and other lenders and then bundling them as securities for sale to investors. They have been under pressure to step up their role to help stabilize the mortgage market during the worst housing slump in more than 20 years.
Freddie lost $2 billion in the third quarter, and Syron said Tuesday that results aren't expected to be any better in the October-December quarter. Fannie's third-quarter loss was $1.4 billion.
"We've reported really ugly numbers, let's face it," Syron said in the meeting with analysts.
Freddie late last month sold $6 billion of preferred stock in a special offering to raise capital and sliced its quarterly dividend in half, to 25 cents -- its first dividend cut since it became a public company in 1989.
Freddie Mac: http://www.freddiemac.com
Fannie Mae: http://www.fanniemae.com
Stock Futures Flat Ahead of Fed Meeting
Tuesday December 11, 7:27 am ET
By Joe Bel Bruno, AP Business Writer
http://biz.yahoo.com/ap/071211/wall_street.html
Wall Street Steady As Investors Weigh Fed Rate Cut, Further Subprime Fallout
NEW YORK (AP) -- Wall Street appeared headed for a flat opening on Tuesday as investors awaited the Federal Reserve's interest rate decision and absorbed more news about fallout from the mortgage and credit crisis.
Investors are expecting policymakers this afternoon will cut rates for a third straight meeting, and perhaps indicate that more might be forthcoming. Most economists are expecting a quarter-point cut in the federal funds rate to 4.25 percent -- though there are some hoping for a half-point cut in the Fed's last meeting this year.
The central bank has been trying to help the economy weather a severe slump in housing, spreading mortgage defaults and financial market turbulence. But, there has been fresh evidence just this week that the world's banks and brokerages are still suffering from the subprime loan fallout.
Washington Mutual Inc. became the latest lender to resort to a massive stock sale to shore up its finances. The nation's largest savings and loan also said late Monday it will close offices, lay off more than 3,000 workers, slash its dividend, and set aside up to $1.6 billion for loan losses in the fourth quarter.
Word of WaMu's plan to sell $2.5 billion worth of convertible preferred stock came just hours after Switzerland-based UBS AG said it would sell $11.5 billion in shares to Singapore's sovereign-wealth fund, and to an unidentified investor in the Middle East.
Wall Street might get a clearer picture about how four of its biggest investment banks have fared over the quarter.
Lehman Brothers Holdings Inc. will report results on Thursday, while Goldman Sachs Group Inc., Morgan Stanley and Bear Stearns Cos. are scheduled for next week.
Stocks rose Monday as expectations for an interest rate cut, sending the Dow Jones industrials up more than 100 points. Stocks have gained in the past few weeks as investors grew more confident in the Fed's openness to loosening its policy again.
Ahead of Tuesday's market opening, Dow futures rose 10, or 0.02 percent, to 13,761, while Standard & Poor's 500 futures edged up 1.90, or 0.13 percent, to 1,520.70, and Nasdaq 100 index futures added 5.00, or 0.34 percent, to 2,145.50.
Bond prices also edged up. The 10-year Treasury note's yield, which moves opposite the price, fell to 4.15 percent from 4.16 percent late Monday.
Oil prices rose in anticipation of a rate cut, a move that could bolster energy demand from world's biggest oil consumer. Light, sweet crude for January delivery rose 53 cents to $88.39 a barrel in electronic trading on the New York Mercantile Exchange.
Besides the Fed decision expected at 2:15 EST, investors will also be examining fresh retail sales numbers with just two weeks left until Christmas. Two weekly retails sales reports -- The International Council of Shopping Centers-UBS Index and the Johnson Redbook Retail Sales Index -- are set for release at 7:45 a.m. and 8:55 a.m. EST.
In addition, the Commerce Department is scheduled to release its monthly wholesale trade report, based on a survey of about 4,500 companies, at 10 a.m. EST. Data is expected to show that wholesale inventories rose at a slower rate in October than the month before, a sign that distributors may be trying to limit their stockpiles in the face of weak retail sales.
In corporate news, Texas Instruments Corp. is expected to rise after the chipmaker lifted the low end of its earnings and revenue outlook, but shaved the top end of its revenue outlook. Strength in demand for chips to power notebooks offset weakness in wireless, the technology company said.
Semiconductor maker STMicroelectronics NV said it will acquire California-based Genesis Microchip Inc. for $336 million. Genesis shareholders have been offered $8.65 each, up from its $5.40 closing price on Monday.
Overseas, Japan's Nikkei stock average closed up 0.76 percent, while Hong Kong's Hang Seng index added 2.55 percent. Britain's FTSE 100 fell 0.53 percent, Germany's DAX index shed 0.21 percent, and France's CAC-40 dropped 0.35 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
NEWS AT A GLANCE.....quick hits
http://finance.yahoo.com/expert/article/business/57147
WaMu quits subprime business
Washington Mutual said it is exiting the subprime mortgage business, cutting 3,150 jobs, and selling $2.5 billion in convertible preferred stock to shore up its tenuous financial position. (MarketWatch) It is also slashing its dividend to 15 cents a share, from 56 cents, and writing down the value of its home-lending unit by $1.6 billion. "They're clearly concerned the industry will stay in a negative mode for an extended period," said Punk Ziegel analyst Richard Bove. (Bloomberg) Moody's and Fitch both downgraded Washington Mutual debt, saying the bank's mortgage losses will be worse than previously thought. The bank's shares dropped 9 percent in extended trading. (AP in Yahoo! Finance)
Citi quietly unloads SIVs
Citigroup has quietly reduced the size of its seven structured investment vehicles by $15 billion, the Financial Times reported. The deals, largely through side deals with junior investors, has reduced the SIVs to about $66 billion, from $83 billion in September. (Financial Times, free registration required) The deals, combined with several banks' recent bailouts of their SIVs, raise questions about the relevance of a proposed "SuperSIV" fund. (Reuters) Separately, Bank of America is liquidating an "enhanced cash" fund for wealthy investors, after an investor pulled $20 billion from the $33 billion fund due to concerns over the fund's SIV exposure. (Los Angeles Times, free registration required)
Newspaper magnate sentenced to 6 1/2 years
Former Hollinger International chairman Conrad Black was sentenced to 6 1/2 years in prison for swindling Hollinger shareholders out of $6.1 million. He also has to give back the $6.1 million and pay a $125,000 fine. Black, 63, built up a newspaper empire that at one point included the Chicago Sun-Times, London's Daily Telegraph, and the Jerusalem Post. (The New York Times, free registration required) The sentence was less that the up to 30 years sought by prosecutors. "Conrad Black dodged a bullet today," said former federal prosecutor Orin Snyder, although he called the sentence "fair and very reasonable." (Reuters)
WaMu to Cut Dividend, Jobs
[A dividend cut was widely expected inasmuch as the yield was about 12%, which is higher than sovereign paper from most banana republics.]
http://online.wsj.com/article/SB119732179759119886.html
>>
By BENJAMIN SIEGEL
December 10, 2007 4:30 p.m.
Washington Mutual Inc. plans to raise $2.5 billion through a preferred stock offering and will cut its dividend to 15 cents from 56 cents in moves designed to generate $3.7 billion in additional capital.
In addition, the Seattle bank will cut $500 million in noninterest expense by reducing its Home Loans business and other expenses. It will discontinue all remaining lending through its subprime mortgage channel; close 190 of 336 home loan centers and sales offices; and eliminate 2,600 Home Loans positions, or about 22% percent of its Home Loans staff.
The company noted the moves at its Home Loans business and the related non-cash charge will result in a net loss for the fourth quarter.
The company will also close WaMu Capital Corp., its institutional broker-dealer business, as well as its mortgage banker finance warehouse lending operation.
Meanwhile, the company now expects its fourth-quarter provision for loan losses to be between $1.5 billion and $1.6 billion, approximately twice the level of expected fourth quarter net charge-offs.
Washington Mutual shares fell nearly 4% in after-hours trading. They rose about 4.5% in regular trading on Monday.
<<
UBS Comes Clean
Parmy Olson, 12.10.07, 6:45 AM ET
http://www.forbes.com/2007/12/10/ubs-subprime-writedown-markets-equity-cx_po_1210markets05.html?feed=rss_news
LONDON - First a pinch, now the punch. UBS has announced a $10 billion write-down linked to the fall in the value of its assets backed by American subprime mortgages, after having downgraded its assets by just $3.4 billion in October.
The Swiss bank now says it'll record a loss for the fourth quarter, and it could also post a net loss attributable to shareholders for the year 2007.
And yet--shares in UBS (nyse: UBS - news - people ) rallied. They bank was up 1.8%, or 1.05 Swiss francs (93 cents), at 58.25 Swiss francs ($51.68), on Monday morning in Zurich.
Most investors had already been expecting a relatively large write-down, based on the knowledge that UBS has been heavily involved in the issuing of collateralized debt obligations, or securities that have subprime debt packaged into them. Many had been fearing losses that would be even larger than those announced Monday.
"People are happier with the news being out than in," said analyst John Raymond of CreditSights, which had predicted that UBS would be the worst-hit bank in Europe because of the subprime crisis and would post a loss of around $9.3 billion. "It's the old thing where the fact is better than the rumor."
UBS Chief Executive Marcel Rohner said the write-downs would create "maximum clarity" on the issue and would have the effect of "substantially eliminating speculation."
"In the last several months, continued speculation about the ultimate value of our subprime holdings--which remains unknowable--has been distracting," he added in a press release. Shares in UBS have fallen 13% since August 14, when the financial market turmoil related to the credit crunch first started.
The write-down was also mitigated by Swiss bank's announcement that it had found a helping hand in the form of an $11.5 billion loan from GIC, a Singaporean sovereign wealth fund, and a $1.8 billion loan from an undisclosed strategic investor in the Middle East, reportedly the government of Oman.
"From a credit point of view it's a new injection of capital, and you've got to welcome that," said Raymond. "You want to make sure that the owners are sound and committed for long term." In that sense, GIC was a good creditor, he added.
Chances are that other big European investment banks will also soon be coming out of the woodwork to announce their write-downs, though none will likely be as large as UBS.
Raymond predicted that of the French banks, Societe Generale (other-otc: SCGLY - news - people ) would post a $3.2 billion write-down, Credit Agricole (other-otc: CRARF - news - people ) a $1.7 billion charge and Credit Suisse (nyse: CS - news - people ) a $1.4 billlion write-down.
BNP Paribas (other-otc: BNPQY - news - people ), which famously froze three of its investment funds back in August to spur the European market turbulence, would post a relatively small write-down since its CDO business is not significant.
Deutsche Bank (nyse: DB - news - people ) would probably post a write-down of slightly less than $4 billion.
On Monday, Lloyds TSB (nyse: LYG - news - people ), the U.K.'s fifth-biggest lender, said that the credit crunch had so far cost it a relatively small £200 million ($408 million). The announcement was welcomed by analysts and investors, who sent Lloyds' shares up 2.6%, or 12.5 pence (26 cents), to 500.5 pence ($10.22), on Monday morning in London.
UBS writes down another $10 Billion!
Swiss bank issues profit warning; receives $11.5 billion injection from outside investors.
http://money.cnn.com/2007/12/10/news/international/ubs.ap/index.htm?section=money_topstories
ZURICH, Switzerland (AP)
Swiss banking giant UBS AG said Monday it will write off a further $10 billion on losses in the U.S. subprime lending market and will raise capital by selling shares to Singapore and an unnamed investor in the Middle East.
UBS will now record a loss for the fourth quarter and a net loss attributable to shareholders for the full year, the bank said.
The bank will borrow around 13 billion Swiss francs ($11.51 billion) from outside investors, sell treasury shares and replace its 2007 cash dividend to shareholders with a stock dividend, bringing in a total of 19.4 billion francs ($17.18 billion) to shore up its capital base, UBS said.
The Government of Singapore Investment Corporation, which overseas the nation's foreign reserves, will invest 11 billion francs and an unnamed strategic investor on the Middle East will put in 2 billion francs, the company said.
Not-so-super funds
As recently as the middle of November, UBS had predicted a profit for the fourth quarter despite ongoing speculation about its subprime holdings.
"Conditions in the U.S. mortgage and housing markets have continued to deteriorate, and we have updated our loss assumptions to the levels implied by the current distressed market for mortgage securities," the company's chief executive, Marcel Rohner, said in a statement.
"In our judgment these writedowns will create maximum clarity on this issue and will have the effect of substantially eliminating speculation," he added.
In October the bank downgraded the value of some assets by over 4 billion francs ($3.4 billion) because of losses linked to the U.S. mortgage crisis.
The writedown meant UBS posted a net loss of 830 million francs ($712 million) in the period ending Sept. 30, the first quarter in nine years in which it suffered an operating loss.
UBS shares gained 2.4 percent to 58.55 francs ($51.90) in Zurich.
Big Fed rate cut may spur a rally
http://www.reuters.com/article/hotStocksNews/idUSN0731463220071208?sp=true
NEW YORK (Reuters) - A big interest-rate cut by the Federal Reserve next week, or at least a hint more cuts are coming, coupled with this week's subprime rescue plan could lift investor confidence and inspire a pre-Christmas rally.
While most investors are banking on a cut of at least a quarter percentage point in the benchmark fed funds rate, many think a deeper reduction is needed to unfreeze credit markets and boost confidence.
On Thursday, President George W. Bush announced a plan to stem U.S. home foreclosures, sending stocks surging on optimism it would keep the economy from sliding into a recession.
"The big focus next week is the Fed meeting," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.
He said that while the market was pricing in an interest- rate cut, there was still speculation about how big such a cut would be and whether the Fed also would cut the discount rate.
"Also if the comments reflect an easing bias, then together with positive momentum on the subprime plan, that should give a good support to equities," he said.
Encouraging data this week, including a resilient payrolls report on Friday, eased some concerns about the economy, decreasing the likelihood of an aggressive 50-basis-point cut in the fed funds rate.
Based on December fed fund futures, the likelihood of a 50- basis-point rate cut stood at 41 percent at midday on Friday, down from 65 percent a week earlier.
The fed funds rate for overnight bank loans now stands at 4.50 percent, following two back-to-back rate cuts -- 25 basis points on October 31 and 50 basis points on September 18.
The discount rate, which is the rate the Fed charges banks for emergency loans, now stands at 5.00 percent, following a 25-basis-point cut on October 31.
For the week, stocks gained, with the blue-chip Dow Jones industrial average .DJI up 1.9 percent, the broad Standard & Poor's 500 Index .SPX up 1.6 percent and the Nasdaq Composite Index .IXIC up 1.7 percent.
And with just a few more weeks left in the year, the Dow is up 9.3 percent so far in 2007. The S&P 500 is up 6.9 percent for the year to date, and the Nasdaq is up 12 percent.
ZEROING IN ON INFLATION
While investors are primarily focusing on a potential rate cut on Tuesday, they will also be closely watching inflation data later in the week.
The Labor Department will release its Producer Price Index for November on Thursday, and the Consumer Price Index is due on Friday. The consensus forecast is for an increase of 1.5 percent in overall PPI and a 0.2 percent gain in core PPI, which factors out volatile food and energy prices.
The overall CPI is expected to rise 0.6 percent, while core CPI is forecast to gain 0.2 percent.
"If the Fed cuts rates on Tuesday, then a stronger-than-expected CPI or PPI could challenge the wisdom of the cut,"said Tom Sowanick, chief investment officer of Clearbrook Financial LLC in Princeton, New Jersey.
BANKERS' REPORT CARDS
Financials will stay in focus, as Lehman Brothers (LEH.N: Quote, Profile, Research) kicks off the fourth-quarter earnings season for investment banks and brokers on Thursday, and with investors braced for more news of subprime write-downs.
"We'll be focusing on analysts cutting their earnings estimates for 2008 and the size of the write-down that will be taken by money-center banks," said Joseph Battipaglia, market strategist at Stifel Nicolaus in Philadelphia.
"They've already done it for the financials. They will start doing it for the economically sensitive sectors."
Other S&P 500 companies due to report earnings next week include H&R Block (HRB.N: Quote, Profile, Research) and Pall Corp (PLL.N: Quote, Profile, Research) on Tuesday, Kroger Co (KR.N: Quote, Profile, Research) on Tuesday and Costco Wholesale Corp (COST.O: Quote, Profile, Research) on Thursday.
In addition, four blue-chip U.S. industrial heavyweights are expected to spell out their financial expectations for 2008 next week.
Investors and analysts who follow General Electric Co (GE.N: Quote, Profile, Research), United Technologies Corp (UTX.N: Quote, Profile, Research), 3M Co (MMM.N: Quote, Profile, Research) and Honeywell International Inc (HON.N: Quote, Profile, Research) said they are expecting the slowing U.S. economy to take a toll on revenue growth and will be listening closely for signs of how companies plan to meet their goals for profit growth in light of that.
Manufacturers are facing economic headwinds, including the slumping U.S. housing market, a credit crunch and high energy and commodity costs.
U.S. crude oil futures CLc1 settled on Friday at $88.28 a barrel, after rising back above $90 this week following OPEC's decision to leave production quotas in place.
A PEEK AT HOLIDAY SPENDING
Monthly data from the Commerce Department, due on Thursday, could also move the market, given concerns about consumer spending, Praveen said.
Retail sales are expected to have risen 0.6 percent in November, at the start of the holiday shopping season, up from a 0.2 percent gain in October, according to the consensus forecast of economists polled by Reuters.
Other economic data scheduled for next week includes pending home sales for October on Monday, which if very weak, would add to calls for a big rate cut on Tuesday. They are expected to fall 1 percent.
Industrial production for November is due on Friday. An increase of 0.1 percent is forecast, an improvement from October's reading of -0.5. Capacity utilization is seen holding steady at 81.7 percent.
Fed seems poised to lower interest rates By JEANNINE AVERSA, AP Economics Writer
Sun Dec 9, 5:33 AM ET
http://news.yahoo.com/s/ap/20071209/ap_on_go_ot/fed_interest_rates
WASHINGTON - A lot has changed since the Federal Reserve hinted two months ago that it might be finished cutting interest rates for a while. Credit has become harder to obtain, Wall Street has convulsed again and the housing slump has intensified. As a result, policymakers at the central bank now appear to have changed their minds about the need to drop interest rates again.
The Fed had cut rates twice this year and officials suggested in October that might be enough to help the economy survive the credit and housing stress. Then the problems snowballed, leading Fed Chairman Ben Bernanke to signal that one more cut might be needed.
Analysts expect the Fed to trim its key rate, now at 4.5 percent, by one-quarter of a percentage point at the meeting Tuesday. Some even speculate about the possibility of a half-point cut.
Banks, financial companies and other investors who made loans to people with spotty credit or put money into securities backed by those subprime mortgages have lost billions of dollars. Investors in the U.S. and abroad have grown more wary of buying new debt, thereby aggravating the credit crunch.
All this has added to the turmoil on Wall Street, and Bernanke and other Fed officials say they must take it into account when deciding their next move.
But does lowering rates mean the Fed essentially is bailing out investors or encouraging more sloppy decision-making? In other words, what exactly is the Fed's job?
Bernanke and other Fed officials say it is to make policy that keeps the economy growing and inflation low, a stable climate that benefits individuals, businesses and investors. The Fed also has a responsibility to ensure the banking system is sound and financial markets run smoothly.
"There is a link between Wall Street and Main Street. The Fed is taking the right actions, but they should be careful," said Victor Li, an economics professor at the Villanova School of Business.
UAL to give shareholders $250 million special payout
Fri Dec 7, 2007
http://www.reuters.com/article/ousiv/idUSWNAS407120071207?sp=true
NEW YORK (Reuters) - UAL Corp (UAUA.O:) parent of United Airlines, will give shareholders a special payout of $2.15 per share, totaling about $250 million, it said on Friday, marking a rare move by an airline to reward investors.
The U.S. airline industry is still recovering from a five-year slump in which it racked up $35 billion in losses. During that time, several airlines went into bankruptcy, including United, wiping out shareholders' investments.
"This shareholder distribution underscores our commitment to creating value for our investors," UAL Chief Executive Glenn Tilton said in a statement.
UAL's shares, which have been essentially flat since the company exited bankruptcy in early 2006, jumped 4 percent at $42.28 on Nasdaq.
UAL's move is a sign of the industry's financial recovery as well as the pressure faced by airline managers to reward investors. The payout could put pressure on other carriers in the highly competitive industry to follow suit.
"Anything that one airline does puts pressure on other airlines," said Calyon Securities analyst Ray Neidl.
The payout to holders of its common stock comes at a difficult time for U.S. airlines. Soaring fuel prices and a softening U.S. economy threaten to cripple their hard-fought recovery.
The move also risks draining UAL's coffers and upsetting the company's employees, who endured harsh wage cuts to help the airline restructure.
"It could cause some problems with the credit rating agencies, some of the employees, and even with some people who would want to see them keep liquidity in an environment where there's very high fuel prices," said Neidl.
UAL posted a better-than-expected net profit of $334 million, $2.21 per share, in the third quarter boosted by higher fares and fuller planes.
UAL noted that it had generated more than $2 billion in operating cash flow in the first nine months of 2007.
The special cash distribution was made possible after United's lenders approved an amendment to the company's credit agreement. Under the amendment, the company said it can undertake an additional $250 million in shareholder initiatives without any additional prepayment.
United also said that it can carry out further shareholder initiatives, which could also include stock buybacks, in an amount equal to future term loan prepayments.
United Airlines said it paid down $500 million of a term loan under its existing credit agreement.
The special payout, equivalent to about 5.3 percent of UAL's closing stock price on Thursday, will be made on January 23 to holders of UAL Corp stock on Jan 9.
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