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Most Actives 11:30-11:35
GBR continuing
LEI continuing
MGRE up on $20M private placement, could be done for today, but keep on watch if you play sub $1
ESLR gapped up (but falling now) on $1B sales contract
SINO (new shipper)
VVUS 3rd day of run, holding steady near HOD
FMD gapped up, not sure why (note top 3 NYSE % gainers are financials)
LDG Longs Drugs up on Q1 report...nice
I forgot to go...I had an interview for a job today, so I think that had me preoccupied. I won't forget tomorrow though, because I've gotta get started soon, otherwise school will start and I'll have to leave again before anything grows!
I think blaming the drop today on the release of the FOMC minutes is BS. Everyone already knew roughly what would be in the minutes, so why the big drop?
``The American market is a bottomless pit right now,'' said Peter Schiff, president of Darien, Connecticut-based brokerage Euro Pacific Capital, which has more than $1 billion in customer accounts. ``The Fed can't cut rates any more. Oil is $132 a barrel and rising. Any company that collects revenues from American consumers is going to have terrible earnings, and share prices are going to fall.''
Hmmm.....
BL: U.S. Stocks Extend Drop on Fed Minutes; Financials Lead Retreat
By Eric Martin
May 21 (Bloomberg) -- U.S. stocks tumbled, sending the Standard & Poor's 500 Index to its biggest two-day drop since March, as the Federal Reserve signaled it is done cutting interest rates and record oil prices threatened to reduce profits at consumer companies.
Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. sent financial shares to their lowest since April 15. Target Corp. led retailers to their worst decline in a month and an index of airlines slid to an all-time low as crude climbed above $133 a barrel. Moody's Corp. slumped the most since 1999 after the credit ratings company said it is investigating whether it mistakenly assigned Aaa ratings to debt securities that later fell in value.
The S&P 500 lost 22.69 points, or 1.6 percent, to 1,390.71. The Dow Jones Industrial Average slid 227.49, or 1.8 percent, to 12,601.19. The Nasdaq Composite Index fell 43.99, or 1.8 percent, to 2,448.27. Four stocks retreated for every one that rose on the New York Stock Exchange.
``The American market is a bottomless pit right now,'' said Peter Schiff, president of Darien, Connecticut-based brokerage Euro Pacific Capital, which has more than $1 billion in customer accounts. ``The Fed can't cut rates any more. Oil is $132 a barrel and rising. Any company that collects revenues from American consumers is going to have terrible earnings, and share prices are going to fall.''
`Close Call'
All 10 industries in the S&P 500 slid after the minutes from the Fed's April meeting suggested record energy costs and rising public expectations for inflation threatened their ability to continue cutting rates. Policymakers also reduced their projections for economic growth this year by almost a full percentage point and raised their forecasts for inflation amid curtailed bank lending and a record rise in the prices for oil
``Most members viewed the decision to reduce interest rates at this meeting as a close call,'' the minutes said. ``Several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term.''
The S&P 500's 2.5 percent drop over the past two days was the benchmark's biggest decline since the Federal Reserve brokered JPMorgan Chase & Co.'s buyout of Bear Stearns Cos. in March.
Citigroup slid 4.8 percent to $21.06, while Bank of America lost 2.2 percent to $34.63 and JPMorgan fell 2.9 percent to $42.42.
Financials Tumble
The S&P 500 Financials Index slumped for a fourth day, losing 2.3 percent. The index has tumbled 34 percent over the past year, allowing technology companies to surpass the group as the biggest industry in the S&P 500, after global banks and securities firms racked up $379 billion in asset writedowns and credit losses related to the collapse of the subprime mortgage market.
Moody's plunged 16 percent to $36.91. Some senior staff at Moody's were aware in early 2007 that constant proportion debt obligations, funds that used borrowed money to bet on credit- default swaps, should have been ranked four levels lower, the Financial Times said, citing internal Moody's documents. Moody's altered some assumptions to avoid having to assign lower grades after it corrected the error, the paper said.
McGraw-Hill Cos., the owner of Moody's rival Standard & Poor's, tumbled 5.5 percent to $41.18.
Lehman Brothers Holdings Inc. lost 5.8 percent to $39.56 after Merrill Lynch & Co. reduced earnings forecasts. Lehman will probably earn 6 cents a share in the quarter that ends May 30, down from Merrill's earlier estimate of 82 cents. Merrill analyst Guy Moszkowski lowered his full-year estimate to $2.80 per share from $3.88.
Crude's Rally
Target, the second-largest U.S. discount chain, tumbled 2.6 percent to $52.87, leading retailers in the S&P 500 to a 2.5 percent drop as a group.
Crude for July delivery climbed $4.19, or 3.3 percent, $133.17 a barrel after U.S. stockpiles unexpectedly dropped, spurring concern that rising fuel bills will leave consumers with less money to spend elsewhere.
At least five banks raised price forecasts for crude in the past week and options contracts betting that oil will exceed $200 a barrel in December have risen 46 percent this week, as futures for delivery in 2016 topped $141.
Homebuilders fell the most since March 26 and accounted for five of the top 10 declines in the S&P 500 on concern that higher borrowing costs will reduce demand. D.R. Horton Inc., the largest U.S. builder by market value, slumped 6.2 percent to $13.43. Smaller rival Lennar Corp. tumbled 7.4 percent to $17.43.
`Another Hurdle'
``Those who expected the Fed would continue to be able to reduce rates and thus provide a safety net to the economy and consumers who are in trouble are going to have to question that,'' said Michael Barron, chief executive officer of Knott Capital Management in Exton, Pennsylvania, which manages $1 billion. ``It's another hurdle the financial sector has in front of it.''
The AMEX Airline Index slumped 12 percent to an all-time low after Soleil Securities downgraded the industry to ``neutral'' from ``outperform'' and AMR Corp.'s American Airlines said it will slash U.S. capacity as much as 12 percent, retire as many as 85 jets and cut jobs to blunt surging fuel prices and slowing demand.
UAL Corp., parent of United Airlines, lost 30 percent to $8.15. Continental Airlines Inc. slid 13 percent to $14.20. AMR lost 24 percent to $6.22. Boeing Co., the world's second-biggest commercial airplane maker, fell 4.6 percent to $81.19.
Bankruptcy Speculation
``We now expect AMR to have trouble avoiding bankruptcy by sometime in 2009,'' Soleil analyst James M. Higgins wrote in a note to clients.
United spokeswoman Robin Urbanski didn't immediately return calls for comment. AMR spokesman Andy Backover said ``We've done a lot of work in recent years to avoid bankruptcy and to put ourselves in a better position to weather today's uncertainty.''
Medtronic Inc. climbed 3 percent to $50.43. Goldman Sachs Group Inc. upgraded the shares to ``buy'' from ``neutral'' after the company's fiscal fourth-quarter profit beat analysts' estimates yesterday as defibrillator sales recovered from a recall and the heart stent Endeavor began selling in the U.S.
Micron Technology Inc. climbed 1.8 percent to $8.36. The largest U.S. maker of computer-memory chips was upgraded to ``buy'' from ``hold'' at Deutsche Bank AG, which said it expects further price increases for dynamic random access memory.
Intuit Inc. gained the most in a month, rising 93 cents, or 3.4 percent, to $28.14. The world's largest maker of tax- preparation software said third-quarter profit rose 21 percent after more customers used its TurboTax software to file U.S. tax returns. Sales advanced 15 percent, topping analysts' estimates.
The Russell 2000 Index, a benchmark for companies with a median market value 95 percent smaller than the S&P 500's, fell 1.2 percent to 727.11. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, dropped 1.6 percent to 14,084.22. Based on its retreat, the value of stocks decreased by $282 billion.
To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net.
Last Updated: May 21, 2008 16:38 EDT
Financials having a great day:
Most Actives 1:40-1:45
Most Actives 12:35-12:40
Mostly energy plays in top 25 % gainers. MXC and SSN smokin.
Most Actives 11:20-11:30
Sure, blame it on the computer!
Dan Loeb: Added to my list of hedge fund aholes.
R: Another hedge fund backing Icahn on Yahoo
Tue May 20, 2008 7:13pm EDT
By Dane Hamilton
NEW YORK (Reuters) - Third Point LLC, a $5.7 billion hedge fund headed by activist Dan Loeb, has recently accumulated a stake of over 5 million shares in Yahoo Inc (YHOO.O: Quote, Profile, Research) and is supporting investor Carl Icahn's proxy battle, a source familiar with the matter said on Tuesday.
Third Point, which held 1 million shares in Yahoo as of March 31, may build a stake of up to 10 million shares in the company, the source said.
Icahn's proxy contest, launched last week, is aimed at pressuring Yahoo to agree to be sold to Microsoft. The software maker broke off talks earlier this month after Yahoo rejected its offer to buy the company for $47.5 billion, or $33 per share, but the companies said Sunday they have revived talks.
Another investor said he was backing Icahn. Oil investor T. Boone Pickens told broadcaster CNBC he has acquired 10 million shares in Yahoo, saying: "(Icahn) jumps in first, I jump in behind him."
For his part, Loeb "strongly supports Icahn and supports his slate and thinks that he is shining a bright light on the botched process at the Yahoo board in negotiating the deal with Microsoft," said the source, who requested anonymity because Loeb's position has not been publicly disclosed.
Loeb, known for his acerbic letters to senior officials of companies he deems to be underperforming, believes Yahoo should be sold to Microsoft.
"They haven't laid out a game plan that gets you to the value of $33 to $34 per share on a stand-alone basis," this source said.
Paulson & Co, another large hedge fund, disclosed last week that it recently built up a stake of 50 million shares in Yahoo and is supporting the Icahn move.
All totaled, Icahn backers have acquired or plan to accumulate about 80 million Yahoo shares, or more than 5 percent of Yahoo's nearly 1.4 billion shares outstanding, as of March 31. That does not include Icahn's options to buy an additional 49 million Yahoo shares.
Yahoo shares closed down 20 cents, or 0.7 percent, at $27.48 on Nasdaq.
(Additional reporting by Daisuke Wakabayashi, editing by Derek Caney and Andre Grenon)
Sounds vaguely like my dream to strike it rich in the pinks...I'll get my panning gear!
BTW: I'm home now, and heading to a nursery tomorrow to see if they have good soil that I can use for my plants. I'll let you know what I buy, if anything.
I waited a few minutes and got in when I tried again. Probably a problem on my end.
GM SL...is the chat down?
R: UPDATE 3-Pacific Ethanol results top Wall St view; stock up
Mon May 19, 2008 4:49pm EDT
(Adds analyst comment, updates share price)
NEW YORK, May 19 (Reuters) - Pacific Ethanol Inc (PEIX.O: Quote, Profile, Research) reported better-than-expected first-quarter results on Monday, sending its shares up more than 60 percent.
The U.S. West Coast ethanol maker posted a net loss of $36.3 million, or 90 cents per share, hurt by a write-down largely from a decline in the value of its recent purchase of Front Range Energy. A year earlier, it recorded a profit of $1.9 million, or 5 cents per share.
Excluding total goodwill write-downs of $87 million, earnings were 6 cents per share, beating the analysts' forecast for a loss of 8 cents, according to Reuters Estimates.
That propelled the stock higher, erasing part of the company's 61 percent sell-off so far this year. Pacific Ethanol shares closed up $1.94, or 61 percent, at $5.14 on the NASDAQ, their highest since mid-March.
One analyst said Pacific Ethanol had made progress in trimming its production costs, but its high valuation versus larger peers such as Verasun Energy (VSE.N: Quote, Profile, Research) and Aventine Renewables (AVR.N: Quote, Profile, Research) made it vulnerable to a pullback from Monday's rally.
Eitan Bernstein, analyst at FBR Capital Markets, who has an "Underperform" rating on the stock, said Pacific Ethanol was trading at $2.35 per gallon of ethanol production, more than 50 percent higher than its larger Midwest peers.
That premium, as well as concerns that corn prices could rise because of the lag in U.S. crop plantings this year, could leave the company vulnerable, he said.
"Corn plantings are about 20 percent behind where they were last year," he said. "That's a real risk that people I think are overlooking."
Prices for corn, the key feedstock for ethanol, has rallied above $6 per bushel in recent weeks, raising costs for producers of the biofuel.
However, surging oil and gasoline prices, as well as government mandates for biofuel usage, have so far kept demand for ethanol strong.
Pacific Ethanol's net sales rose 63 percent to $161.5 million as a 58 percent jump in volumes sold offset a 2 percent drop in selling prices.
Average corn prices rose sharply during the quarter, trimming Pacific Ethanol's gross margin to 9.7 percent from 15.4 percent a year earlier. (Reporting by Matt Daily; Editing by Lisa Von Ahn, Gary Hill) (matt.daily@reuters.com; +1 646 223 6121; Reuters Messaging: matt.daily.reuters.com@reuters.net))
R: NYC campaign shows dark side of counterfeit goods
Sat May 17, 2008 12:51pm EDT
By Edith Honan
NEW YORK (Reuters) - New York City, long a place where counterfeit watches and fake designer handbags are sold on street corners, is unveiling an ad campaign warning consumers of the human cost of indulging in knockoffs.
The city will display 50 black, yellow and red posters in tourist spots like Times Square and Chinatown over the next two months with the message, "The Real Price of Counterfeit Goods."
"When you buy counterfeit goods, you support child labor, drug trafficking, organized crime and even worse," one version reads. Another says that buyers have cost the city $1 billion per year in lost tax revenue.
The money could have funded "10,000 new cops, 10,000 new firefighters, 10,000 new teachers," Deputy New York City Mayor Edward Skyler said.
The United States says China is the No. 1 offender when it comes to counterfeit goods. Others include South Korea, Pakistan and India.
The campaign, which starts on Monday, estimates the global trade in counterfeit goods at $650 billion per year including $80 billion in New York City alone.
U.S. authorities have said one group sells counterfeit goods including fake Viagra to support the Lebanese group Hezbollah, which Washington lists as a terrorist organization.
The group behind the 2004 train bombings in Madrid that killed 191 people was partly funded by the sale of illegal compact discs, New York Police Commissioner Ray Kelly said.
"Do American consumers want their hard-earned money to support terrorism? Or child labor? Or drug trafficking?" Harper's Bazaar magazine, a co-sponsor of the campaign, said in a statement.
"As frightening as it may seem, that is exactly what is happening whenever a counterfeit DVD, handbag or any other product is knowingly purchased," the fashion publication said.
(Editing by Daniel Trotta and Xavier Briand)
R: GE confirms plans to exit appliance business
Fri May 16, 2008 1:07pm EDT
By Scott Malone
BOSTON (Reuters) - General Electric Co (GE.N: Quote, Profile, Research) confirmed on Friday it may sell or spin off its century-old appliances unit, saying the business was too focused on the United States.
The appliance arm, which employs about 13,000 people worldwide, is the area of GE hardest hit by the two-year U.S. housing slump, as the company sold a lot of its dishwashers and refrigerators to home builders.
The Louisville-based business, which last year generated $7.2 billion in revenue, could appeal to an Asian manufacturer looking for a well-known American brand, analysts and investors said. They estimated the appliances business could sell for $4 billion to $8 billion and cited South Korea's LG Electronics (066570.KS: Quote, Profile, Research) and China's Haier as among possible suitors.
"With the weak dollar, this could look more attractive to an overseas company trying to get a big foothold in the U.S. market," said Matt Collins, capital goods analyst at Edward Jones in St. Louis.
LG officials declined to comment, while those at Haier did not respond to calls.
Over the past five years, the Fairfield, Connecticut-based conglomerate has sold off businesses that generated about $52 billion in revenue, including its plastics unit, as it seeks to move away from slower-growing and more volatile market segments in favor of long-cycle businesses with global exposure, like jet engines and commercial finance.
"This review is consistent with the strategy we have been executing to transform our portfolio for long-term growth," said Jeff Immelt, chief executive of the second-largest U.S. company by market capitalization, in a statement. He added that the $7.2 billion appliance unit, which is based in Louisville, "remains primarily a U.S. business, meaning its fortunes are tied to the rise and fall of a single market."
GE is also scaling back its personal finance business, GE Money, looking to sell its Lake Japanese consumer lending unit and U.S. private-label credit card business. Troubles at its financial arms, which the company blamed on the credit crunch, played a major role in GE's unexpected drop in first-quarter profit, though it also cited the GE Industrial arm, which includes appliances, as a weak spot.
GE shares were down 21 cents to $32.16 on the New York Stock Exchange on Friday. They are down about 1 percent since GE's interest in selling for spinning off the unit was first reported late on Wednesday by the Wall Street Journal.
For the year, they are down 13 percent, having seen their sharpest one-day drop in two decades after reporting a surprise drop in first-quarter profit last month.
That's a far deeper drop than the 2.6 percent slide of the blue-chip Dow Jones industrial average .DJI, of which GE is a component.
PORTFOLIO SHUFFLE
Having already warned investors that profit may be flat this year due to the credit crunch and slowing U.S. economy, GE is reshuffling its portfolio of businesses -- which also include NBC Universal media -- to get back on track for its long-term target of 10 percent profit growth next year, investors said.
"This is a slow economy right now, there's no question. So you reposition, you restrategize and you try to support the company in the slower times and really position it to take advantage of the uptick," said George Padula, president of Danforth Associates, a Wellesley, Massachusetts-based company that manages $100 million in assets and holds GE shares.
While GE's appliances unit is a relatively small slice of the conglomerate -- last year it accounted for 4 percent of GE's $173 billion in total revenue -- it is the No. 2 player in the U.S. appliance industry, trailing Whirlpool Corp (WHR.N: Quote, Profile, Research).
It has been hard hit by lower-priced competition from Asian rivals including LG and Haier.
Italian home appliances maker Indesit (IND.MI: Quote, Profile, Research) and Western Europe's largest maker of household appliances Bosch und Siemens Hausgerete, a joint venture of Robert Bosch Gmbh ROBG.UL and Siemens AG (SIEGn.DE: Quote, Profile, Research) also declined comment.
(Additional reporting by Nick Zieminski in New York, Claudia De Lillo in Milan, Kirby Chien in Beijing, Michael Flaherty in Hong Kong, Jens Hack in Munich; editing by Dave Zimmerman, Phil Berlowitz)
R: Strong prospects in software to spy on bank staff
Sat May 17, 2008 8:13pm EDT
By Olesya Dmitracova and Jim Finkle
LONDON/BOSTON (Reuters) - If you work for a bank, a computer may be reading your e-mails, listening to your phone calls or analyzing chat conversations as you type.
Even banking workers used to the idea of surveillance might balk at the thought of a computer doing the job.
But there are strong prospects for the software niche, as banks try to keep a much closer eye on staff in the wake of scandals such as Jerome Kerviel's rogue trading at Societe Generale, or the aggressive rumor-mill that undermined banks including HBOS and Bear Stearns.
"With the credit crisis and so on, people started to be much more careful," said Ruggero Contu, principal research analyst at information technology consultants Gartner.
Known collectively as e-discovery, these technologies are booming despite a slowdown in other areas. Gartner forecasts the segment will generate $760.5 million in revenues this year, up from $524.5 million in 2007.
The systems to record and monitor employee activity can help companies collect huge amounts of internal information -- which they may increasingly need in the face of lawsuits spawned by the subprime crisis, or to meet rising regulatory demands.
U.S. politicians are demanding tougher rules in the wake of the collapse of the once red-hot housing market, while the 2002 Sarbanes-Oxley Act on corporate accounting and investor protection has already spawned hefty legal requirements.
"The overall tech base is under pressure on the back of the credit crunch but there are a few niches, for example the e-discovery space, which may benefit from the regulation," said Josep Bori, technology sector analyst at Deutsche Bank.
Banks are cutting non-essential spending and laying off staff to make up for losses and a slump in business. But spending on e-discovery bucks the trend.
"The one and only area where delays or cancellations are not happening is the regulatory and compliance. There's no way to avoid compliance," said Stephane Gregoire, a product management director at Brussels-headquartered FRSGlobal, which supplies regulatory reporting tools to top banks.
WALLS HAVE EYES
An obvious potential winner identified by Deutsche among others is Anglo-American Autonomy Corp Plc, founded by Cambridge University researcher Mike Lynch. He said it was an Autonomy system that detected that mails created by Kerviel to support what he was saying had not been sent.
The company, with forecast revenue of more than $480 million this year according to analysts polled by Reuters Estimates, sells search technology that can understand e-mail, text, voice and video data. The stock has outperformed the FTSE index by more than 50 percent over the past year.
"The effect of the subprime crisis appears now to be a positive for our business," said Lynch. "This is all being driven by trading scandals and by the sharpening of requests from regulators."
Many companies maintain the right to monitor an employee's electronic correspondence using company property: in Britain, for instance, this is allowed if staff are informed and "the benefits outweigh the risks to individuals' privacy", according to the British Information Commissioner's Office.
The problems the software can help resolve can be costly.
Kerviel was blamed for a 4.9 billion euros ($7.7 billion) loss at Societe Generale. In March over 3 billion pounds ($6 billion) was wiped off the value of British bank HBOS in less than an hour after some traders spread false rumors it had problems. Bear Stearns ended up being taken over.
Credit Suisse blamed a handful of traders for a multi-billion dollar loss, saying they had deliberately mispriced complex credit products.
Such mishaps, including wrong-footed bets on high-risk home loans, have put internal security and data management high on banks' agendas.
"Subprime brought that to a head," said David Paris from the financial markets consulting unit of IBM. "Rather than saying 'strategically we need to go in that direction but don't want to invest now', (companies say) 'oh gosh, we need to do that'."
MESSAGE MONITORS
Kailash Ambwani, CEO of FaceTime Communications, a privately held U.S. company whose software helps companies monitor instant messaging traffic and whose customers include many major banks, said SocGen had boosted interest in FaceTime's technology.
In February, he was recalled to New York from a ski holiday in Lake Tahoe to pitch to executives of two top banks which weren't yet customers: "We had been talking to them, and what this event did was to cause an acceleration in the process."
Another U.S.-based instant messaging specialist also reports fresh interest. Akonix technology archives and monitors instant messaging conversations in real time, sending alerts on certain key words or names or number combinations.
The company says it has in the past six months gained two new clients, which are among the top three or five U.S. brokerages.
"It's not new regulations that have caused an up-pick in interest, it really is incidents like Societe Generale ... where communications were used to do illegal activities," Akonix's head of marketing Don Montgomery said.
And the industry is also attracting some employees who have first-hand knowledge of how to beat the system. French software company LCA said in April it had hired none less than the former SocGen trader Kerviel.
(Additional reporting by Rebekah Curtis and John Bowker; Editing by Douwe Miedema and Sara Ledwith)
R: Morgan Stanley cut 1,500 jobs this week: source
Fri May 16, 2008 6:46pm EDT
NEW YORK (Reuters) - Morgan Stanley (MS.N: Quote, Profile, Research) cut 1,500 jobs this week across its investment banking, trading and asset management businesses, a person familiar with the situation said Friday, a 5 percent reduction of non-broker employees.
Most of the cuts hit employees in the United States and Europe, the source said. A few of the affected employees have not been notified yet.
As reported earlier this month, the second-largest investment bank is taking steps to cut 5 percent of employees across almost every business, excluding the retail brokerage division.
Including this latest round, Morgan Stanley has slashed more than 4,400 mortgage, banking and trading jobs to reduce expenses and weather a period of slowing revenue.
Morgan Stanley had 47,050 employees at the end of February.
(Reporting by Joseph A. Giannone Editing by Andre Grenon)
BL: Food Crisis May Divide Middle East's Oil Haves, Have-Nots
By Glen Carey and Ayesha Daya
May 18 (Bloomberg) -- The wealth gap among Middle Eastern nations may widen as countries with crude oil spend their way out of the food crisis and those without bust their budgets.
The region's powers are pursuing different approaches to defusing the tensions unleashed by the jump in the cost of staples such as rice, vegetable oils and dairy products. Egypt has forbidden the export of rice and is raising taxes to help pay for an 88 percent increase in subsidies, while Saudi Arabia can afford to lower tariffs and the United Arab Emirates is looking to buy farms as far away as Thailand.
``Oil producers can easily pay for food subsidies,'' John Sfakianakis, chief economist at Riyadh-based Saudi British Bank, said in a telephone interview. ``The countries without oil are more fiscally challenged and face public contention and discontent.''
Egyptian President Hosni Mubarak says he will raise the issue of skyrocketing food costs when he hosts world leaders including U.S. President George W. Bush as well as business executives at the Middle East's World Economic Forum starting May 18th. Economic disparities mean regional leaders are unlikely to agree on a coordinated response.
``Our entire food system is broken,'' said Carin Smaller, an agricultural trade analyst in Geneva for the Institute for Agriculture and Trade Policy. ``Some countries have to take unilateral measures now because there is not enough food on the world market. It's going to intensify the crisis.''
Clashes With Police
The issue is critical in non-oil countries like Egypt, where three people were killed last month in clashes with police during a two-day riot over climbing prices. The cost of rice, staple for half the world's population, has almost doubled in the past year, reaching a record $25.07 on April 24. Wheat prices jumped 69 percent in the same period.
Mubarak has promised to increase government salaries and added 15 million people to the country's ration-card system, ending a 20-year freeze on new memberships. Egypt also has banned rice exports from April through October.
To fund the 14 billion Egyptian pounds ($2.6 billion) needed for the salary increases, parliament approved higher taxes on fuel and cigarettes and raised duties on vehicles, which will generate 12 billion pounds.
Spending on subsidies will increase 88 percent next year to 128 billion Egyptian pounds, or 39 percent of the government budget -- at a time when the current budget deficit is 6.9 percent of gross domestic product.
Food Subsidies
``The problem is Egypt doesn't have the money to pay for food subsidies,'' said Simon Kitchen, an economist and strategist at Cairo-based EFG-Hermes.
In Saudi Arabia, which has an economy three times the size of Egypt's and a third its population of 81.7 million, the government cut duties on wheat imports and lowered tariffs to 5 percent on frozen chicken, eggs, vegetable oil and canned food. That cost 6 billion riyals ($1.6 billion) a year in revenue, Okaz newspaper reported on April 3. Saudi Arabia, the world's largest oil exporter, is also planning to boost welfare payments and acquire farms abroad.
The U.A.E., which stashed away about $875 billion in its sovereign wealth fund as oil more than quadrupled, is considering purchasing farms in Cambodia, Thailand and Africa because ``the weather doesn't help us grow items in the country,'' Mohammed Ahmed bin Abdul Aziz, undersecretary of the Planning Sector at the Ministry of Economy, said in a May 13 interview.
Bought the Farm
``Buying farms is not a bad thing,'' Panos Konandreas, acting director of the UN Food and Agriculture Organization in Geneva, said in a telephone interview. ``If you are like Saudi Arabia and have all the resources in the world, you can help farms optimize their strategies and there will be more production.''
Higher prices have led to record levels of inflation throughout the Gulf and oil producing states have been under pressure to follow Kuwait and drop their currencies' dollar pegs to help slow price increases. All have kept the links, citing the need to keep currencies fixed until they form a monetary union in 2010.
Food scarcity in the Middle East, the world's largest wheat importer, is expected to be a key subject of discussion at the forum though it is not on the formal agenda, said Daniel Davies, head of the forum's Middle East program. Those attending include European Union Trade Commissioner Peter Mandelson, World Bank President Robert Zoellick and U.S. trade negotiator Susan Schwab.
The increased trade restrictions and subsidies come as Middle Eastern countries have been opening their economies to global trade. Saudi Arabia joined the World Trade Organization in December 2005, Bahrain signed a free trade agreement with the U.S. in 2004, and Egypt has been cutting duties as it seeks a similar accord with the U.S.
``Countries are overreacting by imposing bans on exports or over-importing and hoarding food, which pushes prices higher,'' Konandreas said.
To contact the reporter on this story: Glen Carey in Dubai at gcarey8@bloomberg.net; Ayesha Daya in Dubai adaya1@bloomberg.net
Last Updated: May 17, 2008 17:00 EDT
BL: Henkel May Sell 25% Stake in Ecolab on Market, Steinebach Says
By Antonio Ligi
May 17 (Bloomberg) -- Henkel AG, the German maker of Loctite glue and Persil detergent, may sell its 25 percent stake in U.S. chemical maker Ecolab Inc. on the market.
``We don't anticipate that we will be selling our stake to one acquirer, more likely it will be distributing the stake broadly into the market,'' Henkel Chief Financial Officer Lothar Steinebach said in an interview late yesterday at a business conference in St. Gallen, Switzerland.
The maker of Right Guard deodorant plans to cut as many as 3,000 jobs to sustain earnings growth and it said in February it will sell some or its entire stake in Ecolab, the world's largest maker of cleaning chemicals for hotels and restaurants. It has a market value of 11.5 billion dollars.
Steinebach said there is no pressure to sell the stake because the company has financing for the purchase of National Starch & Chemical Co. completed in April.
``We expect the recession in the U.S. to probably be milder than what could have been anticipated,'' he said. The impact on the company's business would be ``limited,'' he said.
First-quarter sales excluding acquisitions and disposals and adjusted for currency swings rose 3.8 percent in Asia, and 4.2 percent in the Europe, Africa and Middle East region. In North America, revenue on that basis declined 3.1 percent.
Steinebach said he expected the price of oil to come down ``a little bit,'' though he doesn't see ``a reversal of the trend'' and this will affect the company's business during most of this year. ``There is no question that this year is going to be a very tough year,'' he said.
The company forecasts annual sales growth of 3 percent to 4 percent, excluding the business of recently acquired National Starch & Chemical Co.
To contact the reporter on this story: Antonio Ligi in Zurich at aligi@bloomberg.net
Last Updated: May 17, 2008 07:45 EDT
BL: Dollar Falls Most Against Euro in Seven Weeks on Sentiment, Oil
By Ye Xie and Bo Nielsen
May 17 (Bloomberg) -- The dollar fell the most against the euro since March as a drop in consumer confidence and record crude oil prices raised concern U.S. economic growth will slow.
The dollar's second consecutive weekly decline against the euro pared its increase from the all-time low reached last month to 2.7 percent. The Australian dollar rose to the strongest level against the greenback since 1984 as oil pushed up prices of other commodities. Mexico's peso rose to a five-year high, while the Brazilian real strengthened to the most since 1999.
``The economic backdrop in the U.S. argues against the continuing gains in the dollar,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York.
The dollar fell 0.6 percent to $1.5577 per euro this week, from $1.5482 on May 9. It touched the record low of $1.6019 per euro on April 22. The yen declined 1.2 percent to 104.04 per dollar this week, from 102.87. Japan's currency fell 1.8 percent to 162.27 per euro, from 159.21, the biggest decline since the week ended April 18.
Crude oil rallied to the all-time high of $127.82 a barrel yesterday as Goldman Sachs Group Inc. raised its forecast for the second half of this year to an average of $141 a barrel, citing supply constraints.
The correlation coefficient between oil and the euro-dollar exchange rate has been 0.95 for the past year, indicating they have moved in the same direction 95 percent of the time. The correlation is calculated based on the price changes of oil and the currencies.
`Higher' Oil
``There is no fresh catalyst to mount a successful rally in the U.S. dollar,'' said Michael Woolfolk, a senior currency strategist in New York at Bank of New York Mellon Corp. ``Oil prices are significantly higher.''
The Australian dollar increased 1.1 percent this week and touched 95.60 U.S. cents yesterday, the highest level since 1984, on higher commodity prices. Exports of raw materials, such as iron ore, account for 17 percent of Australia's economy. The Brazilian real rose to the nine-year high of 1.6402 versus the dollar, while Mexico's peso appreciated to 10.3912 the strongest in almost five years.
Iceland's krona was the best performer against the dollar among emerging-market currencies, increasing 6.9 percent to 74.69 after the central banks of Denmark, Sweden and Norway pledged as much as 1.5 billion euros ($2.3 billion) in emergency funds yesterday. The krona jumped 3.5 percent to 116.17 per euro. Before yesterday, it had slumped 24 percent against the euro this year.
Weaker Yen
Japan's currency fell against all of the major currencies this week as global stock gains and lower volatility increased carry trades, in which investors borrow funds in countries with low interest rates and buy assets where returns are higher.
The yen fell 4.9 percent to 13.95 against South Africa's rand and 4 percent to 63.48 against Brazil's real. The Bank of Japan is forecast by 35 economists surveyed by Bloomberg to hold the target lending rate at 0.5 percent next week. That compares with 11.75 percent in Brazil and 11.5 percent in South Africa.
Implied volatility on one-month dollar-yen options fell to 11.26 percent yesterday, from 12.70 percent on May 9, approaching the lowest since Feb. 27. Lower volatility tends to encourage carry trades by making it easier to predict profit. The Standard & Poor's 500 Index rose 2.6 percent this week, the biggest gain since mid-April.
The dollar weakened yesterday as a report showed confidence among U.S. consumers fell in May to the lowest level in almost 28 years. The Reuters/University of Michigan consumer sentiment index dropped to 59.5 this month, from 62.6 in April.
Sales of previously owned homes probably dropped in April to an annual rate of 4.85 million, the all-time low, according to the median forecast of 46 economists surveyed by Bloomberg News. The National Association of Realtors is scheduled to release the report on May 22.
Fed Rate Outlook
Futures on the Chicago Board of Trade yesterday showed 88 percent odds that the Fed will hold the target lending rate at 2 percent at its next meeting on June 25. The balance of bets is for a reduction of a quarter-percentage point. There's a 21 percent chance of an increase to 2.25 percent in September.
The euro got a boost on May 15 as the European Union's statistics office said gross domestic product in the 15 countries that use the currency increased to 0.7 percent in the first quarter. The pace exceeded the 0.5 percent estimate of 32 economists surveyed by Bloomberg News. Germany's 1.5 percent expansion from the previous quarter was more than double what economists had expected.
European Central Bank President Jean-Claude Trichet said yesterday the bank can't relax in its fight against inflation.
``There is no place for complacency,'' he said in a speech in Brussels. ``Price stability in the medium term has to be'' ensured. It's ``a necessary condition to sustain economic growth, job creation and social cohesion.''
The ECB has held its main refinancing rate at a six-year high of 4 percent since last June to control inflation, which accelerated to the fastest pace in 16 years in March.
To contact the reporters on this story: Ye Xie in New York at Yxie6@bloomberg.net; Bo Nielsen in New York at bnielsen4@bloomberg.net
Last Updated: May 17, 2008 08:00 EDT
BL: Fed's Lockhart Says Slowdown to Reduce U.S. Inflation (Update1)
By Steve Matthews
May 17 (Bloomberg) -- Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. economic slowdown may moderate inflation that has been spurred by rising prices of energy and commodities.
``We expect inflation to abate somewhat in the second half and going into 2009 based upon our forecast of weak economic growth,'' Lockhart said in response to a question following a speech today in Atlanta. ``There is some early indication that the strength of inflation has softened.''
Lockhart's comments contrast with remarks this week by Kansas City Fed President Thomas Hoenig and Richard Fisher of the Dallas Fed, who warned about rising prices. Hoenig said inflation was at an ``unacceptable level,'' while Fisher said the economy may recover from its slowdown ``at much higher base rates of inflation than we would want.''
Policy makers indicated last month they may take a breather after lowering the benchmark U.S. interest rate by 3.25 percentage points since September. The reduction in rates this year has been the most aggressive in two decades.
U.S. consumer prices rose less than forecast in April, reflecting cheaper furniture and lodging costs, the Labor Department said May 14. Prices rose 3.9 percent in the 12 months ended in April, down from a 4 percent year-over-year gain in March.
Energy Prices
``The U.S. economy is in the midst of a pronounced slowdown, with very little growth recorded for two consecutive quarters,'' Lockhart said in the text of his speech. At the same time, ``the United States has experienced elevated inflation levels partially driven by a run-up of energy and other commodity prices.''
Lockhart didn't discuss the path of interest rates. The Federal Open Market Committee next meets June 24-25.
U.S. weakness, initially concentrated in housing, has undermined consumer spending, which generates about two-thirds of U.S. gross domestic product, Lockhart said.
``Personal consumption has softened,'' Lockhart told the Southern Center for International Studies at an event at Emory University. ``To the extent the world relies on strong U.S. consumer activity, this weakness could pose a threat to continued global expansion.''
For now, ``growth appears to be softening but still growing nicely'' in emerging economies, he said. While the U.S. slowdown will be felt worldwide, it won't as severe as predicted by some forecasters, he also said.
Lockhart in the question period said the U.S. economy wasn't ``technically'' in recession, adding the second quarter may show economic growth.
Global Problem
Increasing prices have become a global problem, Lockhart said, citing ``unrest'' over food prices in several countries.
``Recently inflation in many parts of the world has begun to pick up,'' he said. That ``is a growing issue for emerging economies.''
U.S. consumers expect an inflation rate of 5.2 percent over the next 12 months, according to a Reuters/University of Michigan survey on May 16, compared with 4.8 percent in the April survey. Longer term, Americans projected prices would increase 3.3 percent, up from a 3.2 percent estimate last month.
Lower demand for energy could bring a reduction in those prices, Lockhart added in the question period, saying prices were likely to be ``somewhat lower but relatively high.''
The U.S. should take a ``realistic'' view of sovereign wealth funds, Lockhart also said, echoing comments made May 15 by Fed Chairman Ben S. Bernanke. The funds have accounted for about one-third of the capital raised by financial companies during the credit crisis, the Fed chief said.
``There has been a fair amount of hand-wringing recently about sovereign wealth funds accumulating U.S. assets,'' the Atlanta Fed official said. ``I believe our posture has to be realistic. One country's trade deficit -- ours, in this case -- is another country's investment surplus.''
Lockhart, responding to questions, said the U.S. dollar would remain ``the dominant currency'' in the world even though some countries may diversify their reserves.
To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net.
Last Updated: May 17, 2008 11:12 EDT
BL: GM Wins Victories in American Axle Accord, Canada Union Vote
By Alex Ortolani and Jeff Green
May 17 (Bloomberg) -- General Motors Corp., the world's largest automaker, won two victories as a supplier reached an accord to end a strike that choked off parts to more than 30 factories and Canadian workers ratified a cost-saving contract.
The partsmaker, American Axle & Manufacturing Holdings Inc., and the United Auto Workers tentatively agreed on a contract late yesterday that would settle an 11-week walkout. The Canadian Auto Workers union said today its labor deal with GM was ratified with 84 percent of the vote.
The accords should restore the flow of parts from GM's biggest axle supplier and ensure three years of peace with the automaker's Canadian workforce. They also build on the U.S. contracts secured last year by GM, Ford Motor Co. and Chrysler LLC to pare pay and benefits.
``The North American non-competitive labor agreements are now history, which is really a big step,'' said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan.
GM's CAW contract covers about 13,000 workers and follows a pattern set in an accord with Ford two weeks ago, the union said in a statement. The CAW said a GM transmission plant in Windsor, Ontario, would shut in 2010, cutting 1,400 jobs.
The American Axle strike created a parts shortage that idled thousands of workers at Detroit-based GM making pickup trucks, sport-utility vehicles, cars, and engine and vehicle parts. That slowdown in turn hit other GM suppliers such as Lear Corp., the second-largest maker of automotive seats.
`Restart Our Operations'
``We're pleased that the UAW and American Axle have reached the agreement and we hope it gets ratified,'' GM spokesman Dan Flores said. ``With ratification we will move to restart our operations where there is impact.''
American Axle's UAW members in Detroit will be briefed tomorrow, and meetings are being scheduled for employees in New York and at a Michigan plant, the union said in an e-mailed statement. The UAW didn't disclose the terms, and company spokeswoman Renee Rogers declined to give details.
The walkout by 3,650 employees at Detroit-based American Axle began Feb. 26 over proposed pay cuts, stopping almost all production at five of the supplier's plants.
``Our members at American Axle have displayed extraordinary solidarity during this strike,'' UAW President Ron Gettelfinger said in the statement.
GM said this month it would pay as much as $200 million to help end the strike. GM said cutbacks due to the parts shortage reduced output by at least 230,000 vehicles and cut cash flow by about $2.1 billion in the first quarter.
GM Flexibility
Full production at American Axle will give GM the flexibility to deliver its entire product line to dealers quickly, said Aaron Bragman, a Troy, Michigan-based analyst with consulting firm Global Insight.
GM has fallen 15 percent in New York trading since the strike began, while American Axle has dropped 2 percent. GM declined 55 cents yesterday to $20.68 in New York Stock Exchange composite trading. American Axle slipped 2 cents to $22.55.
GM reported first-quarter losses of $800 million from the walkout. The production slowdowns affected factories that employed as many as 42,000 of GM's 91,000 hourly and salaried manufacturing workers in North America.
Canada Contracts
Both GM and Ford now have ratified contracts with their Canadian workers. Chrysler has an agreement pending ratification.
Last week, GM also reached an agreement to end a walkout at an SUV plant in Michigan that made models such as the GMC Acadia, which increased U.S. sales 43 percent this year.
In addition, the automaker ratified a contract at a metal- stamping factory in Ohio. GM is still trying to resolve a local strike at a Fairfax, Kansas, plant that makes Chevrolet Malibu and Saturn Aura cars.
American Axle began negotiating with the UAW last year to cut wage and benefits, slashing employees' hourly payments from $73.48 now to a range of $20 to $30 to compete with rivals such as Dana Corp. The union said recent profits showed that American Axle could afford to pay more.
On May 13, American Axle said the only sticking points in the talks involved health care and supplemental unemployment coverage. The UAW had asked for buyouts of as much as $140,000 for workers who agreed to leave and cash payments of about $100,000 over time to cushion the effect of lower wages, the company said.
Before the agreement was reached, American Axle raised its salary offer and the size of the payments that would go to employees who agree to accept lower wages, the Associated Press reported, citing a person who had been briefed on the talks.
The 81-day walkout was the eighth-longest in U.S. union history, said William LeFevre, an archivist at Wayne State University.
American Axle, which generated about 78 percent of its 2007 revenue from GM, increased production in Mexico during the strike. The company was formed by private-equity investors in 1994 from unprofitable GM plants and went public in 1999.
To contact the reporter on this story: Jeff Green in Southfield, Michigan at jgreen16@bloomberg.net; Alex Ortolani in Southfield, Michigan, at aortolani1bloomberg.net
Last Updated: May 17, 2008 16:32 EDT
BL: U.S. Stocks Rise to Highest Since January; Intel, Peabody Gain
By Elizabeth Stanton
May 17 (Bloomberg) -- U.S. stocks rose this week, sending the Standard & Poor's 500 Index to the highest level since January, on speculation global economic growth will drive demand for personal computers and fuel.
Intel Corp. led semiconductor companies in the S&P 500 to a 2008 peak on a Friedman Billings Ramsey & Co. report that orders are improving. Peabody Energy Corp. joined 19 other S&P 500 fuel producers in reaching 52-week highs as crude oil surpassed $127 a barrel for the first time. Most stocks declined yesterday after consumer confidence dropped to a 28-year low.
The S&P 500 climbed 2.7 percent this week to 1,425.35, the highest since Jan. 3. The Dow Jones Industrial Average rose 1.9 percent to 12,986.80. The Nasdaq Composite Index added 3.4 percent to 2,528.85. The Russell 2000 Index of small-cap stocks advanced 2.9 percent to 741.17.
``We seem to have experienced a mid-cycle slowdown, not a hard landing,'' said David Goerz, the San Francisco-based chief investment officer at Highmark Capital Management, which oversees $22 billion. ``If you don't have an economic slowdown, technology should work well.''
The S&P 500 extended its rebound from a 19-month low in March to 12 percent. The recovery followed seven interest-rate cuts by the Federal Reserve, which also extended a record $14.4 billion in direct loans to commercial banks to facilitate lending. The worst housing slump in a generation hurt the value of mortgage-related investments, depleting banks' capital.
88% Profit Slump
Financial companies in the S&P 500 reported an 88 percent decline in first-quarter earnings, according to Bloomberg data. Excluding banks, brokerages and real-estate firms, average earnings rose 8.3 percent for the S&P 500, based on reports by 353 companies since April 7.
Companies scheduled to report first-quarter results next week include Hewlett-Packard Co., which suffered the biggest decline among the 30 companies in the Dow average this week after agreeing to buy Electronic Data Systems Corp. for $13.2 billion.
Other companies slated to release results include Home Depot Inc., Campbell Soup Co., Medtronic Inc. and Target Corp.
Hewlett-Packard, the biggest personal-computer maker, fell 3.8 percent to $47.29 on concern the price-tag for EDS is too high. EDS, the second-largest computer-services provider after International Business Machines Corp., rose 29 percent to $24.33 for the biggest gain in the S&P 500.
Intel, the world's largest chipmaker, rose 7 percent to $25. Friedman Billings Ramsey analyst Craig Berger in a May 15 report said semiconductor companies will benefit from improving global demand for personal computers.
China Earthquake
Peabody Energy, the largest U.S. coal producer, jumped 15 percent to a record $78.83. Coal companies in S&P indexes rose to a record after China, the world's largest producer, temporarily closed mines following the nation's most powerful earthquake since 1950.
Crude oil rose to a record $127.82 a barrel in New York. That sent energy companies including Chevron Corp., ConocoPhillips, Occidental Petroleum Corp. and Halliburton Co. to all-time highs.
Alcoa Inc. had the biggest gain in the Dow average, rising 11 percent to $43.15. The world's third-largest aluminum producer is a possible acquisition target as Rio Tinto Group and Brazil's Cia. Vale do Rio Doce each potentially seek $50 billion takeovers, Ernst & Young LLC said.
Clear Channel Communications Inc. climbed 16 percent to $34.84. The largest U.S. radio broadcaster agreed to a buyout at a reduced price after the private-equity buyers and banks financing the deal reached a legal settlement. Citigroup Inc. and five other banks became unwilling to finance last year's higher offer amid declines in radio advertising sales and investor appetite for loans.
Icahn Threatens Fight
Yahoo! Inc. rose 6.7 percent to $27.66. Billionaire investor Carl Icahn threatened the second-most-popular Internet search engine with a proxy battle for control of its board. He is urging Yahoo to resume takeover talks with Microsoft Corp., the world's largest software maker, which had offered $47.5 billion.
Ambac Financial Group Inc. retreated 12 percent to $3.85 for the steepest drop in the S&P 500. The second-largest U.S. bond insurer had ``meaningfully'' higher losses on home-equity loans and collateralized debt obligations than anticipated, raising concern about its Aaa status, Moody's Investors Service said.
Whole Foods Market Inc. tumbled 11 percent to $29.06 for the second-biggest decline in the S&P 500 and its biggest drop since November 2006. The largest U.S. natural-foods grocer said second-quarter profit fell more than analysts estimated and sales growth slowed.
Options Drop
The Russell 2000 Index of companies whose median market value is 95 percent smaller than the S&P 500's rose 2.9 percent to 741.17. The Chicago Board Options Exchange Volatility Index, the benchmark for U.S. options prices, declined 15 percent to 16.47. The so-called VIX, which gauges the cost of insuring against stock-price losses, closed at the lowest level since Oct. 9, the day the S&P 500 peaked, on May 15.
Treasury securities fell as rising stock prices curbed demand for fixed-rate investments. The two-year note's yield, which moves inversely to its price, climbed to 2.44 percent from 2.24 percent.
The index of U.S. leading indicators was probably unchanged in April, signaling a prolonged stagnation in growth, economists said before a May 19 report. The Fed is scheduled to release on May 21 the minutes of its most recent interest-rate meeting, when its target for the overnight lending rate between banks was lowered to 2 percent from 2.25 percent.
To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.
Last Updated: May 17, 2008 08:00 EDT
BL: Bush Says Saudi Oil Boost `Not Enough' to Ease Prices (Update1)
By Hans Nichols and Janine Zacharia
May 17 (Bloomberg) -- President George W. Bush said Saudi Arabia's decision to raise oil output 300,000 barrels a day is ``not enough'' to ease U.S. energy prices and that more domestic oil exploration and refining capacity are needed.
``It's not enough, it's something but it doesn't solve our problem,'' Bush told reporters in Sharm el-Sheikh, Egypt today when asked about the Saudi decision, taken May 10 and announced yesterday, to increase crude production.
``Our problem in America gets solved when we aggressively go for domestic exploration,'' Bush said after meeting Afghan President Hamid Karzai ahead of a World Economic Forum conference. ``Our problem gets solved if we expand our refining capacity, promote nuclear energy and continue our strategy for the advancement of alternative energy as well as conservation.''
Saudi Arabia, the world's largest oil exporter, said yesterday, while Bush was in Riyadh, that the country's daily output will rise to 9.45 million barrels a day in June. Saudi Oil Minister Ali al-Naimi told reporters the kingdom took the step in response to demands from customers.
Oil prices have doubled in the past year on surging demand, supply disruptions in places such as Nigeria and commodity purchases by investors as a hedge against a weakening U.S. dollar. The price surge threatens to accelerate inflation and curb economic growth.
Nuclear Power, Refineries
Bush voiced frustration with congressional blockades of Republican-led efforts to increase domestic drilling.
``One of the interesting things about American politics is, is those who are screaming the loudest for increased production from Saudi Arabia are the very same people who are fighting the fiercest against domestic exploration, against development of nuclear power and against expanding refining capacity,'' Bush said.
``So I was pleased that they increased production by 300,000, but I am also realistic to say to the American people that we've got to do more at home and we need a Congress who will be responsive to those requests,'' Bush said.
The U.S. Senate on May 13 defeated a Republican plan to increase oil and natural-gas drilling in the Outer Continental Shelf and Alaska's Arctic National Wildlife Refuge.
The measure failed by a 42-56 vote. Republicans argued that more domestic drilling may lower oil and gasoline prices. The measure also promoted alterative fossil fuels such as diesel derived from coal and oil shale.
Strategic Petroleum Reserve
Also this week, the Senate passed legislation that would halt oil shipments to the Strategic Petroleum Reserve in an effort to ease record oil and gasoline prices. Bush is likely to sign the bill.
Crude oil futures traded in New York rose yesterday to a record about one hour after Bush landed in Saudi Arabia. They later settled at $126.29, an increase of $2.17, or 1.7 percent, though below the day's high after the promise to boost production. Saudi Arabia is the world's largest oil exporter and the most influential member of OPEC.
OPEC, which pumps more than 40 percent of the world's oil, has kept output targets unchanged during its past three meetings, on March 5, Feb. 1 and Dec. 5.
To contact the reporters on this story: Janine Zacharia in Sharm el-Sheikh, Egypt at jzacharia@bloomberg.net; Hans Nichols in Sharm el-Sheikh, Egypt at hnichols2@bloomberg.net.
Last Updated: May 17, 2008 10:56 EDT
BL: Guy Hands Rejects Bank LBO Debt Offers, Sees Subprime Parallels
By Edward Evans
Enlarge Image/Details
May 13 (Bloomberg) -- British financier Guy Hands said private equity firms that are buying leveraged buyout loans risk repeating the mistakes of investors in subprime mortgages.
Hands's Terra Firma Capital Partners Ltd. rejected offers from banks for the loans because they didn't offer an attractive enough risk-adjusted rate of return, he said in an interview at his London office.
Citigroup Inc. and Deutsche Bank AG are selling as much as $22 billion of LBO loans to free up capital. The banks are trying to lure private equity buyers such as Apollo Management LP, Blackstone Group LP and TPG Inc. by offering the debt at a discount and providing them with financing to buy the loans. If the global rate of company defaults rises five-fold to 10 percent, buyout firms' equity in the loans will disappear and the debt will return to the banks, Hands said.
``What the private equity firms are doing is what the hedge funds were doing when they were buying the subprime mortgages,'' Hands said. ``They were effectively putting up a small amount of equity and hoping the amount they would receive back in positive spread would pay off that equity before the market went down.''
Hands, 48, built up Nomura Holdings Inc.'s buyout business in the 1990s before quitting to run his own firm with Nomura's backing in 2002. Terra Firma bought EMI Group Plc, the record label of the Beatles, for 2.4 billion pounds ($4.9 billion) last year. New York-based Citigroup, which financed Terra Firma's bid, postponed plans last month to sell the loans because of investor anxiety about EMI's turnaround under Hands.
`Window-Dressing'
The banks wouldn't have needed to sell the loans if the market remains flat for the next three years, Hands said. Still, the sales will help the companies solve their capital problems, he said.
Citigroup spokesman Jeff French and Oonagh Baerveldt, a spokeswoman for Frankfurt-based Deutsche Bank, declined to comment. Citigroup is the biggest U.S. bank by assets and Deutsche Bank is the largest in Germany.
``It's window-dressing,'' Hands said. ``What they've done is lent the money for people to buy the loans. And having lent the money for people to buy the loans, they're hoping they don't come back to them.''
To contact the reporter on this story: Edward Evans in London at at eevans3@bloomberg.net
Last Updated: May 13, 2008 04:05 EDT
BL: European Stocks Fall on Inflation Concern; U.S. Futures Decline
By Sarah Thompson
May 13 (Bloomberg) -- European stocks fell, led by financial companies, on concern accelerating inflation will keep central banks from lowering interest rates. U.S. index futures and shares in China dropped.
Barclays Plc, Britain's third-biggest bank, and Alliance & Leicester Plc retreated as inflation in the U.K. jumped the most since 2002. Societe Generale SA declined for a sixth day after reporting a 23 percent decline in first-quarter profit, while Fortis slipped to a one-month low on more writedowns. Wal-Mart Stores Inc. fell after its forecast trailed some analysts' estimates. China Life Insurance Co. slumped following the biggest earthquake in the country in 58 years.
Europe's Dow Jones Stoxx 600 Index slipped 0.5 percent to 324.21 as of 12:58 p.m. in London. The index has lost 19 percent from a 6 1/2-year high on June 1 on concern $329 billion in credit losses by the world's largest financial firms will cut economic and profit growth.
``European markets are dropping off because the odds of an inflation problem have just gone up,'' said Simon Carter, who manages $3 billion at Aegon Asset Management in Edinburgh. ``Indeed, slowing growth and increased inflationary pressures makes a central bank's job extremely difficult.''
Futures on the Standard & Poor's 500 Index lost 0.4 percent. China's CSI 300 dropped 1.4 percent.
National benchmark indexes retreated in 14 of the 18 western European markets. The U.K.'s FTSE 100 slipped 0.9 percent. France's CAC 40 slid 0.4 percent, and Germany's DAX lost 0.3 percent.
Consumer Prices
Barclays fell 1.9 percent to 436.5 pence. HBOS Plc, the U.K.'s largest mortgage lender, dropped 4.3 percent to 483.75 pence.
Alliance & Leicester decreased 10 percent to 459.25 pence. The British bank that lost more than half its market value in the past year fell the most since September after announcing writedowns of 391 million pounds ($763 million).
Consumer prices climbed 3 percent from a year earlier, compared with 2.5 percent in March, the Office for National Statistics said today in London. The result was the highest in 13 months and exceeded the 2.6 percent median prediction of 37 economists in a Bloomberg News survey.
``Given most of the inflation pressures are global, it may also be possible to read across'' to the European Central Bank, said Tony Dolphin, director of strategy and economics at Henderson Global Investors in London, which oversees about $125 billion. ``This increases the chance of inaction there too.''
Societe Generale fell 2 percent to 70.05 euros. France's second-largest bank by market value reported a 23 percent decline in first-quarter profit on increased provisions for risky loans and writedowns tied to the U.S. subprime mortgage market collapse.
Fortis, Wal-Mart
Fortis, part of the group that bought ABN Amro Holding NV in the world's biggest banking takeover, fell 1.3 percent to 16.73 euros. First-quarter profit dropped 31 percent to 808 million euros ($1.26 billion) on structured-credit writedowns. Fortis, which wrote down 1.8 billion euros of asset in the fourth quarter, had an additional 380 million euros of markdowns in the first quarter.
Wal-Mart lost 37 cents to $57.65 in New York. The world's largest retailer said it expects second quarter earnings of 78 cents to 81 cents a share. Analysts in a Bloomberg survey expected 81 cents on average.
The Bentonville, Arkansas-based company said first-quarter profit increased after it cut prices on groceries and pharmacy items to lure consumers strained by higher food expenses and $3.70-a-gallon gasoline. Net income rose to $3.02 billion, or 76 cents a share, beating analysts' estimates.
China Life
China Life, the nation's largest insurer, tumbled 5.5 percent to 31.39 yuan. Citic Securities Co. dropped 3.6 percent to 35.86 yuan. China Petroleum & Chemical Corp., the largest refiner, lost 2.7 percent to 11.76 yuan.
The 7.9-magnitude earthquake, which killed almost 10,000 people, struck 90 kilometers (56 miles) from the central city of Chengdu, the capital of Sichuan province. The province contains 40 percent of China's gas deposits.
Credit Agricole SA dropped 5.1 percent to 19.68 euros. France's third-largest bank by market value said it may raise 5.9 billion euros ($9.2 billion) in a rights offer to replenish capital as first-quarter profit dropped on subprime-related writedowns.
Corporate Express NV, the world's biggest distributor of office supplies, jumped 6.3 percent to 8.09 euros. Staples Inc., the largest office-supplies retailer, increased its takeover bid for Corporate Express to 8 euros a share in an effort to expand sales of pens and paper directly to companies. The offer compares with an original bid of 7.25 euros a share on Feb. 19, Framingham, Massachusetts-based Staples said.
Celesio AG fell 6.3 percent to 25.36 euros. Europe's biggest drug wholesaler said first-quarter profit dropped 44 percent on lower U.K. sales and a weaker pound.
Redrow Plc fell 6.1 percent to 275 pence. This year's second-best performing U.K. homebuilding stock said the number of customer reservations on properties is running 50 percent below year-earlier levels as mortgage lending dries up.
To contact the reporter on this story: Sarah Thompson in London at sthompson17@bloomberg.net
Last Updated: May 13, 2008 08:05 EDT
BL: U.S. April Retail Sales Fall 0.2%; Rise 0.5% Excluding Autos
By Bob Willis
May 13 (Bloomberg) -- Retail sales in the U.S. fell in April, led by a slump in auto purchases that masked stronger-than- forecast gains elsewhere, indicating rising energy bills and a faltering labor market haven't stopped Americans from shopping.
Purchases dropped 0.2 percent last month after a 0.2 percent increase in March, the Commerce Department said. Purchases excluding automobiles increased 0.5 percent, more than twice as much as anticipated.
The gains may raise expectations that consumers will spend their tax rebate checks at malls and restaurants in coming months, cushioning the economic slowdown. Still, tougher lending rules and declines in payrolls and property values indicate any rebound may be short-lived.
``Don't count the consumer out yet,'' Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report. ``Jobs are harder to get, gasoline prices set new records almost daily, and yet the consumer continues to spend on life's necessities.''
The median forecast of 76 economists surveyed by Bloomberg News projected a 0.2 percent decline. Estimates ranged from a drop of 0.9 percent to a 0.6 percent increase.
Excluding automobiles, sales were projected to increase 0.2 percent.
Today's report showed purchases at automobile dealerships and parts stores dropped 2.8 percent, the most since June, after a 0.5 percent decrease in March.
Car Sales
Industry figures last week showed cars and light trucks sold at an annual pace of 14.4 million in April, the fewest in almost a decade.
Filling station sales also dropped, even as gasoline prices surged. The 0.4 percent decrease last month followed a 1.6 percent gain in March.
The report showed strength in housing-related areas, such as building materials, furniture and appliances. The 1.9 percent jump in demand at suppliers of building materials was the biggest since May 2007. Restaurant sales also improved by 0.9 percent, the most this year.
Excluding autos, gasoline and building materials, the retail group the government uses to calculate gross domestic product, sales climbed 0.4 percent, matching the previous month's gain that was larger than estimated last month. The government uses data from other sources to calculate the contribution from the three categories excluded.
Change Forecasts
Today's report may prompt some economists to boost expectations. Consumer spending is forecast to grow at an annual rate of 0.5 percent this quarter, down from a 1 percent pace in the first three months of 2008 and the smallest gain in almost 17 years, according to the median estimate of economists surveyed by Bloomberg News from May 2 to May 8.
Spending will rebound to a 2.3 percent growth rate in the third quarter as the bulk of the $117 billion in tax-rebate checks included in a government stimulus plan are spent, the survey showed. That will be followed by a deceleration to a 1.6 percent pace at the end the year.
In the two weeks since the payments started, the government sent out $27.2 billion in rebates, the Treasury Department said May 9.
The stimulus probably won't be enough to keep the economy from stagnating in the second quarter. The economists surveyed by Bloomberg forecast overall growth this quarter at a 0.1 percent pace, the weakest since 2001.
Discounters
Shoppers have been flocking to discount stores to stretch their paychecks and stock up on staples and gasoline. Costco Wholesale Corp., the largest U.S. warehouse-club chain, last week said April sales at stores open at least a year rose 8 percent as customers sought less-expensive clothing and discounted fuel.
Wal-Mart Stores Inc., the world's largest retailer, said sales at stores open at least a year climbed 3.2 percent last month. The Bentonville, Arkansas-based company today announced a higher first-quarter profit and forecast second-quarter earnings that may trail analysts' estimates.
Continuing price gains as oil, corn and other commodity prices soar, may prompt the Fed to keep its benchmark rate at 2 percent at its June 25 meeting, according to trading in the futures market.
Housing is likely to continue to be the economy's weakest component for the rest of the year. That indicates demand for building materials, furniture and appliances may not keep growing.
To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net
Last Updated: May 13, 2008 08:30 EDT
BL: Hewlett-Packard Agrees to Acquire Electronic Data (Update1)
By Connie Guglielmo
May 13 (Bloomberg) -- Hewlett-Packard Co., the world's biggest personal-computer maker, agreed to buy Electronic Data Systems Corp. for $13.9 billion to more than double its sales from computer services. The company raised its full-year profit and sales forecasts for the year.
Hewlett-Packard will pay $25 a share, or 33 percent more than Electronic Data's closing price on May 9, before the companies disclosed they were in talks. The acquisition will start adding to earnings, excluding some costs, as of fiscal 2009, Hewlett-Packard said today in a statement.
The purchase is Hewlett-Packard's largest since the $18.9 billion takeover of Compaq Computer Corp., led by Chief Executive Officer Mark Hurd's predecessor, Carly Fiorina. Combining with Electronic Data, founded by H. Ross Perot in 1962 with $1,000, would help Hurd more than double revenue from services as PC shipment growth slows worldwide.
This is ``a big jump start to H-P's outsourcing business,'' Crawford Del Prete, an analyst with IDC in Framingham, Massachusetts, said in an interview on Bloomberg Television today. Hurd can cut ``a significant amount of cost out of EDS'' by reducing jobs and combining data centers, he said.
The company said today that second-quarter profit probably amounted to 87 cents a share, excluding some costs, beating the average 84-cent estimate of analysts surveyed by Bloomberg. Sales advanced to $28.3 billion, also topping projections. The company said sales will amount to at least $114.2 billion, compared with at least $113.5 billion.
Hewlett-Packard Drops
The transaction should close in the second half of 2008, the companies said today in a statement. Hewlett-Packard stock fell 2.6 percent to $45.61 in trading before exchanges opened after closing at $46.83 yesterday on the New York Stock Exchange. Electronic Data, based in Plano, Texas, rose 8 cents to $24.13 after advancing 28 percent yesterday in regular trading.
``The reaction may be a bit negative because EDS has been struggling for a number of years,'' said Chuck Jones, who helps oversee $17 billion in assets, including Hewlett-Packard shares, at Atlantic Trust Private Wealth Management in San Francisco. ``You've got to feel comfortable that he's thought this out well enough to do it. I believe in Mark Hurd.''
The acquisition will more than double Hewlett-Packard's annual sales in its services unit to almost $40 billion, making it as large a business as PCs. Researcher IDC predicts that PC shipment growth probably will slow to 13 percent worldwide in 2008 from 15 percent last year, dragged down by waning demand in the U.S., the largest market for the machines.
Hewlett-Packard gets about 15 percent of its revenue from services. The company competes against IBM in storage devices, software and servers -- computers used to run corporate networks and Web sites. IBM, based in Armonk, New York, got about $54.1 billion from services last year, or more than half its sales.
Sales growth at Electronic Data slowed to 4 percent last year, half the pace of the previous year. Sixty-year-old Ronald Rittenmeyer, who became CEO in September, relied on overseas expansion to boost contract signings 66 percent to $5.6 billion last quarter. Still, a slowing U.S. economy forced some clients to curb spending on small projects, especially in the manufacturing and consumer-products industries, he said last month.
(The companies will hold two conference calls today at 8 a.m. and 9 a.m. New York time. To listen in, go to http://www.hp.com.)
To contact the reporter on this story: Connie Guglielmo in San Francisco at cguglielmo@bloomberg.net
Last Updated: May 13, 2008 08:00 EDT
BL: Bernanke Says Fed `Stands Ready' to Boost Cash Loans to Banks
By Craig Torres and Steve Matthews
Enlarge Image/Details
May 13 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said financial markets remain unsettled and the central bank will increase its auctions of cash to banks as needed.
While market conditions have improved, they remain ``far from normal,'' Bernanke said today in the text of a speech to an Atlanta Fed conference at Sea Island, Georgia. ``We stand ready to increase the size of the auctions if further warranted by financial developments.''
Bernanke's comments contrast with those by Treasury Secretary Henry Paulson and Wall Street leaders including Vikram Pandit, chief executive officer of Citigroup Inc., who say the worst of the credit crisis is over. The Fed chief said it will take ``some time'' for financial firms to resolve the crisis by raising new capital and strengthening their management of risk.
The flight from risk since August has made financial institutions reluctant to lend to each other, driving up banks' borrowing costs. The central bank has made its own balance sheet available to both banks and bond dealers through three new lending tools, and an expansion of existing programs.
Bernanke said the Fed's efforts have yielded ``some improvement,'' while also noting that the steps raise questions regarding moral hazard, or protecting those who take on risk.
The central bank's extension of the federal safety net raised questions about whether the government should now use taxpayer money to stem mortgage foreclosures, the primary cause of market distress.
`Moral Hazard'
``A central bank that is too quick to act as a liquidity provider of last resort risks inducing moral hazard,'' Bernanke said. The belief that the Fed is always standing by would give ``financial institutions and their creditors less incentive to pursue suitable strategies for managing liquidity risk and more incentive to take such risks.''
Bernanke didn't discuss the path of interest rates or the outlook for the economy. The Federal Open Market Committee last month cut its benchmark rate by a quarter point to 2 percent and signaled it's ready for a pause after seven reductions.
Cleveland Fed President Sandra Pianalto said in a speech in Paris today that consumer prices are rising faster than she'd like and that inflation is a ``key risk'' to the economic outlook. Pianalto is a voter on the FOMC this year.
The Fed chairman said federal banking agencies are trying to address moral hazard through a review of ``policies and guidance regarding liquidity risk management to determine what improvements can be made.''
Raise Capital
``Future liquidity planning will have to take into account the possibility of a sudden loss of substantial amounts of secured financing,'' Bernanke said. ``Ultimately, market participants themselves must address the fundamental sources of financial strains -- through deleveraging, raising new capital, and improving risk management.''
That process will take time, he added, noting that ``once financial conditions become more normal, the extraordinary provision by the Federal Reserve will no longer be needed.''
The Fed announced May 2 that it would boost the Term Auction Facility, or TAF, to $150 billion per month from $100 billion, the third increase since the program began in December.
Premiums in term dollar funding markets still ``remain abnormally high,'' Bernanke said. ``Funding pressures have also been evident in the strong participation at recent TAF auctions even after the recent expansion in auction sizes.''
The gap between three-month Treasury bill yields and three- month dollar-denominated loans in London, narrowed to 89 basis points yesterday, the least since Feb. 20. A basis point is 0.01 percentage point.
Boosting Auctions
On March 11, the Fed announced the Term Securities Lending Facility, which allows primary dealers to swap up to $200 billion of AAA rated commercial and residential mortgage-backed securities and other collateral for the Fed's holding of Treasury securities for up to 28 days. The facility was aimed at helping dealers finance mortgage bonds.
The FOMC expanded the facility May 2 to include AAA rated asset-backed securities. The decision followed two separate requests by groups of Senate and House members that the Fed accept debt backed by student loans under the program.
``The Federal Reserve has had to innovate in large part to achieve what other central banks have been able to effect through existing tools,'' Bernanke said.
Bernanke also repeated his defense of the Fed's rescue of Bear Stearns Cos. in March. The central bank invoked emergency authority on March 16 to start direct lending to government bond dealers, and arranged $30 billion in financing to facilitate the Bear Stearns takeover by JPMorgan Chase & Co.
Bear Stearns
``A bankruptcy filing would have forced Bear's secured creditors and counterparties to liquidate the underlying collateral,'' Bernanke said in his speech. ``Given the illiquidity of markets, those creditors and counterparties might have sustained losses.''
The Bear Stearns loan has been criticized by some former officials and Fed watchers, who said the central bank shouldn't substitute its own loans for fleeing creditors when institutions become insolvent.
Vincent Reinhart, former director of the Fed Board's Division of Monetary Affairs, called the Bear rescue the ``worst policy decision in a generation.''
Creditors also now perceive a wide safety net under investment banks, which the Fed doesn't supervise.
The cost of default protection on Merrill Lynch & Co. debt fell to 1.58 percentage point yesterday from 3.3 percentage points March 14, CMA Datavision's credit-default swap prices show.
Kansas City Fed President Thomas Hoenig said May 6 the central bank's decisions are ``likely to weaken market discipline.''
To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net or Steve Matthews in Atlanta at smatthews@bloomberg.net;
Last Updated: May 13, 2008 08:16 EDT
UUL.v +9.43% (.29) another Uranium play on the run.
SA: Should We Force a Housing Bottom?
by: Kevin Price posted on: May 10, 2008
Some say a recession has arrived. Some say it hasn't yet but will. Some say it never will.
Notwithstanding all the disagreement about where we are not, we've detected near-unanimity on the need for the housing market to stabilize (or "bottom") before the economy stages any kind of meaningful recovery. Which, as far as it goes, is almost certainly true. But the argument has assumed a normative dimension, with many observers claiming that it would be an affirmatively good thing for housing to bottom. Alas, this a question that gets too little attention in the current debate: Should we make extraordinary efforts to force the bottom into place right here, right now?
We think the answer is a definitive no. In the long run, the U.S. economy would be better-served if home prices fell further--much further in some markets, a little further in others--in order to reach market-clearing levels without short-term gimmicks and unsustainable subsidies.
After all, the big problem these days is that too many Americans became overleveraged to acquire (or, more accurately, occupy) unproductive assets. This, we think, is a gross mis-allocation of public and private resources. And all this so Americans could stake partial/leveraged claims to an asset class that historically has been a relatively poor performer.*
Three caveats:
1. We are not of the "let them eat cake" school of economics. Not at all. But the castles-in-the-sky fantasies of the last few years served Americans of moderate means very poorly. These are people whose real wages are lower now than they were when we embarked on this outrageous real estate bubble. So bringing real estate prices back to some reasonable level of affordability, for all the dislocations it will cause in the short run, is very much in the long-term interests of working- and middle-class America.
2. We aren't reflexively anti-government. By its very existence, government "intervenes" in markets...by creating them!** We do think that extraordinary interventions should have clearly stated objectives and plausible likelihoods of achieving those objectives. But we do think it's entirely legitimate for government to try to smooth out the roughest edges, and mitigate the negative externalities, of market cycles.
3. We freely and fully acknowledge that falling home prices do and will hurt in the short run. But we'd rather take the responsible position of focusing on the long-term requirements of economic growth than just applying an expensive short-term salve to the wounds created by the last bubble.
And what are those requirements of growth? Here we'll focus on just one: A higher rate of domestic saving. By slashing interest rates, the Fed has punished saving (of which we need more) and encouraged borrowing (of which we need less). These days, the marginal spent dollar is the marginal borrowed dollar. They're the same thing!***
Only in the most short-sighted sense is a bottom in housing (which we intend to mean a stabilization in the price of residential real estate) necessary or good. A further purging of the truly perverse excesses that have barnacled the American economy over over the last few years would serve us all better in the long run. Less leverage. More affordability. Higher savings rates. More discretionary income for other stuff. More productivity.
No self-respecting elected official will touch this argument, and we understand why. But let's be honest: That doesn't make it any less compelling.
~~~~~~~~~~~~~~~~
* Thanks in part to exceptionally high "expense ratios." If we included the true costs of homeownership (interest payments, property taxes, maintenance, &c.), the return on equity from residential real estate would, in all but the most unusual circumstances (of the sort we witnessed from 2000 to 2005), be remarkably low, even negative in many instances. That doesn't mean real estate is inherently a "bad investment." For several reasons, economic and otherwise, we like the idea of homeownership as much as anyone. But it does mean that as an investment per se, residential real estate isn't especially attractive.
** Through the establishment and preservation of physical and intellectual property rights, the enforcement of contracts, and the maintenance of infrastructure and public safety, among other things.
*** Those stimulus checks now flying toward a mailbox near you? Those are borrowed too, and the feds want you to spend 'em.
Sources
Alison Vekshin, "U.S. House Passes Anti-Foreclosure Bill Facing Bush Veto Threat," Bloomberg, May 9, 2008
Kevin S. Price
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This article has 31 comments:
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free markets
May 10 03:24 PM
Good article and ideas but it will never happen here. Nice try though
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Seventh sense
May 10 04:58 PM
' Mis-allocation of resources" ..exactly.
Another area facing similar mis-allocation is health care. It may sound rather unkind but not every 90-year-old need hundreds of thousands of dollars of care in the last couple of days of their lives. We better spend that money in providing better science education to our kids and retrainig the work force.
Health care is another bubble waiting to deflate. Health care like homes are necessities but they don't build strong nations or economies.
Last couple of decades, America has put the cart before the horse in most critical areas. We are paying for such thoughtless planning.
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Wez
May 10 05:03 PM
I agree with most of this article, but there seems a glaring hole in the analysis. Leverage. Most of the return the average home owner experiences is from buying an asset with a moderate appreciation rate (forget the years leading up to the bubble bursting), with basically a 3 - 20% down payment. Even modest price appreciation translates to a very high return on that down payment.
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Henry L
May 10 05:05 PM
Tell it like it is! I love it when a smart fella can be logical, rational, and just plain on the money - then acknowledge that the pols won't dare buy it.
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zenalgorithm
May 10 06:13 PM
Asset values all over the world are over-priced. Unreal county and city property development taxes are preventing many poor people from owning a house.
Productivity depends a lot on the ability to own property - it's what mainly separates Communism from Capitalism.
Poor people are losing the American dream. There needs to be a massive shake-up in wealth to re-establish this dream.
Now billionaires are cornering the markets on commodities...resorting to propaganda and hysteria which promote the ruse that resources are almost depleted like Goldman Sach's recent oil "super-spike" pump.
Too much manipulation in the markets leads to unrealistic asset valuations - bubbles.
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AlexS
May 10 06:33 PM
My Website
zenalgorithm: "There needs to be a massive shake-up in wealth."
OK, zenalgorithm. Hand over your wealth.
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LKSteve
May 10 07:05 PM
My Website
The housing bubble is not just an American problem, although the mania of the last few years started in the U.S. The problem has spread globally. Easy money pumped up the bubble & millions of people piled in. Those in early made a bundle as values ballooned. The suckers, the last ones in had the door slammed on them & are now up the creek without a paddle. The financial system is the culprit. Government bailouts & sovereign-fund liquidity injections only delay the day of reckoning & pump up inflation. My suggestion: Let the banks that fuelled this monster sink. This will restore the value of financial prudence. As things stand the global financial system has become blatantly corrupt & self-serving & every time it makes a cock-up it gets a slap on the hand & a bailout. The author’s wry comment about gun-shy politicians is on the money. We may as well wait for the cows to come home as expect them to make unpopular decisions.
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zenalgorithm
May 10 07:25 PM
AlexS,
I am one of the poor...:)
Something which would make homes more affordable is to keep property taxes low for your primary residence. All other properties one owns are considered investment properties and taxed twice as much as a primary residence. This would hinder investors from hoarding and monopolizing property.
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Argyle
May 10 08:17 PM
Except that double taxation of investment properties would also have the unpleasant side effect of driving up rents. Making it even less likely that the lower middle class would ever be able to afford traditional financing.
Interest rate increases are the medicine that nobody wants to swallow. Just how far are prices likely to fall when the real cost of money is so darn cheap?
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fatcat
May 10 08:42 PM
Here's the deal..we're all fuc*** if I'm reading it right. Markets have to clear themselves out...
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VP of Common Sense
May 10 08:43 PM
Is anyone else thinking:
maybe the fed isn't fighting inflation in order to inflate our way out of the housing crash?
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icandoitdon
May 10 08:44 PM
good article and thoughtful comments by all.
i have an observation regarding what appears to be a near-universal view that our politicians are not only not serving us well but they are actually harming the country. it is this:
it is not just individual politicians who have failed...it is democracy itself. we have both a near-complete polarization between the major parties and a universal unwillingness on the part of elected officials in either to act on behalf of the public interest as opposed to their self-interest, which invariably is reelection.
to use an old but applicable cliche: nero fiddles while rome burns.
tell me...what has democracy done for us lately?
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bruin532
May 10 10:14 PM
Dont blame democracy blame the oil men in the white house Bush and Chaney. The oil energy policy the Serria Club and the courts were never able to see. The Iraq war waged under false pretenses and benifited the halaburtin and military establishment. The tax cuts were 90% of the benifit went to the top 10%. The bankrupting of the treasury to cripple the social programs and the list goes on. Greenspans easy money policy pre 2004 election to tilt the election to Bush and the relaxation of the lending standards caused the housing bubble .
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andrewh10
May 10 10:47 PM
My Website
Isn’t it frustrating listening to all the whining by homeowners that prices have declined a little? I sure am sick of it, anyone who thought that housing was an asset class which never declined had a bad case of wishful thinking. It will take time for the US housing market to bottom these things do not happen overnight since prices appreciated so much over a short period of time. Most real estate analysts agree that the general the US retail housing market has about 10-30% further to drop indicating some kind of bottom in the latter stage of 2008 or early 2009. However, if certain areas are not correcting it could delay the whole process to 2010 and beyond depending on how the slowdown/recession plays out. The housing bubble was caused by low interest rates and massive leverage which was the result of Mr. Greenspan so called legacy interest rate policy. Ben Bernanke, another self proclaimed genius is aiding another bubble in commodities by lowering the heck out of interest rates again. The FED has sold out to politics many years ago and it’s a shame how they are bailing out the banking sector. The FED is the perpetrator of all these modern day financial bubbles. We need to let the financial markets rule themselves by deciding which firms should go bust.
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bruin532
May 10 10:58 PM
The Fed is the banks and its primary function is to protect the banks. Inflation be damed protect the banking bottom line!
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ValueHunter
May 10 11:31 PM
Democracy is not failing because of Chaney or Halliburton or Exxon Mobil. Democracy is failing because of us. The American people are incredibly ignorant of economics, politics, geography, science and every other subject on earth. I'd wager more than 50% don't even know who Dick Chaney is, let alone how they are getting bilked. Unfortunately, the old adage about democracy being the worse form of government except for everything else is still true. But don't worry, one day the crisis will be so big that some demagogue will establish some form of dictatorship.
As far as red herrings like "o.k. if you are so liberal give up your wealth", nobody advocates that outside of Cuba and North Korea. All that is required is to stop the corruption, the robbing the middle class and the poor in ways both legal and illegal. But hey, most of us here will do fine and will relocate to China, Brazil or Russia with our investments once the U.S. is in ashes, so as long as you don't give a damn about that, all is fine.
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No Guru
May 11 01:53 AM
I agree property taxes on your first home should be minimal and massive on your second property or atleast non tax exempt even as an expense.
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curious cat
May 11 02:38 AM
My Website
investing in homes, even second homes, was not the problem. we allowed people to borrow, who had no way to pay the money back, unless property values went up. of course, that is the same thing that happened in japan, the same thing that happened in the roaring twenties too. if the bankers tighten too much, too fast, there will be no buyers and all their previous borrowers will be swept into a black hole.
if credit flows at a reasonable rate, there will be enough buyers to form a cushion. this is why the fed had to loosen again. they realized the crash would be deep and hard otherwise. this is also why they cannot raise rates quickly. they can attempt to look vigilant against inflation, pretend that inflation will not be a problem, in the hope that consumers and investors will believe them and stop worrying about inflation. as a result, the global forces of deflation may have a chance to counter any spikes.
if our corporations bring in more dollars and we begin to produce cheaper goods and services to send abroad, our dollars will eventually get stronger and we will live in peace and harmony.
either that, or we'll have to go into a downward spiral of lower prices and lower income and lower status at home and abroad until we just hand over the keys to the canadians and the mexicans in exchange for oil. what the heck, maybe the indians will let us make one last bet in their casinos.
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Rhett
May 11 09:32 AM
Seventh Sense, you're on the mark. Your comment is worth re-reading and saving.
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CaptBob
May 11 10:05 AM
The only meddling Govt. should do in ANY segment of the economy is regulation, oversight and prosecution of the speculating meddlers in the private sector, no matter the size of their campaign contributions--(bribes-influence buying).
And NOT under any conditions be bailing them out, and letting them keep the gains to reinvest in their next scheme.
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Jay Jay
May 11 11:47 AM
Its been so long, most people forget that interest rates aren't supposed to be set by a group appointed by politicians, they're supposed to be set by the market. When people have lots of savings, interest rates are low, when people are short of savings, interest rates are high. What we have today is the unnatural situation of low savings, and excessive debt, AND low interest rates. The restorative force has been broken by the short term outlook of politicians.
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alphameister
May 11 11:56 AM
Kudos to Kevin Price and to those whose comments reflect a similar understanding of the free market and free society. Democracy might work if we limited the vote to those who do not depend on a menu of government "entitlements" for their subsistence. The founding fathers saw the dangers and gave us a republic rather than a democracy so that citizens could "vote with their feet" in the event that any state began to enact abusive laws, such as the redistributionist taxes born of envy. Add in the institutionalized miseducation provided by a near-monopolistic public education system and it is not surprising that the greatest experiment in the history of the world has lost its philosophical moorings and is in its twilight years.
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Tom Lindmark
May 11 12:29 PM
My Website
Good article. I've advocated much the same for some time- blog.metro-real-estate.com/?p=37 .
Not sure I agree with your conclusions about the returns from investing in residential real estate. Was your analysis based on leveraged or unleveraged returns? Makes a difference.
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alphameister
May 11 12:47 PM
The difference between leveraged and unleveraged returns SHOULD BE a distinction without a difference. In a rational market, projected average annual housing appreciation will be appropriately reflected in the mortgage interest rate. Housing is a deteriorating asset, requiring considerable upkeep expense. In a well-ordered market, houses are built for people who can afford to live in them and not for investors and speculators.
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Simple Simon
May 11 12:54 PM
My Website
Certainly there are some families that were undeservedly rug yanked out from under-but then so were those who happened to be in the path of a hurricane, tornado, flood, or forest fire,crop failure, ad infinitum. Gov't has to be seen trying to sweep back the tide with a broom, sort of like Mickey in Fantasia dealing with a form of broom leveraging. I remember hearing a still small voice some years ago cautioning that our economy was riding on equity loans. The rains came and the dam burst. I personally don't think the disasters are over. Gov't can't compel everyone to stop driving up the cost of energy with their shifting of capital to commodities, we probably find ourselves wistfully wishing for something like that. A return to simplifying our lives, and downscaling our "need" for $750K homes, and vehicles that get less gas mileage than city buses..so we can ride around in behemoths all by our haughty selves. I agree that the housing market should be allowed to correct, and correct some more. A reorientation to integrity and restraint is facing us all, speaking of redescovering our 'moorings'.
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gordon
May 11 01:50 PM
OK- addressing your points:
**LESS LEVERAGE- The Fed/Treasury is trying to reflate leverage with M3 money supply now running 18%, the window's for broker-dealers to exploit.
**MORE AFFORDABILTY- The gov't is trying to arrest falling house prices with massive proposals passed by the House.
**HIGHER SAVINGS RATES- Prudent savers are punished with below inflation returns, all engineered to move money into stocks. Money funds subsidized to prevent "breaking the buck" is hardly safe anymore.
** MORE DISCRETIONARY INCOME- Resulting inflation w/ below inflation interest rates/ plummeting dollar means food/fuel wipes out any excess spending.
** MORE PRODUCTIVITY- The recent GDP/Unemployment stats show more workers now on part-time (and temps), marginally boosting the productivity. The increases in productivity since Bush took office NEVER translated into higher (real) wages like other economic "expansions". The anti-worker media still refers to wage gains as the evil culprit for business and the reason for inflation. I call this what it is- a conspiracy against the working class and organized labor.
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mojotronic
May 11 05:37 PM
As far as the housing market goes, the war on the middle class is being waged from both the right and the left, and the entire real estate policy of the Federal government needs to be reexamined from top to bottom. Entire cities are being destroyed by the cancer of Section 8--which is in fact corporate welfare for slum landlords. It's not a racial issue. Working and middle class families of all races are deprived of life quality and lose property value when too many Section 8 tenants invade their neighborhoods.
When mayors attempt to put reasonable restraints on the number of homes in any area that can be Section 8'ed, the Feds threaten to pull their Federal funds. Meanwhile Federal laws override state eviction laws making it extremely difficult to evict problem tenants, but don't reimburse landlords for damages done to property.
While the housing market was booming in upscale areas, Section 8 landlords were amassing huge portfolios of properties by renting to lowlife tenants who scared out older residents, driving property prices lower in those middle class neighborhoods, allowing the landlords to scoop them up without limitations. Horror stories abound about the activities of many Section 8 tenants, but like all slum landlords, the Section 8 landlords are only concerned about the government checks pouring into their mailboxes, which they use to bankroll more properties.
The combination of unrestrained acquisition, neglectful management and inability to discipline tenants means neighborhoods that were healthy and stable for half-a-century or longer have devolved in less than a decade into burned-out, half-occupied slums.
Unfortunately this is one problem that neither the Democrats nor the Republicans will ever address, so inner city neighborhoods will continue to be rotating slums, destined for the wrecking ball and eventual reclamation by tract housing developers (very far into the future). So even the most visionary mayor attempting to rebuild a blighted city will have his hands tied by the Feds.
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curious cat
May 11 07:15 PM
My Website
businesses in poor neighborhoods should be subsidized. they should not be taxed. they risk being robbed, beaten and killed and have to raise their prices to compensate for these risks. eventually, most good businesses leave and the public housing problem gets worse when business abandons an area.
rather than tax them, we should merely require that they hire local residents and make it worth the risks they take for being there with credits and subsidies. this would help residents buy cheaper necessities, recognize that business is not trying to gouge them, and give local residents opportunities to escape their environment through job placements and provide role models other than drug users, sellers and pimps. society would benefit on many levels.
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A-State9099
May 11 10:05 PM
Oh how ironic (if it weren't so sad it would be funny) those of you who bemoan the current state of our political system and don't even know that the VP's name is spelled C-h-e-n-e-y, not C-h-a-n-e-y.
As someone else said, the founding fathers intended this country to be a constitutionally limited republic, not a democracy. Democracies are actually very dangerous things. As a wise man once said, 'Democracy is like to foxes and a chicken voting on what's for dinner'. As each bubble inflates then implodes causing more government intervention, less constitutionally limited republic and more democracy is exactly what we're getting.
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Dimmerdave
May 12 08:04 AM
A-State9099 - Are you kidding? You say with each government intervention we are getting more democracy? Under the Bush administration? I don't think so.
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John G
May 12 08:52 AM
My Website
$3,000 per American worker - that is what this bill will cost; all to transfer money from the prudent to the imprudent. One of the greatest thefts in American history!
Have your say! Add your comment:
Do you like cats? If so:
Warning: I hope you don't like cats as much as I do, because you'll be browsing through these for a LONG time if you do.
http://www.fotothing.com/tag/cat/
Interesting.
Nooooooooooooo!