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Dow jumps another 300 after 936-point gain Monday

2008-10-14T07:12:00.000-07:00

Tuesday October 14, 9:54 am ET
Dow industrials jump another 300 points today after 936-point gain yesterday
NEW YORK (AP) -- The Dow Jones industrial average jumped more than 300 points in early trading today on top of yesterday's historic 936-point gain. Wall Street surged again today as investors reacted enthusiastically to the U.S. government's plans to spend $250 billion to buy stock in private banks.
In the first half-hour of trading, the Dow Jones industrial average rose 295.73, or 3.15 percent, to 9,683.34 after jumping more than 377 points in the early going.
Broader stock indicators also rose. The Standard & Poor's 500 index rose 40.69, or 4.06 percent, to 1,044.04 and the Nasdaq composite index rose 42.90, or 2.33 percent, to 1,877.15.
Investors had snapped up stocks Monday in anticipation of the government's plan. President Bush said Tuesday the government will use a portion of the $700 billion bailout to inject capital into the nation's major banks, which have been slammed by souring mortgage investments. The move follows a similar one announced Monday by European governments to invest about $2 trillion in their own troubled banks.
Investors are hoping extraordinary steps by government officials will help resuscitate stagnant credit markets.
The revised bailout plan differs from the original in that it aims to recapitalize banks, not just buy the troubled assets off their books at prices that could leave the banks with losses.
"This begins to penetrate the core of the problem," said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc.
But, he said, "there will be a point in time where the euphoria of the bailout plan begins to wear off and the market begins to face reality. And that reality is likely to be a sour earnings season, and that the economy is in recession."
While the markets are enjoying a big rebound, stock trading may see ongoing volatility in the weeks and months ahead. The Dow remains 33.7 percent below its Oct. 9, 2007 record close of 14,164.53, and could fluctuate around these levels for some time as investors wait for signs of stabilization in the slumping housing market and deteriorating job market.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com

Government moves again to unclog credit lines

2008-10-14T07:10:00.000-07:00

Tuesday October 14, 10:01 am ET By Martin Crutsinger, AP Economics Writer
Administration buying some bank shares, raising insurance coverage, to steady faltering market
WASHINGTON (AP) -- President Bush on Tuesday announced a $250 billion plan by the government to directly buy shares in the nation's leading banks, saying the drastic steps were "not intended to take over the free market but to preserve it."
Nine major banks will participate initially including all of the country's largest institutions, he announced, in a move that sent stocks soaring on Wall Street.
Some of the nation's largest banks had to be pressured to participate by Treasury Secretary Henry Paulson, who wanted healthy institutions that did not necessarily need capital from the government to go first as a way of removing any stigma that might be associated with banks getting bailouts.
"We regret having to take these actions," Paulson said. "Today's actions are not what we ever wanted to do -- but today's actions are what we must do to restore confidence to our financial system."
It was the latest in a long series of moves taken by the administration and the Federal Reserve over the past several weeks to prop up a weakening financial industry. The economic picture in the United States had been darkening for months, but the slump took on new urgency -- and had greater global repercussions -- amid record-setting selloffs on Wall Street and enactment of a $700 billion bailout bill.
Under the new multifaceted stabilization program described Tuesday, the government will initially buy stocks in nine major U.S. banks. When financial markets stabilize and recover, the banks are expected to buy the stock back from the government, Bush said in brief remarks from the White House Rose Garden.
"These efforts are designed to directly benefit the American people by stabilizing the financial system and helping the economy recover," he said.
Paulson told a Treasury Department news conference that the aggressive government intervention was "what we must do to restore confidence in our financial system."
The Federal Reserve, meanwhile, announced that it will begin buying vast amounts of short-term debt on Oct. 27 -- its latest effort to break through a credit clog. The Fed is invoking Depression-era emergency powers to buy commercial paper -- a crucial short-term funding that many companies rely on to pay their workers and buy supplies. Last week the Fed said it intended to take the action but didn't specify when.
Fed Chairman Ben Bernanke welcomed all the new steps and said he believes they will help ease problems plaguing financial markets and threatening the economy. However, he also made clear that policymakers would continue to take actions as needed to battle the crisis.
"Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable set backs," he said. "But we will not stand down until we have achieved our goals of repairing and reforming our financial system and thereby restoring prosperity to our economy."
"The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it," Paulson said, meaning that they will use the money to bolster lending to each other and to their customers.
"Government owning a stake in any private U.S. company is objectionable to most Americans -- me included," he added. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."
Said Bernanke: "We will not stand down until we have achieved our goals of repairing and reforming our financial system and thereby restoring prosperity to our economy."
The move, in effect a partial nationalization of the banking system, does put the United States in the awkward position of owning shares in institutions it also regulates. The shares purchased by the government are expected to be nonvoting ones.
"The government's role will be limited and temporary," Bush pledged. "These measures are not intended to take over the free market but to preserve it. He said these steps and other related actions echoed similar bold moves made overseas in an effort to prevent a global recession. Bush said that by restoring confidence in the system, the hope is to "return our economy back to the road of growth and prosperity."
He said that the efforts to rescue the nation's battered financial sector was a short-term move to help banks to be able to begin lending again.
Executives of the country's biggest banks were summoned to a remarkable meeting at the Treasury Department on Monday to be briefed on the plan. Paulson basically told the bank CEOs that they had to accept the government stock purchases for the good of the U.S. economy.
The administration plans to spend $250 billion this year on the stock purchases and the president was to certify that another $100 billion would be needed. That would leave $350 billion of the $700 billion program, presumably to be spent by the next president.
The action represents a remarkable turnaround for a rescue program that was already the largest bailout in U.S. history. As the plan sped through Congress, the administration said the money was needed to purchase bad mortgage-related assets that are weighing on the books of financial institutions, never mentioning direct stock purchases.
However, as the financial crisis gained new intensity last week, sending U.S. stocks down by a record amount, the administration decided to shift focus and adopt a bolder program modeled more along the lines of bank rescue efforts being put together in Britain and other European countries.
Tuesday morning's Wall Street advance took the Dow Jones industrials up more than 300 points and followed the Dow's historic 936-point jump Monday, when investors were buying in anticipation of the government's plan.
After the purchase of preferred stock in nine large banks, the new program is expected to be expanded to many others. Among the initial banks participating will be all of the country's largest institutions, including Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp. and Morgan Stanley, said one official, with each institution expected to receive billions of dollars in return for the sale to the government of preferred shares.
The advantage to the taxpayer is that if the rescue plan works, then the shares can be sold for more than the government initially paid, providing a profit on the transaction.
At a briefing, Treasury officials said that the first purchases of stock from the nine major banks will begin within days and will total $125 billion. The government expects to spend the entire $250 billion slated for the bank stock purchase program by the end of the year.
In addition to the stock purchases, the Federal Deposit Insurance Corp. will temporarily provide insurance for loans between banks, charging the banks a premium for doing so.
This FDIC program would take the form of providing insurance for new "senior preferred" debt that one bank would lend to another. This debt would be insured by the FDIC for three years, helping to unlock bank-to-bank lending, which has fallen dramatically because of fears about repayment in the face of billions of dollars of bank losses because of bad loans, primarily in mortgages.
The FDIC will also remove temporarily the current $250,000 limit on FDIC insurance on bank deposits for non-interest-bearing accounts. This primarily would benefit businesses who use non-interest-bearing accounts to run their companies. That money now would be insured, removing the need for companies to juggle funds among multiple bank accounts to stay under the $250,000 limit.
Congress, as part of the bailout bill, temporarily boosted the deposit insurance cap from $100,000 to $250,000, an action that will not be affected by the new program.
The $700 billion rescue program will continue to feature the purchase by the government of banks' bad assets, but the administration decided to place greater emphasis on the stock purchase program after doubts were raised about how long it might take to get the asset purchase program up and running.
Democrats in Congress, while supportive of Paulson's desire to expand the program, complained Monday that not enough strings were being attached, such as restricting excessive compensation for Wall Street executives who raked in millions of dollars in bonuses by pursuing risky investment strategies that now have helped push the U.S. financial system to the brink.
Paulson said companies which sell stock to the government will be required to accept restrictions on executive compensation including a ban on golden parachutes for the period in which Treasury holds the banks' stock.
Worried about the slumping U.S. economy only three weeks from the elections, House Republicans and Democrats on Monday pushed for fresh action to prevent a serious downturn. Democrats scheduled hearings to consider a postelection stimulus package that could cost as much as $150 billion. Republicans called for more tax cuts and energy exploration.
In a campaign speech in Ohio, Democratic presidential nominee Barack Obama proposed a 90-day moratorium on home foreclosures at some banks and a two-year tax break for businesses that create new jobs. His Republican opponent, John McCain, promised a change in direction from the Bush administration's economic policies.

Bush says anxiety feeding market instability

2008-10-10T08:32:00.000-07:00

Friday October 10, 11:26 am ET By Terence Hunt, AP White House Correspondent
President Bush says public and investor anxiety making credit crisis more severe
WASHINGTON (AP) -- President Bush said Friday that the government's financial rescue plan was aggressive enough and big enough to work, but would take time to fully kick in. "We can solve this crisis and we will," he said in brief remarks from the White House Rose Garden.
Bush spoke as leaders of the world's top economies gathered in Washington amid frozen credit markets, panic selling in stock markets and a looming global recession.
The president noted that major Western countries were working together in an attempt to stabilize markets and end the spreading panic, including coordinated cuts in interest rates.
"Through these efforts, the world is sending an unmistakable signal. We're in this together and we'll come through this together," Bush said.
Finance ministers and central bankers from the Group of Seven -- the United States, Japan, Britain, Germany, France Italy and Canada -- were here for a weekend meeting. Bush plans to meet with the leaders on Saturday.
Bush said he understood how Americans could be concerned about their economic future. "That anxiety can feed anxiety and that can make it hard to see all that's being done to solve the problem," he said.
But despite a relentless sell-off that has seen the Dow Jones industrials plunge 20 percent in the past seven trading days, Bush said, "We are a prosperous nation with immense resources and a wide range of tools at our disposal."
The president said the new $700 billion rescue plan that he signed into law a week ago authorizes the Treasury Department to use a variety of measures to rebuild their balance sheets including "purchasing equity of financial institutions."
It was the first time the president has mentioned suggestions that the government buy shares of banks, although it has been mentioned by other administration officials.
Since the bailout package was signed into law, the conversation about how it will be used has shifted from taxpayers buying troubled mortgages to taxpayers buying troubled banks. Or at least pieces of them.
Such a move would amount to a partial nationalization of the U.S. banking industry, a move once considered unthinkable.
The government is authorized under the law to buy "troubled assets."
Those assets include mortgages, but according to the law, they may also include "any other financial instrument" that is "necessary to promote financial market stability ... ."
It is the government's position that this authority extends to bank stocks.
"The plan we are executing is aggressive. It is the right plan. It will take time to have its full impact. It is flexible enough to adapt as the situation changes. And it is big enough to work," Bush said.
He also noted that the Federal Reserve has injected hundreds of billions into the system and with other central banks has made interest-rate cuts that should help thaw frozen credit markets and enable loans to flow again.
Government insurance on bank and credit union deposit accounts has been raised to $250,000 and the Treasury is offering insurance for the first time for money-market funds, he added.
"The federal government has a comprehensive strategy and the tools necessary to address the challenges in our economy," Bush said.
While he sought to reassure Americans that the government is doing all it can, Bush also acknowledged mounting worry among people about their retirement and investment accounts.
Bush said his administration had launched initiatives that "have helped more than 2 million Americans stay in their homes."
He also noted "rigorous enforcement" steps taken by the Securities and Exchange Commission to make sure that some investors don't "take advantage of the crisis to illegally manipulate the stock market."
Stock market volatility continued, with the Dow Jones industrials falling nearly 700 points soon after trading began, regaining all of that deficit to show an advance and then turning lower again.
"Over the past few days," Bush said, "we have witnessed a startling drop in the stock market, much of it driven by uncertainty and fear. This has been a deeply unsettling period for the American people."

Japan to propose bailout fund at G-7

2008-10-10T08:21:00.000-07:00

Friday October 10, 3:33 am ET By Yuri Kageyama, AP Business Writer
Japan to propose international bailout fund at G-7 meeting
TOKYO (AP) -- Japan is set to propose to the world's leading industrialized nations that a joint fund be set up to give emergency loans to nations hit by the growing financial crisis, the finance minister said Friday.
Japanese Finance Minister Shoichi Nakagawa said he is set to make the proposal at the Group of Seven meeting of finance and central bank officials that he is attending in Washington.
"Japan would like to see what it can do to work with other countries to ensure ample capital supply," he said on nationally televised NHK news.
He did not give details of the plan. But he said Japan's experience in dealing with its bad debt crisis in the 1990s may offer lessons for the other G-7 nations.
He said he hopes to tell others how Japan injected public money into banks at that time to bolster their capital after the so-called bubble economy of soaring land and stock prices burst and banks got stuck with mountains of bad debt.
His comments come at a time when Washington, which is implementing a $700 billion bailout, mainly to buy bad mortgages and mortgage-related securities from banks and financial institutions, may also need to inject capital in them and take partial ownership.
Britain is moving to pour cash into troubled banks in exchange for stakes in them -- a partial nationalization. In Iceland, the government now has control of all three of the country's major banks as it struggles to contain the troubles there.
Japan's proposal will call for setting up a cooperative scheme through the International Monetary Fund to dole out emergency lending to nations whose financial systems run out of cash, The Nikkei, Japan's top business daily, reported in its Friday's editions, without citing sources.
China and Middle Eastern nations will also be asked to contribute money to the fund, the report said, in an effort to prevent the further spread of the global fallout from the U.S. credit crisis.

U.S.News & World Report

2008-09-29T20:45:00.000-07:00

Monday September 29, 6:07 pm ET By Rick Newman
Bailout, Take II: What the Feds Do Next
OK, so that didn't work.
After a bunch of all-nighters in Washington and some premature back-slapping, we're right back where we were a couple of weeks ago, after Lehman Brothers declared bankruptcy and the government lent AIG $85 billion. There's no one-size-fits-all bailout plan, after all. That $700 billion in taxpayer money remains under lock and key. Glum investors are now the ones bailing out, fleeing stocks and bonds and seeking safer ground.
But there are still some levers the government can pull. Working through the mess just won't be as orderly or predictable as it would if there were a single plan and a big pot of money. Here's what's likely to happen next:
Another try at a big bailout plan. A lot of those constituents who have been calling Congress to complain about rescuing fat cats are going to rethink their indignation as they watch the stock markets--and their own portfolios--sink. Lawmakers who voted against the bailout plan are going to have to explain why they're letting the markets collapse. The more uncomfortable voters get, the more likely Congress will be to pass some kind of sweeping relief plan. This is far from over.
More piecemeal bailouts. Before the big $700 billion bailout plan even existed, the Fed and the Treasury Department were already patching leaks in the financial system--one trouble spot at a time. The idea behind an umbrella bailout plan was to overhaul the whole system, establishing public standards and treating every ailing company more or less the same, before a bunch of leaks became a gusher. That would have eliminated the guesswork over whether a struggling company meets the criteria for a rescue--like AIG--or falls short, like Lehman Brothers.
Now we're back to guessing. The feds still have the wherewithal to lend money, buy bad assets, or take other measures to keep ailing companies afloat. What they don't have is a single plan that applies to all companies and the authority to soak up vast amounts of bad assets. So those weekend meetings at the New York Fed, with supplicant CEOs pleading for help, are likely to continue.
More failed companies. Duke University finance Prof. Campbell Harvey predicts there could be 750 to 1,000 bank failures over the next six months because of billions in bad assets stemming from the housing meltdown. Scarce credit also threatens other types of companies that are already struggling and desperately need capital, such as the Detroit automakers and some of the airlines. The government will be able to deal with some of those companies one at a time, but without a comprehensive plan, others will fall through the cracks.
Manic markets. Investors were hoping that a big bailout plan would offer some predictability about how the government will deal with struggling companies. Their crystal ball is once again very dark. That means wild swings in stock prices as big investors try to get out of the market ahead of bad news, and get back in if it looks like the feds will ride to the rescue. One of the most volatile sectors is likely to be regional bank stocks as investors worry that banks like Sovereign Bancorp and National City might be the next to fail.
Patchwork regulation. There's already a system in place for dealing with failed banks--led by the FDIC--but that may not be enough to handle the damage that's unfolding. Even without a big bailout bill, Congress may have to set up a new agency to deal with dozens or hundreds of bank failures, one similar to the Resolution Trust Corp. formed in the late 1980s. We could see a whole slew of lesser regulations, too, like restrictions on certain lending practices and higher federal coverage limits on bank deposits.
Continued government intervention. The Federal Reserve continues to pump huge sums of money into the global banking system in a desperate effort to prompt banks to loosen their grip on loans to companies, consumers, and one another. For now, that seems to be having little effect as banks absorb the startling news from Washington and hunker down. That may lead the Fed to pump out even more money and take other important steps, like cutting interest rates. Sooner or later, that will probably help loosen things up. Until then, however, it's apparently up to the markets to fix themselves. Plan accordingly.

House rejects $700B bailout in stunning defeat

2008-09-29T19:55:00.000-07:00

Monday September 29, 10:06 pm ET By Julie Hirschfeld Davis, Associated Press Writer
House rejects $700B bailout in stunning defeat, driving stocks down; Treasury vows more work
WASHINGTON (AP) -- In a vote that shook the government, Wall Street and markets around the world, the House on Monday defeated a $700 billion emergency rescue for the nation's financial system, leaving both parties' lawmakers and the Bush administration scrambling to pick up the pieces. Dismayed investors sent the Dow Jones industrials plunging 777 points, the most ever for a single day.
"We need to put something back together that works," a grim-faced Treasury Secretary Henry Paulson said after he and Federal Reserve Chairman Ben Bernanke joined in an emergency strategy session at the White House. On Capitol Hill, Democratic leaders said the House would reconvene Thursday, leaving open the possibility that it could salvage a reworked version.
Senate leaders showed no inclination to try to bring the measure to a vote before they could determine its fate in the House. President Bush, meanwhile, was scheduled to make a statement on the rescue plan Tuesday morning, the White House said.
All sides agreed the effort to bolster beleaguered financial markets, potentially the biggest government intervention since the Great Depression, could not be abandoned.
But in a remarkable display on Monday, a majority of House members slapped aside the best version their leaders and the administration had been able to come up with, bucking presidential speeches, pleading visits from Paulson and Federal Reserve Chairman Ben Bernanke and urgent warnings that the economy could nosedive without the legislation.
In the face of thousands of phone calls and e-mails fiercely opposing the measure, many lawmakers were not willing to take the political risk of voting for it just five weeks before the elections.
The bill went down, 228-205.
The House Web site was overwhelmed as millions of people sought information about the measure through the day.
The legislation the administration promoted would have allowed the government to buy bad mortgages and other sour assets held by troubled banks and other financial institutions. Getting those debts off their books should bolster those companies' balance sheets, making them more inclined to lend and ease one of the biggest choke points in a national credit crisis. If the plan worked, the thinking went, it would help lift a major weight off the national economy, which is already sputtering.
Hoping to pick up enough GOP votes for the next try, Republicans floated several ideas. One would double the $100,000 ceiling on federal deposit insurance. Another would end rules that require companies to devalue assets on their books to reflect the price they could get in the market.
In the meantime, Paulson said he would work with other regulators "to use all the tools available to protect our financial system and our economy."
"Our tool kit is substantial but insufficient," he said, indicating the government intended to continue piecemeal fixes while pressing Congress for broader action.
Stocks started plummeting on Wall Street even before Monday's vote was over, as traders watched the rescue measure going down on television. Meanwhile, lawmakers were watching them back.
As a digital screen in the House chamber recorded a cascade of "no" votes against the bailout, Democratic Rep. Joe Crowley of New York shouted news of the falling Dow Jones industrials. "Six hundred points!" he yelled, jabbing his thumb downward.
The final stock carnage far surpassed the 684-point drop on the first trading day after the Sept. 11, 2001, terror attacks.
In the House, "no" votes came from both the Democratic and Republican sides of the aisle. More than two-thirds of Republicans and 40 percent of Democrats opposed the bill. Several Democrats in close election fights waited until the last moment, then went against the bill as it became clear the vast majority of Republicans were opposing it.
Thirteen of the 19 most vulnerable Republicans and Democrats in an Associated Press analysis voted against the bill despite the pleas from Bush and their party leaders to pass it.
In all, 65 Republicans joined 140 Democrats in voting "yes," while 133 Republicans and 95 Democrats voted "no."
The overriding question was what to do next.
"The legislation may have failed; the crisis is still with us," said House Speaker Nancy Pelosi, D-Calif., in a news conference after the defeat. "What happened today cannot stand."
Republican leader John Boehner, R-Ohio, the minority leader, said he and other Republicans were pained to back the measure, but in light of the potential consequences for the economy and all Americans, "We need to renew our efforts to find a solution that Congress can support."
Sen. Chris Dodd, D-Conn., said there was scant time to reopen legislation that was the product of hard-fought bipartisan negotiations.
"What happened today was not a failure of a bill, it was a failure of will," said Dodd, the Banking Committee chairman. "Our hope is that cooler heads will prevail, people will think about what they did today and recognize that this is not just scare tactics -- it's reality."
A brutal round of partisan finger-pointing followed the vote.
Republicans blamed Pelosi's scathing speech near the close of the debate -- which assailed Bush's economic policies and a "right-wing ideology of anything goes, no supervision, no discipline, no regulation" of financial markets -- for the defeat. It was not much different from her usual tough words against the president and his party.
"We could have gotten there today had it not been for the partisan speech that the speaker gave on the floor of the House," Boehner said.
Rep. Roy Blunt, R-Mo., the whip, estimated that Pelosi's speech changed the minds of a dozen Republicans who might otherwise have supported the plan.
That amounted to an appalling accusation by Republicans against Republicans, said Rep. Barney Frank, D-Mass., chairman of the Financial Services Committee: "Because somebody hurt their feelings, they decide to punish the country."
More than a repudiation of Democrats, Frank said, Republicans' refusal to vote for the bailout was a rejection of their own president.
Indeed, many GOP lawmakers spurned Bush's urgent calls for action. "We have a gun to our head," said Rep. Ginny Brown-Waite, R-Fla., who opposed the bill. "This isn't legislation -- it's extortion."
The two men campaigning to replace Bush watched the situation closely -- from afar -- and demanded action.
In Iowa, Republican John McCain said his rival Barack Obama and congressional Democrats "infused unnecessary partisanship into the process. Now is not the time to fix the blame; it's time to fix the problem."
Obama said, "Democrats, Republicans, step up to the plate, get it done."
Lawmakers were under extraordinary pressure from powerful outside groups, which gave notice they considered the legislation a "key vote" -- one they would consider when rating members of Congress.
The U.S. Chamber of Commerce said opponents of the bailout would pay for their stance.
"Make no mistake: When the aftermath of congressional inaction becomes clear, Americans will not tolerate those who stood by and let the calamity happen," said R. Bruce Josten, the Chamber's top lobbyist, in a letter to members.
The conservative Club for Growth made a similar threat to supporters of the bailout.
"We're all worried about losing our jobs," Rep. Paul Ryan, R-Wis., declared in an impassioned speech in support of the bill before the vote. "Most of us say, 'I want this thing to pass, but I want you to vote for it -- not me.'"
"We're in this moment, and if we fail to do the right thing, Heaven help us," he said.
If Congress doesn't come around on a bailout, more pressure would fall on the Federal Reserve.
The Fed, which has been providing billions in short-term loans to squeezed banks to help them overcome credit stresses, could keep expanding those loans to encourage lending. And, it could keep working with other central banks to inject billions into financial markets overseas.
It also has the power to expand emergency lending to other types of companies and even to individuals if they are unable to secure adequate credit.
Associated Press writers Jeannine Aversa, Jim Abrams and Andrew Taylor contributed to this report.

Dow plummets record 777 as financial rescue fails

2008-09-29T19:37:00.000-07:00

Monday September 29, 10:08 pm ET By Tim Paradis, AP Business Writer
Dow dives 777 points, biggest single day fall ever, as House rejects financial bailout package
NEW YORK (AP) -- The failure of the bailout package in Congress literally dropped jaws on Wall Street and triggered a historic selloff -- including a terrifying decline of nearly 500 points in mere minutes as the vote took place, the closest thing to panic the stock market has seen in years.
The Dow Jones industrial average lost 777 points Monday, its biggest single-day fall ever, easily beating the 684 points it lost on the first day of trading after the Sept. 11, 2001, terrorist attacks.
As uncertainty gripped investors, the credit markets, which provide the day-to-day lending that powers business in the United States, froze up even further.
At the New York Stock Exchange, traders watched with faces tense and mouths agape as TV screens showed the House vote rejecting the Bush administration's $700 billion plan to buy up bad debt and shore up the financial industry.
Activity on the trading floor became frenetic as the "sell" orders blew in. The selling was so intense that just 162 stocks on the Big Board rose, while 3,073 dropped.
The Dow Jones Wilshire 5000 Composite Index recorded a paper loss of $1 trillion across the market for the day, a first.
The Dow industrials, which were down 210 points at 1:30 p.m. EDT, nose-dived as traders on Wall Street and investors across the country saw "no" votes piling up on live TV feeds of the House vote.
By 1:42 p.m., the decline was 292 points. Then the bottom fell out. Within five minutes, the index was down about 700 points as it became clear the bill was doomed.
"How could this have happened? Is there such a disconnect on Capitol Hill? This becomes a problem because Wall Street is very uncomfortable with uncertainty," said Gordon Charlop, managing director with Rosenblatt Securities.
"The bailout not going through sends a signal that Congress isn't willing to do their part," he added.
While investors didn't believe that the plan was a cure-all and it could take months for its effects to be felt, most market watchers believed it was at least a start toward setting the economy right and unlocking credit.
"Clearly something needs to be done, and the market dropping 400 points in 10 minutes is telling you that," said Chris Johnson, president of Johnson Research Group. "This isn't a market for the timid."
Before trading even began came word that Wachovia Corp., one of the biggest banks to struggle from rising mortgage losses, was being rescued in a buyout by Citigroup Inc.
That followed the recent forced sale of Merrill Lynch & Co. and the failure of three other huge banking companies -- Bear Stearns Cos., Washington Mutual Inc. and Lehman Brothers Holdings Inc., all of them felled by bad mortgage investments.
And it raised the question: Which banks are next, and how many? The Federal Deposit Insurance Corp. lists more than 110 banks in trouble in the second quarter, and the number has probably grown since.
Wall Street is contending with all of it against the backdrop of a credit market -- where bonds and loans are bought and sold -- that is barely functioning because of fears that anyone lending money will never be paid back.
More evidence could be found Monday in the Treasury's three-month bill, where investors were stashing money, willing to accept the tiniest of returns simply to be sure that their principal would survive. The yield on the three-month bill was 0.15 percent, down from 0.87 percent and approaching zero, a level reached last week when fear was also running high.
Analysts said the government needs to find a way to help restore confidence in the markets.
"It's probably fair to say that we are not going to see any significant stability in the credit markets or the stock market until we see some sort of rescue package passed," said Fred Dickson, director of retail research for D.A. Davidson & Co.
The bailout bill failed 228-205 in the House, and Democratic leaders said the House would reconvene Thursday in hopes of a quick vote on a revised bill.
"We need to put something back together that works," Treasury Secretary Henry Paulson said. "We need it as soon as possible."
The Dow fell 777.68 points, just shy of 7 percent, to 10,365.45, its lowest close in nearly three years. The decline also surpasses the record for the biggest decline during a trading day -- 721.56 at one point on Sept. 17, 2001, when the market reopened after 9/11.
In percentage terms, it was only the 17th-biggest decline for the Dow, far less severe than the 20-plus-percent drops seen on Black Monday in 1987 and before the Great Depression.
Broader stock indicators also plummeted. The Standard & Poor's 500 index declined 106.62, or nearly 9 percent, to 1,106.39. It was the S&P's largest-ever point drop and its biggest percentage loss since the week after the October 1987 crash.
The Nasdaq composite index fell 199.61, more than 9 percent, to 1,983.73, its third-worst percentage decline. The Russell 2000 index of smaller companies fell 47.07, or 6.7 percent, to 657.72.
A huge drop in oil prices was another sign of the economic chaos that investors fear. Light, sweet crude fell $10.52 to settle at $96.36 on the New York Mercantile Exchange as investors feared energy demand would continue to slide amid further economic weakness. And gold, where investors flock when they need a relatively secure investment, rose $23.20 to $911.70 on the Nymex.
Marc Pado, U.S. market strategist at Cantor Fitzgerald, said investors are worried about the spread of troubles beyond banks in the U.S. to Europe and other markets.
"Things are dying and breaking apart," he said.
The federal Office of Thrift Supervision, one of the government's banking regulators, indicated that the market was overreacting to the House vote and that its fears about the financial system are misplaced.
"There is an irrational financial panic taking place today, and we support and applaud the continuing efforts of Secretary Paulson and congressional leadership to restore liquidity and public confidence," John Reich, Director of the federal Office of Thrift Supervision, said in a statement.
The plan would have placed caps on pay packages of top executives that accepted help from the government, and included assurances the government would ultimately be reimbursed by the companies for any losses.
The Treasury would have been permitted to spend $250 billion to buy banks' risky assets, giving them a much-needed cash infusion. There also would be another $100 billion for use at the president's discretion and a final $350 billion if Congress signs off.
But Wall Street found further reason for worry overseas. Three European governments agreed to a $16.4 billion bailout for Fortis NV, Belgium's largest retail bank, and the British government said it was nationalizing mortgage lender Bradford & Bingley, which has a $91 billion mortgage and loan portfolio. It was the latest sign that the credit crisis has spread beyond the U.S.
Business Writers Joe Bel Bruno in New York and Christopher S. Rugaber in Washington contributed to this report.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com

Microsoft to buy back $40 billion of stock

2008-09-22T06:55:00.000-07:00

Monday September 22, 9:19 am ET
Microsoft board OKs $40 billion stock buyback plan, raises dividend
REDMOND, Wash. (AP) -- Software giant Microsoft Corp. said Monday its board approved a plan to buy back up to another $40 billion of its shares.
The program expires on Sept. 30, 2013. As of July 28, Redmond, Wash.-based Microsoft had about 9.13 billion shares outstanding, according to a regulatory filing.
The company said it has completed its previous $40 billion stock repurchase program.
Microsoft also raised its quarterly dividend to 13 cents from 11 cents. The dividend is payable Dec. 11 to shareholders of record on Nov. 20.
The company's board has also authorized debt financings of up to $6 billion. As part of this authorization, Microsoft has established a $2 billion commercial paper program. The company plans to use the proceeds for general corporate purposes, including buybacks and funding for working capital.
On Monday, Moody's Investors service assigned an "Aaa" senior unsecured debt rating to Microsoft, with a stable outlook. The ratings agency said this reflects the company's "position as the world's largest software company with a strong and defensible market position throughout its diverse core offerings."
Microsoft also said it received a "AAA" corporate credit rating from Standard & Poor's Rating Services.
Shares rose $1.22, or 4.9 percent, to $26.38 in premarket trading.

World stocks mixed on proposed US bailout

2008-09-22T06:53:00.000-07:00

Monday September 22, 7:45 am ET By Louise Watt, Associated Press Writer
World markets mixed on US bailout plan; China stock index jumps 7.8 percent
LONDON (AP) -- Global markets were mixed Monday as investors awaited more developments in the U.S. government's $700 billion plan to rescue banks from risky mortgage debt.
European markets, after edging higher in early trading, had fallen by afternoon in Europe and Wall Street futures were lower ahead of the New York opening. Asian markets had risen earlier.
Britain's FTSE 100 lost 0.39 percent to 5,290.82 by midday Monday, Germany's DAX slumped 0.30 percent to 6,170.83 and France's CAC 40 dropped 0.11 percent to 4,320.01.
"There was massive reaction on Friday, today there is an element of profit-taking and a bit of reality of people worrying about the world economy as we see the price of oil move higher again," said Stephen Pope, chief global markets strategist for Cantor Fitzgerald.
"As the week develops there should be some concrete proposals coming through," he added.
Wall Street appeared headed to a lower start. Dow Jones industrial average futures were down 78, or 0.69 percent, to 11,277. Standard & Poor's 500 index futures fell 7.30, or 0.59 percent, to 1,238.70. Nasdaq 100 index futures fell 7.00, or 0.40 percent, to 1,732.50.
In Asia, investors were more upbeat. In Japan, the Nikkei 225 index rose 1.4 percent to close at 12,090.59 points, while Hong Kong's Hang Seng Index rose 1.6 percent to 19,632.20.
In China, the Shanghai Composite Index soared 7.8 percent on hopes of a turnaround after government steps to stabilize the country's beaten down shares. Markets in Australia and Taiwan advanced strongly after their regulators issued curbs on short selling, following similar moves in the U.S., Britain and other countries. The practice, which bets on a stock's decline, has been partly blamed for driving down share prices.
Global markets had rallied Friday on news Washington was likely to enact a bailout plan, calming investors worried that losses from bad bets on mortgages could bring about the collapse of more companies, straining an already weakened financial system and global economy.
As a rough outline of the plan took shape over the weekend, the Bush administration continued to lobby lawmakers Sunday for authority to use $700 billion to buy up a mountain of bad debt at the heart of the crisis.
While the proposed bailout lifted sentiment for the time being, there were still a number of uncertainties about the plan and the general health of financial firms that could further unsettle markets in the coming days, an analyst said.
"This should stem the bleeding, but the patient is still very fragile," said Thomas Lam, a senior economist at the United Overseas Bank in Singapore. "The list of uncertainties is pretty long."
Meanwhile, cash demand showed some signs of easing as European central banks offered more liquidity to money markets.
According to the Bank of England, it offered $40 billion in a one-day tender, for which the bank said it received $26 billion in bids, but didn't indicate from how many banks.
But the European Central Bank said it received bids worth $82.1 billion for the $40 billion it offered in a one-day transaction, or more than double what it had offered.
Japan's central bank pumped another 1.5 trillion yen ($14.1 billion) into short-term money markets, the ninth injection over five straight working days.
Monday's moves come after central banks in Britain, Canada, the United States, Japan and Canada last week supplied cash to banks that had become wary of lending to one another in the aftermath of the bailout of AIG and the bankruptcy of Lehman Brothers. Banks have been increasingly reluctant to lend to each other as distrust spread throughout the financial system.
Financial stocks, battered in recent weeks, were among leaders in Asia.
Japanese banking giant Mitsubishi UFJ Financial Group Inc. shot up more than 5.2 percent, while leading Australian firm Macquarie Group Ltd. climbed 5.3 percent. In Hong Kong, Industrial & Commercial Bank of China, the country's biggest, was up 2.4 percent.
In mainland China, share prices surged on strong buying of financial shares after the government announced plans to buy shares in major state-owned banks and other measures.
After watching share prices slide for almost a year, the government moved to support the stock market last week in response to the global financial crisis triggered by problems with bad debt in the U.S.
Comments by Premier Wen Jiabao over the weekend urging support for the financial system and market stability also boosted buying sentiment, analysts said.
"According to our analysis, this could be a turning point for the market, not just a brief rebound," said Zhang Xiuqi, a strategist for Guotai Junan Securities in Shanghai. "Market sentiment is finally recovering."
The Shanghai benchmark still is down 57 percent for the year.
Elsewhere, Australia's &P/ASX 200 index jumped 4.5 percent and Taiwan's benchmark rose 2.3 percent.
In Russia, stocks inched up following big gains for all indexes last week, with the U.S. dollar-denominated RTS adding 1.6 percent.
The advances came after an another extraordinary rally on Wall Street on Friday. The Dow Jones industrials soared about 370 points, or 3.35 percent, to 11,388.44, giving the index a gain of about 780 points over two days.
U.S. stock index futures were down, though, suggesting Wall Street may open lower. The S&P 500 futures index was down 8.3 points, or 0.7 percent, to 1,237.2.
Light, sweet crude for October delivery was up $1.41 to $105.96 a barrel in electronic trading on the New York Mercantile Exchange by afternoon in Europe. The contract soared $6.67 Friday.
AP Business Writers Jeremiah Marquez in Hong Kong and Elaine Kurtenbach in Shanghai contributed to this report.

Last major investment banks change status

2008-09-22T06:51:00.000-07:00

Monday September 22, 8:41 am ET By Martin Crutsinger
Federal Reserve changes status of Goldman Sachs and Morgan Stanley to bank holding companies
WASHINGTON (AP) -- It was the end of an era on Wall Street as the Federal Reserve granted permission for the last two major investment banks -- Goldman Sachs and Morgan Stanley -- to become bank holding companies in order to stay in business.
The Fed announced late Sunday evening that it had approved the request, which will allow Goldman and Morgan Stanley to create commercial banks that can take deposits, bolstering the resources of both institutions.
The change is the latest seismic shift on Wall Street as the financial system tries to cope with mounting problems that began more than a year ago with the subprime mortgage crisis.
Shares of Morgan Stanley slipped 3.3 percent and Goldman's fell 2.8 percent in premarket electronic trading on Monday. Overall, U.S. stocks appeared headed for a slightly lower opening as investors remained nervous about the U.S. government's plan to buy $700 billion in soured bank mortgage debt.
After weekend meetings where the Treasury Department, Fed and congressional staff ironed out the program's details, Sen. Christopher Dodd said Monday it's equally important to act responsibly as it is to move quickly on the legislation needed to stabilize the country's troubled financial markets.
Dodd, chairman of the Senate Banking committee, said on CBS's "The Early Show" that many members of Congress believe a legislative relief package also should be tailored to protect taxpayers in the best way possible.
Democrats in Congress said they will add provisions in the bailout measure to protect people in danger of losing their homes and measures to cap executive compensation at firms who get to unload their bad mortgages debt onto the government.
But the proposal is still expected to win quick congressional passage because both parties are concerned about the adverse reaction in financial markets should the measure look like it is being delayed.
The Fed's board of governors granted the investment banks' requests by unanimous vote during a late Sunday meeting in Washington.
The change of status means both companies will come under the direct regulation of the Fed, which oversees the nation's bank holding companies. The banking subsidiaries of the two institutions will face the stricter regulations that commercial banks are required to meet. Previously, the primary regulator for Goldman and Morgan Stanley was the Securities and Exchange Commission.
Shares of both institutions had come under pressure ever since the bankruptcy filing last week by investment bank Lehman Brothers and the forced sale of investment bank Merrill Lynch to Bank of America.
Three people familiar with the matter said Monday that Japan's largest brokerage Nomura Holdings is buying Lehman's Asian assets. Britains Barclay's Bank received bankruptcy court approval early Saturday morning to purchase Lehman's North American brokerage operations.
Investors feared that the last remaining independent investment banks would not be able to survive in their current form, especially after hedge funds saw some of their funds at Lehman Brothers frozen as part of its bankruptcy. There had been speculation that both institutions would be acquired by commercial banks, whose ability to take deposits would give them a stable source of funding.
In the surprise announcement late Sunday, the central bank said Goldman and Morgan Stanley would be allowed during a transition period to get short-term loans from the Federal Reserve Bank of New York against various types of collateral.
The Fed said its action would take final effect after a five-day waiting period required under law.
The decision means that Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed's emergency loan program.
After the collapse of Bear Stearns and its forced sale to JP Morgan Chase last March, the Fed used powers it had been granted during the Great Depression to extend its emergency loans to investment banks as well as commercial banks. However, that extension was granted on a temporary basis.

Judge says Lehman can sell units to Barclays

2008-09-20T08:27:00.001-07:00

Saturday September 20, 6:32 am ET By Vinnee Tong, AP Business Writer
Bankruptcy judge approves Lehman Brothers sale of key businesses to Barclays
NEW YORK (AP) -- A bankruptcy judge approved a plan just after midnight Saturday under which Lehman Brothers will sell its investment banking and trading businesses to Barclays.
The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman's Midtown Manhattan office tower.
Lehman filed the biggest bankruptcy in U.S. history Monday, after Barclays declined to buy the investment bank in its entirety.
The British bank will take control of Lehman units that employ about 9,000 employees in the U.S.
"Not only is the sale a good match economically, but it will save the jobs of thousands of employees," Lehman lawyer Harvey Miller of Weil, Gotshal & Manges said.
Barclays took on a potential liability of $2.5 billion to be paid as severance, in case it decides not to keep certain Lehman employees beyond the guaranteed 90 days. But observers have said Barclays' main reason for acquiring Lehman is to get its people and presence in North America, making widespread layoffs less likely.
"It's unimaginable to me that they can run the business without people," said Lehman's financial adviser, Barry Ridings, of Lazard Ltd.
Barclays had little competition to land the deal.
Miller said that before it filed for bankruptcy, Lehman had negotiated with just one other bidder, Bank of America Corp. BofA instead announced Monday that it would buy Merrill Lynch & Co., saving it from a fate similar to Lehman's. That deal was originally valued at $50 billion.
Miller said that since Lehman filed for bankruptcy, Barclays had been the only buyer to express interest in acquiring even parts of the 158-year-old investment bank.
Lehman lawyers announced a number of changes to the deal before the hearing, which started at 4:30 p.m. Friday and continued well past midnight Saturday.
Lehman lawyers said the value of stock Barclays will buy and liabilities it will assume has fallen since the start of the week due to market volatility. Under the new deal, Barclays will buy $47.4 billion in securities and assume $45.5 billion in liabilities.
Barclays also said it would buy three additional units -- Lehman Brothers Canada Inc., Argentina-based Lehman Brothers Sudamerica SA and Lehman Brothers Uruguay SA. The two South American entities are part of Lehman's money management business. Barclays is not paying extra to get the three units.
There was no change to a $250 million goodwill payment and the purchase of two data centers in New Jersey that will go to Barclays, although Barclays may pay less for them. Lehman's investment management business Neuberger Berman was not bought by Barclays.
The Securities Investor Protection Corporation liquidated Lehman accounts on Friday under a bankruptcy-style process to transfer assets from 639,000 Lehman customer accounts -- about 130,000 of which are owned by individual investors -- to Barclays accounts.
"The substance of this transaction is to continue a business for the benefit of the economy," Lehman lawyer Miller said in court.
The hearing drew more than 200 lawyers and observers, who spilled into overflow rooms on two floors of the U.S. Bankruptcy Court in Lower Manhattan.
In response to the extraordinary events of the week, the Bush administration announced Friday the biggest proposed government intervention in financial markets since the Great Depression. Some are calling it an "RTC-style bailout" in reference to the government-owned Resolution Trust Corp. that wound down the assets of Savings and Loan Associations, mostly in the 1980s.
"Somehow Lehman Brothers gets left on the sidelines," said Daniel Golden of Akin Gump Strauss Hauer & Feld LLP, who represents clients holding about $9 billion in bonds. "We believe this was a flawed sales process. It benefits Barclays and the federal government but not the creditors of this estate.
"The economic landscape seems to have changed over the last two days," he said. "Yet the debtors and the Fed seem determined that nothing get in the way of this transaction."
Had Lehman filed for Chapter 11 a week later than it had, its fate may have been different.
"This is a tragedy -- maybe we missed the RTC by a week," Miller said.
"That occurred to me, as well," the judge in the case, James Peck, said. "Lehman Brothers became a victim, in effect the only true icon to fall in the tsunami that has befallen the credit markets."

Rescue plan seeks $700B to buy bad mortgages

2008-09-20T08:26:00.000-07:00

Saturday September 20, 10:38 am ET By Julie Hirschfeld Davis, Associated Press Writer
Bush rescue plan seeks $700B for to buy bad mortgages, would raise limit on national debt
WASHINGTON (AP) -- The Bush administration is asking Congress to let the government buy $700 billion in toxic mortgages in the largest financial bailout since the Great Depression, according to a draft of the plan obtained Saturday by The Associated Press.
The plan would give the government broad power to buy the bad debt of any U.S. financial institution for the next two years. It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue. The proposal does not specify what the government would get in return from financial companies for the federal assistance.
"We're going to work with Congress to get a bill done quickly," President Bush said at the White House. Without discussing details of the plan, he said, "This is a big package because it was a big problem."
The White House and congressional leaders hoped the developing legislation could pass as early as next week.
Administration officials and members of Congress were to negotiate throughout the weekend. The plan is designed to let faltering financial institutions unload their bad debt on the government, and in turn the taxpayer, in a bid to avoid dire economic consequences.
Bush said he worried the financial troubles "could ripple throughout" the economy and affect average citizens. "The risk of doing nothing far outweighs the risk of the package, and over time we're going to get a lot of the money back."
He added, "People are beginning to doubt our system, people were losing confidence and I understand it's important to have confidence in our financial system."
"In my judgment, based upon the advice of a lot of people who know how markets work, this problem wasn't going to be contained to just the financial community," the president said. He said he was concerned about "Main Street" and that what happens on "Wall Street" affects "Main Street."
Democrats are insisting the rescue include mortgage help to let struggling homeowners avoid foreclosures. They also are also considering attaching additional middle-class assistance to the legislation despite a request from Bush to avoid adding controversial items that could delay action. An expansion of jobless benefits was one possibility.
Asked about the chances of adding such items, Bush sidestepped the question, saying only that now was not the time for political posturing. "The cleaner the better," he said about legislation he hopes Congress sends back to him at the White House.
If passed by Congress, the plan would give the treasury secretary broad power to buy and sell the toxic mortgage-related assets without any additional involvement by lawmakers. The proposal, however, would require that the congressional committees with oversight on budget, tax and financial services issues be briefed within three months of the government's first use of the rescue power, and every six months after that.
In a briefing to lawmakers Friday, Paulson and Federal Reserve Chairman Ben Bernanke painted a grave picture of an economy on the edge of a major recession and telling them that action was urgent and imperative.
In a session with House Democrats, they described a plan where the government would in essence set up reverse auctions, putting up money for a class of distressed assets -- such as loans that are delinquent but not in default -- and financial institutions would compete for how little they would accept for the investments, said Rep. Brad Sherman, D-Calif., who participated in the conference call.
"You give them good cash; they give you the worst of the worst," Sherman said. A critic of the plan, he complained that Bush and his economic advisers were trying to panic lawmakers into rubber-stamping it.
Paulson said the new troubled-asset relief program must be large enough to have the necessary impact while protecting taxpayers as much as possible.
"I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said. "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."
Administration officials hoped the rescue plan could be finalized this weekend, to lend calm to Monday morning's market openings, said Keith Hennessey, the director of the president's economic council. The goal is to have something passed by Congress by the end of next week, when lawmakers recess for the elections.

Worst Crisis Since '30s, With No End Yet in Sight

2008-09-17T21:50:00.002-07:00

By JON HILSENRATH, SERENA NG and DAMIAN PALETTA
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The financial crisis that began 13 months ago has entered a new, far more serious phase.
Lingering hopes that the damage could be contained to a handful of financial institutions that made bad bets on mortgages have evaporated. New fault lines are emerging beyond the original problem -- troubled subprime mortgages -- in areas like credit-default swaps, the credit insurance contracts sold by American International Group Inc. and others. There's also a growing sense of wariness about the health of trading partners.
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Traders on the floor of the New York Stock Exchange Wednesday. Expectations for a quick end to the crisis are fading fast.
The consequences for companies and chief executives who tarry -- hoping for better times in which to raise capital, sell assets or acknowledge losses -- are now clear and brutal, as falling share prices and fearful lenders send troubled companies into ever-deeper holes. This weekend, such a realization led John Thain to sell the century-old Merrill Lynch & Co. to Bank of America Corp. Each episode seems to bring government intervention that is more extensive and expensive than the previous one, and carries greater risk of unintended consequences.
Expectations for a quick end to the crisis are fading fast. "I think it's going to last a lot longer than perhaps we would have anticipated," Anne Mulcahy, chief executive of Xerox Corp., said Wednesday.
"This has been the worst financial crisis since the Great Depression. There is no question about it," said Mark Gertler, a New York University economist who worked with fellow academic Ben Bernanke, now the Federal Reserve chairman, to explain how financial turmoil can infect the overall economy. "But at the same time we have the policy mechanisms in place fighting it, which is something we didn't have during the Great Depression."
Spreading Disease
The U.S. financial system resembles a patient in intensive care. The body is trying to fight off a disease that is spreading, and as it does so, the body convulses, settles for a time and then convulses again. The illness seems to be overwhelming the self-healing tendencies of markets. The doctors in charge are resorting to ever-more invasive treatment, and are now experimenting with remedies that have never before been applied. Fed Chairman Bernanke and Treasury Secretary Henry Paulson, walking into a hastily arranged meeting with congressional leaders Tuesday night to brief them on the government's unprecedented rescue of AIG, looked like exhausted surgeons delivering grim news to the family.
In the wake of this past week's market meltdown, WSJ's economics editor David Wessel looks at the shakeup and sees one of two outcomes: the crisis as catharsis or a drawn-out mess.
Fed and Treasury officials have identified the disease. It's called deleveraging, or the unwinding of debt. During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can't pay back the loans, a problem that is exacerbated by the collapse in housing prices. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.
At least three things need to happen to bring the deleveraging process to an end, and they're hard to do at once. Financial institutions and others need to fess up to their mistakes by selling or writing down the value of distressed assets they bought with borrowed money. They need to pay off debt. Finally, they need to rebuild their capital cushions, which have been eroded by losses on those distressed assets.
But many of the distressed assets are hard to value and there are few if any buyers. Deleveraging also feeds on itself in a way that can create a downward spiral: Trying to sell assets pushes down the assets' prices, which makes them harder to sell and leads firms to try to sell more assets. That, in turn, suppresses these firms' share prices and makes it harder for them to sell new shares to raise capital. Mr. Bernanke, as an academic, dubbed this self-feeding loop a "financial accelerator."

"Many of the CEO types weren't willing...to take these losses, and say, 'I accept the fact that I'm selling these way below fundamental value,'" said Anil Kashyap, a University of Chicago Business School economics professor. "The ones that had the biggest exposure, they've all died."
Deleveraging started with securities tied to subprime mortgages, where defaults started rising rapidly in 2006. But the deleveraging process has now spread well beyond, to commercial real estate and auto loans to the short-term commitments on which investment banks rely to fund themselves. In the first quarter, financial-sector borrowing slowed to a 5.1% growth rate, about half of the average from 2002 to 2007. Household borrowing has slowed even more, to a 3.5% pace.
Not Enough
Goldman Sachs Group Inc. economist Jan Hatzius estimates that in the past year, financial institutions around the world have already written down $408 billion worth of assets and raised $367 billion worth of capital.
But that doesn't appear to be enough. Every time financial firms and investors suggest that they've written assets down enough and raised enough new capital, a new wave of selling triggers a reevaluation, propelling the crisis into new territory. Residential mortgage losses alone could hit $636 billion by 2012, Goldman estimates, triggering widespread retrenchment in bank lending. That could shave 1.8 percentage points a year off economic growth in 2008 and 2009 -- the equivalent of $250 billion in lost goods and services each year.
"This is a deleveraging like nothing we've ever seen before," said Robert Glauber, now a professor of Harvard's government and law schools who came to Washington in 1989 to help organize the savings and loan cleanup of the early 1990s. "The S&L losses to the government were small compared to this."
Hedge funds could be among the next problem areas. Many rely on borrowed money to amplify their returns. With banks under pressure, many hedge funds are less able to borrow this money now, pressuring returns. Meanwhile, there are growing indications that fewer investors are shifting into hedge funds while others are pulling out. Fund investors are dealing with their own problems: Many have taken out loans to make their investments and are finding it more difficult now to borrow.
That all makes it likely that more hedge funds will shutter in the months ahead, forcing them to sell their investments, further weighing on the market.
Debt-driven financial traumas have a long history, from the Great Depression to the S&L crisis to the Asian financial crisis of the late 1990s. Neither economists nor policymakers have easy solutions. Cutting interest rates and writing stimulus checks to families can help -- and may have prevented or delayed a deep recession. But, at least in this instance, they don't suffice.
In such circumstances, governments almost invariably experiment with solutions with varying degrees of success. President Franklin Delano Roosevelt unleashed an alphabet soup of new agencies and a host of new regulations in the aftermath of the market crash of 1929. In the 1990s, Japan embarked on a decade of often-wasteful government spending to counter the aftereffects of a bursting bubble. President George H.W. Bush and Congress created the Resolution Trust Corp. to take and sell the assets of failed thrifts. Hong Kong's free-market government went on a massive stock-buying spree in 1998, buying up shares of every company listed in the benchmark Hang Seng index. It ended up packaging them into an exchange-traded fund and making money.
Taking Out the Playbook
Today, Mr. Bernanke is taking out his playbook, said NYU economist Mr. Gertler, "and rewriting it as we go."
Merrill Lynch & Co.'s emergency sale to Bank of America Corp. last weekend was an example of the perniciousness and unpredictability of deleveraging. In the past year, Merrill had hired a new chief executive, written off $41.4 billion in assets and raised $21 billion in equity capital.
But Merrill couldn't keep up. The more it raised, the more it was forced to write off. When Merrill CEO John Thain attended a meeting with the New York Fed and other Wall Street executives last week, he saw that Merrill was the next most vulnerable brokerage firm. "We watched Bear and Lehman. We knew we could be next," said one Merrill executive. Fearful that its lenders would shut the firm off, he sold to Bank of America.
This crisis is complicated by innovative financial instruments that Wall Street created and distributed. They're making it harder for officials and Wall Street executives to know where the next set of risks is hiding and also contributing to the crisis's spreading impact.
Swaps Game
The latest trouble spot is an area called credit-default swaps, which are private contracts that let firms trade bets on whether a borrower is going to default. When a default occurs, one party pays off the other. The value of the swaps rise and fall as the market reassesses the risk that a company won't be able to honor its obligations. Firms use these instruments both as insurance -- to hedge their exposures to risk -- and to wager on the health of other companies. There are now credit-default swaps on more than $62 trillion in debt, up from about $144 billion a decade ago.
One of the big new players in the swaps game was AIG, the world's largest insurer and a major seller of credit-default swaps to financial institutions and companies. When the credit markets were booming, many firms bought these instruments from AIG, believing the insurance giant's strong credit ratings and large balance sheet could provide a shield against bond and loan defaults. AIG believed the risk of default was low on many securities it insured.
As of June 30, an AIG unit had written credit-default swaps on more than $446 billion in credit assets, including mortgage securities, corporate loans and complex structured products. Last year, when rising subprime-mortgage delinquencies damaged the value of many securities AIG had insured, the firm was forced to book large write-downs on its derivative positions. That spooked investors, who reacted by dumping its shares, making it harder for AIG to raise the capital it increasingly needed.
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Credit default swaps "didn't cause the problem, but they certainly exacerbated the financial crisis," said Leslie Rahl, president of Capital Market Risk Advisors, a consulting firm in New York. The sheer volume of CDS contracts outstanding -- and the fact that they trade directly between institutions, without centralized clearing -- intertwined the fates of many large banks and brokerages.
Few financial crises have been sorted out in modern times without massive government intervention. Increasingly, officials are coming to the conclusion that even more might be needed. A big problem: The Fed can and has provided short-term money to sound, but struggling, institutions that are out of favor. It can, and has, reduced the interest rates it influences to attempt to reduce borrowing costs through the economy and encourage investment and spending.
But it is ill-equipped to provide the capital that financial institutions now desperately need to shore up their finances and expand lending.
Resolution Trust Scenario
In normal times, capital-starved companies usually can raise money on their own. In the current crisis, a number of big Wall Street firms, including Citigroup Inc., have turned to sovereign-wealth funds, the government-controlled pools of money.
But both on Wall Street and in Washington, there is increasing expectation that U.S. taxpayers will either take the bad assets off the hands of financial institutions so they can raise capital, or put taxpayer capital into the companies, as the Treasury has agreed to do with mortgage giants Fannie Mae and Freddie Mac.
One proposal was raised by Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee. Rep. Frank is looking at whether to create an analog to the Resolution Trust Corp., which took assets from failed banks and thrifts and found buyers over several years.
"When you have a big loss in the marketplace, there are only three people that can take the loss -- the bondholders, the shareholders and the government," said William Seidman, who led the RTC from 1989 to 1991. "That's the dance we're seeing right now. Are we going to shove this loss into the hands of the taxpayers?"
The RTC seemed controversial and ambitious at the time. Any version today would be even more complex. The RTC dispensed mostly of commercial real estate. Today's troubled assets are complex debt securities -- many of which include pieces of other instruments, which in turn include pieces of others, many steps removed from the actual mortgages or consumer loans on which they are based. Unraveling these strands will be tedious and getting at the underlying collateral, difficult.
In the early stages of this crisis, regulators saw that their rules didn't fit the rapidly changing financial system they were asked to oversee. Investment banks, at the core of the crisis, weren't as closely monitored by the Securities and Exchange Commission as commercial banks were by their regulators.
The government has a system to close failed banks, created after the Great Depression in part to avoid sudden runs by depositors. Now, runs happen in spheres regulators may not fully understand, such as the repurchase agreement, or repo, market, in which investment banks fund their day-to-day operations. And regulators have no process for handling the failure of an investment bank like Lehman Brothers Holdings Inc. Insurers like AIG aren't even federally regulated.
Regulators have all but promised that more banks will fail in the coming months. The Federal Deposit Insurance Corp. is drawing up a plan to raise the premiums it charges banks so that it can rebuild the fund it uses to back deposits. Examiners are tightening their leash on banks across the country.
Pleasant Mystery
One pleasant mystery is why the crisis hasn't hit the economy harder -- at least so far. "This financial crisis hasn't yet translated into fewer...companies starting up, less research and development, less marketing," Ivan Seidenberg, chief executive of Verizon Communications, said Wednesday. "We haven't seen that yet. I'm sure every company is keeping their eyes on it."
At 6.1%, the unemployment rate remains well below the peak of 7.8% in 1992, amid the S&L crisis.
In part, that's because government has reacted aggressively. The Fed's classic mistake that led to the Great Depression was that it tightened monetary policy when it should have eased. Mr. Bernanke didn't repeat that error. And Congress moved more swiftly to approve fiscal stimulus than most Washington veterans thought possible.
In part, the broader economy has held mostly steady because exports have been so strong at just the right moment, a reminder of the global economy's importance to the U.S. And in part, it's because the U.S. economy is demonstrating impressive resilience, as information technology allows executives to react more quickly to emerging problems and -- to the discomfort of workers -- companies are quicker to adjust wages, hiring and work hours when the economy softens.
But the risk remains that Wall Street's woes will spread to Main Street, as credit tightens for consumers and business. Already, U.S. auto makers have been forced to tighten the terms on their leasing programs, or abandon writing leases themselves altogether, because of problems in their finance units. Goldman Sachs economists' optimistic scenario is a couple years of mild recession or painfully slow economy growth.

Asian markets tumble as financial fears deepen

2008-09-17T21:50:00.001-07:00

By JEREMIAH MARQUEZ, AP Business Writer1 hour, 32 minutes ago
Asian stocks tumbled Thursday, tracking declines on Wall Street as investors feared more companies could succumb to the global financial crisis that forced the U.S. to bail out troubled insurer American International Group Inc.
Every regional benchmark fell deeply in the red.
Hong Kong's Hang Seng Index led the region's losses, tanking 1,272.86 points, or 7.22 percent, to 16,364.33 — its lowest level in over two years.
In Japan, the Nikkei 225 stock index was down 445.67 points, or 3.79 percent, at 11,304.12. Australia's S&P/ASX200 index fell more than 3.5 percent, South Korea's Kospi lost 3.6 percent and Shanghai's index fell 5.8 percent.
The losses tracked U.S. markets, where the Dow Jones industrial average fell about 450 points, or 4.06 percent, to 10,609.66.
Investors were unsettled by the Federal Reserve's $85 billion loan to AIG, the huge U.S. insurer that lost billions in the risky business of insuring against bond defaults. It was the latest financial giant to fall in a historic financial crisis on Wall Street that's already claimed investment banks Lehman Brothers and Merrill Lynch.
"It's a complete collapse of confidence," said Francis Lun, general manager of Fulbright Securities Ltd in Hong Kong. "The financial crisis in the U.S. is hitting everyone, everyone is running for cover. If the largest insurance company can fail, than no one is safe."
As equities markets staggered, investors fled to gold, seen as a safe haven in times of trouble. Gold for December delivery rose as much as $90.40, or 11.6 percent, to $870.90 an ounce in after-hours trading on the New York Mercantile Exchange after jumping $70 to settle at $850.50 in the regular session.
Oil rose above $97 in Asian trade Thursday, extending its big gains overnight. The dollar was little changed at 104.32 yen and the euro rose to $1.4345.
Financial stocks across Asian went into a tailspin.
Japan's three megabanks fell hard: Mizuho Financial Group, Inc. sank 7.2 percent, Mitsubishi UFJ Financial Group, Inc. shed 4.6 percent, and Sumitomo Mitsui Financial Group retreated 7.4 percent.
Leading China lender Industrial & Commercial Bank of China Ltd, or ICBC, fell over 5 percent in Hong Kong.
Macquarie Group Ltd., Australia's biggest investment bank and securities firm, took an 18 percent nosedive.
Richard herring, the director of trading at Burrell Stockbroking, said Australian investors were nervous about AIG bailout.
"It has actually opened up a whole lot of other questions for investors to answer and that is: AIG is on the rack, what else is potentially out there that could go under?" Herring said.
Major exporters including auto makers and electronics firms also wilted, hurt by a sagging dollar and slowing overseas markets.
In Japan, Nintendo Co., maker of the popular Wii game console, tumbled 4.4 percent after earlier hitting a near year-low.

Another nightmare on Wall Street: Dow down 450

2008-09-17T21:50:00.000-07:00

Thursday September 18, 12:37 am ET By Ellen Simon, AP Business Writer
Stock market takes another dive as investors digest government rescue of giant insurer AIG
NEW YORK (AP) -- The stock market took another nosedive Wednesday as the American banking system appeared even shakier and investors worried that the financial crisis is spinning so far out of control that even government rescues can't stop it.
The Dow Jones industrial average, which only two days earlier had suffered its steepest drop since the days after the Sept. 11 attacks, lost another 450 points. About $700 billion in investments vanished.
One day after the Federal Reserve stepped in with an emergency loan to keep American International Group Inc., one of the world's largest insurers, from going under, Wall Street wondered which companies might be the next to falter.
A major investor in ailing Washington Mutual Inc. removed a potential obstacle to a sale of the bank, and stock in two investment banks, Morgan Stanley and Goldman Sachs, was pummeled.
It was the fourth consecutive day of extraordinary turmoil for the American financial system, beginning with news on Sunday that another venerable investment house, Lehman Brothers, would be forced to file for bankruptcy.
The 4 percent drop Wednesday in the Dow reflected the stock market's first chance to digest the Fed's decision to rescue AIG with an $85 billion taxpayer loan that effectively gives it a majority stake in the company. AIG is important because it has essentially become a primary source of insurance for the entire financial industry.
As the stock market staggered, the price of gold, which rises in times of panic, spiked as much as $90.40 an ounce. Bonds, a traditional safe haven for investors, also climbed.
"The economy is not short of money. It is short of confidence," said Sung Won Sohn, an economics professor at California State University.
The financial stocks in the Standard & Poor's 500 dropped even more, falling 10 percent, and insurance that backs corporate debt soared for the last two surviving independent U.S. investment banks, Morgan Stanley and Goldman Sachs.
"It seems as though banks are hoarding cash, no matter what rate they could be lending it at," said David Rosenberg, North American economist at Merrill Lynch.
Markets around the world also tumbled, with stocks dropping from Hong Kong to London. Brazil's benchmark index saw the largest drop, losing nearly 7 percent in a day.
Worse, the short-term credit markets remained frozen, with overnight interest rates soaring for loans between banks and for overnight loans to businesses. Long-term loans, however, didn't rise as much.
"The worry on short-term loans is you're not sure who the ultimate borrower is," said Brian Bethune, chief U.S. economist at Global Insight Inc.
And in case anyone needed additional symbolism, a glass panel near the top of a Bank of America skyscraper in Midtown Manhattan fell more than 50 stories onto the street below and shattered. No injuries were reported.
In the United States, the faltering economy and banking system have begun to dominate conversations at dinner tables, bars and online, not to mention seizing the campaign trail.
One blogger, Michele Catalano of Long Island, posted this on Wednesday: "Dreamed about AIG and the stock market, woke up with the urge to stock up on canned goods and shotguns."
Mortgage rates, which had fallen after the government's takeover of Fannie Mae and Freddie Mac, rose again, removing a glimmer of hope that the housing crisis, the kindling for the broader financial meltdown, was hitting bottom.
And new statistics showed that construction of new homes and apartments fell a surprising 6.2 percent in August to the weakest pace in 17 years.
The Treasury Department, for the first time in its history, said it would begin selling bonds for the Federal Reserve in an effort to help the central bank deal with its unprecedented borrowing needs.
Treasury officials said the action did not mean that the Fed was running short of cash, but simply was a way for the government to better manage its financing needs.
Separately, the Securities and Exchange Commission tightened rules on short selling, the practice of betting that a stock will fall.
A $62 billion money market fund -- Primary Fund from Reserve -- on Tuesday saw its holdings fall below its total deposits, a condition known as "breaking the buck" that hasn't happened to a money market fund since 1994, Rosenberg said. Money market funds are supposed to be conservatively invested and almost as safe as cash.
Democratic presidential nominee Barack Obama appeared Wednesday in a two-minute commercial to outline his economic plans and caution it won't be easy to fix the nation's worsening financial problems.
"The truth is that while you've been living up to your responsibilities, Washington has not," he said.
Republican John McCain's running mate, Alaska Gov. Sarah Palin, said of the AIG move: "It's understandable but very, very disappointing that taxpayers are called upon for another one."
The Dow fell 449.36 to 10,609.66, finishing near its lowest point of the trading day. The index is down more than 7 percent just this week and more than 25 percent since its record close less than a year ago, on Oct. 9, 2007.
Stock in Washington Mutual fell 13 percent, dropping 31 cents to $2.01 amid reports that the government was trying to find a buyer for the bank, which has been battered by bad home loans. It lost $3.3 billion in the second quarter.
Many economists worried about the unintended consequences of the Fed's actions.
"Every time that umbrella widens, it gets heavier and heavier for those holding it up -- which is the taxpayer," said Bernard Baumohl, chief economist at the Economic Outlook Group in Princeton, N.J.
"With most Americans now preoccupied about their own future job security, the one thing they do not want to hear is how they will end up paying the bill for poorly managed companies," he said.

Stocks sink in early trading after AIG bailout

2008-09-17T07:04:00.000-07:00

Wednesday September 17, 9:44 am ET By Madlen Read, AP Business Writer
Wall Street tumbles again after government bails out AIG, Barclays buys Lehman businesses
NEW YORK (AP) -- Stocks skidded again Wednesday, with anxieties about the financial system still running high even after the government bailed out the insurer American International Group Inc. The Dow Jones industrial average dropped about 200 points.
The Federal Reserve is giving a two-year, $85 billion loan to AIG in exchange for a nearly 80 percent stake in the company. Wall Street had feared that the insurer, which has lost billions in the risky business of insuring against bond defaults, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy.
Lehman, after filing for bankruptcy protection on Monday, sold its North American investment banking and trading operations to Barclays, Britain's third-largest bank, on Tuesday for the bargain price of $250 million.
The moves by the Fed and Barclays lift some of the uncertainty surrounding two of the most precarious pillars of the U.S. financial system, but investors' worries are far from erased.
The two independent Wall Street investment banks left standing -- Goldman Sachs Group Inc. and Morgan Stanley -- remain under scrutiny. Morgan Stanley revealed its quarterly earnings early late Tuesday, posting a better-than-expected 7 percent slide in fiscal third-quarter profit and insisting that it is surviving the credit crisis that has ravaged many of its peers.
Over the weekend, Merrill Lynch, the world's largest brokerage, sold itself in a last-ditch effort to avoid failure to Bank of America Corp.
Furthermore, the troubles in the financial sector could exacerbate the problems facing the weak U.S. economy. The Commerce Department reported Wednesday that new home construction fell by 6.2 percent in August to 895,000 units, the slowest building pace since January 1991.
Slumping demand for houses, sinking home prices and mortgage defaults have been the catalysts behind Wall Street's turmoil -- and the risky mortgage-backed assets held by the nation's banks are not apt to regain in value until the housing market turns around.
A day after Wall Street regained some of Monday's nosedive, the Dow fell 200.54, or 1.81 percent, to 10,858.48 in early trading.
Broader stock indicators also tumbled. The Standard & Poor's 500 index fell 21.38, or 1.76 percent, to 1,192.22. The Nasdaq composite index fell 44.21, or 1.76 percent, to 1,192.22.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com

Lehman unloads its banking divisions to Barclays

2008-09-17T07:03:00.000-07:00

Wednesday September 17, 8:12 am ET By Joe Bel Bruno and Stephen Bernard, AP Business Writers
Barclays gets Lehman's North American banking and capital markets units for a Wall Street song
NEW YORK (AP) -- Lehman Brothers, which a year ago had a market capitalization of more than $33 billion, is now unloading its once-prized businesses for what passes as pocket change on Wall Street.
Barclays PLC, the third-largest British bank, took advantage of Lehman Brothers Holdings Inc.'s bankruptcy reorganization Tuesday to reach a deal for Lehman's North American investment banking and trading operations for just $250 million.
Barclays also picked up Lehman's New York headquarters and two data centers in New Jersey for $1.5 billion.
It marks a major coup for the U.K. bank, which agreed to buy the assets just days after walking away from a deal to purchase all of Lehman.
The U.S. investment bank filed for bankruptcy protection on Monday after it was unable to find financing or fresh capital to shore up its balance sheet amid a continued downturn in the credit markets.
The deals require approval from the bankruptcy court.
Meanwhile, Lehman executives continue to negotiate a potential sale of its prized investment management division, which includes money manager Neuberger Berman. The division was once valued by as much as $10 billion by Wall Street analysts, but now could fetch much less considering Lehman's bankruptcy proceedings.
A person familiar with the negotiations, who spoke on the condition of anonymity because the talks are ongoing, said Lehman was focusing on trying to sell the business to private-equity firms. The sale is expected to happen in a matter of days, the person said.
Bain Capital and Hellman & Friedman are the two top private-equity shops bidding on the investment management division, the person said, but Kohlberg Kravis Roberts & Co. is still in the running.
Barclays said it will acquire Lehman's North American banking operations, which include fixed income and equities sales, trading and research and investment banking business. The deal throws a lifeline to about 10,000 employees working in the divisions.
Barclays and Lehman reached the agreement hours after Lehman's first bankruptcy hearing in a crowded courtroom at the U.S. bankruptcy court in Manhattan, just steps away from Wall Street's iconic bull statue.
JPMorgan advanced Lehman $87 billion when the market opened Monday, acting in part on a request by the Federal Reserve Bank of New York. The New York Fed later repaid JPMorgan that amount. On Tuesday, JPMorgan advanced another $51 billion.
Shai Waisman, a lawyer for Weil, Gotshal & Manges, LLP representing Lehman Brothers, in his opening statement argued that Lehman's Brothers' downfall was the result of a "chain reaction" of events that were largely out of the investment bank's control.
"Lehman operated in an extremely unfavorable business environment," Waisman said, referring to declining asset values and low levels of liquidity.
Judge James Peck approved a motion that JPMorgan Chase & Co. will remain Lehman's clearing house through the bankruptcy proceedings. The issue arose over the past two days, when JPMorgan made the advances to Lehman to allow it to keep trading and "avoid a disruption of the financial markets," according to court filings.
Also on Tuesday, the House Oversight and Government Reform committee said it would hold a hearing Sept. 25 to examine the "regulatory mistakes and financial excesses" that led to Lehman's bankruptcy filing. It asked Lehman Chief Executive Richard Fuld to testify before the committee.
AP Business Writers Vinnee Tong and Madlen Read contributed to this story.

Lehman Brothers files for Chapter 11 protection

2008-09-15T11:09:00.000-07:00

Monday September 15, 8:13 am ET
Lehman Brothers files for Chapter 11 bankruptcy protection
NEW YORK (AP) -- Lehman Brothers has filed for bankruptcy protection under the weight of $60 billion in soured real estate holdings.
The company's filing for Chapter 11 protection will allow it to restructure while creditor claims are held at bay. The filing was made Monday in the U.S. Bankruptcy Court in the Southern Disctrict of New York.
Lehman's last hope of surviving outside of court protection faded Sunday after British bank Barclays PLC withdrew its bid to buy the investment bank.
The 158-year-old investment bank had said earlier that none of its broker-dealer subsidiaries or other units would be included in the Chapter 11 filing. It says it is exploring the sale of its broker-dealer operations and is in "advanced discussions" to sell its investment management unit.

Stocks tumble amid new Wall Street landscape

2008-09-15T11:07:00.000-07:00

Monday September 15, 1:57 pm ET By Tim Paradis, AP Business Writer
Stocks fall sharply following Lehman bankruptcy, Merrill sale; AIG remains worry, falls 44 pct
NEW YORK (AP) -- A stunning reshaping of the Wall Street landscape sent stocks tumbling Monday, but the pullback appeared relatively orderly -- perhaps because investors were unsurprised by the demise of Lehman Brothers Holdings Inc. and relieved by a takeover of Merrill Lynch & Co.
The Dow Jones industrial average fell 300 points, a number that has become familiar over the past year amid the turmoil in the financial sector. Bond prices soared as investors sought the safety of government debt.
Stocks also posted big losses in markets across much of the globe as investors absorbed Lehman's bankruptcy filing and what was essentially a forced sale of Merrill Lynch to Bank of America for $50 billion in stock. While those companies' situations had reached some resolution, the market remained anxious about American International Group Inc., which is seeking emergency funding to shore up its balance sheet. A faltering of the world's largest insurance company likely would have financial implications far beyond that of Lehman, the largest U.S. bankruptcy.
The swift developments are the biggest yet in the 14-month-old credit crises that stems from now toxic subprime mortgage debt.
Investors are worried that trouble at AIG and the bankruptcy filing by Lehman, felled by $60 billion in bad debt and a dearth of investor confidence, will touch off another series of troubles for banks and financial institutions that may be forced to further write down the value of their own debt assets. Wall Street had been hopeful six months ago that the collapse of Bear Stearns would mark the darkest day of the credit crisis.
AIG's troubles a week after its stock dropped 45 percent are worrisome for some investors because of the company's enormous balance sheet and the risks that troubles with that companies finances could spill over to the companies with which it does business. AIG, one of the 30 stocks that make up the Dow industrials, fell $5.31, or 44 percent, to $6.83 Monday as investors worried that it would be the subject of downgrades from credit ratings agencies.
Before the start of trading, there were fears that Monday's decline would even more severe.
Jeffrey Mortimer, chief investment officer at Charles Schwab Investment Management in San Francisco, said stocks' losses aren't steeper because the market expected Lehman would find a buyer or declare bankruptcy.
"This is showing that this was not completely unexpected," he said, of Lehman. He added that the Merrill deal removes one possible source of concern for investors. "This may have taken a player who might have been next out of the target zone."
Still, the market was fractious, and a sharper drop as the session wears on was still possible.
In early afternoon trading, the Dow fell 300.03, or 2.63 percent, to 11,121.96 after falling nearly 350 points seen in the early going.
Broader stock indicators also fell. The Standard & Poor's 500 index declined 33.06, or 2.64 percent, to 1,218.64, and the Nasdaq composite index fell 46.69, or 2.06 percent, to 2,218.64.
Declining issues outnumbered advancers by about 9 to 1 on the New York Stock Exchange, where volume came to a moderate 833.7 million shares.
Light, sweet crude dropped $4.15 to $97.03 on the New York Mercantile Exchange after damage to Gulf of Mexico oil infrastructure from Hurricane Ike was less than investors feared. Worries about a slower economy have also weighed on oil prices in recent weeks. Oil is down sharply from its mid-July highs when it hit a record over $147 a barrel.
Despite the pullback in oil, prices at the gas pump rose above $5 per gallon in some parts of the country Sunday after Ike left some the nation's refining capacity inoperable.
Investors will be watching to see whether the Dow moves below the 11,000 mark, a level it hasn't traded and closed under since mid-July. The S&P 500 last tested the 1,200 level in mid-July.
Bond prices surged as investors fled to the security of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, plunged to 3.52 percent from 3.72 percent late Friday. The dollar was lower against other major currencies, while gold prices rose.
AIG pared some of its losses after New York Gov. David Paterson said in a press conference the company will be allowed to access $20 billion of assets held by its subsidiaries to stay in business. Paterson asked the state's insurance regulators to in essence allow AIG to provide a bridge loan to itself. Investors are worried that the company could need up to $40 billion to aid its balance sheet.
Other financial stocks fell as investors worried about the strength of banks' balance sheets. Washington Mutual Inc. fell 44 cents, or 16 percent, to $2.29, while Wachovia Corp. fell $3.05, or 21 percent, to $11.22.
Investors did have some more solid footing than they might have predicted at the end of last week, when Lehman's troubles and those of AIG weighed on the markets. A global consortium of banks, working alongside government officials in New York, announced a $70 billion pool of funds to lend to troubled financial companies.
And the deal for Merrill Lynch pays a 70 percent premium to the brokerage's closing price Friday. The stock has been squeezed in recent weeks, leading many Wall Street veterans to point to the company as the next behind Lehman as likely to run into trouble with bearish investors and get hit by intensified selling. The deal to pair the company with Bank of America, a huge bank with a big asset base, removes some of the worries about Merrill would be the next to fall.
Merrill rose $2.63, or 15 percent, to $19.68, while Bank of America fell $6.26, or 19 percent, to $27.48.
Although Monday's losses were milder than analysts' worst fears, many market observers have said for months that a cathartic sell-off is necessary for Wall Street to purge its worries over bad debt and the tight credit conditions that have hobbled the economy. They reason that a scare and subsequent sell-off in the markets could establish conditions for a market bottom to form.
"This is sort of groundbreaking type stuff," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York.
Fullman, who has worked on Wall Street for 29 years, noted that the Dow contains companies, such as retailers like Wal-Mart Stores Inc. that could help cushion some of the selling in the financial sector. Wal-Mart fell 21 cents to $62.20, while Coca-Cola Co. rose 95 cents to $55.46.
"While they might get hit hard they won't get hit as hard," he said.
But even good news like a drop in oil and some resolution to fears about Merrill couldn't prevent widespread selling. Markets in Tokyo and several other Asian money centers were closed for holidays. Britain's FTSE 100 fell 3.92 percent, Germany's DAX index lost 2.74 percent, and France's CAC-40 fell 3.78 percent. The European Central Bank, the Bank of England, and the Swiss central bank stepped in an attempt to calm markets by making more short-term credit available to banks.
The reduced headcount of Wall Street firms Monday left Goldman Sachs Group Inc. and Morgan Stanley as the remaining big, independent firms. The two are slated to report quarterly results Tuesday and Wednesday, respectively.
Goldman Sachs fell $17.11, or 11 percent, to $137.10, while Morgan Stanley fell $4.24, or 11 percent, to $32.99.
The shake-up comes only a week after the government bailed out mortgage lenders Fannie Mae and Freddie Mac and ahead of sizable economic developments this week. The Fed is expected to make a decision on interest rates on Tuesday.
The Russell 2000 index of smaller companies fell 14.98, or 2.08 percent, to 705.28.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com

AirAsia takes risks with expansion amid downturn

2008-09-07T03:57:00.000-07:00

Sunday September 7, 3:32 am ET By Eileen Ng, Associated Press Writer
Budget carrier AirAsia takes risky gamble with expansion amid downturn
KUALA LUMPUR, Malaysia (AP) -- AirAsia, the region's biggest budget carrier, is making a risky bet.
As soaring fuel prices have forced other airlines to cut back, shed jobs and ground planes, AirAsia is doing the opposite: increasing flights, adding routes and boosting capital investment.
Last month, it even gave away a million free seats (although passengers still had to pay taxes and fuel surcharges). The seven-year-old company is aiming to fill the vacuum as other airlines reduce capacity, betting that more travelers will opt for budget flights amid a global economic downturn.
Analysts say that if it survives the industry slump, AirAsia could come out a winner with increased customer loyalty and a strong route network to catch the growth wave when good times return.
"They are reasonably well positioned for the long run but there's always a trade-off. It's a long term decision, which will cause some short-term pain," said Damien Horth, Asia transport analyst at UBS AG in Hong Kong.
Of course, the strategy could also backfire badly.
Already there are signs of trouble. Last month, AirAsia reported a 95 percent plunge in its net profit for April-June quarter to 9.42 million ringgit ($2.9 million). But the company chalked that up mostly to a 77 million ringgit ($23 million) foreign exchange loss from a weakened Malaysian ringgit, not weakness in its underlying business.
Average load factor -- the percentage of seats taken up in an airplane -- dipped to a still relatively strong 76 percent, from 80 percent in 2007.
Chief Executive Tony Fernandes remains undaunted.
"We are focused and happy with our strategy. We won't sacrifice long-term (growth) for short-term profits," he told The Associated Press.
There are doubts, however, on whether AirAsia can fund its expansion.
It has a cash reserve of about 1 billion ringgit ($303 million) but outstanding debts stand at 5.4 billion ringgit ($1.6 billion), giving it a net debt position of 4.4 billion ringgit ($1.3 billion). Debts are set to grow as it receives new planes.
The carrier has firm orders for 175 Airbus A320 planes, to be delivered gradually up to 2014, as part of fleet replacement and expansion.
Chris Eng, analyst with OSK Securities in Malaysia, said AirAsia's growth prospects may be curbed while its joint-ventures in Thailand and Indonesia are expected to remain in the red.
"It will be challenging but we believe AirAsia can survive," Eng said, citing its efficient regional network and good cost control.
As it expands, AirAsia also faces a challenge in filling up capacity as consumer spending slows and competition increases from flag carrier Malaysia Airlines, which recently offered zero fares on surplus seats, analysts say.
"Everybody is now having to dig deeper into the well of consumer demand and the more they compete, the more fares go down," said Peter Harbison, executive chairman of the Center for Asia-Pacific Aviation in Sydney.
The International Air Transport Association has forecast a $5.2 billion loss this year for the global airline industry. It said crude oil price, currently averaging $113 a barrel, is still 55 percent higher than the 2007 average price while passenger demand growth is slowing even in Asia-Pacific.
At least two dozen airlines worldwide have closed down this year. Many low-cost airlines are also struggling despite escaping the worst of the downturn.
Europe's Ryanair and Southwest Airlines in the U.S.-- two of the most resilient budget carriers -- have cut capacity this year. Ryanair, which reported a second quarter loss, said it may face its first full-year losses in 2008.
UBS's Horth warned AirAsia may also plunge into the red for the first time this year with losses stretching into 2009, as its rapid expansion and aggressive pricing policy bite into revenue.
"Assuming oil prices remain around current levels, its certainly going to be tough. The management is taking a long term approach but investors may get scared," he said. Fuel prices account for half of AirAsia's cost.
AirAsia's stock has plunged by half from a year ago to around 1 ringgit (30 cents), but has risen from an all-time low of 0.765 ringgit (23 cents) in June.

Government may soon back troubled mortgage giants

2008-09-06T02:05:00.000-07:00

Friday September 5, 11:12 pm ET By Alan Zibel, AP Business Writer
Government may soon take over troubled mortgage finance giants Fannie Mae, Freddie Mac
WASHINGTON (AP) -- The government is expected to take over Fannie Mae and Freddie Mac as soon as this weekend in a monumental move designed to protect the mortgage market from the failure of the two companies, which together hold or guarantee half of the nation's mortgage debt, a person briefed on the matter said Friday night.
Some of the details of the intervention, which could cost taxpayers billions, were not yet available, but are expected to include the departure of Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to the source, who asked not to be named because the plan was yet to be announced.
Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and James Lockhart, the companies' chief regulator, met Friday afternoon with the top executives from the mortgage companies and informed them of the government's plan to put the troubled companies into a conservatorship.
The news, first reported on The Wall Street Journal's Web site, came after stock markets closed. In after-hours trading Fannie Mae's shares plunged $1.54, or 22 percent, to $5.50. Freddie Mac's shares fell $1.06, or almost 21 percent, to $4.04. Common stock in the companies will be worth little to nothing after the government's actions.
The news also followed a report Friday by the Mortgage Bankers Association that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.
That confirmed what investors saw in Fannie and Freddie's recent financial results: trouble in the mortgage market has shifted to homeowners who had solid credit but took out exotic loans with little or no proof of their income and assets.
Fannie Mae and Freddie Mac lost a combined $3.1 billion between April and June. Half of their credit losses came from these types of risky loans with ballooning monthly payments.
While both companies said they had enough resources to withstand the losses, many investors believe their financial cushions could wither away as defaults and foreclosures mount.
Many in Washington and on Wall Street hadn't expected Treasury Secretary Henry Paulson to intervene unless the companies had trouble issuing debt to fund their operations.
This summer, Congress passed a plan to provide unlimited government loans to Fannie and Freddie and to purchase stock in the two companies if needed.
Critics say the open-ended nature of the rescue package could expose taxpayers to billions of dollars of potential losses.
Supporters, however, argue the Bush administration had little choice but to support Fannie and Freddie, which together hold or guarantee $5 trillion in mortgages -- almost half the nation's total.
Representatives of Fannie and Freddie declined to comment on the government assistance plan.
Treasury spokeswoman Brookly McLaughlin said officials "have been in regular communications" with Fannie and Freddie, but refused to comment saying, "We are not going to comment on rumors."
Concern has been growing that a government rescue of Fannie and Freddie could not only wipe out common stockholders, but also be costly for scores of investment, banking and insurance companies that hold billions of dollars in their preferred shares.
Paulson has been in contact in recent weeks with foreign governments that hold billions of dollars of Fannie and Freddie debt to reassure them that the United States recognizes the importance of the two companies.
The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.
Mudd, the son of TV anchor Roger Mudd, was elevated to Fannie Mae's top post in December 2004 when chief executive Franklin Raines and chief financial officer Timothy Howard were swept out of office in an accounting scandal. Syron was named Freddie Mac's CEO in 2003, replacing former chief Gregory Parseghian, who was ousted in after being implicated in accounting irregularities.
He formerly was executive chairman of Thermo Electron Corp., a Waltham, Mass.-based maker of scientific equipment, served head of the American Stock Exchange was president of the Federal Reserve Bank of Boston in the early 1990s.
Fannie Mae was created by the government in 1938, and was turned into a shareholder-owned company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie.
A government takeover could cost taxpayers up to $25 billion, according to the Congressional Budget Office.
But the epic decision highlights the size of the threats facing the housing market and the economy. On Friday, Nevada regulators shut down Silver State Bank, the 11th failure this year of a federally insured bank. And earlier this year, the government orchestrated the takeover of investment bank Bear Stearns by JP Morgan Chase.
AP Business Writers Martin Crutsinger and Jeannine Aversa contributed to this report.

World markets sink after Wall Street plunge

2008-09-05T08:02:00.000-07:00

Friday September 5, 10:43 am ET By Louise Watt, Associated Press Writer
World markets sink after Wall Street plunge as weak US data undercut recovery hopes
LONDON (AP) -- World stock markets fell sharply Friday in the wake of a sell-off on Wall Street amid mounting concerns about a slumping U.S. economy and its impact on global growth.
Wall Street extended its decline Friday after the U.S. government disappointed investors with news that the economy shed jobs for the eighth straight month in August and at a faster-than-expected pace. In morning trading, the Dow Jones industrial average fell 34.33, or 0.31 percent, to 11,153.79.
The Labor Department said payrolls shrank by 84,000 last month, more than the 75,000 economists predicted, and higher than the 51,000 jobs lost in July. The unemployment rate rose to 6.1 percent from 5.7 percent.
Friday's report followed disappointing reports on U.S. retail sales and jobless claims overnight, eroding investors' hopes for a late-year recovery in the world's biggest economy.
By mid-afternoon in Europe, Britain's FTSE-100 was down 1.09 percent to 5,303.90, Germany's DAX lost 1.82 percent to 6,165.19, and France's CAC 40 fell 1.42 percent to 4,242.74.
In Moscow, the ruble-denominated RTS benchmark was down 6.51 percent in late afternoon trading, sinking to the 1,400-point level which has not been seen since June 2006. Moscow-based analysts say they see the market going further down to 1,300 points this year.
Russia's U.S. dollar-denominated MICEX was down 5.54 percent.
Asian markets also fell. In Japan, the benchmark Nikkei 225 index sank 2.75 percent to 12,212.23. Hong Kong's Hang Seng index tumbled 2.24 percent to 19,933.28, dropping below 20,000 for the first time in more than a year.
Markets in India, Australia and Singapore also were down sharply. China's Shanghai index slid 3.3 percent to its lowest close in 21 months.
European markets, adjusting to the falls in Asia and the 3 percent declines seen in the U.S. markets overnight, also traded lower.
"The financials are once again under pressure following comments from Bill Gross at PIMCO -- the world's largest bond fund -- that implied the market was set to experience a "financial tsunami," said Stephen Pope, chief global markets strategist for Cantor Fitzgerald.
"All banks are weaker, although with gloomy euro-zone economic news in the system, and a hawkish policy still persisting from the ECB, Irish and Spanish names are especially hard pressed," he added.
Mobile phone maker Nokia's announcement that it expects its global market share to be hit in the third quarter saw its shares tumble more than 10 percent. The news dragged down the shares of other mobile handset makers, said Pope, adding that the telecommunications sector was down 7.6 percent.
Mark Matthews, chief Asia strategist at Merrill Lynch, said emerging markets in Asia and other regions have been hit hard lately as investors withdrew funds and faith in the global economy withered.
"People want to be confidant that the economy of the world can get better, and right now they don't have that confidence," Matthews said. "They think the global economy is still going to get worse."
News Thursday from major U.S. retailers that shoppers curtailed their spending last month helped send the Dow Jones industrial average down 344.65 points, or 2.99 percent, to 11,188.23. The Nasdaq composite index declined 3.2 percent, or 74.69 points, to 2,259.04.
"It was ugly in the States; many are still taking their leads from the U.S.," said Lorraine Tan, director at Standard & Poor's equity research in Singapore. "And there's just an overall concern with global growth."
Investors bracing for weak U.S. jobs figures fueled selling in Japan, said Masaru Ohnishi, equity strategist at JP Morgan Securities in Tokyo.
But because markets have already fallen so sharply, they are "likely to rebound if results are good," he said.
Toyota Motor Corp. retreated 2.5 percent to 4,750 yen, Nissan Motor Co. tumbled 3.6 percent to 800 yen, and Mazda Motor lost 6.9 percent to 527 yen.
Sony Corp. dived 4.2 percent to 3,880 yen after the consumer electronics maker announced Thursday a worldwide recall of 440,000 Vaio laptop computers due to a wiring flaw that could cause overheating.
In Hong Kong, investors sent Chinese commodity producers spiraling, with Angang Steel losing 7.5 percent to HK$8.56 and Aluminum Corp. of China, or Chalco, down 3.2 percent to HK$6.19.
Property stocks fell sharply after Goldman Sachs issued a pessimistic outlook for the sector. Hong Kong's leading property firm Sun Hung Kai tanked more than 6 percent, while Cheung Kong plunged 5.7 percent.
In Shanghai, selling was heavy across the board, with the key index falling 3.3 percent to 2,202.45. PetroChina, the Shanghai index's biggest traded share, sank 4.2 percent.
In India, the Sensex fell 2.8 percent to 14,483.83.
AP reporters Tomoko A. Hosaka in Tokyo, Jeremiah Marquez in Hong Kong and Joe Bel Bruno and Tim Paradis in New York contributed to this report.

Jobless rate at 5-year high

2008-09-05T07:42:00.000-07:00

Friday September 5, 10:10 am ET By Glenn Somerville
WASHINGTON (Reuters) - The U.S. unemployment rate unexpectedly shot up to 6.1 percent in August, the highest in nearly five years, as employers cut payrolls for an eighth straight month and a decline in labor markets accelerated.
The Labor Department said on Friday 84,000 jobs were lost in August, significantly more than the 75,000 that economists surveyed by Reuters had forecast. In addition, July's job losses were revised up to 60,000 and June's to 100,000 from a previously reported 51,000 in each month.
Analysts said the bleak hiring data showed a weakening economy that likely will oblige the Federal Reserve to keep interest rates low for an extended period.
"The economy is clearly deteriorating," said Gary Thayer, senior economist for Wachovia Securities in St. Louis. "We're also seeing weakness around the globe so there's less reason for the Fed to focus on inflation and more reason to focus on getting the economy back on its feet."
Stock indexes futures extended losses but U.S. Treasury debt prices rose as investors bet it meant interest rates will remain in hold. The dollar dipped in value against other major currencies and short-term interest rate futures began to signal that the Fed could cut interest rates by year-end.
Labor department officials said the August jobless rate was the highest since September 2003. Analysts had expected the rate to remain steady at July's 5.7 percent rate rather than to jump.
"We're running job losses that are typically seen in the early stages of an economic recession," said David Resler, chief economist for Nomura Securities in New York, adding, "we're probably in one."
There were steep cuts in hiring in nearly every major category of employment. Some 61,000 manufacturing jobs were lost in August, the most for any month since mid 2003, and 8,000 more construction jobs were cut. There were 53,000 jobs eliminated in professional and business services and 4,000 in leisure and hospitality industries.
The average hours of work remained unchanged from July at 33.7 but employers cut overtime to an average 3.7 hours per week in August from 3.8.
A few sectors added jobs. Government payrolls increased by 17,000 in August and education and health services businesses took on another 55,000 employees.
(Additional reporting by Ellen Freilich in New York, Editing by Andrea Ricci)

Stocks open lower after disappointing job data

2008-09-05T07:32:00.000-07:00

Friday September 5, 10:02 am ET By Tim Paradis, AP Business Writer
Wall Street opens moderately lower after disappointing jobs data; unemployment hits 5-yr high
NEW YORK (AP) -- Selling swept across Wall Street for a second straight session Friday on news that the economy shed jobs for the eighth straight month in August and at a faster-than-expected pace.
The Labor Department said payrolls shrank by 84,000 last month, more than the 75,000 economists predicted, and higher than the 51,000 jobs lost in July. The unemployment rate rose to a five-year high of 6.1 percent from 5.7 percent.
The report confirmed Wall Street's fears that the economy continues to weaken. The nation has lost nearly 550,000 jobs so far this year, eroding investors' hopes for a late-year recovery.
"This was an ugly number that pretty much confirms that our economy continues to trend downward," said Jack Ablin, chief investment officer of Harris Private Bank. "I had thought things were stabilizing, and this just knocks the legs out of any hope of seeing much economic improvement right now."
Meanwhile, a downgrade of Merrill Lynch & Co. compounded the market's misery. Goldman Sachs analyst William Tanona cut the nation's largest brokerage to a "sell" rating on expectations it will incur fresh write-downs on top of the $5.7 billion it announced in late July. Merrill fell 25 cents to $25.96.
In the first hour of trading, the Dow Jones industrial average fell 34.33, or 0.31 percent, to 11,153.79.
Broader stock indicators also fell. The Standard & Poor's 500 index slid 4.97, or 0.40 percent, to 1,231.86, and the Nasdaq composite index fell 10.27, or 0.45 percent, to 2,248.77.
Stocks turned in a dismal performance on Thursday, with all three major indexes moving back into bear market territory, defined as a 20 percent drop from a recent peak. The Dow plunged more than 340 points in a sell-off underpinned by disappointing economic news and lackluster sales reports from retailers.
With concerns about the economy and more problems in the financial sector, investors again moved into the safety of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.61 percent from 3.62 percent late Thursday.
As it had earlier in the week, Wall Street found little comfort from falling oil prices. Crude at one point dropped below $107 a barrel Friday as the dollar continued to gain on the euro and investors waited to see whether OPEC moves to restrict output next week following a two-month plunge in prices. The Organization of the Petroleum Exporting Countries is scheduled to meet early next week in Vienna and has indicated it may take action to defend the $100-a-barrel level.
Light, sweet crude fell 14 cents to $107.75 a barrel in electronic trading on the New York Mercantile Exchange.
Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 110.7 million shares.
The Russell 2000 index of smaller companies fell 3.36, or 0.47 percent, to 715.26.
And the gloom about the U.S. economy was not contained to just major American indexes. Investors overseas sent shares lower on concerns about America's effect on global growth.
Japan's Nikkei stock closed down 2.75 percent. In afternoon trading in Europe, Britain's FTSE 100 fell 0.13 percent, Germany's DAX index dropped 0.58 percent, and France's CAC-40 shed 0.52 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com

U.S. House Price Decline Could Be Worse than Great Depression, Economist Shiller Says

2008-09-05T02:42:00.000-07:00

Posted Sep 04, 2008 01:36pm EDT by Henry Blodget in Newsmakers, Recession
Related: ^gspc, fre, fnm

Eight years ago, Yale superstar professor and MacroMarkets chief economist Robert Shiller famously called the top of the stock market in his book Irrational Exuberance. Then, a year before the housing bubble peaked, he predicted the colossal bust we are now experiencing.If you recognize Shiller's name, it’s because the Standard & Poor's/Case-Shiller home price indexes, which he developed with Wellesley College economist Karl Case, have become the nation's most authoritative source for home price trends. In part one of my one-on-one with Shiller, we discuss the grim outlook for U.S. housing, which he tackles in-depth in his new book The Subprime Solution. Highlights of our first discussion include:

Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around.

There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).

The current hopeful consensus -- that house prices will bottom soon and then begin to recover -- is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.

Asian markets plunge after Wall Street sell-off

2008-09-05T02:27:00.000-07:00

TOKYO (AP) -- Asian stock markets plunged Friday after more bad news on the U.S. economy, a vital export market, triggered a broad sell-off on Wall Street overnight.
Disappointing reports on U.S. retail sales and jobless claims undercut hopes for a late-year recovery in the U.S. and depressed investor sentiment across Asia.
In Japan, the benchmark Nikkei 225 index closed down 2.75 percent at 12,212.23.
Hong Kong's Hang Seng index tumbled 3.1 percent to 19,752.65, dropping below the key psychological level of 20,000 to its lowest point in more than a year.
Markets in mainland China, India, Australia and Singapore were also down more than 2 percent.
Pessimism permeated markets as they nervously awaited the U.S. employment report for August later Friday. News Thursday from major U.S. retailers that shoppers curtailed their spending last month helped send the Dow Jones industrial average down 344.65 points, or 2.99 percent, to 11,188.23.
Investors bracing for weak U.S. jobs figures fueled selling in Japan, said Masaru Ohnishi, equity strategist at JP Morgan Securities in Tokyo.
But because markets have already fallen so sharply, they are "likely to rebound if results are good," Ohnishi said. "And even if the data are weak, U.S. markets are unlikely to fall that much further on Friday."
A drop in the dollar against the yen overnight contributed to the malaise, pummeling major Japanese exporters. The dollar fell to 106.59 yen Friday afternoon in Asia; on Thursday in Tokyo it was trading above 108 yen.
Toyota Motor Corp. retreated nearly 2.5 percent, and Nissan Motor Co. tumbled 3.6 percent.
Sony Corp. dived 4.2 percent to after the consumer electronics maker announced Thursday it is recalling 440,000 Vaio laptop computers worldwide due to a wiring flaw that could cause overheating. Sony said the recall involves 19 models in the Vaio TZ series manufactured between May 2007 and July 2008.
Investors in Hong Kong sent Chinese commodity producers spiraling, with Angang Steel losing 5.3 percent and Aluminum Corp. of China, or Chalco, down 3.9 percent early Friday afternoon. Telecoms such as heavyweight China Mobile, down 3.3 percent, also took a beating.
Inflation continues to be a major concern in Asia, with the Philippines reporting Friday that the August consumer price index rose 12.5 percent from a year ago, the highest in nearly 17 years. The local stock index fell 1 percent to 2,724.72.

Currency movements main factor in deciding ranking of most expensive cities in the world

2008-09-02T21:16:00.000-07:00

A report by Mercer Consulting
28 July 2008: Moscow is the world’s most expensive city for expatriates for the third consecutive year, according to the latest Cost of Living Survey from Mercer. Tokyo is in second position climbing two places since 2007, whereas London drops one place to rank third. Oslo climbs six places to 4th place and is followed by Seoul in 5th. Asunción in Paraguay is the least expensive city in the ranking for the sixth year running. With New York as the base city scoring 100 points, Moscow scores 142.4 and is close to three times costlier than Asunción which has an index of 52.5. Contrary to the trend observed last year, the gap between the world’s most and least expensive cities now seems to be widening.

Mercer’s survey covers 143 cities across six continents and measures the comparative cost of over 200 items in each location, including housing, transportation, food, clothing, household goods and entertainment. It is the world’s most comprehensive cost of living survey and is used to help multinational companies and governments determine compensation allowances for their expatriate employees.

Yvonne Traber, a principal and research manager at Mercer, commented, “Current market conditions have led to the further weakening of the US dollar which, coupled with the strengthening of the Euro and many other currencies, has caused significant changes in this year’s rankings. Although the traditionally expensive cities of Western Europe and Asia still feature in the top 20, cities in Eastern Europe, Brazil and India are creeping up the list. Conversely, some locations such as Stockholm and New York now appear less costly by comparison.”She added: “The research confirms the global trend in price increases for certain foodstuffs and petroleum, though the rise is not consistent in all locations. This is partly balanced by decreasing prices for certain commodities, such as electronic and electrical goods. Mercer attribute this to cheaper imports from developing countries, especially China, and to advances in technology. Keeping on top of the changes in expatriate cost of living is essential so companies can ensure their employees are compensated fairly and at competitive rates when stationed abroad.”Traber added: “In some cases, cost of living increases may be correlated to countries with a high rate of economic growth. Companies may assign high priority to expansion in these economies but may have to deal with inflationary pressures due to competition for expatriate-level housing and other services.”For example, Latvia had real GDP growth of 10.2 per cent in 2007, well above the global average growth rate of 5.2 per cent, and its capital, Riga, jumped to 46th place in the latest Mercer ranking, up from 72nd a year ago. Cities in India all rose in the cost of living ranking, with New Delhi climbing to 55th place from 68th a year ago, as India posted a real GDP growth rate of 9.2 per cent in 2007. Bogota jumped to 87th place from 112th, reflecting Colombia’s 7 per cent real GDP growth.

The Americas
The only North American city to feature in this year’s top 50 is New York in 22nd place (score 100), dropping seven places in one year. All other US cities also experienced a significant decline in the rankings. For example, Los Angeles moved from 42nd to 55th place (score 87.5), Miami from 51st to 75th place (score 82) and Washington, DC, from 85th to 107th place (score 74.6)."The decline in the ranking of all US cities is due to the weakening value of the US dollar against other major world currencies," said Mitch Barnes, principal at Mercer in the US. "The dollar has been declining steadily for the past several years, which has resulted in an overall decrease in the cost of living in 19 US cities relative to other major global cities studied. On the bright side, the US dollar's loss of value may serve to attract globally mobile executives to business centers such as New York, Chicago and Los Angeles. The difference in cost of living can be significant, particularly for those executives with families."In 54th place (score 88.1), jumping 28 places from last year, Toronto is the most expensive city for expatriates living in Canada. All other Canadian cities in the survey experienced similar rises, with Vancouver moving from 89th to 64th (score 85.8), Calgary from 92nd to 66th place (score 85.4) and Montréal from 98th to 72nd with a score of 83. This reverses last year’s trend, which saw Canadian cities decline, and places them back where they have traditionally been rated. The Canadian dollar has appreciated nearly 15 per cent against the US dollar, the main reason for these movements.The two top-ranking cities in South America are São Paulo in 25th place (score 97) and Rio de Janeiro in 31st place (score 95.2), jumping 37 and 33 places, respectively. The Brazilian real appreciated nearly 18 per cent against the US dollar last year, causing these Brazilian cities to rocket up the list. Another high-riser in this region is Caracas, jumping 40 places from 129th to 89th place (score 79.3). High inflation in Venezuela has caused a sharp increase in the price of food and household products.South America also has some of the lowest ranking cities globally. Asunción is the least expensive city in the region for the sixth consecutive year (score 52.5), followed by Quito in Ecuador in 142nd place (score 54.6), Buenos Aires in 138th place (score 62.7) and Montevideo in 136th place (score 63.2).

Europe, Middle East and Africa
Moscow is ranked the most expensive city both in Europe and globally for the third year running. The city’s score has steadily increased over the last few years and is currently at 142.4 (compared to 134.4 in 2007 and 123.9 in 2006). “Moscow’s position as the most expensive place for expatriate living has been strengthened by the appreciation of the rouble against the US dollar and the continuous rising accommodation costs,” said Ms Traber.London is the next European city in the ranking at 3rd place (score 125), down from last year, while Oslo jumped six places to rank 4th with a score of 118.3. Norwegian property prices were at an all-time high towards the end of last year after a 50 per cent increase in the last five years. Coupled with the continuous strengthening of the Norwegian krone, this has created a substantial increase in living costs for expatriates in Oslo. London’s drop can be explained by the weakness of the pound sterling against the euro and other currencies and, more importantly, to the British currency’s stability against the dollar. For example, while the euro reached a record high against the dollar in the early summer of 2008 (1.60 dollars to the euro), the pound sterling – at 1.99 dollars to the pound was well down from last year’s record high of 2.10.Other European cities in the global top 10 include Copenhagen at 7th place (117.2) and Geneva in 8th place (115.8). Both cities have dropped one place from last year. Zurich remains in 9th place (112.7), whereas Milan climbs to 10th place with a score of 111.3. Sofia in Bulgaria is again the least expensive European city for expatriates in 97th place (76.9), although the city has climbed 11 places in the overall ranking.Several European cities have experienced a significant rise in the rankings this year, mainly as a result of local currency strengthening against the US dollar. For example, Prague has jumped from 49th to 29th place (score 96) and Warsaw is up to 35th place (score 95) compared to 67th in 2007. Istanbul has climbed 15 places to rank 23 (score 99.4) reflecting the Turkish lira’s significant appreciation against the US dollar as well as general price increases, especially for accommodation.In addition to London dropping one place, two additional UK cities, Birmingham and Glasgow, have both moved down in the rankings, dropping from 41st to 66th (score 85.4) and 36th to 69th (score 84), respectively. “In contrast to the strengthening euro and other European currencies, the British pound has remained relatively stable against the US dollar. As the cost of living in the Eurozone has risen relative to the US, UK cities have declined in the rankings,” according to Ms. Traber.Tel Aviv is again the most expensive city in the Middle East at 14th place (score 105), up three places from 2007. Both Dubai and Abu Dhabi have dropped significantly this year, at positions 52 (score 89.3) and 65 (score 85.7), respectively. This is mainly due to the UAE dirham being pegged to the US dollar. Most African cities in the survey have moved down the ranking with the exception of Lagos in Nigeria, which has jumped seven places to join the top 30 at position 30 (score 95.9).

Asia
Tokyo is the costliest Asian city, in 2nd place (score 127), rising two places since last year. Seoul follows in 5th place (score 117.7) and Hong Kong closely follows after in 6th place with a score of 117.6. Singapore ranks 13th and holds a score of 109.1. Karachi continues to be the least costly city in this region in 141st place with a score of 54.7.While the five top-scoring cities in Asia remain relatively stable in the ranking, there have been significant changes further down the list. In India, Mumbai moves up four places to reach 48th (score 90.3), whereas New Delhi climbs 13 places to 55th place (score 87.5) due to the strengthening of the India rupee against the US dollar. Although India has experienced relatively high inflation, this has increased at similar pace to New York and has therefore had a reduced impact on its cities’ rise in the rankings. Manila rises a total of 27 places, ranking 110th with a score of 73.4, mainly as a result of price increases for international-standard accommodation.In contrast, certain cities in this region have experienced significant declines in the ranking. Some examples are Jakarta, falling from 55th to 82nd place (score 80.5), and Bangkok, dropping from 95th to 105th place with a score of 75.1. In Vietnam, Hanoi drops 35 places to rank 91st place (score 79) and Ho Chi Minh City drops 40 places to rank 100th place (score 76.3), mainly because the Vietnamese dong has remained stable against the US dollar and so has pushed these cities down on the list. The low level of inflation observed for goods in these Vietnamese cities compared to in New York has further widened the gap.

Australia and New Zealand
Sydney continues to be the most expensive city for expatriates in this region, moving up six places in the overall ranking to reach 15th place (score 104.1). Melbourne follows in 36th place (score 94.2), jumping 28 places and Perth climbs 31 places to reach ranking number 53rd (score 88.5).Both Australian and New Zealand cities are moving up in the rankings due to the appreciation of their local currencies against the US dollar. However, New Zealand’s cities remain the less costly option for expatriates, with Auckland in 78th place (score 81) and Wellington in 93rd place (score 77.6).

Notes:The figures for Mercer’s cost of living comparisons are based on a survey conducted in March 2008. The 2008 comparisons are based on a similar survey conducted in March 2007. The information is used by governments and major companies to protect the purchasing power of their employees when transferred abroad. The choice of cities surveyed is based on the demand for corresponding data from companies and governmental organizations.

Oil's retreat not enough to sustain stock rally

2008-09-02T20:57:00.000-07:00

Tuesday September 2, 5:38 pm ET By Madlen Read, AP Business Writer
Wall Street turns lower as economic, financial worries overtake relief about lower oil prices
NEW YORK (AP) -- Wall Street succumbed to its ongoing angst Tuesday, giving up a sharp advance and turning moderately lower after falling oil prices failed to calm the market's nervousness about the economy and the financial sector.
The Dow Jones industrial average initially surged by nearly 250 points as oil prices dropped as low as $105.46 a barrel on reports that the Gulf Coast and its oil facilities were spared heavy damage from Hurricane Gustav. But the positive effect of the storm's outcome on stocks was short-lived, and the blue chips ended the day down 26.
Falling commodities prices caused the stocks of oil and metals companies to sink, dragging on the broader market, and the technology sector was also weak. Furthermore, crude oil eventually lifted off its lows of the day, settling near $110 a barrel and signaling to some traders that oil has the potential to rebound as quickly as it sold off.
"We could have another storm announced tomorrow, and it'd be back up again," said Anthony Conroy, managing director and head trader for BNY ConvergEx Group.
The financial sector was stronger than usual on Tuesday, but not enough to lift the stock market. Investors remain fearful that a weak housing market and tight credit environment will keep racking up losses for the nation's major money centers.
"The one problem with financials is that maybe the Street has a good handle on subprime, but they do not have a good handle on commercial or industrial lending," said Philip S. Dow, managing director of equity strategy at RBC Wealth Management.
Due to the high level of uncertainty in the market -- not to mention low summer trading volumes, which tend to add to volatility -- investors recently have appeared to be aiming for quick, day-to-day profits as opposed to committing to a long-term strategy, Dow said.
"We've had this manic tape for some time," he said. "By and large, it's just a market that's victim to whatever the news of the day is, without a whole lot of conviction."
The Dow fell 26.63, or 0.23 percent, to 11,516.92. On Friday, the blue chip index lost 171 points. The biggest drop among the 30 Dow components came from aluminum producer Alcoa Inc., which fell $1.67, or 5.2 percent, to $30.46.
Broader stock indicators also turned lower after moving sharply higher in early trading. The Standard & Poor's 500 index fell 5.25, or 0.41 percent, to 1,277.58, and the technology-dominated Nasdaq composite index fell 18.28, or 0.77 percent, to 2,349.24.
Advancing issues outnumbered decliners, however, by about 8 to 7 on the New York Stock Exchange, where consolidated volume came to 4.67 billion shares, up from 3.14 billion on Friday.
Light, sweet crude fell $5.75 to settle at $109.71 a barrel on the New York Mercantile Exchange.
Bond prices shot higher as Wall Street gave up its gains. The yield on the benchmark 10-year Treasury note, which moves opposite its price, sank to 3.74 percent from 3.82 percent late Friday. The dollar strengthened against most other major currencies, while gold prices fell sharply.
The Institute for Supply Management, a trade group of purchasing executives, said Tuesday its index on manufacturing activity fell marginally to 49.9 in August -- as expected -- from 50 in July. A reading below 50 indicates contraction. The ISM also found that inflation lessened.
Bill Dwyer, chief investment officer at MTB Investment Advisors in Baltimore, said the reactions of the energy and stock markets Tuesday illustrate the overall uncertainty about the economy.
"It just shows you how unstable the market is based on the perception of the macro economic outlook. It changes daily. There isn't a consistent viewpoint of what is actually happening in the economy," he said.
Financials ended mostly higher Tuesday, but trading was erratic; investors remain extremely skittish about financial services companies, given the billions of dollars in risky loans and securities that remain on their books.
Lehman Brothers Holdings Inc. rose but pared larger gains after the governor of the state-owned Korea Development Bank said discussions were under way to set up a consortium with private banks to acquire Lehman. The comments follow weeks of speculation that the investment bank could be bought as it struggles amid tightness in the credit markets.
Lehman shares rose 4 cents to close at $16.13.
A few financial stocks weakened, including Merrill Lynch & Co., which fell 60 cents, or 2.1 percent, to $27.75.
The drop in oil prices sent airline stocks higher. American Airlines parent AMR Corp. jumped $1.17, or 11.3 percent, to $11.50, Delta Air Lines Inc. rose $1.04, or 12.8 percent, to $9.17, while JetBlue Airways Corp. rose 25 cents, or 4.1 percent, to $6.32.
But energy names fell. Exxon Mobil Corp., one of the 30 Dow industrials, fell $2.69, or 3.4 percent, to $77.32, while Chevron Corp., another Dow component, lost $3.03, or 3.5 percent, to $83.29.
Most technology companies declined as well. One of the most actively traded stocks in the Nasdaq composite index was Dell Inc., which on Friday reported disappointing quarterly results and set off a string of estimate cuts by analysts.
Dell shares extended their declines, falling by 90 cents, or 4.1 percent, to $20.83.
The Russell 2000 index of smaller companies fell 0.99, or 0.13 percent, to 738.51.
Overseas, Japan's Nikkei stock fell 1.75 percent. Britain's FTSE 100 rose 0.32 percent, Germany's DAX index rose 1.51 percent, and France's CAC-40 advanced 1.50 percent.
New York Stock Exchange: http://www.nyse.com
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Insurers estimate Gustav claims as high as $10B

2008-09-02T20:54:00.000-07:00

BEAUMONT, Texas (AP) -- Residential and commercial insurance claims could total $4 billion to $10 billion. More than a million customers, including some refineries, lack electricity. And retailers are gearing up for a burst of sales once residents who fled the Gulf Coast return.
Snapshots of Hurricane Gustav's economic impact revealed Tuesday that the storm was hardly as damaging as feared -- particularly for the region's vast network of energy facilities. But it will be days, if not weeks, before business as usual returns.
While Gustav's force paled in comparison to Hurricane Katrina, which cost insurers $41 billion, oil workers, utility crews, fishermen and other business owners fanned out across the Gulf Coast Tuesday to assess damage and make preparations to restart operations.
Outside a Lowe's in Houma, La., 34-year-old sales manager Britt Coyle said there was only minor damage to the store, which he expected to be open on Wednesday to sell chainsaws, generators and other necessities to residents returning home.
For the moment, there were no customers in sight, and power outages in the area were widespread.
At the nearby Jolly Inn restaurant, the owners had a diesel generator powering their refrigerator in order to prevent thousands of dollars worth of food from spoiling. Forty-five-year-old Denise Prosperie-Fritch, whose family owns the Jolly Inn and rode out Gustav inside the restaurant, said the establishment is insured but that they only have one or two days worth of diesel fuel left to keep the food cold.
"We will be addressing our hardest-hit policyholders first," Elizabeth Stelzer, a spokeswoman for Nationwide Mutual Insurance Co., said. "Those homes with a tree through a wall, an exposed roof, or other claims in which the home has become uninhabitable are the priority."
Meanwhile, utilities started dealing with the task of restoring power. Utility giant Entergy Corp. said 826,000 customers, mostly in Louisiana, were without power. A Royal Dutch Shell-owned refinery in Convent lacked power late Tuesday, as did the company's chemical plant in Geismar. The power outages also brought down cellular and Internet service in parts of Louisiana.
Entergy did not have an estimate on when power may be restored, saying it could be weeks in some instances. "Our transmission system has had massive damage," Entergy spokesman Mike Burns said, noting damage to 191 transmission lines and 210 substations that affected 825,000 customers, mostly in Louisiana.
Gustav also created problems for the region's Gulf Coast oyster industry.
Mike Voisin, owner of an oyster processing plant in Houma and president of the Louisiana Oyster Task Force, said Louisiana won't be producing oysters for at least a week to 10 days, depending on how quickly officials can ensure oyster beds have not been contaminated by floodwaters carrying bacteria. Similar closures were announced in Alabama and Mississippi as Gustav approached.
Residential and land-based commercial losses, including costs associated with business interruption, were expected to total between $3 billion and $7 billion, Newark, Calif.-based Risk Management Solutions Inc. estimated. The firm estimated damage to oil platforms and wells, as well as production interruption caused by wind and waves, at about $1 billion to $3 billion.
Insurance industry analysts warned that computerized data on insurance losses may understate actual costs because the figure don't include damage to uninsured property or destruction caused by actions excluded from some policies, such as flooding. Total losses won't be known for months.
Still, there were signs that the region held up better than expected:
-- Preliminary indications were that Gustav caused little physical damage to the region's onshore and offshore energy-production facilities.
-- Port of New Orleans spokesman Chris Bonura said damage appeared to be light, and that the Mississippi River was already open to some traffic Tuesday morning.
-- In the Louisiana coastal fishing village of Cocodrie, where the storm made landfall Monday morning, there was little evidence of widespread destruction. There were colorful, expensive-looking second homes, fishing shacks and trailer homes built high up on stilts. Some were damaged by wind, but few appeared to have flooded. One small house had part of its roof and a wall torn away, revealing a man's clothes still hanging in a closet.
-- Crowley Maritime Corp., which operates container ships, tugs and barges, said its shipping facilities in Lake Charles, La., and Gulfport, Miss., areas remained closed Tuesday, but spokesman Mark Miller said, "We fared pretty well. We're happy about that."
-- In Mississippi, regulators say the 11 casinos along the Gulf Coast will remain closed until crews finish cleaning up from the storm and an adequate number of employees return to work. Larry Gregory, executive director of the Mississippi Gaming Commission, said Tuesday that none of the casinos suffered any structural damage from Gustav.
Insurance officials acknowledged that the first damage estimates following a hurricane can come in high.
"When you provide initial numbers there's no goal, but you do tend to error on the comfort side," said Tom Larsen, senior vice president of the Oakland, Calif.-based Eqecat Inc.
Katrina, which struck three years ago last month, was the single largest natural disaster loss in the history of the insurance industry. Insurers paid $41 billion arising from 1.7 million claims for damage to homes, businesses and vehicles to policy holders in six states. Hurricane Andrew -- the previous record holder -- produced $15.5 billion in losses in 1992 and 790,000 claims.
Associated Press Writers John Porretto in Houston, Ashley Heher in Chicago, Peter Svensson in New York, Mike Kunzelman in Houma, La., and Kevin McGill in New Orleans contributed to this report. Ieva M. Augstums reported from Charlotte, N.C.

Japan's inflation rises as leaders unveil package

2008-08-29T08:14:00.000-07:00

Friday August 29, 7:17 am ET By Tomoko A. Hosaka, Associated Press Writer
Japan unveils economic stimulus package as inflation surges and spending slips
TOKYO (AP) -- Japan unveiled a stimulus package with 2 trillion yen ($18 billion) in fresh spending to shore up its flagging economy on Friday as figures showed that inflation has spiked to its highest in nearly 11 years, denting consumer spending.
Measures in the package span discounts on expressway tolls to assistance to farms and help for part-time workers to find better jobs. Funds are also earmarked for better medical care, ecological technology, housing loans and education, according to the Cabinet Office.
Economists are skeptical that the package will help revive Japan's economy, which shrank 2.4 percent at an annual pace in the second quarter.
And critics call it a publicity stunt to lift Prime Minister Yasuo Fukuda's dismal approval ratings.
"This is just reckless spending," Yukio Hatoyama, leader of the main opposition Democratic Party, said on nationally televised news. "The package is aimed at getting voters' attention in anticipation of the next election."
All told, the value of the programs involved comes to 11.7 trillion yen ($107.5 billion). Aside from the $18 billion cash infusion, most of the package consists of non-spending measures such as lower road tolls and loans to businesses.
Friday's package did not include tax breaks, but cuts will be considered in the future, the government said.
Masamichi Adachi, senior economist for JP Morgan Securities in Tokyo, called the new spending a "drop in the bucket" compared to Japan's total gross domestic product of about 500 trillion yen, or $4.6 trillion.
"It's definitely positive, but to what extent (is the question)," he said.
July economic figures released Friday painted a mixed picture of the Japanese economy. Industrial production rose modestly, but the outlook is choppy. The jobless rate fell and retail sales rose. Household spending declined but not as steeply as expected.
The rapid acceleration in inflation was the most alarming of all the indicators released.
Japan's core consumer price index, which excludes fresh food prices but includes energy, rose 2.4 percent in July, the quickest pace in almost 11 years, the Ministry of Internal Affairs said.
While Japan's economy is indeed slowing, many economists see the downturn as mild, with little risk of the sort of deep recession that crippled the country in the 1990s.
"We've been calling this a 'shallow recession,' and the data today tend to support that view," Adachi said. "But that doesn't mean they point toward a quicker recovery either."
The Bank of Japan, meanwhile, is unlikely to tighten monetary policy in response to inflation, even though July's figure surpasses the central bank's inflation target range of 0-2 percent. Last week, policy board members kept the key interest rate unchanged at 0.5 percent.
So-called core-core inflation excluding food and energy rose a modest 0.2 percent, indicating that huge price gains have yet to permeate all sectors.
Merrill Lynch economists Takuji Okubo and Masayuki Kichikawa said earlier this week that current inflation appears to be a short-term trend.
"Going forward, whether core measures of CPI excluding food and energy would show signs of inflation would be the key factor in determining (the Bank of Japan's) actions," they said.
Overall CPI was up 2.3 percent in July, while core CPI for the Tokyo area rose 1.5 percent in August.
Among other key economic data, Japan's industrial production in July was up 0.9 percent from the previous month on a seasonally adjusted basis, posting the first rise in two months on higher output by makers of cars and electronics.
"Improved external demand for products of those industries in July seemed to be in the background of their industrial production gains," said UBS economist Akira Maekawa in a research memo.
The news cheered investors, who helped push the benchmark Nikkei 225 stock index up 2.9 percent Friday. Stronger-than-expected economic growth figures in the U.S. in the second quarter -- up 3.3 percent at an annual pace -- also lifted sentiment.
The outlook for industrial production looks uneven. The Ministry of Economy, Trade and Industry said it expects production to fall 2.9 percent in August before increasing 3.4 percent in September.
Japan's unemployment rate fell from 4.1 percent to 4 percent in July.
Meanwhile, spending by Japanese households slipped 0.5 percent from a year earlier but was more robust than anticipated. Hotter weather spurred sales in items like air conditioners and certain types of food, Maekawa said.
Retail sales in the country rose 1.9 percent in July from the previous year, the government said.

Stocks fall after personal income data; oil rises

2008-08-29T07:57:00.001-07:00

Friday August 29, 10:47 am ET By Tim Paradis, AP Business Writer
Stocks fall as drop in personal incomes stirs concerns about consumers; Dell weighs on techs
NEW YORK (AP) -- Stocks declined unevenly Friday after the government said personal incomes fell last month by the largest amount in nearly three years while consumer spending slowed. A disappointing profit report from computer maker Dell Inc. weighed on technology stocks.
Meanwhile, oil prices rose as investors charted the path of Tropical Storm Gustav as it heads toward the Gulf of Mexico and its oil rigs and refineries.
Wall Street's retreat following the downbeat news about consumers also comes after several days of sizable gains in stocks and on the final session before the long Labor Day weekend. Pre-holiday trading is generally light; therefore, some pullback was to be expected.
Still, investors were uneasy after the Commerce Department reported that personal incomes fell by 0.7 percent in July -- well beyond the drop of 0.1 percent that analysts polled by Thomson IFR had predicted on average. That reflects the waning impact of tax rebate checks that Americans received this spring.
As expected, the government also said consumer spending rose a modest 0.2 percent. That was below the 0.6 percent increase seen in June and, accounting for rising prices, spending actually fell by 0.4 percent in July. Wall Street has been particularly concerned about Americans' ability to help the economy grow, since rising prices for gas and food have strapped many household budgets.
In midmorning trading, the Dow Jones industrial average fell 80.85, or 0.71 percent, to 11,632.44. The blue chips began the session having logged a three-day advance of nearly 330 points.
Broader stock indicators also fell. The Standard & Poor's 500 index fell 9.15, or 0.70 percent, to 1,291.53. The technology-heavy Nasdaq composite index fell 31.69, or 1.31 percent, to 2,379.95.
Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to an anemic 153.9 million shares. Trading has been light all week, prompting some observers to dismiss the market's moves as aberrations that occur when many traders are on vacation.
Bond prices fell Friday. The 10-year note's yield, which moves opposite its price, rose to 3.81 percent from 3.79 percent late Thursday. The dollar was mixed against other major currencies, while gold prices rose.
Light, sweet crude rose $2.41 to $118 per barrel on the New York Mercantile Exchange. So far, oil trading has been fairly orderly as Gustav progresses, although there is concern about damage from the storm or a disruption in the flow of gasoline and other fuel from Gulf Coast refineries.
With many investors fixated on the thickness of the consumers' wallets, Wall Street showed little reaction to the Reuters/University of Michigan's index on consumer sentiment, which rose to 63 for August from 61.2 in July, its highest level in five months. Still, most economists reason that consumers who are upbeat about their prospects are more likely to spend.
Also, investors shrugged off the Chicago Purchasing Managers' index, which measures business conditions across Illinois, Michigan and Indiana. It jumped to 57.9 from 50.8 in July.
In corporate news, Dell fell $3.05, or 12 percent, to $22.16 after the company's profit margins came in well below what analysts had been expecting.
The Russell 2000 index of smaller companies fell 8.12, or 1.09 percent, to 739.67.
In Tokyo, the Nikkei index rose 2.39 percent. In afternoon trading in Europe, London's FTSE-100 index rose 1.32 percent, Frankfurt's DAX fell 1.57 percent and the CAC-40 index in Paris rose 0.81 percent.
New York Stock Exchange: http://www.nyse.com
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Stocks jump on better-than-expected GDP, jobs data

2008-08-28T21:29:00.000-07:00

Thursday August 28, 6:03 pm ET By Tim Paradis, AP Business Writer
Stocks jump on better-than-expected gross domestic product reading, decline in jobless claims
NEW YORK (AP) -- Wall Street barreled higher Thursday after a better-than-expected reading on the gross domestic product and a drop in jobless claims gave investors some reassurance that the economy is holding up. The Dow Jones industrial average jumped more than 200 points.
A decline in oil prices also appeared to add force to the rally in stocks. But trading volume was again light heading toward the Labor Day weekend, a condition that can skew price moves.
The Commerce Department's report that gross domestic product rose at an annual rate of 3.3 percent for the April-June period followed several economic readings this week that have left guarded investors somewhat optimistic. The weaker dollar helped boost U.S. exports, which pushed GDP growth beyond the government's initial estimate of 1.9 percent as well as economists' forecast of 2.7 percent.
It marked the economy's best performance since the third quarter of last year, when GDP rose at a 4.8 percent pace.
Investors are watching GDP, considered the best barometer of the economy's well-being, to look for signs that growth is picking up after being pounded by housing woes and a debilitating credit crisis. The economy grew at a weak rate of 0.9 percent in the first quarter after shrinking in the last three months of 2007.
Also Thursday, the Labor Department said the number of newly laid off people seeking jobless benefits fell for the third straight week. Claims dropped to a seasonally adjusted 425,000, down 10,000 from the previous week. That was slightly better than the 427,000 expected by analysts surveyed by Thomson/IFR.
But some economists consider claims above 400,000 an indicator of a slowing economy. Companies have cut jobs every month this year as they grapple with high energy costs and tighter credit.
The Dow rose 212.67, or 1.85 percent, to 11,715.18, bringing its three-day advance to nearly 330 points. Still, for the week, the Dow is up only slightly after a big decline Monday on credit worries.
Broader stock indicators also rose Thursday. The Standard & Poor's 500 index advanced 19.02, or 1.48 percent, to 1,300.68, and the Nasdaq composite index rose 29.18, or 1.22 percent, to 2,411.64.
Bonds fell as investors moved into stocks. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.79 percent from 3.77 percent late Wednesday. The dollar rose against most major currencies. Gold also advanced.
"This is an environment in which we're likely to get a lot of head-fakes both on the upside and the downside," said Bill Urban, principal with San Francisco-based Bingham, Osborn & Scarborough, referring to economic data. He noted that the initial reading on the fourth quarter last year had been positive before revisions revealed the economy contracted.
"This is just sort of data that trickles out that can be very positive one day and negative the next. We don't yet think it signals a trend," he said.
Beyond economic reports, investors are watching oil prices as Tropical Storm Gustav churns toward the Gulf of Mexico on a course that could collide with oil and gas platforms. Oil rose in the early going on concerns about the storm but a strengthening dollar upended oil's climb.
Light, sweet crude fell $2.56 to settle at $115.59 on the New York Mercantile Exchange.
The decline in oil made energy stocks one of the session's few areas of weakness.
Devon Energy Corp. fell $3.62, or 3.4 percent, to $103.16, while Hess Corp. fell $1.61, or 1.5 percent, to $105.53.
Financial shares advanced after MBIA Inc. agreed to reinsure nearly $200 billion of municipal bonds backed by FGIC Corp. The deal between the two bond insurers led to some hopes that the troubled credit market is beginning to right itself. MBIA jumped $4.17, or 35 percent, to $16.15. Other bond insurers also rose, with Ambac Financial Group Inc. climbing $2.18, or 42 percent, to $7.42.
Government-chartered mortgage companies Fannie Mae and Freddie Mac rose for a fourth straight session after Fannie Mae announced a management shake-up and analysts raised further doubts that a government bailout of the companies is in the offing; such a move could wipe out shareholder equity. Fannie Mae rose $1.47, or 23 percent, to $7.95, while Freddie Mac rose 53 cents, or 11 percent, to $5.28.
Among retailers, Tiffany & Co. jumped $4.24, or 11 percent, to $43.85 after reporting that its second-quarter profit doubled as sales jumped in Asia and Europe.
Zale Corp. forecast a fiscal 2009 profit that topped what Wall Street had been expecting. The specialty jeweler rose $4.77, or 21 percent, to $27.92.
Investors have been looking at retailers' results this week for insights into the health of consumers, whose spending accounts for more than two-thirds of U.S. economic activity. Several upbeat retail reports Wednesday helped buoy Wall Street's mood.
Advancing issues outnumbered decliners by about 3 to 1 on the New York Stock Exchange, where volume came to 956.2 million shares compared with 820.6 million shares Wednesday.
The Russell 2000 index of smaller companies rose 14.84, or 2.02 percent, to 747.79.
Overseas, Japan's Nikkei stock average edged up 0.12 percent. Britain's FTSE 100 rose 1.32 percent, Germany's DAX index added 1.57 percent, and France's CAC-40 jumped 2.02 percent.
New York Stock Exchange: http://www.nyse.com
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Borders shares gain 25 percent after narrower loss

2008-08-27T09:21:00.000-07:00

Wednesday August 27, 10:39 am ET
Borders shares surge 25 percent after bookseller posts narrower 1st-quarter loss
ANN ARBOR, Mich. (AP) -- Shares of Borders Group Inc. soared more than 25 percent in early trading Wednesday following the bookseller's better-than-expected earnings for the second quarter.
Borders said late Tuesday that it narrowed its losses in the second quarter, losing $9.2 million, or 15 cents a share, compared with a loss of $25.1 million, or 43 cents a share for the same quarter of last year.
The company, which has been restructuring and selling some business units, said that it lost $11.3 million, or 19 cents a share, from its continuing operations, compared with a loss of $18.1 million, or 31 cents a share, last year.
Analysts polled by Thomson Reuters had anticipated a second-quarter loss of 29 cents per share, on average.
Total revenue fell to $758.5 million from $812.4 million. Borders said comparable-store sales for the quarter fell 8.9 percent, due in part to the release of a book in the Harry Potter series last year and current declines in music sales.
Borders shares gained $1.39 to $6.75 in morning trading.

Stocks turn higher following durable goods report

2008-08-27T09:16:00.000-07:00

Wednesday August 27, 11:49 am ET By Tim Paradis, AP Business Writer
Stocks turn higher after durable goods orders rise more than expected; retailers advance
NEW YORK (AP) -- Stocks rose moderately Wednesday after the government reported a larger-than-expected increase in orders for big-ticket manufactured goods, offsetting some unease about a rise in oil prices.
The Commerce Department said orders for durable goods jumped 1.3 percent in July compared with the previous month, led by a big gain in demand for commercial aircraft. That was well above the 0.1 increase expected by economists surveyed by Thomson/IFR.
Durable goods, which also include cars, appliances and machinery, are under scrutiny not only because they reflect business spending, but because they are also an indicator of consumer confidence. The July increase equaled a 1.3 percent rise in June; both months produced the strongest gains since a 4.1 percent leap back in December.
Mark Coffelt, portfolio manager at Empiric Funds in Austin, Texas, cautioned against reading too much into the durable goods report and said economic readings will likely continue to come in mixed. He predicts that volatility also will likely continue as investors thumb through a list of concerns ranging from the financial sector, to housing to energy costs.
"I think what we see is a lot of confusion right now. I'm not sure investors really know what to do. You've got oil jumping all over the place," he said.
Light, sweet crude rose $1.53 a barrel to $117.80 on the New York Mercantile Exchange on worries that Tropical Storm Gustav might hit Gulf of Mexico installations
In late morning trading, the Dow Jones industrial average rose 46.57, or 0.41 percent, to 11,459.44.
Broader stock indicators also rose. The Standard & Poor's 500 index advanced 5.16, 0.41 percent, to 8,319.06, and the Nasdaq composite index rose 9.76, or 0.41 percent, to 2,371.73.
Light trading volume ahead of the long Labor Day weekend is also likely to exacerbate the market's moves.
Stocks ended mixed Tuesday as what was then Hurricane Gustav sent oil prices higher and offset a better-than-expected reading on consumer confidence.
Bond prices fell slightly Wednesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.79 percent from 3.78 percent late Tuesday. The dollar was mixed against other major currencies, while gold prices rose.
Rising energy prices initially curtailed the market's overall advance but investors eventually appeared to set aside some of their concerns. But the rise in oil prices still weighed on companies such as airlines, which have been hit hard by rising costs for jet fuel. It also buoyed names in the energy sector.
Northwest Airlines Corp. fell 99 cents, or 10 percent, to $8.56, while U.S. Airways Group fell $1.27, or 11 percent, to $9.88.
Oil refiner Tesoro Corp. rose $1.79, or 11 percent, to $18.36, while Valero Energy Corp. added $1.87, or 5.6 percent, to $35.47.
Several retailers advanced after signaling that business is stronger than some investors might have expected, offering investors some reassurance about consumer spending and in turn, the health of the economy.
Borders Group Inc. jumped $1.10, or 21 percent, to $6.46 after the bookseller reported better-than-expected second-quarter results and slashed debt.
Clothing retailer Talbots Inc. rose $2.90, or 29 percent, to $12.90 after the company raised its forecast for 2008 per-share earnings.
Chico's FAS Inc. rose 48 cents, or 9.4 percent, to $5.56 after the women's apparel retailer's fiscal second-quarter profit fell sharply but beat Wall Street's expectations.
Advancing issues outnumbered decliners by about 5 to 2 on the New York Stock Exchange, where volume came to a light 243.3 million shares.
The Russell 2000 index of smaller companies rose 5.78, or 0.80 percent, to 729.29.
Overseas, Japan's Nikkei stock average fell 0.20 percent. In afternoon trading, Britain's FTSE 100 rose 0.49 percent, Germany's DAX index fell 0.42 percent, and France's CAC-40 slipped 0.08 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com

July durables orders surprisingly strong

2008-08-27T09:14:00.000-07:00

Wednesday August 27, 9:07 am ET By Mark Felsenthal
WASHINGTON (Reuters) - New orders for long-lasting U.S. manufactured goods jumped a surprising 1.3 percent in July, while a gauge of business investment also rose unexpectedly, a government report showed on Wednesday.
Orders for durable goods, items meant to last three years or more, were up after an upwardly revised 1.3 percent gain in June, the Commerce Department said. Analysts were expecting durables orders to remain unchanged from the previous month.
Stock futures rose and the dollar strengthened in foreign exchange trading against the euro, while U.S. Treasury debt prices slipped on the report.
"This bodes well for capital spending in the third quarter," said Matthew Moore, economic strategist at Banc of America Securities in New York. "It doesn't seem like the credit crisis is impacting capital spending."
Transportation orders rose 3.1 percent in July, the largest gain since February, on a 28 percent rise in civilian aircraft orders.
Orders for machinery and primary and fabricated metals rose, while demand for computers and appliances waned.
Even when volatile transportation orders were stripped out, demand for durables rose 0.7 percent. Analysts had expected a 0.5 percent drop in durables orders excluding transportation.
Non-defense capital goods orders excluding aircraft, seen as a barometer of business spending, jumped 2.6 percent, the steepest gain since April. Analysts were expecting that category to decline by 0.1 percent.
(Additional reporting by Walden Siew in New York, Editing by Andrea Ricci)

Oil falls as dollar strengthens against euro, yen

2008-08-26T06:49:00.000-07:00

Tuesday August 26, 6:37 am ET By Pablo Gorondi, Associated Press Writer
Oil prices fall as stronger dollar trumps concerns Hurricane Gustav may disrupt oil output
Oil prices slumped below $113 a barrel Tuesday as gains by the U.S. dollar against other major currencies pulled investors away from commodities and outweighed concerns Hurricane Gustav may disrupt oil operations in the Gulf of Mexico.
By midday in Europe, light, sweet crude for October delivery was down $2.17 to $112.94 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 52 cents overnight to settle at $115.11 a barrel.
In London, October Brent crude retreated $2.68 to $111.82 a barrel on the ICE Futures exchange.
While oil prices initially rose earlier in Tuesday's session due to the fears over Hurricane Gustav, they began falling markedly as the dollar strengthened.
"Lately, there has been a very strong correlation between oil futures and the U.S. dollar," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.
Oil prices typically fall when the dollar strengthens as investors buy commodities as a hedge against inflation and weakness in the U.S. currency.
The euro fell below $146 Tuesday, a six-month low. By midday in Europe, the 15-nation currency stood at $1.4594, more than 1.5 cents below the $1.4756 it bought in late trading Monday in New York.
At the same time, the dollar gained to 109.78 Japanese yen compared with 109.35 Monday.
Tropical storm Gustav became a hurricane Tuesday as it approached Haiti's southern coast, and is also on track to hit Cuba.
"It's hard to predict where Gustav will strike," Shum said. "But the market is reacting to it and edging up some."
The National Hurricane Center in Miami said the hurricane's maximum sustained winds were near 80 mph (130 kph).
Haitians were told to prepare for evacuations as the storm formed Monday in the Caribbean. Haiti upgraded storm warnings to hurricane warnings along much of its coast as Gustav closed in from the south.
Forecasters said storm preparations in Haiti should be rushed to completion and that floods and landslides were possible across its southern peninsula. The forecasts suggested Gustav's eye could pass near the capital of Port-au-Prince, home to nearly 3 million people.
Traders worried that the hurricane could head into the Gulf, where there are many oil drilling platforms. The storm was centered about 130 miles (210 kilometers) south-southeast of Port-au-Prince and was moving toward the northwest near 12 mph (19 kph).
In other Nymex trading, heating oil futures fell 2.23 cents to $3.1291 a gallon, while gasoline prices lost 3.24 cents to $2.8499 a gallon. Natural gas futures increased 12 cents to $7.945 per 1,000 cubic feet.
Associated Press writers Alex Kennedy in Singapore and Matt Moore in Frankfurt contributed to this report.

Stock futures mixed ahead of new home sales data

2008-08-26T06:35:00.001-07:00

Tuesday August 26, 9:24 am ET By Stevenson Jacobs, AP Business Writer
Wall Street heads for mixed open ahead of reports on new home sales data, consumer sentiment
NEW YORK (AP) -- Wall Street headed for a narrowly mixed open Tuesday, a day after a big pullback, as investors awaited key readings on new home sales and consumer confidence.
Investors expect the Commerce Department report to show new home sales dropped again in July, falling nearly 1 percent to a seasonally adjusted annual rate of 525,000 from June's 530,000, according to analysts surveyed by Thomson/IFR. That would be the eighth decline in the past nine months. The report is due at 10 a.m. EDT.
Reducing the inventory of new homes has been difficult as mortgage rates have increased and banks have tightened lending standards due to the credit crunch.
Also Tuesday, the widely watched Standard & Poor's/Case-Shiller home price index tumbled the most ever during the second quarter, falling 15.4 percent compared to the same period a year ago.
The market is also awaiting a report on U.S. consumer sentiment. The Conference Board's Consumer Confidence Index is expected to rise slightly for August to 53, just higher than last month's reading of 51.9, according to economists surveyed by Thomson/IFR. That would be the second straight month the index posted a slight gain, but the forecast still remains about half of what it was a year ago.
Investors closely watch for any sign that consumers' moods are lifting as consumer spending accounts for two-thirds of the U.S. economy.
The Dow Jones industrial average futures rose 14, or 0.12 percent, to 11,398. On Monday, the Dow fell almost 250 points as worries about American International Group Inc. fed concerns that the deterioration of the credit markets will bring more big losses for financial companies.
The Standard & Poor's 500 index futures rose 0.10, or 0.01 percent, to 1,266.50, and the Nasdaq 100 index futures fell 2.50, or 0.13 percent, to 1,892.50.
Bonds rose. The yield on the benchmark 10-year Treasury note, which trades opposite its price, fell to 3.78 percent from 3.79 percent late Monday. The dollar was higher against other major currencies, while gold prices fell.
Light, sweet crude rose 67 cents to $115.78 in premarket electronic trading on the New York Mercantile Exchange.
In corporate news, Smithfield Foods Inc., the nation's largest hog producer and pork processor, said Tuesday it swung to a fiscal first-quarter loss due in part to a $20.1 million write-down in the value of commodities contracts. The company said it lost $12.6 million, or 9 cents per share, in the period. Analysts, who typically exclude one-time costs, expected a loss of 4 cents per share on $2.87 billion in sales.
Overseas, Japan's Nikkei stock average fell 0.78 percent. In afternoon trading, Britain's FTSE 100 was down 1.98 percent, Germany's DAX index was down 0.18 percent, and France's CAC-40 was down 0.95 percent.
New York Stock Exchange: http://www.nyse.com
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S&P: Home prices tumble by record amount

2008-08-26T06:33:00.000-07:00

Tuesday August 26, 9:26 am ET
Private housing index shows home prices tumbling by record amount nationwide in June
NEW YORK (AP) -- A widely watched housing index released Tuesday showed home prices dropping by the sharpest rate ever in the second quarter.
The Standard & Poor's/Case-Shiller U.S. National Home Price Index tumbled a record 15.4 percent during the quarter from the same period a year ago.
The monthly indices also clocked in record declines. The 20-city index fell by 15.9 percent in June compared with a year ago, the largest drop since its inception in 2000. The 10-city index plunged 17 percent, its biggest decline in its 21-year history.
No city in the Case-Shiller 20-city index saw year-over-year price gains in June, the third straight month that's happened.
However, the rate of single-family home price declines slowed from May to June, a possible silver lining, the index creators said.
"While there is no national turnaround in residential real estate prices, it is possible that we are seeing some regions struggling to come back, which has resulted in some moderation in price declines at the national level" said David M. Blitzer, chairman of the index committee at S&P.

German consumer, business confidence ebbs

2008-08-26T05:01:00.000-07:00

Tuesday August 26, 7:01 am ET By Matt Moore, AP Business Writer
German consumer, business confidence slide to 5- and 3-year lows; gov't confirms GDP pinch
FRANKFURT, Germany (AP) -- Consumer confidence in Europe's biggest economy declined for a fourth month in a row, sliding to another five-year low as lower energy prices failed to bolster Germans' likelihood of buying new goods, a report released Tuesday found.
A separate report, meanwhile, found that business executives' confidence in the German economy had also dropped to a three-year low in August, the third consecutive monthly decline.
The forward-looking GfK consumer climate forecast index dropped to 1.5 points for September from a revised 1.9 points in August. The last time it was that low was five years earlier.
"The consumer climate ... was depressed further by the very subdued economic outlook. Even significantly lower crude oil prices did nothing to brighten the consumer mood," the report said.
"Consumers are not interpreting the marked decrease in crude oil prices as an all-clear signal when it comes to purchasing power," GfK added in the report.
Ifo's Business Climate for Germany report, which surveyed 7,000 business executives across Germany, found that business confidence fell to 94.8 points in August from 97.5 points in July.
The global financial turbulence was still affecting business confidence despite the recent fall in oil prices and the euro's retreat from record highs against the dollar, said Timo Klein, an economist with Global Insight, of the latest report.
Munich-based Ifo said that manufacturing firms had seen a cooling in the business climate, as had construction and retail companies.
"The German economy is encountering an increasingly more difficult situation," Ifo said in the report.
Germany's government also confirmed that the economy shrank for the first time in nearly four years in the second quarter as consumer spending and capital investment declined.
The reports helped push the euro to a six-month low against the dollar. It fell to $1.4595 in late morning trading compared with $1.4756 the night before in New York.
The economy contracted by 0.5 percent in the April-June period compared with the previous quarter, the Federal Statistical Office said. It was the first decline since the third quarter of 2004.
The two reports provided ample proof that Germany, and its consumers, are not immune to the global economic slowdown, said Andreas Rees, an economist at UniCredit in Munich.
"The German consumer is clearly no match for the rapid slowdown of the global economy," he said.
In the report, the Nuremberg-based GfK said that consumers' propensity to buy dropped by 1.7 points to minus 27.9 points, a level last seen in mid-2005.
"High energy prices are reducing the purchasing power of consumers. With manufacturing and wholesale prices rocketing most recently, there is little hope of an easing in the price trend of other fast-moving consumer goods," the report said.
Because of that it is unlikely that Germans, even those who have received bumps in their salaries because of union wage talks, will make major purchases from cars to washing machines.
As such "real disposable income for consumption will therefore hardly see an increase this year," GfK said.
All three of GfK's subindexes, which refer to current conditions, fell in August versus July.
The index that measures economic expectations dropped to minus 21.8 points in August from minus 8 points in July. The index showing income expectations fell to minus 16.8 points in August from minus 20 points in July. The index showing consumers' consumption and propensity to buy fell to minus 27.9 points in August from minus 26.2 points in July.
http://www.gfk.com

Stocks poised higher ahead of new home sales data

2008-08-26T05:00:00.001-07:00

Tuesday August 26, 7:57 am ET By Stevenson Jacobs, AP Business Writer
Wall Street heads for higher open ahead of reports on new home sales data, consumer sentiment
NEW YORK (AP) -- Wall Street headed for a higher open Tuesday, a day after a big pullback, as investors awaited key readings on new home sales and consumer confidence.
Investors expect the Commerce Department report to show new home sales dropped again in July, falling nearly 1 percent to a seasonally adjusted annual rate of 525,000 from June's 530,000, according to analysts surveyed by Thomson/IFR. That would be the eighth decline in the past nine months. The report is due at 10 a.m. EDT.
Reducing the inventory of new homes has been difficult as mortgage rates have increased and banks have tightened lending standards due to the credit crunch.
Also Tuesday, investors are looking for Standard & Poor's/Case-Shiller's June home price index.
The market is also awaiting a report on U.S. consumer sentiment. The Conference Board's Consumer Confidence Index is expected to rise slightly for August to 52.4, just higher than last month's reading of 51.9, according to economists surveyed by Thomson/IFR. That would be the second straight month the index posted a slight gain, but the forecast still remains about half of what it was a year ago.
Investors closely watch for any sign that consumers' moods are lifting as consumer spending accounts for two-thirds of the U.S. economy.
The Dow Jones industrial average futures rose 36, or 0.31 percent, to 11,420. On Monday, the Dow fell almost 250 points as worries about American International Group Inc. fed concerns that the deterioration of the credit markets will bring more big losses for financial companies.
The Standard & Poor's 500 index futures rose 1.60, or 0.13 percent, to 1,268, and the Nasdaq 100 index futures rose 2.50, or 0.13 percent, to 1,897.50.
Bonds rose. The yield on the benchmark 10-year Treasury note, which trades opposite its price, fell to 3.78 percent from 3.79 percent late Monday. The dollar was higher against other major currencies, while gold prices fell.
Light, sweet crude fell $1.70 to $113.41 in premarket electronic trading on the New York Mercantile Exchange.
In corporate news, Smithfield Foods Inc., the nation's largest hog producer and pork processor, said Tuesday it swung to a fiscal first-quarter loss due in part to a $20.1 million write-down in the value of commodity contracts. The company said it lost $12.6 million, or 9 cents per share, in the period. Analysts, who typically exclude one-time costs, expected a loss of 4 cents per share on $2.87 billion in sales.
Overseas, Japan's Nikkei stock average fell 0.78 percent. In afternoon trading, Britain's FTSE 100 was down 1.98 percent, Germany's DAX index was down 0.18 percent, and France's CAC-40 was down 0.95 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com

Stocks fall on rising oil, unease about financials

2008-08-21T10:31:00.001-07:00

Thursday August 21, 12:53 pm ET By Tim Paradis, AP Business Writer
Stocks fall as oil prices rise amid Russia tensions; downgrades weigh on financial sector
NEW YORK (AP) -- Stocks resumed their pullback Thursday as a surge in oil prices fanned inflation concerns and as investors grew more anxious about the financial sector.
Oil jumped as investors questioned whether rising tensions with Russia could disrupt energy shipments from the world's second-largest oil producer. Wall Street is worried that oil's turn higher will hasten increases in inflation and put more pressure on already struggling consumers, whose spending is crucial to the well-being of the economy.
Light, sweet crude oil rose $6.03 to $121.59 a barrel on the New York Mercantile Exchange.
Investors also contended with fresh worries about the financials and the sector's troubles with faltering mortgage debt. A slew of analysts have been downgrading banks and brokerages over the past few weeks, and late Wednesday, Citigroup analyst Prashant Bhatia lowered his third-quarter estimates for the investment banks Lehman Brothers Holdings Inc., Goldman Sachs Group Inc. and Morgan Stanley. He predicted Lehman will write down its assets by $2.9 billion, that Goldman Sachs will write down $1.8 billion, and that Morgan Stanley will write down $1.7 billion.
"Oil is the driver and then it depends on a series of other factors that are kind of like magnifiers," said Doug Roberts, chief investment strategist at Channel Capital Research, pointing to Wall Street's latest worries about the financials.
In midday trading, the Dow Jones industrial average fell 37.78, or 0.33 percent, to 11,379.65. The Dow managed a moderate gain on Wednesday after heavy losses the first two days of the week.
Broader stock indicators also declined Thursday. The Standard & Poor's 500 index fell 2.33, or 0.18 percent, to 1,272.21, and the Nasdaq composite index fell 17.39, or 0.73 percent, to 2,371.69.
Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.83 percent from 3.80 percent late Wednesday.
Gold prices rose and the dollar was lower against other major currencies.
While oil prices remain well off their July 11 high of $147.27, the rebound in recent days is unnerving to investors after inflation readings the past two weeks showed prices were rising for consumers and businesses at a faster pace than expected.
With the focus on oil investors, appeared unimpressed by a better-than-expected snapshot of demand at some factories. The Philadelphia Fed said regional manufacturing activity is increasing in August by more than it did in July. Its index of activity improved to a negative 12.7 from a negative 16.3 in July.
The Conference Board's leading economic indicators report showed a 0.7 percent drop for July compared with a 0.1 percent decline in June. The index is aimed at predicting economic activity in the next three to six months.
A larger-than-expected drop last week in unemployment claims from newly laid-off workers failed to cheer Wall Street -- especially as the four-week moving average for claims hit a nearly seven-year high. The Labor Department said claims fell by 13,000 to 432,000, but that the four-week average rose to 445,750.
A shaky job market has been slamming consumers who also face a tighter credit climate, rising costs and falling home prices. That is troubling to investors as consumer spending accounts for more than two-thirds of U.S. economic activity.
"All three reports tend to indicate that we're bottoming out but that there is no real end in sight and that's what I think the market has to get used to," Channel Capital's Roberts said.
Investors again focused on the financials, which are getting hit as consumers fall behind on payments for mortgages and other debt. Citigroup's downcast note about the sector arrived after a volatile trading session Wednesday that saw worries about the possibility of a government bailout of Fannie Mae and Freddie Mac. Such a move could wipe out shareholder equity.
But Fannie and Freddie shares fluctuated after falling more than 20 percent Wednesday. Fannie rose 29 cents, or 6.6 percent, to $4.68, while Freddie rose 3 cents to $3.28.
Lehman Brothers is under particular scrutiny as well, after the Financial Times reported late Wednesday the investment bank failed to sell up to half of its shares to South Korean or Chinese investors earlier this month. Lehman fell 79 cents, or 5.8 percent, to $12.94.
Goldman Sachs fell $5.04, or 3.2 percent, to $153.21, while Morgan Stanley slipped 87 cents, or 2.3 percent, to $36.53.
The rise in oil weighed on sectors like airlines and lifted energy names. United Airlines parent UAL Corp. fell 78 cents, or 6.3 percent, to $11.62, while Continental Airlines Inc. fell 97 cents, or 6.4 percent, to $14.19.
Exxon Mobil Corp. and Chevron Corp. showed the strongest performance among the 30 stocks that make up the Dow industrials. Exxon rose $1.54, or 2 percent, to $80.35, while Chevron rose $1.84, or 2.1 percent, to $88.30.
Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume came to 423.8 million shares.
The Russell 2000 index of smaller companies fell 7.08, or 0.97 percent, to 724.52.
Overseas, Japan's Nikkei stock average fell 0.77 percent. Britain's FTSE 100 slipped 0.03 percent, Germany's DAX index fell 1.28 percent, and France's CAC-40 declined 1.40 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com

Jobless claims fall for second straight week

2008-08-21T10:27:00.000-07:00

Thursday August 21, 9:09 am ET By Christopher S. Rugaber, AP Business Writer
Jobless claims fall for second consecutive week, after hitting 6-year high
WASHINGTON (AP) -- The number of newly laid-off workers seeking unemployment benefits fell more than expected last week, the second straight drop from a six-year high, according to government data released Thursday.
The Labor Department reported that applications for jobless benefits dropped to 432,000, down by 13,000 from the previous week. It was a bigger improvement than analysts expected.
But claims remain elevated compared with recent years. The four-week average climbed to 445,750, the highest level in almost seven years.
Unemployment claims have increased in the past several weeks, partly reflecting an outreach effort by the Labor Department to notify people of a 13-week benefit extension approved by Congress in June. The action has turned up some people eligible to file new claims, according to the department.
That effort -- coupled with businesses cutting jobs due to higher energy costs, tighter credit markets and a slowing economy -- caused claims to spike to a six-year high of 457,000 for the week of Aug. 2, the largest total since claims surged to 479,000 in March 2002. The increase more than six years ago occurred the last time Congress extended benefits to deal with the impact of soaring layoffs due to a weak economy.
The number of people continuing to receive benefits last week also dropped slightly to 3.36 million, but the four-week average rose to 3.33 million, its highest level in almost five years.
That number doesn't include the government's extended benefits program. The Labor Department estimated an additional 1.29 million unemployed workers are getting benefits under that program.
Several companies announced job cuts recently, including newspaper publisher Gannett Co. Inc., which said it would lay off 600 workers.
Ford Motor Co. said it would lay off 300 workers at an engine plant, and chip designer Rambus Inc. said it would cut 90 jobs.
Employers cut 51,000 jobs in July, the Labor Department reported earlier this month, pushing the unemployment rate to 5.7 percent.

Oil jumps $6 on US-Russia tensions, sliding dollar

2008-08-21T09:21:00.000-07:00

Thursday August 21, 11:35 am ET By Stevenson Jacobs, AP Business Writer
Oil jumps $6 on growing US-Russia tensions, sliding dollar, worries of OPEC output cut
NEW YORK (AP) -- Oil prices shot up $6 a barrel Thursday, rising to the highest level in over two weeks as escalating tensions with Russia stoked fears of a disruption of energy shipments to Western countries.
Crude's rally mimicked the wild price swings seen last month and have at least temporarily halted oil's slide back toward $100 a barrel. A weaker U.S. dollar and worries about tightening output from OPEC countries are also supporting prices.
Tensions with Russia about a deal between Washington and Poland to install a missile defense system in Eastern Europe -- seen as a threat by Moscow -- and the continued presence of Russian troops in Georgia contributed greatly to the bullish mood.
Light, sweet crude for October delivery jumped $6.32 to $121.88 a barrel on the New York Mercantile Exchange. It was crude's highest trading level since Aug. 4.
"The sellers are backing away for now," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill. "If military activity heats up again, pipeline flows into Europe could be disrupted and that would affect the United States as well."
The price jump came as retail gas prices continued to fall, shedding more than a penny overnight to a new national average of $3.702, according to auto club AAA, the Oil Price Information Service, and Wright Express. Prices have now fallen 10 percent from record highs above $4 a gallon set July 17, but the pace of the drop off could slow if oil holds onto Thursday's gains.
"This is probably about it in terms of a retail gas drop. We may be a few cents away from the August bottom," said Tom Kloza, publisher and chief analyst at the Oil Price Information Service in Wall, N.J.
Oil's jump came a day after the U.S. government report a huge rise in U.S. crude inventories. But other supplies were less abundant.
Gasoline inventories shrank by a larger-than-expected 6.2 million barrels to below-average levels in the week ended Aug. 15, the U.S. Energy Department's Energy Information Administration said Wednesday. Meanwhile, distillate inventories -- which include heating oil and diesel fuel -- rose by less than expected, the EIA said.
That was enough to offset a hefty 9.4 million barrel rise in U.S. crude stocks last week when the average analyst forecast had been for a 1.7 million barrel increase, according to energy information provider Platts.
"That report had something for everyone," said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. "On the one hand, the crude inventory buildup was quite strong, but the gasoline draw was also very prominent."
But growing concerns over Russia's standoff with Georgia and NATO grabbed the attention of most oil traders Thursday.
On Wednesday, Secretary of State Condoleezza Rice and her Polish counterpart signed a deal to build an American missile defense base in Poland. Last week, a top Russian general warned Poland was risking an attack, possibly a nuclear one, by developing the base.
JBC Energy in Vienna said the "political risk premium of oil prices" had widened to more than $10 a barrel, which could be attributed at least in part to the Russian angle.
Investors are also trying to anticipate the outcome of the next Organization of the Petroleum Exporting Countries meeting in early September, as supply concerns could rise further if members of the cartel decide to lower their output in response to slower demand. Venezuelan Oil Minister Rafael Ramirez said he might propose an output cut at the next OPEC meeting.
U.S. energy consultancy Cameron Hanover noted in its daily market report that some members of the oil group were "terrified of allowing Western countries to build any kind of cushion for the unexpected, because it has the potential to return prices to normal or sustainable economic levels" and interfere with OPEC's ability to keep building massive foreign currency reserves.
Oil prices have rebounded after falling about $35, or nearly a quarter, from their all-time trading record $147.27 on July 11. Many investors expect that high gasoline prices and slowing economic growth in the U.S., Europe and Japan will undermine global energy demand.
Prices were supported Thursday by a weaker dollar compared to the euro. A falling greenback encourages investors to seek commodities such as oil as a hedge against inflation and a weaker dollar.
"The slide in the dollar has taken some of the wind out of the bear's sail in the energy complex," said The Schork Report, edited by analyst and trader Stephen Schork.
In other Nymex trading, heating oil futures rose 17.75 cents to $3.3421 a gallon, while gasoline prices gained 15.15 cents to $3.0618 a gallon. Natural gas futures increased 27 cents to $8.355 per 1,000 cubic feet.
In London, October Brent crude rose $5.57 to $119.93 a barrel.
Associated Press writers Pablo Gorondi in Budapest, Hungary and Alex Kennedy in Singapore contributed to this report.

Oil surges on global tensions and soft dollar

2008-08-21T09:12:00.000-07:00

Thursday August 21, 11:27 am ET By Richard Valdmanis
NEW YORK (Reuters) - Oil prices rose 5 percent on Thursday, the biggest gain in more than two months, amid rising global tensions and a weak U.S. dollar.
U.S. crude gained $6.00, or 5.19 percent, to $121.56 a barrel by 11 a.m. EDT, the biggest percentage gain since June 6. London Brent crude climbed $6.11 to $120.47.
"There's a myriad of geopolitical factors rumbling in the background -- Russia, Iran," said Tony Machacek, broker at Bache Commodities Ltd. "Also, the dollar is weaker."
The United States and Poland signed a deal on Wednesday to station parts of a U.S. missile defense shield on Polish soil, drawing a sharp response from Russia, the world's second-largest oil exporter.
The pact comes as relations between Russia and the West have been strained by Moscow's military intervention in Georgia. The conflict there has disrupted the transit of Azeri oil through Georgia.
The spat adds to political factors that have supported oil prices in recent months, such as the dispute over Iran's nuclear program and repeated militant attacks on oil facilities in Nigeria.
International tension outweighed a U.S. government report that Wednesday showed crude inventories rose by 9.4 million barrels, the largest weekly increase since March 2001.
Oil has fallen from a record high of $147.27 a barrel reached last month on evidence that demand is slowing, but prices remain up about 20 percent so far this year and have climbed from below $20 in early 2002.
Also supporting the market was concern that Tropical Storm Fay might re-enter the Gulf of Mexico over the weekend, affecting oil refineries and offshore platforms.
Dealers were also concerned that the Organization of the Petroleum Exporting Countries and Saudi Arabia, its top producer, may decide to trim supply in a bid to stem a further price fall.
Saudi Arabia boosted oil output in July to 9.7 million barrels a day from 9.45 million bpd in June, far above the country's informal OPEC target. OPEC meets on September 9 to review output policy.
"As prices drop, Saudi Arabia may cut back on its recent increase in production, which could halt the most recent price decline," the U.S. Energy Information Administration said in its weekly review of the market.
(Additional reporting by Alex Lawler in London, Seng Li Peng in Singapore, editing by Matthew Lewis)

Leading economic indicators fell sharply in July

2008-08-21T09:10:00.000-07:00

Thursday August 21, 10:49 am ET By Ellen Simon, AP Business Writer
July's leading indicators fell sharply as building permits, stocks dropped, unemployment rose
NEW YORK (AP) -- A private business group's measure of the economy's health showed the largest drop in one year as stocks fell, new building permits declined and unemployment rose.
The New York-based Conference Board's said Thursday its monthly forecast of future economic activity fell 0.7 percent in July, far more than the consensus estimate of a 0.2 percent decline by Wall Street economists surveyed by Thomson/IFR.
The last time the index showed a drop this great was last August, when it fell by 1 percent.
Revised June data showed no change to the index, which has slipped 0.9 percent for the six months ending in July.
The decline was the steepest in the index this year. The largest drag on the index was the decline in building permits, followed in order by stock prices, rising unemployment claims, a tightened money supply and falling manufacturers' orders for consumer goods.
Interest rate spreads, consumer expectations and manufacturers' orders for capital goods all contributed to the index.
Stocks, which were down before the index's release, cut some of their losses. The Dow Jones industrial average was down 52.35 at 11,365.08. The Standard & Poor's 500 was down 4.45 at 1,270.09, and the Nasdaq Composite was down 18.64 at 2,370.44.

Housing starts and permits tumble in July

2008-08-19T08:58:00.001-07:00

Tuesday August 19, 9:10 am ET
WASHINGTON (Reuters) - Home building projects started in July fell 11 percent to the lowest annual rate in more than 17 years, while building permits tumbled 17.7 percent, the Commerce Department reported on Tuesday.
The annual pace of housing starts at 965,000 slimly beat Wall Street's expectations of 960,000, but it was the lowest since a 921,000 unit rate in March 1991. In June, housing starts rose 10.4 percent, revised up from the previously reported 9.1 percent.
Building permits, an indicator of future construction, dropped to an annual rate of 937,000, well below the 970,000 analysts polled by Reuters had forecast.
The magnitude of the drop in permits was the biggest since a plunge of almost 24 percent in February 1990, while the number was the lowest since March this year, when they were 932,000.
Single family homes, which constitute the bulk of new housing, were especially weak. The annual unit rate of 641,000 single family homes started in July was the lowest since January 1991, when they were 604,000. Building permits were 584,000, the lowest since 523,000 in August 1982.
U.S. stocks extended their losses and U.S. Treasury bond prices pared their gains after the data were released.
In June, new home construction was boosted by a change in New York City building codes. But July's national numbers hinted that the United States may still be mired in a housing downturn.
"It can be seen as a payback in June from the building code change in New York City. We may see another decline in August," said Dana Saporta, economist at New York's Dresdner Kleinwort Securities LLC.
"The fundamentals in housing are still poor," Saporta added.
(Reporting by Lisa Lambert, Editing by Chizu Nomiyama)

Home Depot's 2Q profit drops 24 percent

2008-08-19T08:56:00.000-07:00

Tuesday August 19, 11:44 am ET By Ashley M. Heher, AP Business Writer
Home Depot says 2nd-quarter profit falls 24 percent, expects similar full-year drop
CHICAGO (AP) -- The Home Depot Inc. said Tuesday that its second-quarter profit sank 24 percent and reiterated its downbeat outlook for the year amid a weak housing market that shows no signs of recovery.
For the three-months ending Aug. 3, the nation's largest home improvement chain said its net income fell to $1.2 billion, or 71 cents per share. That's down from $1.59 billion, or 81 cents per share, during the same period last year.
Meanwhile, revenue slid 5.4 percent to $21 billion, down from $22.2 billion last year. And same-store sales, an important retail industry metric of sales at stores opened at least a year, fell 7.9 percent.
The results handily beat expectations as do-it-yourselfers began to take their hammers and paint brushes out of retirement. Analysts surveyed by Thomson Reuters had projected earnings of 61 cents per share on revenue of $20.58 billion.
Goldman Sachs analyst Matthew Fassler told investors in a research note that the better-than-expected results indicate a "reprieve" from an earlier slowdown by shoppers who postponed projects as the nation's housing market slows.
"These results confirm that the DIY market received a reprieve from some combination of better weather, fiscal stimulus, and a floor in demand," he wrote.
Still, the results paint a grim picture of the cost-conscious American consumer, and Home Depot shares fell 56 cents, or 2 percent, to $26.40 in midday trading.
The company said comparable sales were negative for each of the company's selling departments and the average spending per customer in a visit fell 1.2 percent to $57.58.
But a bright spot was basic repair jobs that are shoppers are undertaking, even as bigger-ticket purchases continue to fall, executives said.
"Customers are spending to maintain their homes," said Craig Menear, Home Depot's executive vice president of merchandising.
Amid so much economic uncertainty, Home Depot said it expects earnings per share from continuing operations to decline by 24 percent for the year. The company had said in May that it felt "more comfortable" that it would meet the low end of its full-year guidance for a drop of 19 percent to 24 percent in earnings per share, but did not elaborate.
The earnings per-share guidance does not include the company's charge related to the closing of 15 stores and its reduction of 50 stores from its future expansion plan, the company said.
Home Depot also projects that full-year sales should decline by 5 percent.
"As we look forward into the second half of the year, we see continued pressure on our markets," Chief Executive Frank Blake told investors during a conference call.
Home Depot's results come on the heels of better-than-expected second-quarter results from competitor Lowe's Cos. Inc.
The Mooresville, N.C.-based company said second-quarter profit fell nearly 8 percent, but managed to top Wall Street expectations. The company offered a weaker-than-expected outlook for the third quarter, but raised its guidance for the full year.

Oil fluctuates around $113 as storm threat eases

2008-08-19T08:55:00.000-07:00

Tuesday August 19, 11:46 am ET By Stevenson Jacobs, AP Business Writer
Oil prices fluctuate around $113 a barrel as supply concerns over Tropical Storm Fay ease
NEW YORK (AP) -- Oil prices fluctuated Tuesday, hovering near $113 a barrel after the dollar weakened and Tropical Storm Fay missed offshore oil and gas installations in the Gulf of Mexico.
At the pump, retail gas prices continued to fall, suggesting that cash-strapped Americans are still cutting back on their driving. A gallon of regular slipped another penny overnight to a new national average of $3.73, almost 10 percent lower than record prices of $4.114 a gallon reached July 17, according to auto club AAA, the Oil Price Information Service and Wright Express.
Fay, the sixth named storm of the 2008 Atlantic hurricane season, swept over southwest Florida early Tuesday, bringing heavy rain and wind but staying well clear of oil and gas platforms scattered across the Gulf. The storm was moving to the north and was expected to gradually weaken during the day. Fay steamed through the Caribbean over the weekend and was blamed for at least 14 deaths in Haiti and the Dominican Republic.
Royal Dutch Shell PLC said the storm no longer threatened its oil facilities in the Gulf and that it had begun redeploying 425 evacuated workers.
Light, sweet crude for September delivery rose 40 cents to $113.27 in morning trading on the New York Mercantile Exchange, after alternating between positive and negative territory earlier in the day. The September contract expires Wednesday, adding to the volatility. On Monday, crude closed below $113 a barrel for the first time since May 1 as traders became assured that Fay wouldn't disrupt offshore oil production.
"We dodged a bullet with the storm so that's leading to some selling," said Phil Flynn, analyst at Alaron Trading Corp. in Chicago.
But other traders were buying oil contracts after the dollar weakened slightly against the euro. A falling greenback encourages buying among investors seeking commodities like oil as a hedge against inflation or weakness in the U.S. currency.
Still, analysts said the fact that even slightly bullish news such as the storm or ongoing tensions in Georgia didn't send prices significantly higher shows how much the market sentiment has changed from only a few weeks ago.
Oil prices have shed about $35, or 24 percent, from their all-time trading record $147.27 reached July 11 amid mounting evidence that a cooling global economy and high fuel costs are curtailing demand for energy.
"If this storm had happened a couple of weeks ago, it would have driven prices higher. The momentum of this market is definitely on the downside as people realize that demand is very soft," Flynn said.
Olivier Jakob of Petromatrix in Switzerland, however, said it was too early to assert that oil prices had reached a bottom, "especially since there is a clear lack of buying momentum."
Regarding oil fundamentals, Jakob said it was worth keeping an eye on how China's import of oil products will develop after the buildup of stocks for the Beijing Olympics. Reports of lower demand there could put further downward pressure on prices.
A bearish forecast on Friday from the Organization of the Petroleum Exporting Countries of lower global oil demand growth also helped keep oil prices in check.
In its monthly report, OPEC forecast that the world's daily appetite for oil this year would grow by 1 million barrels, a reduction of 30,000 barrels a day from its previous estimate. It predicted growth for 2009 will be 900,000 barrels a day, the lowest growth in world demand since 2002.
Analysts said uncertainty over the conflict between Russia and Georgia will support oil pricing. Russia has begun withdrawing troops, but U.S. officials said Moscow has positioned missile launchers in the separatist South Ossetia province.
In other Nymex trading, heating oil futures rose 1.91 cents to $3.1039 a gallon, while gasoline prices rose 1.08 cents to $2.826 a gallon. Natural gas futures added 12 cents to $8.008 per 1,000 cubic feet.
In London, October Brent crude rose 13 cents to $112.05 a barrel.
Associated Press writers Pablo Gorondi in Budapest, Hungary and Eileen Ng in Kuala Lumpur, Malaysia, contributed to this report.

Wholesale prices rising at fastest pace since 1981

2008-08-19T08:54:00.000-07:00

Tuesday August 19, 11:15 am ET By Martin Crutsinger, AP Economics Writer
Wholesale inflation surged by 1.2 percent in July, more than double what had been expected
WASHINGTON (AP) -- Wholesale inflation surged in July, leaving prices for the past year rising at the fastest pace in 27 years, according to government data released Tuesday.
The Labor Department reported that wholesale prices shot up 1.2 percent in July, pushed higher by rising costs for energy, motor vehicles and other products. The increase was more than twice the 0.5 percent gain that economists expected.
Core prices, which exclude food and energy, rose 0.7 percent. That increase was the biggest since November 2006 and more than triple the 0.2 percent rise in core prices that had been expected.
In other economic news, the Commerce Department reported that housing construction fell in July to the lowest pace in more than 17 years. Builders broke ground on 965,000 housing units at a seasonally adjusted annual rate last month -- the weakest showing since March 1991 -- as the housing industry continues to struggle with falling sales and rising mortgage foreclosures.
The bad news on wholesale prices followed a report last week that consumer prices shot up by 0.8 percent in July, leaving consumer inflation rising at the fastest pace since 1981.
The July price pressures reflected in part the big surge in energy costs during the month that pushed crude oil prices to a record of $147.27 per barrel and sent gasoline pump prices to an all-time high of $4.11 per gallon.
Crude oil prices have fallen by more than $30 per barrel since then, raising hopes that the surge in inflation will soon abate.
However, the price spikes in a number of areas seen in July raised concerns that the prolonged surge in energy prices was beginning to show up more broadly throughout the economy.
Sal Guatieri, an economist at BMO Capital Markets, said he believed inflation at both the consumer and wholesale levels will remain high for another month or so but then start to decline, reflecting the large decreases already seen in crude oil and other commodities.
"A firmer dollar, retreating commodity prices and continued economic weakness should damp inflation by the fall," he said.
Such a development would put the Federal Reserve in a severe bind. The central bank would like to keep interest rates low to give a boost to the badly lagging economy, but Fed officials may feel pressured to start raising rates in an effort to make sure inflation does not get out of control.
For July, wholesale energy prices jumped by 3.1 percent following a 6 percent gain in June. That increase reflected big jumps in the price of natural gas, home heating oil and liquefied petroleum gas, which offset a 0.2 percent dip in gasoline costs.
Food prices rose by 0.3 percent in July after a 1.5 percent surge in June. Beef prices jumped by 7.4 percent, the biggest increase in nearly four years. Milk prices shot up by 5 percent, the biggest gain in a year, while soft drink prices rose by 2.4 percent, the largest increase in four years.
Excluding energy and food, the 0.7 percent rise in core inflation reflected big gains in the prices of passenger cars and light trucks, pharmaceutical preparations and plastic products.

Stocks fall on inflation data, financial worries

2008-08-19T08:53:00.000-07:00

Tuesday August 19, 11:25 am ET By Madlen Read, AP Business Writer
Stocks drop following bigger-than-expected jump in wholesale inflation; bank worries remain
NEW YORK (AP) -- Stocks fell sharply Tuesday after a hefty jump in wholesale inflation and a drop in new home construction gave investors more reasons to believe the economy won't rebound anytime soon. The Dow Jones industrial average dropped by more than 100 points.
The Labor Department said its Producer Price Index rose by 1.2 percent in July, more than double the expected rate. The increase means prices have risen in the past 12 months at the fastest pace in 27 years.
The data also showed that core wholesale inflation, which excludes food and energy prices, rose 0.7 percent -- the biggest increase since November 2006 and more than triple the 0.2 percent rise in core prices that had been expected.
"Maybe investors were hoping to shrug off the challenges of high commodity prices and inflation," said Jack A. Ablin, chief investment officer at Harris Private Bank. "But now we find out that perhaps the inflation situation is worse than we thought."
A weak report on new home construction did little to quell investors' worries. The Commerce Department said July housing starts fell to an annual rate of 965,000 units -- higher than analysts predicted, but the lowest level in more than 17 years nonetheless.
Tuesday's pair of economic reports indicated not only that the financial sector is struggling to right itself after billions of dollars in credit losses, but also that the rest of the economy is still showing significant signs of stress.
The weakness in housing has not only imperiled home builders and suppliers, but has left financial companies reeling over how to cope with soured mortgage debt. Lehman Brothers Holdings Inc., for one, came under pressure Tuesday after a JPMorgan Chase & Co. analyst estimated that Lehman will have to write down its investments during the third quarter by $4 billion.
In late morning trading, the Dow Jones industrial average fell 119.69, or 1.04 percent, to 11,359.70.
Broader stock indicators also dropped. The Standard & Poor's 500 index fell 11.56, or 0.90 percent, to 1,267.04, and the Nasdaq composite index fell 22.87, or 0.95 percent, to 2,394.11.
Bond prices slipped. While investors often seek the shelter of government debt when bad news arrives, inflation is unwelcome for bonds because it devalues their fixed returns. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.83 percent from 3.82 percent late Monday.
The dollar was mixed against other major currencies, while gold prices fell.
One of the few bright spots for Wall Street has been the price of oil. Crude has fallen substantially from its July record above $147 a barrel, and fell 32 cents to $112.55 a barrel Tuesday on the New York Mercantile Exchange.
Lehman fell $1.26, or 8.3 percent, to $13.77. There have been reports swirling that the investment bank might have to sell one of its businesses to raise cash.
Retailers reported mixed quarterly results, adding to investors' uncertainty about the economy.
Home Depot Inc. reported a 24 percent decline in its second-quarter earnings but topped Wall Street's expectations. The nation's largest home improvement retailer reiterated its forecast for the year. Shares dipped 50 cents to $26.46.
Target Corp. said its second-quarter earnings fell 7.5 percent but beat forecasts despite anemic sales. Shares fell 22 cents to $49.83.
And Saks Inc. reported a wider-than-expected loss in the second quarter as its affluent shoppers cut back on apparel. The luxury goods retailer also issued a downbeat forecast for the year. Shares dropped $1.42, or 13 percent, to $9.80.
The Russell 2000 index of smaller companies fell 9.45, or 1.27 percent, to 732.52.
Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 270.8 million shares.
Overseas, Japan's Nikkei stock average fell 2.28 percent. In afternoon trading, Britain's FTSE 100 fell 2.10 percent, Germany's DAX index lost 2.08 percent, and France's CAC-40 fell 2.27 percent.
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J.C. Penney's 2Q profits fall 36 percent

2008-08-15T19:02:00.000-07:00

Friday August 15, 9:21 am ET By Anne D'Innocenzio, AP Business Writer
J.C. Penney's 2Q profits fall 36 percent amid tough economy
NEW YORK (AP) -- J.C. Penney Co. reported a 36 percent drop in second-quarter profits Friday and issued a downbeat outlook for the current quarter as shoppers cut back on clothing spending in a tough economy.
The Plano, Texas-based department store chain said it earned $117 million, or 52 cents per share, in the three-month period ended Aug. 2, compared with $182 million, or 81 cents per share, a year earlier.
Total net sales fell 2.5 percent to $4.28 billion from $4.39 billion. Same-store sales, or sales at stores opened at least a year, fell 4.3 percent. Same-store sales are considered a key indicator of a retailer's health.
Analysts polled by Thomson Reuters expected earnings of 50 cents per share on revenue of $4.28 billion.
Penney said it expects third-quarter earnings to be in the range of 70 cents to 75 cents per share. A poll by Thomson Reuters projects 76 cents per share. The company also predicted that total sales would drop by a low-single digit percentage and that same-store sales would drop in the mid-single digits in the same period.
"In this difficult consumer environment, we have continued to focus on tightly controlling all aspects of our business, and our second-quarter results show the benefits of our approach," said Myron "Mike" Ullman, chairman and chief executive, in a statement.
The company reported that comparable-store inventory levels at the end of the second quarter were below last year, and it remains on track for total inventory to be below 2007 levels by the end of the back-to-school season.
Penney and other apparel chains have been hard hit in a challenging economy as customers, aiming to save money for gas and food, focus their buying on necessities and shop at discounters and warehouse clubs that offer a breadth of merchandise. High-end department store chain Nordstrom Inc. reported a 21 percent drop in second-quarter profit on Thursday and cut its full-year forecast. Meanwhile, Kohl's reported a 12 percent drop in profits but upgraded its full-year outlook to reflect stricter inventory control that boosted profit margins.
In response to the slowing economy, Penney announced in June that it would further slow the pace of new department store openings and cut capital spending next year because of the weak economy. It now plans 20 new or relocated stores next year, down from the 36 it expects to open in 2008. Penney had once planned 50 new stores a year through 2011.
Meanwhile, Penney is expanding its repertoire of exclusive offerings. For the back-to-school season, it introduced six new lines aimed at teens and young adults, compared with only one last year. Earlier this year, Penney unveiled American Living, an exclusive collection that is part of an alliance with Polo Ralph Lauren Corp. The collection is the biggest brand launch in Penney's history. Ullman noted in a statement that the back-to-school launches had "good initial customer response."

Industrial output up 0.2 percent in July

2008-08-15T18:56:00.001-07:00

Friday August 15, 12:28 pm ET By Martin Crutsinger, AP Economics Writer
July industrial output rose by a better-than-expected 0.2 percent despite utility decline
WASHINGTON (AP) -- Industrial output rose in July at a slightly better pace than expected as a further rebound in the auto industry offset a big plunge in output at the nation's utilities.
The Federal Reserve reported Friday that industrial production edged up 0.2 percent last month. That was half the pace of the 0.4 percent gain in June, but it did surpass analysts' expectations for flat production in July.
The increase reflected a 0.4 percent gain in output at manufacturing plants. Motor vehicles and parts showed the biggest increase in manufacturing, advancing for a third straight month.
These gains were not seen as signaling a sustained rebound, however, given the problems facing the auto industry this year. Instead, the rebound in auto activity was viewed as a temporary improvement because a strike ended at parts supplier American Axle.
Even with the recent gains, production at auto plants remained 10.4 percent below where it was a year ago as automakers struggle with slumping demand due to the weak economy and the big spike in gasoline prices, which has hurt sales of their once-popular sport utility vehicles.
The modest increases in June and July production had followed three straight monthly declines. The manufacturing sector has been battered by the prolonged slump in housing and the multiple problems in the auto industry. Many economists viewed the slight strength in the past two months as temporary given what's ailing the broader economy.
"Unfortunately, housing activity continues to worsen, job losses continue, inflation is rampant, credit is more difficult to obtain and firms remain cautious about capital investments," said Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI. "We think manufacturing will remain in a slow, shallow, downward trend until early 2009."
Other analysts noted the industries that did well in July were for the most part connected to exports, which have been booming this year as declines in the dollar have boosted the competitiveness of U.S. products in foreign markets.
"Without the lifeline from the rest of the world, the manufacturing picture would be a lot darker," said Nariman Behravesh, chief economist at Global Insight, a Lexington, Mass., forecasting firm.
The 0.4 percent increase in manufacturing helped to offset a big 1.9 percent drop in output at utilities, a decline which followed a 2.3 percent surge the previous month. Both changes were seen as weather-related.
The big June jump came from hotter-than-normal weather requiring increased electricity production. The decline in July reflected a return to more normal weather which meant a drop in utility output compared to the previous month.
Output in the mining sector rose a strong 0.9 percent, matching the increase of the previous month. The gains in this sector have been paced by strong activity in oil and natural gas production.
With all the changes, the nation's factories, mines and utilities operated at 79.9 percent of capacity in July, up slightly from June when the operating rate was 79.8 percent of capacity. That level remained below the average operating rate of 81 percent seen over the last 25 years.
While the surge in U.S. export sales has been a bright spot, there is concern that this boom may not last given spreading weakness in major overseas markets in Europe and Japan.

Merrill facing NY lawsuit over securities sale

2008-08-15T18:55:00.001-07:00

Friday August 15, 3:14 pm ET By Stephen Bernard, AP Business Writer
NY AG to file lawsuit against Merrill Lynch for sale of securities; Wachovia settles case
NEW YORK (AP) -- New York Attorney General Andrew Cuomo said Friday he sent a letter to Merrill Lynch & Co. notifying the investment bank that his office will file suit against it imminently as part of an investigation into the collapse of the auction-rate securities market.
"We have been trying to resolve the matter," with Merrill, Cuomo said during a conference call with reporters. Cuomo said he has not been able to reach a satisfactory agreement with the bank.
The letter sent to Merrill, which was given to reporters by Cuomo's office, is similar to one Citigroup Inc. received before settling with the attorney general. Cuomo is one of several regulators investigating whether financial companies misled investors in the auction-rate securities market; officials from several other states and the Securities and Exchange Commission have also been involved in negotiations with the big banks.
Merrill said in a statement it was surprised to receive a letter about potential legal action, noting it has held discussions with regulators since it announced a voluntary repurchase plan.
"We anticipated further talks," Merrill said in the statement.
The expected lawsuit comes a week after Merrill said it would voluntarily repurchase auction-rate securities from customers. Merrill said it would buy back securities between Jan. 15, 2009 and Jan. 15, 2010. The bank said the repurchase plan would likely affect 30,000 clients holdings about $10 billion in the securities.
The attorney general's office called the bank's voluntary buyback plan "woefully inadequate," according to the letter sent to Merrill. The letter said the attorney general is still open to reaching a settlement with Merrill, assuming the bank meets similar provisions agreed upon by other banks reaching settlements.
Cuomo said his office is investigating about 25 financial firms that were involved in selling the securities. The investigation includes Goldman Sachs Group Inc. and other underwriters of the securities as well as retail brokers, Cuomo said.
"We've had discussions with them," Cuomo said of Goldman Sachs. Cuomo's office has targeted the financial firms with the largest portfolios of auction-rate securities because settlements with those companies will affect the most customers.
Earlier Friday, Wachovia Corp. became the fifth bank to settle as part of the investigation; Wachovia agreed to buy back $8.5 billion of the securities at face value from investors. The Charlotte, N.C.-based bank will also pay $50 million in fines to be distributed among states. The fines will be distributed to states based on the amount of securities sold to investors in each state.
Over the past eight days, Citigroup, UBS AG, JPMorgan Chase & Co. and Morgan Stanley agreed to repurchase a combined $32.6 billion in auction-rate securities and will pay fines totaling $310 million.
Nearly 150,000 customers have been affected by the five settlements.
The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt, except the interest rates were reset at regular auctions, some as frequently as once a week. A number of companies and retail clients invested in the securities because they could treat their holdings almost like cash.
The bond-like investments were widely held by many institutional and individual investors and were seen as highly liquid, money market-like investments. However the market for them collapsed in February amid the downturn in the broader credit markets.
Regulators have been investigating the collapse in the market to determine who was responsible for its demise and whether banks knowingly misrepresented the safety of the securities when selling them to investors.
Like the other banks that have reached agreements with regulators, Wachovia will buy back all auction-rate securities from retail customers, charities and small businesses. It will buy back those securities by Nov. 28. Wachovia will also reimburse customers who sold securities at a loss after the market collapsed in February.
Wachovia will also repurchase securities from institutional shareholders by the end of June 2009. Wachovia neither acknowledged or denied any wrongdoing as part of the settlement.
These settlements come amid a time when banks have reported billions of dollars in losses from other investments because of deterioration in credit markets.
Banks have been forced to cut the value of mortgage-backed securities and other investments by more than $300 billion over the past year and added billions of additional dollars to reserves to cover likely loan losses.
Those losses have forced some banks to raise new capital to shore up their balance sheets.
Losses from the auction-rate securities are likely to be smaller than those from mortgage-backed securities.
UBS said it will take a charge of about $900 million on a pretax basis -- including its $150 million fine -- to buy back $18.6 billion in auction-rate securities.
Citigroup said it will take a pretax charge of about $500 million because of its settlement to repurchase $7 billion in the securities.

Wall Street ends mixed on credit concerns, oil

2008-08-15T18:54:00.000-07:00

Friday August 15, 6:01 pm ET By Sara Lepro, AP Business Writer
Wall Street ends mixed as concerns over credit markets offset declining oil prices
NEW YORK (AP) -- Wall Street closed mixed Friday after playing out a now familiar scenario: Upbeat sentiment about falling oil prices flagged amid ongoing concerns about weak credit markets and the economy. The major indexes also turned in a mixed performance after another volatile week.
Investors were encouraged early in the session as oil's pullback lifted the outlook for consumer companies and eased concerns that record-high energy prices would force Americans to curb spending. Light, sweet crude dropped $1.24 to settle at $113.77 a barrel on the New York Mercantile Exchange, and earlier traded as low as $111.34, its lowest level in more than three months.
Oil fell on a growing sense that economies around the world are joining the U.S. in a slowdown. The rising dollar, which is gaining strength on economic concerns, contributed to the sell-off in crude and other commodities. Crude is down more than $35 from its July 11 record of $147.27; meanwhile, gold prices that swept past $1,000 an ounce earlier this year are now below $800.
While the decline in oil was placating investors this week, it still did not offset their ever-present anxiety over the slumping housing and credit markets. Concerns about more write-downs at investment banks continued, causing major market indexes to fluctuate over the course of the week; the Dow Jones industrials continued a volatile streak, dropping more than 100 points two days in a row amid intensifying fears about the health of the financial sector.
"With some of this sharp price collapse in commodities you would think the market would be up a lot more," said Greg Church, chief investment officer of Church Capital Management. "The underlying factor is that credit continues to appear to be very weak."
The Dow rose 43.97, or 0.38 percent, to 11,659.90.
Broader indexes were narrowly mixed. The Standard & Poor's 500 index rose 5.26, or 0.41 percent, to 1,298.20, while the Nasdaq composite index fell 1.15, or 0.05 percent, to 2,452.52.
Volume remained extremely light, exaggerating moves in the major indexes. On the New York Stock Exchange, advancing issues were relatively even with decliners; consolidated volume came to 3.99 billion, about even with Thursday.
For the week, the Dow finished down 0.63 percent and the S&P 500 rose a modest 0.15 percent. The tech-focused Nasdaq, however, logged its fifth-straight weekly gain by finishing up 1.59 percent; it has risen 8.5 percent since mid-July.
The market has been trying to sort through a number of different factors, including the price of oil and other commodities, ongoing concerns about the state of the credit markets and varying economic data. Investors seem to be grabbing on to any piece of news that might signal a turnaround for the economy.
The Nasdaq's performance this week indicates that investors are rotating back into technology stocks. However, the market has had little motivation to move into other sectors -- and analysts said many traders are simply buying into the dips.
The uncertainty in the market has increased demand for the safety of government debt, which rose modestly Friday. In late trading, the yield on the benchmark 10-year Treasury note, which moves opposite its price, slid to 3.84 percent from 3.90 percent late Thursday.
The dollar rose against other major currencies, contributing to Friday's pullback in oil and other commodities.
The day brought somewhat disappointing news about consumers. The University of Michigan reported a slightly smaller-than-expected rise in consumer sentiment in early August compared with July, evidence that the consumer remains under pressure.
Moreover, earnings outlooks from retailers J.C. Penney Co. and Abercrombie & Fitch Co. on Friday came in below forecasts.
"At the beginning of this year, earnings expectations started to drop precipitously, and the stock market dropped with them," said Scott Bleier, founder of market advisory service CreateCapital.com. "Those expectations got built into the stock market and to an excess. A lot of stocks discounted all of the bad news that was out there."
New York Attorney General Andrew Cuomo said Friday he plans to take legal action against Merrill Lynch & Co. as part of an ongoing investigation into the failure of the auction-rate securities market. Wachovia Corp., meanwhile, became the fifth bank in recent weeks to agree to repurchase billions of the investments as part of a settlement with regulators.
Merrill Lynch shares rose 4 cents to $26.33. Wachovia fell 24 cents, or 2.5 percent, to $15.57.
Airline stocks rose on the drop in oil. AMR Corp., the parent company of American Airlines, gained 46 cents, or 4.1 percent, to $11.74. However, shares of major oil companies declined, with ConocoPhillips down $1.71, or 2.1 percent, at $77.66.
The Russell 2000 index, which tracks small-cap stocks, fell 1.01, or 0.13 percent, to 753.37.
Overseas, Japan's Nikkei stock average rose 0.48 percent. Britain's FTSE 100 fell 0.66 percent, Germany's DAX index rose 0.06 percent, and France's CAC-40 rose 0.60 percent.
The Dow Jones industrial average ended the week down 74.42, or 0.63 percent, at 11,659.90. The Standard & Poor's 500 index finished up 1.88, or 0.15 percent, at 1,298.20. The Nasdaq composite index ended the week up 38.42, or 1.59 percent, at 2,452.52.
The Russell 2000 index finished the week up 19.07, or 2.60 percent, at 753.37.
The Dow Jones Wilshire 5000 Composite Index -- a free-float weighted index that measures 5,000 U.S. based companies -- ended Friday at 13,271.88, up 74.75 points, or 0.57 percent, for the week. A year ago, the index was at 14,531.52.
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Oil touches 3-month low on stronger US dollar

2008-08-15T18:48:00.000-07:00

Friday August 15, 5:10 pm ET By Stevenson Jacobs, AP Business Writer
Oil prices touch 3-month low as US dollar strengthens, demand for energy keeps falling
NEW YORK (AP) -- Oil fell to its lowest price in three months Friday, briefly touching the $111 level after the dollar muscled higher and OPEC predicted the world's thirst for fuel next year will fall to its lowest point since 2002.
Light, sweet crude for September delivery fell $1.24 to settle at $113.77 a barrel on the New York Mercantile Exchange after falling to $111.34, its lowest price since May 2 and more than $35 -- or 24 percent -- below its July 11 trading record above $147.
As high energy costs force countries around the globe to cut back on consumption, crude prices have plummeted and are now within striking distance of $100 a barrel, a level first reached Feb. 19.
At the pump, retail gas prices also continued falling, with a gallon of regular shedding about half a penny overnight to a new national average of $3.771, according to auto club AAA, the Oil Price Information Service and Wright Express. Gas peaked at $4.114 on July 17.
Crude fell after the dollar gained strength against the euro on U.S. data showing that industrial output rose more than expected in July. The 15-nation euro has lost some of its luster compared to its American rival amid growing evidence that European economies are slowing. The euro bought $1.4675 in trading Friday, down from $1.4811 late Thursday.
A rising dollar typically pushes oil prices lower as investors who buy crude and other commodities as hedges against inflation start dumping their positions to cut their losses. A stronger greenback also makes dollar-denominated commodities more expensive to overseas buyers, further eroding demand.
"The dollar is on fire again so that's causing people to re-evaluate everything," said Phil Flynn, oil analyst at Alaron Trading Corp. in Chicago. "It means oil prices could fall dramatically. We could see prices get to double digits if this continues."
An OPEC forecast of lower demand also put downward pressure on prices.
In its monthly oil report, the organization forecast world appetite for oil this year overall will fall by 30,000 barrels a day. While forecasting demand growing by a daily 1 million barrels a day this year, and another 900,000 barrels in 2009, the report noted that world demand growth next year will also be "the lowest since 2002," with demand growth from the major industrialized countries actually declining.
"They're basically saying we could have an oil glut because demand is slowing," Flynn said. "It's obvious that high prices do slow down demand and the market works."
The OPEC report came two days after the U.S. Department of Energy highlighted the ongoing drop in U.S. demand for energy as Americans struggle with high costs for gasoline, food and other goods.
Oil's steady decline has continued despite the simmering weeklong conflict between Russia and Georgia over two breakaway provinces. Western leaders worked Friday to persuade Russia to pull troops out of Georgia, but regional tensions soared after a top Russian general warned that Poland could face attack over its missile defense deal with the United States.
British oil company BP PLC said Thursday it has resumed pumping gas into the Baku-Tbilisi-Erzurum pipeline that runs through Georgia, but two oil pipelines remained closed. BP's Baku-Supsa oil pipeline was shut as a precaution, and the larger Baku-Tbilisi-Ceyhan line, a key supplier to Western countries, remains shut after a fire earlier this month on the Turkish section of the line.
Analysts noted that the conflict in Georgia, while likely not driven primarily by energy concerns, highlights Moscow's influence over oil and natural gas reserves in the region. Russia exports more oil than any country except Saudi Arabia, and is the world's leading producer of natural gas.
Only weeks ago, such a clash would likely have sent oil prices soaring. But the market has largely ignored the fighting in Georgia because traders have already priced in the geopolitical risk, analysts say. Crude's monthlong nosedive has also made it harder for bullish traders to spark a rally, despite a possible threat to oil installations.
Also weighing on prices Friday was the expiration of September oil contract options at the end of the day, a trading cycle that often increases volatility.
In other Nymex trading, heating oil futures rose 2 cents to settle at $3.1191 a gallon, while gasoline prices slipped 5.18 cents to settle at $2.8602 a gallon. Natural gas futures fell 4.4 cents to settle at $8.092 per 1,000 cubic feet.
In London, September Brent crude fell $1.13 to settle at $112.55 a barrel.
Associated Press writers George Jahn in Vienna, Austria, Adam Schreck in Dubai and Alex Kennedy in Singapore contributed to this report.

JPMorgan loses $1.5 billion so far in third quarter

2008-08-12T08:24:00.000-07:00

Tuesday August 12, 8:50 am ET
(Reuters) - Investment bank JPMorgan Chase & Co has incurred losses of about $1.5 billion since the start of July, hurt by turmoil in the credit and mortgage markets and by wider credit spreads and lower levels of liquidity, the company said in a regulatory filing late Monday.
JPMorgan said trading conditions have "substantially deteriorated" in the third quarter compared with that of the second, and spreads on mortgage-backed securities and loans have "sharply widened." The estimated losses exclude hedging, the firm said.
In addition, if the bank's own credit spreads tighten, the change in the fair value of certain trading liabilities would also hurt trading results, JPMorgan said.
The third-largest U.S. bank was forced to write down the value of its $33 billion in mortgage-backed securities as prices continued to drop in July, the Financial Times said Tuesday, citing people close to the company.
The writedowns were partly driven by Merrill Lynch & Co Inc's recent decision to sell $30.6 billion in risky debt to U.S. private equity firm Lone Star Funds for just $6.7 billion, or about 22 cents on the dollar, the FT said.
Merrill's move ratcheted up pressure on rivals to cut the values of their own subprime assets as they grapple with mounting debts and weakening economies.
As of June 30, JPMorgan held an aggregate $19.5 billion of prime and Alt-A mortgage exposure, $1.9 billion of subprime mortgage exposure, and $11.6 billion of commercial mortgage-backed securities (CMBS) exposure, the filing showed.
"These mortgage exposures could be adversely affected by worsening market conditions, further deterioration in the housing market and market activity reflecting distressed sellers," the company said.
JPMorgan did not immediately return a call seeking comment.
Last month, JPMorgan Chase posted a smaller-than-expected drop in earnings on resilient stock and bond underwriting revenue, but cautioned that the mortgage market and the economy were getting worse.
CAUTIOUS OUTLOOK
In the August 11 filing, JPMorgan said that it expects continued deterioration in credit trends for its consumer portfolios, and that this will likely require additions to the consumer loan loss allowance during the rest of 2008.
Quarterly net charge-offs in the home equity portfolio could continue to increase for the rest of 2008, the company said.
Prime and subprime mortgage net charge-offs were likely to continue to rise "significantly" in the second half of 2008, with deterioration expected to continue into 2009, JPMorgan said.
According to the filing, JPMorgan held $16.3 billion of legacy leveraged loans and unfunded commitments as of June 30.
"Leveraged loans and unfunded commitments are difficult to hedge effectively, and if market conditions further deteriorate, additional markdowns may be necessary on this asset class," the company said.
In a research note to clients on Tuesday, Lehman Brothers cut its 2008 earnings estimates for JPMorgan to $2.30 a share from $2.60, but maintained its "overweight" rating and $50 price target on the stock
Shares of the company were trading at $40.90 in premarket dealings on Tuesday, down from Monday's close at $41.89 on the New York Stock Exchange.
(Reporting by Tenzin Pema in Bangalore; Editing by Elaine Hardcastle and Mike Miller)

June trade deficit shrinks as exports climb

2008-08-12T08:05:00.000-07:00

Tuesday August 12, 10:23 am ET By Martin Crutsinger, AP Economics Writer
US trade deficit unexpectedly declines as exports hit all-time high, offsetting rise in oil
WASHINGTON (AP) -- The U.S. trade deficit unexpectedly fell in June as exports advanced to an all-time high, offsetting another big surge in oil imports.
The Commerce Department reported Tuesday the trade imbalance dropped to $56.8 billion in June, down by 4.1 percent from a revised May deficit of $59.2 billion. It was the smallest deficit in three months and much better than the $61.5 billion deficit Wall Street had been expecting.
Exports of goods and services rose to a record of $164.4 billion, helped by the dollar's declines earlier in the year, which have made U.S. goods cheaper on overseas markets.
Imports also rose to a record of $221.2 billion, up 1.8 percent from the May level. But the increase was driven by a 14.6 percent surge in petroleum imports, which hit an all-time high of $44.5 billion as crude oil prices jumped to record levels.
The country's goods trade deficit outside of petroleum shrank to the lowest level since February 2003. Demand for a variety of consumer products from clothing to televisions and furniture has weakened, reflecting the sharp economic slowdown in the United States.
Through the first half of this year, the trade deficit is running at an annual rate of $702.8 billion, up only slightly from last year's deficit of $700.3 billion. The 2007 deficit was down 7 percent from 2006, marking the first annual improvement after five straight years of record deficits.
The Bush administration points to the falling deficits as evidence that the president's trade policies are working to open overseas markets to U.S. products.
But critics say the deficits still remain far above the levels when Bush took office. They also contend that the string of record deficits contributed to the loss of more than 3 million manufacturing jobs since 2001 as many companies moved production to low-wage countries.
The deficit in June, after adjusting for inflation, was the lowest monthly imbalance since December 2001, a month when the country was struggling to emerge from the last recession. Many economists believe the 2008 slowdown will ultimately be ruled a recession too, although the gross domestic product has yet to post back-to-back negative quarters, a traditional definition of a downturn.
The GDP expanded at an annual rate of 1.9 percent in the April-June quarter. It may have been negative during that period, however, had it not been for a sizable improvement in the trade balance, reflecting the drop in demand for imports and surging export sales.
Economists are worried that the big lift from exports could fade in coming months if economic growth in Europe and Japan, two big overseas markets for American goods, falters.
The politically sensitive deficit with China rose to $21.4 billion in June, the largest monthly imbalance since a record $25.9 billion deficit with China last October. The deficit is likely to rise further in coming months.
The Chinese reported Monday that their surplus with the world rose to the highest level in eight months in July. Its surpluses with the United States and the 27-nation European Union expanded.
Critics accuse China of unfair trade practices such as artificially depressing the value of its currency to boost the competitiveness of Chinese products. The Bush administration, led by Treasury Secretary Henry Paulson, has been prodding China to move more quickly to allow its currency to rise against the dollar and head off Democratic moves in Congress to impose penalty tariffs on Chinese goods over the currency issue.
The record level of U.S. exports in June reflected big increases in sales of farm products such as soybeans, corn and wheat and gains in exports of manufactured goods. Sales of aircraft engines, electric generators and computer chips all posted big gains.
U.S. exports to Mexico, the European Union and South and Central America all hit records in June.
But America's deficit with OPEC set a record too in June as the average price of imported crude oil climbed to a record of $117.13 per barrel. Oil prices, which hit a record on the spot market of $147.27 in early July, have fallen by about 20 percent since that time, raising hopes that the oil portion of the trade deficit will start to narrow in coming months.
(This version CORRECTS import figure to $221.2 billion, sted of $164.4 billion.)

Stocks fall as oil fluctuates; financials decline

2008-08-12T08:02:00.001-07:00

Tuesday August 12, 10:45 am ET By Tim Paradis, AP Business Writer
Stocks decline as oil fluctuates and investors grow more concerned about financials
NEW YORK (AP) -- Stocks pulled back Tuesday as oil prices fluctuated and losses from JPMorgan Chase & Co. raised more concerns about the financial sector. The Dow Jones industrial average fell more than 100 points.
Oil trading was buffeted by several factors: differing views on whether global demand is falling or rising, and word from BP Plc that it had shut down an oil pipeline that runs through Georgia as a precautionary measure due to the fighting between Georgian and Russian troops. Light, sweet crude fell 15 cents to $114.30 a barrel on the New York Mercantile Exchange. Oil has fallen more than $30 from its July 11 high of $147.27, easing concerns on Wall Street about inflation.
The latest reminder of continuing troubles in the financial sector came when JPMorgan said late Monday it has incurred wider losses in its mortgage holdings so far in the third quarter than in the second quarter.
The company's disclosure in a regulatory filing that it has lost $1.5 billion, after hedges, in its mortgage-backed securities and loans this quarter offered fresh signs of the scope of the troubles in the credit markets. In the second quarter, the company's losses tied to souring mortgage debt totaled $1.1 billion.
Still, some investors likely saw the losses as relatively small compared with the more than $300 billion that financial institutions have written down over all in the past year.
In midmorning trading, the Dow fell 119.28, or 1.01 percent, to 11,663.07. A pullback was to be expected after the Dow rose more than 350 points, or 3.1 percent, in the past two sessions.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 9.06, or 0.69 percent, to 1,296.26, and the Nasdaq composite index fell 8.71, or 0.36 percent, to 2,431.24.
Bond prices rose as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.93 percent from 4.00 percent late Monday.
The dollar was higher against most other major currencies, while gold prices fell.
Meanwhile, a Commerce Department report showed the nation's trade deficit shrank in June, rather than growing as expected. The trade imbalance dropped 4.1 percent to $56.8 billion in June from a revised May deficit of $59.2 billion, as exports rose to an all-time high. It was the smallest deficit in three months and was better than the $61.5 billion Wall Street expected.
Financial stocks fell. JPMorgan fell $2.99, or 7.1 percent, to $38.90.
UBS AG, Switzerland's largest bank, fell 62 cents, or 3.9 percent, to $21.07 after reporting Tuesday it had further losses and write-downs of $5.1 billion during the second quarter of 2008.
Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume came to 219.1 million shares.
The Russell 2000 index of smaller companies fell 3.88, or 0.58 percent, to 747.18.
Overseas, Japan's Nikkei stock average fell 0.95 percent. In afternoon trading, Britain's FTSE 100 rose 0.10 percent, Germany's DAX index declined 0.46 percent and France's CAC-40 fell 0.69 percent.
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Oil sinks on stronger dollar to $115 a barrel

2008-08-10T01:35:00.000-07:00

Friday August 8, 6:25 pm ET By Madlen Read, AP Business Writer
Oil plummets as dollar's jump, signs of slowing growth lure investors out of energy to stocks
NEW YORK (AP) -- Oil prices dove to $115 a barrel on Friday, driven lower by a huge jump in the U.S. dollar, signs of moderating demand around the world and the burgeoning belief that commodities may have peaked.
Shrugging off concerns about a sabotaged oil pipeline in Turkey, investors pulled their money out of commodities and put it back into stocks -- giving crude oil a weekly loss of nearly $10 a barrel, and driving the Dow Jones industrial average up more than 300 points.
With energy losing its luster in the marketplace, the cost of roadside gasoline has been crawling lower. The average retail price for a gallon of gasoline slipped to $3.836 Friday. That's down about a penny from Thursday, and down nearly 28 cents from the record high of $4.114 reached July 17.
"We're probably going to see gasoline at the retail level around $3.50 for Labor Day," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com.
Light, sweet crude for September delivery slumped $4.82 to settle at $115.20 a barrel on the New York Mercantile Exchange -- its lowest settlement since May 1, when it settled at $112.52. During Friday's trading, crude dipped as low as $114.90. Prices for gasoline, heating oil and natural gas also dropped.
Many analysts have pointed to the $117-a-barrel mark for crude oil as technically significant -- a move below this level suggests, they say, that oil's recent slide is more than a brief pullback. Crude is now down $32 from its high of $147.27 on July 11.
"You have to remember that this market has baffled anyone who's used fundamentals or charts. But if you're a chartist, today is the death knell for the possibility of new highs in the marketplace," said Tom Kloza, publisher and chief oil analyst of the Oil Price Information Service in Wall, N.J.
Lehman Brothers chief energy economist Edward Morse issued a research note Friday saying that, barring a physical disruption to supplies, "we think oil prices have peaked."
As the dollar launched a massive rebound against the euro and yen after the European Central Bank and the Bank of England both left their benchmark interest rates unchanged, energy traders found reason to sell -- especially since the ECB indicated that there probably wouldn't be any more rate hikes to come.
Higher interest rates make a country's currency more attractive to invest in.
By the energy market's close, the euro had dropped to $1.5007 against the dollar, while the dollar rose to 110.22 yen. The British pound tumbled to $1.9193, after reaching its lowest point since November 2006.
The weak dollar had been boosting oil prices earlier this year, because dollar-denominated commodities are often used as hedges against inflation and a falling U.S. currency. Furthermore, the central banks' actions bolstered the growing belief in the energy markets that economies around the world are slowing alongside the United States, dampening global demand for crude oil products.
"The biggest driving factor now to the downside is the fact that the U.S. economy has a lot of company right now in terms of weakening economic growth," Cordier said, pointing to both China and India.
Behavioral changes have had a dampening effect too -- Morse noted that U.S. drivers are switching to more fuel-efficient cars, and Cordier pointed to Beijing's June decision to remove half the cars from its roads by the time the Olympics begin.
Nymex front-month crude futures are down nearly 22 percent from their record high. They are still up, however, nearly 60 percent from a year ago.
Earlier this year, Americans were paying about $1.65 billion a day for gasoline at the peak of prices and demand, Kloza said. The country appears to be headed for below $1.5 billion a day now that prices are coming down and demand is slowing, he said, but he pointed out that that's still three times what Americans were paying in 2002.
Heating oil futures fell 10.56 cents to finish at $3.1280 a gallon on the Nymex, where gasoline futures fell 11.53 cents to close at $2.8874 a gallon. Natural gas futures fell 32.3 cents to settle at $8.248 per 1,000 cubic feet.
In London, Brent crude for September delivery fell $4.53 to finish at $113.33 a barrel.
Nymex crude oil had risen $1.14 Thursday to close at $120.02 a barrel after Turkey's state-run news agency Anatolia said the pipeline, attacked by the separatist group Kurdistan Workers' Party, could be shut down for up to 15 days.
The pipeline can pump slightly more than 1 million barrels of crude oil per day, or more than 1 percent of the world's daily crude output. In Turkey, pipeline shareholder BP PLC and other oil companies declared what's called a force majeure after the pipeline attack, freeing them of contractual obligations to deliver crude.
Associated Press writers Alex Kennedy in Singapore and George Jahn in Vienna contributed to this report.

Stocks jump as oil prices fall sharply

2008-08-10T01:13:00.000-07:00

Friday August 8, 5:52 pm ET By Tim Paradis, AP Business Writer
Stocks surge after rise in dollar and drop in oil ease worries about financials; Dow jumps 300
NEW YORK (AP) -- Wall Street rebounded smartly Friday, shooting higher as a surge in the dollar and another plunge in oil prices eased some of investors' worries about losses at mortgage finance company Fannie Mae. The Dow Jones industrials soared more than 300 points, more than wiping out a big loss from the previous session, and all the major indexes had their best weekly gains since April.
The session extended a streak of volatility that has seen the Dow making frequent triple-digit moves as investors reacted feverishly to news about the financial sector, corporate earnings and the economy.
On Friday, the dollar, which has sagged along with the economy, reached its highest level against the euro since February, and in the process sent a wave of confidence through the stock market. And because the dollar's strength has contributed to the recent skid in oil prices, light, sweet crude dropped sharply again, falling $4.82 a barrel to settle at $115.20 on the New York Mercantile Exchange. That brought crude's decline over the past four weeks to more than $30.
Investors see the drop in oil as a big boost for the economy, because it should allow consumers to spend more freely. For the moment, that has allowed the market to set aside nervousness about the financial sector, which is still contending with the fallout from the year-old credit crisis.
Fresh financial worries surfaced Friday after Fannie Mae, the largest U.S. buyer and backer of home loans, reported a quarterly loss more than three larger than what Wall Street had expected and said it would slash its quarterly dividend to conserve cash.
Philip S. Dow, managing director of equity strategy at RBC Dain Rauscher in Minneapolis, said that while the strength in the dollar and the resulting drop in oil were attracting buyers Friday, Wall Street's recent back-and-forth trading illustrates investors' great anxiety.
"We live in a market where people react, they don't anticipate," he said. "So you've got this market that's kind on a seesaw every day reacting to news."
The Dow rose 302.89, or 2.65 percent, to 11,734.32. The blue chips fell nearly 225 points Thursday after concerns about the financial sector, a weak showing by retailers in July and a spike in weekly unemployment claims; Friday's advance marked the seventh time in two weeks that the Dow rose or fell by triple digits.
Broader indicators also rose sharply Friday. The Standard & Poor's 500 index advanced 30.25, or 2.39 percent, to 1,296.32 and the Nasdaq composite index advanced 58.37, or 2.48 percent, to 2,414.10.
For the week, the Dow rose 3.6 percent, the S&P gained 2.9 percent and the technology-heavy Nasdaq jumped 4.5 percent. It was their best weekly performance since the week ended April 18.
Bonds ticked lower as stocks jumped, easing demand for the safety of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its prices, rose to 3.94 percent from 3.93 percent late Thursday. Gold prices fell. Prices rebounded in after-hours trading, sending the 10-year yield to 3.93 percent.
The dollar's rise against the euro came after the European Central Bank and the Bank of England separately left their benchmark interest rates unchanged Thursday. With the ECB signaling more rate hikes aren't likely, the euro wasn't as attractive as an investment option.
Kelli Hill, a portfolio manager at Ashfield Capital Partners in San Francisco, said a more robust dollar not only makes commodities like oil less expensive but can also offer a much-needed dose of faith in the U.S. markets and economy.
"People want to sell on anything or buy on anything," she said, noting that light trading volume can exacerbate the market's gyrations. "Strengthening in the dollar is a good thing not only for business but also to build back confidence both domestically and internationally."
She is optimistic the markets will recover and said the rebound could come swiftly once the money sitting on the sidelines gets a sense that the economy is poised to turn higher.
The falling price of oil also overshadowed a Labor Department report showing that U.S. workers' efficiency grew at a slightly slower pace in the second quarter. Worker productivity grew at an annual rate of 2.2 percent. Economists surveyed by Thomson/IFR had predicted growth would come in at 2.7 percent compared with 2.6 percent in the first quarter. Still, some market watchers said any gains are positive.
Fannie Mae reported a loss of $2.3 billion, or $2.54 a share. Analysts surveyed by Thomson Financial had expected the company to report a loss of 68 cents a share. The company also said it would cut its quarterly dividend to 5 cents from 35 cents. Fannie Mae fell 90 cents, or 9 percent, to $9.05.
The report from Fannie Mae follows a loss Wednesday from fellow mortgage financier Freddie Mac that was more than three times larger than Wall Street analyst had expected.
McDonald's Corp. said strong demand for breakfast items helped lifted global same-store sales 8 percent in July. The world's largest hamburger chain said same-store sales, or sales at locations open at least a year, rose 6.7 percent in the U.S. The stock, one of the 30 that comprise the Dow industrials, rose $3.81, or 6.2 percent, to $65.67 after reaching a new high of $66.24.
While the drop in oil helped stocks in general, certain sectors like the airlines, which have been hit by soaring fuel prices, showed steep gains. United Airlines parent UAL Corp. jumped $1.52, or 16 percent, to $11.13, and Continental Airlines Inc. rose $1.73, or 12 percent, to $16.48.
Advancing issues outnumbered decliners by about 3 to 1 on the New York Stock Exchange, where consolidated volume came to a relatively light 4.82 billion shares compared with 5.09 billion shares traded Thursday.
The Russell 2000 index of smaller companies rose 20.89, or 2.93 percent, to 734.30.
Global wasn't affected by a 4.5 percent drop Friday in the Shanghai Composite Index. China's benchmark index fell to its lowest level in nearly 19 months over investor disappointment that a rally tied to the Beijing Olympic games didn't develop.
Elsewhere overseas, Japan's Nikkei stock average rose 0.33 percent. Britain's FTSE 100 rose 0.21 percent, Germany's DAX index rose 0.28 percent, and France's CAC-40 rose 0.77 percent.
The Dow Jones industrial average ended the week up 408.00, or 3.60 percent, at 11,734.32. The Standard & Poor's 500 index finished up 36.01, or 2.86 percent, at 1,296.32. The Nasdaq composite index ended the week up 103.14, or 4.46 percent, at 2,414.10.
The Russell 2000 index finished the week up 18.14, or 2.53 percent, at 734.30.
The Dow Jones Wilshire 5000 Composite Index -- a free-float weighted index that measures 5,000 U.S. based companies -- ended Friday at 13,197.13, up 308.92 points, or 2.40 percent, for the week. A year ago, the index was at 14,641.03.
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Jobless claims hit highest point since March 2002

2008-08-07T12:05:00.000-07:00

Thursday August 7, 12:57 pm ET By Jeannine Aversa, AP Economics Writer
Jobless claims hit highest point in more than 6 years as companies hunker down
WASHINGTON (AP) -- The nation's jobs market sent a fresh cry of distress as the number of newly laid off people unexpectedly hit the highest level in more than six years, a Labor Department report showed Thursday.
The faltering economy and tight credit have forced companies to cut back, and as the job market shrinks, consumer spending may dwindle, too.
All that spells potentially more trouble for the country later this year as the bracing tonic of the government's tax rebates disappears. "Consumers will be very tight fisted in the coming months," predicted Richard Yamarone, economist at Argus Research. "Nothing shuts down the consumer -- and the economy -- like the loss of a job."
Companies are laying off workers as they struggle with slowing customer demand, harder-to-get credit and high costs for fuel and other raw materials.
New applications filed for unemployment benefits rose last week by a seasonally adjusted 7,000 to 455,000, the department said in its weekly report. That was the most since late March 2002, when the job market was struggling mightily to get back on its feet after the 2001 recession.
A program to locate people eligible for jobless benefits played a role in last week's increase, a department analyst said. However, the analyst couldn't say how much of a role.
The latest snapshot of layoff filings was worse than economists expected. They were forecasting new claims to drop to around 430,000.
The data disappointed Wall Street and the White House. The Dow Jones industrials fell more than 80 points in afternoon trading.
"The job market isn't strong right now as we work through the downturn in housing and high energy prices. We would like to see more job creation," said White House spokesman Tony Fratto. He credited the government's stimulus program as a helpful cushion.
To that end, Wal-Mart, the world's largest retailer, and Costco Wholesale Corp. reported solid sales for July.
Wal-Mart's sales, however, came in a bit below Wall Street forecasts. And, the company projected sales would slow in August as rebate checks dry up. Many apparel stores including Limited Brands Inc., Abercrombie & Fitch Co. and Pacific Sunwear of California were stuck in a rut.
"Times are tough so people are husbanding their money," said Bill Cheney, chief economist at John Hancock Financial Services.
A growing number of economists fear that a pull back by cautious consumers will throw the economy into a tailspin in the final three months of this year.
That's prompting calls from Democrats, including presidential contender Sen. Barack Obama, to enact a second round of stimulus. The Bush administration has been cool to the notion. GOP presidential contender, Sen. John McCain, favors strengthening the jobs market by helping small businesses and others.
On the layoffs front, the new filings for unemployment benefits were distorted somewhat by the outreach program to notify people that they could qualify for additional benefits being made available under a new law.
When people went to state claims offices to apply for these extended benefits, state officials discovered that some were eligible for -- but haven't filed for -- their initial unemployment benefits, the department analyst said. That accounted for some of last week's increase, he said.
Even so, that didn't change the broader picture. "The labor market is weak, no doubt about that," said Ian Shepherdson, chief economist at High Frequency Economics.
The number of people continuing to collect unemployment benefits went up by 31,000 to 3.3 million for the week ending July 26, the most recent period for which that information is available. That was the highest since early December 2003.
Among the companies announcing job cuts in late July or early August were: General Motors Corp., Weyerhaeuser Co., and Starbucks Corp. Bennigan's restaurants owned by privately held Metromedia Restaurant Group, are closing, driving more people to unemployment lines.
Squeezed by high energy prices and fallout from housing and credit troubles, employers clamped on hiring in July. The unemployment rate jumped to a five-year high of 5.7 percent, the government reported last week. Employers cut jobs every month so far this year close to half a million. More losses are expected through the rest of this year, and the jobless rate could hit 6.5 percent by the middle of next year.

AIG's huge 2Q loss shows credit market woes linger

2008-08-07T11:51:00.000-07:00

Thursday August 7, 12:52 am ET By Madlen Read, AP Business Writer
AIG loses more than $5B in 2Q, dashing investors' hopes that mortgage market woes behind it
NEW YORK (AP) -- American International Group Inc. posted its third straight quarterly loss, a rude awakening to investors hoping that troubles in the insurer's mortgage market investments were starting to level off.
Shares of AIG fell nearly 8 percent in after-hours trading.
The world's largest insurer suffered a deficit of $5.36 billion in the second quarter after losing $5.56 billion, or $3.62 billion after taxes, in what are called credit default swaps, and writing down $6.08 billion, or $4.02 billion after taxes, in the value of other investments.
Credit default swaps are insurance policies to protect bondholders against defaults. Over the past three quarters, AIG has lost more than $25 billion, pretax, to credit default swaps, and more than $15 billion, pretax, in other investments.
Financial institutions that bet heavily on risky mortgage-backed securities have been pummeled since the start of the credit crisis. When the mortgages underlying these securities began failing, the value of the investments plunged, forcing companies like AIG to heavily mark down the value of their holdings.
Investors' abandonment of the credit markets last year brought the value of debt securities down even further, and the continuing wave of foreclosures this year has extended the losses at financial companies.
Some analysts believe AIG may have more losses ahead of it.
"Management either seems unaware or unwilling to admit the full level of the company's exposure to risky assets," said Byron MacLeod of Gradient Analytics. He noted that the collateral AIG has put up to offset unrealized losses, related primarily to the credit default swaps portfolio, has risen to $16.5 billion in the second quarter from $9.7 billion in the first quarter and from $5.3 billion in the fourth quarter.
"There's no quick fix here for the company," MacLeod said. "Things are still deteriorating for AIG's assets, so it's really hard to call a bottom at this point."
AIG lost $5.36 billion in the April-to-June period, or $2.06 per share. In the same period last year the company earned $4.28 billion, or $1.64 per share.
After excluding one-time items, the loss per share came to 51 cents -- much worse than the 63-cent gain that analysts were anticipating.
AIG's general insurance segment saw a 54.3 percent decline in operating income to $1.39 billion, and its life insurance and retirement services division saw a 10 percent decline in operating income to $2.61 billion. The company's asset management unit also suffered a decline in income.
Back in May, having posted two consecutive quarterly losses, AIG decided to raise capital in an effort to improve its financial standing. AIG said Wednesday that it raised approximately $20 billion in capital through the sale of $7.47 billion of common stock, $5.88 billion in equity units and $6.91 billion in certain fixed-income securities.
Then in June, the insurer replaced its then-Chief Executive Martin Sullivan with Citigroup Inc. veteran Robert Willumstad. Willumstad said at the time that he would review AIG's businesses, and that there were "no sacred cows." The CEO reiterated those thoughts Wednesday, and said the insurer will report on its progress in late September.
"Our second quarter results were adversely affected by the severe conditions in the housing and credit markets and a very difficult investment environment," Willumstad said in a statement. "These results do not reflect the earnings power and potential of AIG's businesses and it is clear that we have a lot of work to do to restore AIG's profitability to where it should be."
AIG executives will hold a conference call to discuss the company's results with investors on Thursday at 8:30 a.m. Eastern time.
The insurer's dropped $2.25, or 7.7 percent, to $26.84 in after-hours trading, having fallen 80 cents, or 2.7 percent, to close Wednesday at $29.09.

Stocks fall on weak jobs report, Wal-Mart sales

2008-08-07T11:44:00.000-07:00

Thursday August 7, 2:46 pm ET By Tim Paradis, AP Business Writer
Wall Street falls on jump in unemployment claims; retailers report lackluster same-store sales
NEW YORK (AP) -- Wall Street retreated Thursday after weekly unemployment claims jumped to a six-year high and Wal-Mart Stores Inc. and other retailers reported disappointing sales, touching off renewed fears that a pullback in consumer spending will damage the economy. The Dow Jones industrials fell about 120 points.
The Labor Department said the number of newly laid off people seeking jobless benefits increased by a seasonally adjusted 7,000 to 455,000 last week, the highest level since late March 2002. Wall Street had expected new claims to rise to around 430,000.
Wal-Mart, the world's largest retailer, said same-store sales, or stores open at least one year, rose 3 percent in July as consumers began using up their government stimulus checks. Analysts who follow the important measure of a retailer's health had expected a 3.4 percent rise, on average.
Financial stocks also lost ground after insurer American International Group Inc. reported that it lost more than $5 billion in the second quarter. The stock was by far the steepest decliner among the 30 that make up the Dow industrials.
Bill Stone, chief investment strategist for PNC Wealth Management, said the stream of economic news has been somewhat negative lately, often short-circuiting the market's attempts to build on rallies. Thursday's reports on employment and financials only added to investors list of worries, he said.
"The concerns about a weakening economy always run to worries about the financials and then you add some negative news to them on their own and you've got what we've got today," he said.
In midfternoon trading, the Dow fell 117.08, or 1.00 percent, to 11,538.99. The pullback comes after a two-day rally in the Dow of more than 370 points.
Broader indicators also slid. The Standard & Poor's 500 index fell 10.87, or 0.84 percent, to 1,278.32, and the Nasdaq composite index fell 3.04, or 0.13 percent, to 2,375.33.
Oil prices that fell sharply earlier in the week rebounded Thursday, likely adding to Wall Street's downbeat mood. Light, sweet crude rose $1.11 to $119.69 on the New York Mercantile Exchange.
Bonds jumped as investors sought the protection of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its prices, fell to 3.93 percent from 4.05 percent late Wednesday. The dollar mostly rose against other major currencies, while gold prices fell.
The employment data Thursday indicated that the labor market continues to weaken. The number of people continuing to collect unemployment benefits rose for the week ending July 26 to the highest level since early December 2003. In recent weeks, General Motors Corp., Weyerhaeuser Co. and Starbucks Corp. have all announced job cuts, sending more people to the unemployment lines.
Stocks briefly came off their lows after the National Association of Realtors said its seasonally adjusted index of pending sales for existing homes rose 5.3 percent to 89 from a downwardly revised figure of 84.5 for May. Despite the June increase, the index sits 12 percent below year-ago levels. Economists surveyed by Thomson/IFR had predicted the index would fall to 84.3.
Jerry Webman, chief economist at Oppenheimer Funds Inc., said swift pullback in stocks after the day's economic readings illustrates the fragility of investor sentiment. He said the market's volatility reflects an undercurrent of uncertainty and efforts by some traders to capitalize on shifts in the mood.
"We react very strongly to bits of news," he said. "The whipsaw danger is pretty high here."
In corporate news, American International Group fell $4.71, or 16 percent, to $24.38 after the world's largest insurer reported its loss and said weakness in the credit markets has erased several billions of dollars in value from its credit default swaps portfolio and other investments.
Citigroup Inc. fell 72 cents, or 3.7 percent, to $18.98 after federal and state regulators announced settlements Thursday in which the company will repurchase more than $7 billion in auction-rate securities and pay $100 million in fines. The company neither acknowledged nor denied wrongdoing under the settlements. New York Attorney General Andrew Cuomo had threatened to charge Citigroup with fraudulent sales of auction-rate securities and with the destruction of key documents.
The latest worries about financials offered an unwelcome reminder of the trouble companies are having with bad debt on their balance sheets. Tightness in the credit markets makes it hard for companies to unload and even value mortgages and other paper. And the reports of rising unemployment Thursday only added to fears that defaults on mortgages and other borrowings aren't likely to end soon as consumers continue to struggle.
The results from Wal-Mart and other retailers only fanned concerns about consumer spending, which accounts for more than two-thirds of U.S. economic activity.
Wal-Mart, also a Dow stock, fell $3.33, or 5.5 percent, to $57.43 after reporting its July sales.
Other retailers' reports disappointed Wall Street. Target Corp. fell $1.50, or 3.1 percent, to $46.51, while Macy's Inc. fell 63 cents, or 3.2 percent, to $19.06.
Among technology names helping check the Nasdaq's losses, Intel Corp. rose $1.01, or 4.4 percent, to $23.81, while Microsoft Corp. advanced 50 cents $27.52.
Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume totaled 776.9 million shares.
The Russell 2000 index of smaller companies fell 5.28, or 0.73 percent, to 720.62.
Overseas, Japan's Nikkei stock average fell 0.98 percent. Britain's FTSE 100 fell 0.16 percent, Germany's DAX index fell 0.27 percent, and France's CAC-40 added 0.20 percent.
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Oil rises to near $120, halting slide

2008-08-07T05:16:00.000-07:00

Thursday August 7, 6:55 am ET By George Jahn, Associated Press Writer
Oil rises to near $120, halting four-week slide as Iran sanctions look likely
VIENNA, Austria (AP) -- Concerns that tension over Iran's nuclear program could lead to conflict propelled oil prices upward Thursday to near $120 a barrel, halting a four-week slide.
Light, sweet crude for September delivery rose $1.21 to $119.79 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe. The contract dropped 59 cents overnight to settle at $118.58 a barrel.
"The market has been ignoring supply-side concerns lately, but it's looking like the world powers will go forward and place more sanctions on Iran," said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore.
The five permanent U.N. Security Council members and Germany agreed Wednesday to pursue new sanctions against Iran, which will probably take months to implement.
Tehran has refused to curb its uranium enrichment and may be trying to run out the clock on the Bush administration in hopes of getting a better offer from a new U.S. president next year, the State Department said.
Iran says it isn't seeking nuclear weapons and won't scale back what it calls a legitimate energy-production program.
Before the rebound, Nymex front-month crude futures had fallen around 20 percent since reaching a record high of $147.27 on July 11.
"The market got oversold," Shum said. "People have been overwhelmingly preoccupied with poor U.S. oil demand."
The U.S. Energy Department's Energy Information Administration said Wednesday that crude supplies rose 1.7 million barrels in the week ended Aug. 1, slightly more than the 1.2 million-barrel increase expected by analysts surveyed by energy research firm Platts.
The EIA said inventories of distillate fuel, which include diesel and heating oil, jumped 2.8 million barrels. The analysts had expected an increase of 2.3 million barrels.
Meanwhile, EIA data showed gasoline stockpiles fell 4.4 million barrels last week, much more than the 1.4 million drop expected by analysts. The big drop in gasoline stocks surprised some oil market traders, but analysts said it likely signals that gas distributors have taken more deliveries from the refiners as the summer driving season enters its last month -- not that U.S. motorists are suddenly ramping up their driving amid recent pullbacks in pump prices.
Lending support to that idea, the EIA said demand for gasoline for the month ended Aug. 1 topped out at about 9.4 million barrels a day, 2.3 percent lower than for the same period last year.
In London, September Brent crude was up $1.54 at $118.54 a barrel on the ICE Futures exchange.
A fire Wednesday on a Turkish section of the Baku-Tbilisi-Ceyhan pipeline -- a major supplier of crude to Western markets -- disrupted the flow of oil and helped support prices.
The overnight blaze forced workers to shut down two valves along the pipeline as a precaution, halting the flow of all oil being sent to Ceyhan terminal from the east. Shipments were not affected.
Still such events usually drive prices upward. But the fire did not "excite any real buying interest," commented trader and analyst Stephen Schork in his Schork Report, adding: "That's bearish."
The U.S.-backed 1,100-mile (1,760-kilometer) pipeline allows the West to tap oil from Azerbaijan's Caspian Sea fields, estimated to hold the world's third-largest reserves, and bypass Russia and Iran. The pipeline can pump slightly more than 1 million barrels of crude oil per day, more than 1 percent of the world's daily crude output.
In other Nymex trading, heating oil futures rose more than 3 cents to $3.2717 a gallon (3.8 liters), while gasoline prices gained over 4 cents to $2.99 a gallon. Natural gas futures rose by nearly 9 cents to $8.862 per 1,000 cubic feet.
Associated Press Writer Alex Kennedy contributed to this report from Singapore.

Freddie Mac swings to 2Q loss

2008-08-06T10:25:00.001-07:00

Wednesday August 6, 12:20 pm ET By J.W. Elphinstone, AP Business Writer
Freddie Mac swings to $821 million loss in 2nd-quarter, falls below estimates
NEW YORK (AP) -- Freddie Mac on Wednesday posted a second-quarter loss that was more than three-times larger than Wall Street expected as a huge number of borrowers with good credit fell behind on their exotic and risky mortgages.
The losses were concentrated in a handful of state -- California, Florida, Nevada, and Arizona -- where home prices shot up the most and are now falling precipitously.
The dismal financial results come just weeks after the government threw a financial lifeline to Freddie and its sister company Fannie Mae to ward off fears the pair could collapse and take down the U.S. mortgage market. Together, the two hold or guarantee nearly half of outstanding U.S. mortgage debt.
Freddie lost $821 million, or $1.63 a share, for the quarter that ended June 30, compared with a profit of $729 million, or 96 cents a share, in the year-ago period.
Revenue fell to $1.69 billion from $2.34 billion.
Stock analysts surveyed by Thomson Financial expected a loss of just 53 cents a share.
In a troubling sign that mortgage delinquencies and foreclosures are increasing, Freddie set aside $2.5 billion -- more than double what it had reserved in the first quarter.
Freddie Mac Chief Financial Officer Buddy Piszel told The Associated Press that the credit problems are emerging mostly in the company's Alt-A portfolio, which contains mortgages with high risk factors like undocumented borrower income or no down payments.
Alt-A loans make up about 10 percent, or $190 billion, of Freddie's entire portfolio, but accounted for more than half of the company's credit losses in the quarter.
For all of Freddie Mac's loans, the percentage of loans more than three months past due edged up to 0.82 percent from 0.74 percent.
Freddie's cash cushion against losses also shrank during the quarter, falling to $37.1 billion, or $2.7 billion more than the 20 percent surplus required by its federal regulator.
To preserve capital, the government-sponsored company said it expects to cut its dividend this quarter to 5 cents or less a share from 25 cents a share.
The McLean, Va.-based company also said it would sell at least $5.5 billion in stock.
Shares of Freddie were down 92 cents at $7.12 a share in midday trading Wednesday.
As part of a sweeping housing rescue bill signed last week by President Bush, the Treasury Department gained unlimited power through 2009 to lend money to Freddie and Fannie or buy their stock if needed.
"We're managing the firm to not have to access the government support," Piszel told the AP.
Also, the Federal Reserve said it would offer a special lending option to the pair and will take on a new role overseeing the two companies.
On Tuesday, the Treasury Department said it retained investment firm Morgan Stanley to help the government assess the state of the mortgage market and give a financial profile of Fannie and Freddie.
Also on Tuesday, Fannie Mae said it will double the fee it charges lenders and brokers to help it gird against higher credit risks and losses from mortgages it buys from lenders.
Piszel said Freddie is evaluating its pricing, but isn't announcing any action now.
Fannie Mae reports its quarterly financial results Friday.

Wall Street pares losses on as oil declines

2008-08-06T09:57:00.000-07:00

Wednesday August 6, 12:31 pm ET By Tim Paradis, AP Business Writer
Stocks pare declines as drop in oil offsets unease over wider-than-expected Freddie Mac loss
NEW YORK (AP) -- Stocks pared early losses and traded narrowly mixed Wednesday as a drop in oil prices helped corral fresh worries about the financial sector.
Investors began the day fearing more industrywide write-downs of bad home loans after mortgage financier Freddie Mac reported a larger-than-expected second-quarter loss. But a reversal in oil prices, continuing a decline that propelled stocks sharply higher Tuesday, helped calm investors about the forces tugging at the economy.
Freddie Mac, which substantially increased its reserves for souring loans, lost about three times what Wall Street expected on a per-share basis. The company also announced that it expects to cut its third-quarter dividend as it seeks to preserve capital.
The well-being of Freddie Mac and sister company Fannie Mae is a big concern on Wall Street as the government-chartered companies hold or back nearly half of all U.S. mortgage debt. The companies have lost billions of dollars due to failed loans over the past year; the federal government has pledged to help both companies with larger lines of credit or stock purchases if necessary.
The problems at both companies have contributed to the volatility on Wall Street in recent months. But trading appeared orderly Wednesday, a day after the Dow Jones industrial average soared more than 330 points on a reassuring economic statement from the Federal Reserve and another drop in oil prices. Some retrenchment after such steep gains wasn't unexpected.
Lincoln Anderson, chief investment officer and chief economist at LPL Financial in Boston, said that while the troubles in the financial sector aren't over, investors are somewhat emboldened by the fall in oil and signs of strength in the dollar.
"I think we're getting into better territory. I've been very much focused on the fall in oil prices as a necessary ingredient to avoid recession. To the extent that we're getting that that's just great," he said.
Oil extended its slide into a third day. Light, sweet crude fell 87 cents to $118.30 on the New York Mercantile Exchange after the government reported a jump in domestic inventories; oil is now down about $30 from its record high of $147.27 reached on July 11.
In midday trading, the Dow fell 25.24, or 0.22 percent, to 11,590.53, after having been down nearly 100 points in the early going.
Broader stock indicators traded mixed. The Standard & Poor's 500 index fell 2.68, or 0.21 percent, to 1,282.20, and the Nasdaq composite index rose 11.20, or 0.48 percent, to 2,361.03.
Bonds fell as investors left the safety of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 4.07 percent from 4.02 percent late Tuesday. The dollar was mixed against other major currencies, while gold prices fell.
Following its report, Freddie Mac fell 93 cents, or 12 percent, to $7.11, while Fannie Mae fell $1.09, or 8 percent, to $12.51.
Other financial stocks fell as investors worried about the balance sheets of financial companies and the effects of souring mortgage debt. Wells Fargo & Co. fell 68 cents, or 2.2 percent, to $30.52, while Wachovia Corp. fell 42 cents, or 2.2 percent, $18.64.
In other earnings news, Time Warner Inc. said second-quarter profits fell 26 percent on declining subscriber fees at its AOL online unit and lower ad revenue at the Time publishing business. Time Warner rose 1 cent to $14.89.
Sprint Nextel declined 85 cents, or 9.9 percent, to $7.70 after posting a second-quarter loss on severance and other costs.
Qwest Communications International Inc. said earnings fell 24 percent in the second quarter. The stock fell 13 cents, or 3.6 percent, to $3.46.
Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume came to 502.8 million shares.
The Russell 2000 index of smaller companies fell 1.62, or 0.22 percent, to 719.42.
Overseas, Japan's Nikkei stock average rose 2.63 percent. Britain's FTSE 100 rose 0.58 percent, Germany's DAX index added 0.65 percent and France's CAC-40 jumped 1.41 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com

Oil tumbles below $120 a barrel

2008-08-05T10:33:00.000-07:00

Crude prices lower as investors await Fed rate decision and its impact on the dollar.
By Kenneth Musante, CNNMoney.com staff writer
Last Updated: August 5, 2008: 1:08 PM EDT
NEW YORK (CNNMoney.com) -- Oil prices fell near $120 a barrel Tuesday, as investors anticipated further economic weakness in the United States, which could erode demand for crude products.
U.S. crude for September delivery fell $1.14 to $120.27 a barrel in electronic trading. It traded as low as $118 a barrel before rebounding.
Crude last reached $118 on May 5, when prices rose $3.65 to settle at $119.97 a barrel.
On Monday, oil settled down $3.69 to $121.41 a barrel.
Fed meeting: Investors are keeping an eye on the Federal Reserve's policy announcement, which is due at 2:15 p.m. ET.
The Federal Reserve is largely expected to leave its key rate unchanged at 2% as it tries to balance rising inflation and weak economic growth. But investors will be looking closely for any hints policymakers make about the future direction of rates.
Over the past several months, the Fed has either cut rates to inject liquidity into the market, or held them steady to ward off inflation. Some policymakers, such as Minneapolis Fed president Gary Stern, have called for rate increases to cope with rising inflation, according to reports.
"If the number of dissenting Fed directors increases, that would be bullish for the dollar," said James L. Williams, head of WTRG Economics in London, Ark.
The potential of a stronger dollar would send crude prices lower, since oil is traded in dollars and it would take fewer dollars to buy a barrel.
Falling demand: Weekly reports from the Department of Energy have indicated demand for crude products is well below what they were a year ago.
Meanwhile the market has been talking about falling demand from Europe and Japan, as well as developing nations such as China, according to Jim Ritterbusch, president of energy consulting firm Ritterbusch and Associates in Galena, Ill.
"We're still responding to both anecdotal evidence and statistical evidence that demand is falling," Ritterbusch said.
Expensive gasoline: High fuel prices have weighed heavily on consumers in the U.S., the world's largest oil consumer.
A daily survey from motorist group AAA showed Tuesday that while average gas prices have fallen for 19 straight days to $3.871 a gallon, they're still more than $1 higher than a year ago. Gasoline prices hit a record high of $4.114 at the pump on July 16.
A recent CNN/Opinion Research poll found that 75% of respondents said prices at the pump are a "financial hardship," up from 60% in April.
"People are just figuring out ways to drive a little bit less," said Brian Youngberg, senior energy analyst with Edward Jones in St. Louis. "They're not taking that extra trip down to the corner grocery store."
Election: Responding to public outcry on high oil prices, Democratic presidential candidate Barack Obama laid out an energy plan Monday that would include releasing 70 million barrels of crude from the Strategic Petroleum Reserve and accepting a "limited amount" of new offshore drilling in the U.S.
Republican opponent John McCain has supported new drilling for several weeks, and was scheduled to tour the Fermi 2 nuclear plant outside of Detroit on Tuesday. Both candidates have pushed for the development of non-fossil fuels.
Edouard: Concerns about supply disruptions in the Gulf of Mexico dissipated as Tropical Storm Edouard failed to reach hurricane strength as it struck the Texas coast, and just grazed vital off-shore oil facilities near Galveston, Texas, according to reports.
First Published: August 5, 2008: 7:12 AM EDT

Stocks Fall Despite Oil-Price Drop

2008-08-05T09:54:00.001-07:00

Inflation fears diminished as energy and other commodity prices dropped, but trading was quiet ahead of Tuesday's Fed announcement
Major U.S. stock indexes finished lower Monday after a recovery attempt late in the day sparked by falling oil prices evaporated. But the plunge in oil prices on abating hurricane concerns and general weakness across the commodities complex did help diffuse some of the market pessimism caused by a rise in inflation.
Natural gas, platinum and copper prices all fell to six-month lows, while corn traded at its lowest levels in four months.
On Monday, the Dow Jones industrial average closed 42.17 points, or 0.37%, lower at 11,284.15. The broader S&P 500 ended down 11.30 points, or 0.90%, at 1,249.01. The tech-heavy Nasdaq composite index gave back 25.40 points, or 1.10%, to finish at 2,285.56.
On the New York Stock Exchange, 21 stocks were trading lower for every 10 that were gaining, while on the Nasdaq the ratio was 19-9 negative amid slow trading pre-Fed announcement. Energy and basic materials stocks were down, as were financials, but consumer staples and discretionary names were trading higher, S&P MarketScope said.
The market was initially spooked by a jump in an inflation gauge contained in the government’s personal income report for June, though those fears eased somewhat with the drop in commodity prices. The personal consumption expenditure (PCE) deflator surged 0.8% on the month and is up a hefty 4.1% over last year, well above the upwardly revised 3.5% year-over-year gain in May (from a 3.1% rise before). The core PCE deflator rose 0.3% in June and is up 2.3% from last June -- and above the 2.2% y/y pace seen since March.
The headline figure on the personal income report came in at a better than expected rise of 0.1% in June, beating expectations of a 0.3% decline due to adjustments in tax rebate assumptions in the revised data, Action Economics said. Income would have increased 0.3% in June and an estimated 0.3% in July, were it not for rebate distortions. Disposable income dropped 1.9% in June following a hefty 5.7% spike in May.
While the income and spending readings were a bit better than expected, thanks to the tax rebate checks, the big jump in inflation have worried markets ahead of the FOMC meeting, says S&P senior economist Beth Ann Bovino.
All eyes are on what the Federal Reserve policy committee's next move will be in steering the economy. The committee heads into its Aug. 5 meeting sharply divided over the appropriate direction of policy, with three of its 10 voting members having expressed their concern in recent weeks over future inflation. Economists are betting the majority, led by Chairman Ben Bernanke, will prevail in holding the Fed’s target rate steady at 2%.
Despite the higher inflation deflator figure, recent events auguring more tough times for the economy have diminished the inflation hawks' argument for a rate hike and might even put the possibility of a rate cut back on the table at some point during the second half of 2008. The troubles at the mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) have pushed up mortgage rates and created tighter credit conditions generally, whiles slower growth abroad, especially in Europe, will slow U.S. exports. Cheaper oil, if sustained, will also weaken concerns about a broader rise in inflation.
"The economy is too unstable for them to raise rates any time soon," says Doug Roberts, chief investment strategist for ChannelCapitalResearch.com, based in Shrewsbury, N.J. "We have the credit crisis, the housing crisis shows no signs of a bottom, and demand for oil, which is source of inflation, is a global thing [based on] demand driven by emerging markets."
Raising interest rates would hurt the U.S. economy more than it would the world economy, which is where a more pronounced slowdown is needed to rein in long-term trends in oil consumption, he says. Lately, oil prices have been cooperating, giving the Fed cover to hark back to its prior position on core inflation moderating over time, he adds.
"If they have a divided committee and as long as there are enough dissenters who are more hawkish, they can maintain credibility on inflation and it buys them more time to not do anything," he says.
HSBC Holdings (HBC) shares fell after the bank reported a pretax profit of $10.25 billion, down 28% from a year ago. HSBC's Tier 1 capital ratio was 8.8%. The latest results include loan impairment charges and credit risk provisions of $10.06 billion.
Citigroup (C) confirmed plans to close a $400 million convertible arbitrage fund that is the final piece of its TriBeCa hedge fund.
In other economic news Monday, U.S. factory orders surged 1.7% in June, well above the median estimate of a 0.9% gain, after rising a revised 0.9% in May. Excluding transports, orders were up 2.3% in June.
Oil prices dropped sharply as weather-related concerns faded after Tropical Storm Edouard wasn't upgraded to a hurricane. A report that Iran's chief nuclear negotiator Saeed Jalili and the European Union's foreign policy chief, Javier Solana, had called on Monday for a "positive air" over Iran's nuclear issue and would continue to keep communication open was also weighing on oil prices.
September WTI crude oil futures fell more than $4 a barrel before bouncing from the lows to settle $3.69 lower at $121.41 a barrel on Monday.
David Joy, chief market strategist at RiverSource Investments in Boston, sees the drop in oil prices as only a correction, "not a fundamental breakdown in the overall uptrend" since demand will be sustained by the industrialization efforts in emerging economies, especially in Asia.
But he thinks the price could drop as far as $90 to $100 a barrel, which is where supply-and-demand analyses suggest it should be trading now, he says.
The Reuters/CRB index, the most widely followed commodity index, fell below 402.0 on Monday, within striking distance of the 400.0 psychological area, the lowest point since the index broke that level back on May 1. That's a big drop from session highs above 416 and keeps the downtrend intact from record highs near 474 set back on July 3, Action Economics said. Energy prices came down as on reduced fears about the likely path Tropical Storm Edouard will cut on the Gulf Coast and on Barack Obama's comments about releasing oil from the U.S. Strategic Petroleum Reserve, but natural gas prices were down even more sharply.
Agricultural prices are all substantially lower, too, as are copper prices after an inventory build. Precious metals have taken a cue from energy as well, with gold probing below $900 per ounce for the second time in a week. A decisive technical break and close below $117 per barrel on NYMEX crude would prompt a re-test of the low of 377.45 on the CRB reached on Mar. 20, Action Economics said.
The drop across the commodities complex, while showing that the runup in prices was probably overdone in part by the speculation element, factor, suggests widening anticipation of weaker economic conditions worldwide ahead, says Joy.
Among other stocks in the news on Monday, shares of Charlotte Russe Holding (CHIC) tumbled after the mail-based specialty fashion retailer said that Patti Johnson had resigned as chief financial officer. Len Mogil, currently interim CEO, will assume the additional position of interim CFO. Roth Capital downgraded the stock to sell from hold.
InterContinentalExchange (ICE) shares fell after the company posted a second-quarter profit of $1.19 a share, vs. 75 cents a share a year ago, on a 44% gain in revenue. Quarterly trading volume exceeded 126 million futures and over-the-counter contracts were up 44%. The exchange set a $500 million stock buyback. S&P maintained its buy rating.
Nicor Inc. (GAS) shares rose after the company posted 64 cents a share in second-quarter earnings vs. a 40-cent preliminary forecast on a 26% rise in revenue. The company affirmed its 2008 earnings outlook of $2.20 to $2.40 a share. Standard & Poor's maintained its buy rating on the stock.
Freightcar America (RAIL) shares plunged after the company reported a second-quarter loss of eight cents a share, vs. earnings of 93 cents a year ago, on a 28% drop in sales. The manufacturer, repairer and leaser of freight cars noted that a combination of a sharp increase in input costs, specifically steel and aluminum, and pricing pressures had reduced margins. Due to increases in raw material costs on certain fixed price railcar contracts in backlog, the company's current estimated cost to complete some contracts is expected to exceed contractual sales price.
Major European indexes were trading lower Monday. In London, the FTSE 100 index slid 0.64% to 5,320.20. In Paris, the CAC 40 fell 0.78% to 4,280.63, while Germany's DAX index dropped 0.73% to 6,349.81.
In Asia, Japan's Nikkei 225 shed 1.23% to close at 12,933.18, while Hong Kong's Hang Seng index fell 1.52% to 22,514.92.
Treasury market
Treasuries reversed course to trade lower as commodity prices came off, undercutting inflation fears. The 10-year note moved down to 99-08/32 for a yield of 3.96% and the 30-year bond was down 14/32 at 96-17/32 for a yield of 4.59%.

Stocks Rally Ahead of Fed Decision

2008-08-05T09:43:00.000-07:00

Traders were awaiting the 2:15 p.m. ET announcement from Bernanke & Co. Oil prices continued to fall
http://businessweek.feedroom.com/?fr_chl=273e4cf956cc61c79bf6963949abebd5f8d0aaff&rf=ev&hl=true&skin=twoclip
Major U.S. stock indexes rallied late Tuesday morning ahead of the Federal Reserve's decision on interest rates, expected at 2:15 pm ET. An increase in a closely watched gauge of service-sector activity helped lift sentiment. Oil and gold futures skidded amid speculation the commodities bubble may be bursting, according to Standard & Poor's MarketScope.
Bonds were trading lower ahead of a Treasury refunding program scheduled to start Wednesday amid indications the government will have to issue more debt. The dollar index was higher.
On Tuesday, the Dow Jones industrial average gained 190.52 points, or 1.69%, to 11,474.67. The broader S&P 500 index added 19.05 points, or 1.53%, to 1,268.06. The tech-heavy Nasdaq composite index rose 33.34 points, or 1.46%, to 2,318.90.
Activity in the broader market was positive. On the News York stock exchanges, 21 stocks rose in price for every seven that declined. The ratio on the Nasdaq was 16-8 positive. Trading was moderate, with financial, consumer discretionary, and industrial issues higher.
"On a short term basis, the burden of proof is probably on the bulls that they can generate enough buying interest to sustain something more than a 1-2 day rally," according to Richard Dickson and Tracy Knudsen of Lowry's Reports in North Palm Beach, Fla.
The Fed is expected to leave the Fed funds rate target unchanged at 2.0% although some board members might call for a rate hike. There is some uncertain what the FOMC will say about the economic outlook in light of recent mixed data, as the Fed contends with inflation, slow growth, and the ongoing credit crunch. Fed chairman Ben Bernanke could talk tougher on inflation to head off dissent from potentially widening to three FOMC members, according to a Bloomberg article.
"Any such shift would not come without risks, such as spooking investors if the Fed came off too hawkish relative to increasingly fragile economic conditions -- especially after he widened those goal posts in recent monetary policy testimony," wrote Action Economics analysts in a website posting.
In economic news Tuesday, the U.S. ISM services composite index improved to 49.5 in July after falling over 3 points to 48.2 in June. The general activity index was little changed at 49.6 from 49.9. The employment component rose to 47.1 after hitting a record low at 43.8 in June. New orders index slipped to 47.9 from 48.6. New export orders slid to 47.9 from 52.0, back below 50 for the first time since February. Prices paid fell to 80.8 from the record 84.5 in June.
Though the headline index was a little better than the market expected, mix of data won't have much market impact ahead of the FOMC meeting, reports Action Economics, but the softness in some of the key components will add to concerns on the Street over a slowdown in growth.
“Although quantitatively the nonmanufacturing ISM index was somewhat less weak than expected, qualitatively the story for the economy is unchanged,” wrote economist John Ryding of RDQ Economics in an Aug. 5 note. “In our judgment, the dominant theme remains stagflation and, with the Fed more focused on growth and financial stability, the risk is that inflation moves higher in 2009.”
Oil futures were falling amid reports Tropical Storm Edouard went through the heart of the Gulf of Mexico's oil belt without causing major damage, and was heading for landfall along the Texas/Louisiana border. September West Texas Intermediate crude oil futures were off $1.60 to $119.81 per barrel.
August gold futures were lower at $888.50 per ounce.
Among Tuesday's stocks in the news, Procter & Gamble (PG) reported fourth quarter earnings per share of 92 cents, vs. 67 cents one year earlier, on a 10% revenue rise. The company sees fiscal 2009 EPS of $4.18-$4.25 (GAAP basis), which includes an estimated 50-cent gain from the sale of its Folgers coffee business and a 12-cent investment in incremental restructuring.
Bankrate (RATE) posted second quarter adjusted operating EPS of 39 cents, vs. 35 cents one year earlier, on a 73% revenue rise. As previously announced on July 7, the company lowered its 2008 annual guidance as a result of softness in display advertising. The company expects annual revenue to be between $164-$169 million and adjusted EBITDA of $54-$58 million. Jefferies cut its price target on the shares to $35 from $54. The firm also cut its estimates on Bankrate and reiterated its hold recommendation.
Molson Coors Brewing (TAP) reported second-quarter non-GAAP EPS (underlying after-tax income) of 93 cents, vs. 97 cents one year earlier, as higher special charges, increased energy and commodity inflation in all markets, and a higher effective tax rate for the second quarter offset a 4.8% sales rise.
Marvel Entertainment (MVL) posted second-quarter EPS of 59 cents, vs. 34 cents one year earlier, on a 55% sales rise. The company sees $1.55-$1.75 2008 EPS on revenue of $450-$480 million. Marvel’s guidance now includes results from its Film Production unit.
Archer-Daniels-Midland (ADM) posted lower-than-expected fourth-quarter EPS of 58 cents, vs. $1.47 one year earlier, on a 78% revenue rise. Wall Street was looking for a profit of 67 cents. The company notes results in the prior-year period include after-tax gains on asset sales of 95 cents per share.
Tenet Healthcare (THC) posted a second-quarter loss of 3 cents per share vs. a loss of6 cents one year earlier on a 6.3% revenue rise.
Allied Capital (ALD) posted a second-quarter loss of 59 cents per share vs. 57 cents EPS one year earlier as a net change in unrealized appreciation or depreciation offset a 14% rise in total interest and related portfolio income.
CNBC reports Lehman Brothers Holdings (LEH) is considering selling its entire investment management business, including private equity and hedge fund stakes, rather than just its Neuberger Berman business, as the bank looks to raise capital.
UBS reportedly initiates coverage on Apple Inc. (AAPL) with a buy rating.
UBS also reportedly upgraded American International Group (AIG) to buy from neutral.
Major European indexes were trading higher Tuesday. In London, the FTSE 100 index climbed 2.14% to 5,434.20. In Paris, the CAC 40 index rose 2.42% to 4,384.40. Germany’s DAX index gained 2.69% to 6,520.53.
Major Asian equity indexes lost ground Tuesday. Japan’s Nikkei 225 index fell 0.14% to 12,914.66. In Hong Kong, the Hang Seng index tumbled 2.51% to 21,949.75.
Treasury market
Treasuries were mixed ahead of the FOMC meeting. The 10-year note was lower in price at 99-05/32 for a yield of 3.983%, while the 30-year bond was lower at 96-13/32 for a yield of 4.598%. The U.S. government will sell $17 billion of 10-year notes on Wednesday and $10 billion of 30-year bonds on Thursday.

No change expected in Fed interest rates

2008-08-05T09:34:00.000-07:00

Tuesday August 5, 12:14 pm ET By Martin Crutsinger, AP Economics Writer
Federal Reserve expected to leave interest rates alone as powerful forces buffet the economy

WASHINGTON (AP) -- The Federal Reserve, caught between mounting job losses and rising inflation, is likely to sit tight and hope that the interest rate cuts it has already provided will be enough to heal a sick economy.
The central bank started Tuesday's meeting with a new member. Elizabeth Duke, formerly an officer at a Virginia-based community bank, was sworn in by Fed Chairman Ben Bernanke before the closed-door deliberations got under way.
Private economists believe that when the central bank will decide during the discussions Tuesday to leave its target for the federal funds rate, the interest that banks charge each other, at 2 percent.
Bernanke and his colleagues are being forced to navigate treacherous waters, trying to keep the economy from plunging into a deep recession while worrying about keeping interest rates so low that they could trigger a dangerous inflation spiral.
"The Fed is really locked in right now. They can't go forward or backward," said Sung Won Sohn, an economics professor at the Smith School of Business at California State University Channel Islands.
Many economists believe the funds rate will remain at 2 percent not only in August but for the rest of this year. That would mean that commercial banks' prime lending rate, the benchmark for millions of consumer and business loans, will remain at 5 percent, its lowest level since late 2004.
The Fed board, which normally has seven members, has been forced to operate with vacancies during the current economic turbulence. Democrats, who control the Senate, have been reluctant to give Bush the opportunity to fill seats that could be occupied next year by a Democrat if Barack Obama wins the presidency.
The Senate approved Duke's nomination. But it has deferred acting on banker Larry Klane, who Bush nominated along with Duke more than a year ago.
Fed Governor Randall Kroszner's nomination by Bush for a full 14-year term is still pending. Fed Governor Frederic Mishkin has announced that he will leave the Fed at the end of August to return to teaching at Columbia University, creating another vacancy on the board.
Responding to a severe credit crisis, the Fed last September launched an aggressive effort to cut interest rates. It reduced the funds rate seven times, lowering it from 5.25 percent, where it had been for more than a year, down to 2 percent in April.
At the Fed's last meeting on June 24-25, Fed officials passed up the chance to cut rates again. Instead, they signaled growing concerns about inflation pressures that have been made worse this year by surging oil prices, which hit a record high at $147.27 per barrel on July 11.
The inflation pressures have come while the economy has been staggered by a prolonged housing slump that has pushed home prices down by record amounts and a severe credit crisis that has seen banks tighten lending standards sharply after billions of dollars of losses on bad mortgage loans.
The combination of a weak economy and rising inflation has raised fears of stagflation, the malady that last beset the country during the oil price shocks of the 1970s.
The Fed's problem is that its main policy tool, interest rates, can only address one problem at a time. The central bank cuts rates to spur economic activity and raises rates when it wants to battle inflation.
Bernanke acknowledged the opposing forces when he delivered the Fed's midyear economic outlook to Congress last month. He said that the risks to the inflation outlook "have intensified" while the threats from the prolonged housing slump and credit crunch "represent significant downside risks" to growth.
Some Fed officials have said that even with unemployment rising and financial markets still turbulent, the central bank may need to move to combat inflation. Rising price pressures are difficult to contain once they gain momentum in the economy.
Janet Yellen, head of the Fed's regional bank in San Francisco, said in a July speech that "we cannot and will not allow a wage-price spiral to develop." Charles Plosser, head of the Philadelphia regional Fed bank, said the Fed will probably need to boost interest rates "sooner rather than later" to battle inflation even if employment and financial conditions have not fully revived.
Even with those hard-line comments, many private economists are betting that Fed officials are not close to raising interest rates, hoping instead that their tough-talk against inflation will do enough to keep inflation expectations under control without having to resort to actual rate hikes.
Unemployment jumped last month to a four-year high of 5.7 percent.
The government also reported last week that the overall economy, as measured by the gross domestic product, rose at annual rate of 1.9 percent in the April-June quarter. That's more than double the first quarter pace and significantly higher than the decline of 0.2 percent in GDP in the final three months of last year, the first outright drop since the last recession in 2001.
David Wyss, chief economist at Standard & Poor's in New York, said he believed the rebound in GDP growth, while it may only be temporary, will take pressure off the Fed to cut rates again while recent declines in oil prices will help ease inflation worries.
"I don't see the Fed changing policy until next spring when I expect to see them start to raise rates," he said.

Oil falls as low as $118 on demand concerns

2008-08-05T09:28:00.000-07:00

Tuesday August 5, 11:43 am ET By Stevenson Jacobs, AP Busines Writer
Oil prices decline as low as $118 on concerns that US slowdown is hurting fuel demand

NEW YORK (AP) -- Oil prices kept falling Tuesday, sinking as low as $118 a barrel on growing concerns that a U.S. economic slowdown and high energy costs are curbing consumer demand for gasoline and other petroleum products.
Crude's decline is giving Americans more relief at the pump. A gallon of regular gasoline on average fell another penny overnight to $3.871, according to auto club AAA, the Oil Price Information Service and Wright Express. Gas prices have fallen four straight weeks for the first time in December; prices are off 5.9 percent from their July high as U.S. motorists cut back on their driving to save money.
A day after plunging as much as $5 a barrel in a dramatic sell-off, crude continued its downward trend Tuesday as traders sold oil contracts on the belief that prices are still too high in relation to demand and have further room to fall.
Light, sweet crude for September delivery lost $1.86 to trade at $119.55 a barrel on the New York Mercantile Exchange, after earlier falling to $118, the lowest level since May 5.
Crude has now fallen more than $25 since reaching a trading high of $147.27 on July 11.
"The market psychology has finally shifted," said Stephen Schork, an analyst and trader in Villanova, Pa., adding that "$4-a-gallon gasoline has clearly killed demand."
On Monday, the Commerce Department said consumer spending after adjusting for inflation fell 0.2 percent in June -- the biggest drop since February -- as shoppers dealt with higher prices for gasoline, food and other items. Oil prices also fell after Tropical Storm Edouard did not severely disrupt oil and natural gas output in the Gulf of Mexico.
The dollar's gains against the euro also contributed to oil's decline Tuesday. The euro fell to $1.5467 from the $1.5587 it bought late in New York trading Monday, making oil and other commodities less attractive to investors seeking a hedge against inflation and dollar weakness.
Meanwhile, investors ignored continued tension over Iran's nuclear program. Representatives of the five permanent members of the U.N. Security Council and Germany agreed Monday to seek new sanctions against Iran after the country failed to meet a weekend deadline to respond to an offer intended to defuse the dispute, State Department spokesman Gonzalo Gallegos said.
Also Monday, Iran announced that it has tested a new weapon capable of sinking ships nearly 200 miles away, and Tehran reiterated threats to close a strategic waterway at the mouth of the Gulf if attacked. Up to 40 percent of the world's oil passes through the Strait of Hormuz, a narrow passage along Iran's southern coast, and any move by Iran to close it to tanker traffic would send oil prices skyrocketing.
In other Nymex trading, heating oil futures fell 3.55 cents to $3.3146 a gallon, while gasoline prices dropped 4.67 cents to $2.9535 a gallon. In London, September Brent crude was down $2.48 to $118.20 a barrel on the ICE Futures exchange.
Natural gas futures rose 9.9 cents to $8.825 per 1,000 cubic feet. On Monday, natural gas plunged 66.3 cents, or 7 percent, to $8.726 per 1,000 cubic feet, its lowest level in nearly six months. Prices have closed lower in eight of the last 11 sessions and have dropped 36 percent from the contract's all-time trading high of $13.752, reached July 2.
The pullback is double the size of crude's recent slide. That has fed speculation on Wall Street that a large hedge fund or something like it may be near collapse and has dumped a vast amount of natural gas contracts to free up cash. Last month, SemGroup LP, based in Tulsa, Okla., folded after losing $2.4 billion in bad bets on oil futures. SemGroup's collapse came amid a massive sell off in the oil market.
"Anytime you get that kind of violent price action in a short amount of time, it reeks of someone big being in trouble," Schork said.
Associated Press writers Pablo Gorondi in Budapest, Hungary and Alex Kennedy in Singapore contributed to this report.

Wall Street spikes higher after ISM data

2008-08-05T09:17:00.000-07:00

Tuesday August 5, 11:29 am ET By Joe Bel Bruno, AP Business Writer
Wall Street moves higher ahead on strong ISM data, ahead of Fed meeting
NEW YORK (AP) -- Wall Street shot higher Tuesday as investors got some heartening economic news: a report that activity in the services sector fell less than expected last month, and another drop in the price of oil. The upbeat developments, which lifted the Dow Jones industrials nearly 200 points, came as the market awaited the outcome of a Federal Reserve meeting on interest rates.
The Institute for Supply Management, the trade group of corporate purchasing executives, said its services sector index rose to 49.5 from 48.2 in June. Analysts surveyed by Thomson Financial/IFR predicted it would rise to 49.0.
Any reading below 50 signals contraction. The report is based on a survey of the institute's members and covers such indicators as new orders, employment, inventories, prices and exports and imports.
The notion that the sector might be in better shape than many investors feared gave Wall Street reason for optimism. Moreover, the trade group's gauge for prices paid by non-manufacturers fell to 80.8 from June's 84.5, which was the highest on record. That indicated an easing of inflation, which has been a growing concern on the Street.
Oil prices slid further Tuesday, dropping to as low as $118 a barrel on widening expectations that the slumping U.S. economy will keep eroding consumer demand for gasoline and other petroleum products. Crude's retreat has eased some of Wall Street's concerns about the impact of higher prices on consumer spending, which accounts for more than two-thirds of the nation's economy.
Investors will get a better idea about how the Fed is feeling about the economy when it releases its policy statement at 2:15 p.m. EDT. The central bank, seeking to support an anemic U.S. economy and also contain inflation, is expected to keep its benchmark federal funds rate steady at 2 percent. As always, investors will be keen to see in the Fed's statement what its bias is toward future rate moves.
"Oil and the ISM service manufacturing index are sparking a nice rally, and then there's anticipation of the Fed meeting this afternoon," said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners. "There's also light volume, and that might be the reason we're seeing the averages take a bigger leap."
In late morning trading, the Dow rose 190.27 or 1.69 percent, to 11,474.42. Earlier, the Dow was up just over 200.
Broader indexes also rose. The Standard & Poor's 500 index added 19.18, or 1.54 percent, to 1,268.19, and the Nasdaq composite index rose 33.84, or 1.48 percent, to 2,319.40.
Bonds were lower ahead of the Fed meeting. The yield on the benchmark 10-year Treasury note, which moves opposite its prices, rose to 3.98 percent from 3.97 percent late Monday.
The dollar traded mostly higher against other major currencies, while gold prices fell.
Light, sweet crude fell $1.93 to $119.48 on the New York Mercantile Exchange. Crude has closed lower in six of the last nine sessions and is 18 percent off its all-time high above $147 reached July 11.
In corporate news, Procter & Gamble Co., maker of Tide detergent and Gillette razors, said its fiscal fourth-quarter profit jumped 33 percent, boosted by price increases, overseas sales and tax benefits. Shares rose $1.98, or 2.9 percent, to $67.78.
Archer Daniels Midland Co. reported a 61 percent plunge in fourth-quarter profit, but said revenues soared amid higher prices for commodities like wheat and corn. The stock fell $1.44, or 5.2 percent, at $25.96.
D.R. Horton Inc., the nation's largest homebuilder, posted a narrower fiscal third-quarter loss as charges to write down the value of property declined. Shares fell 53 cents, or 4.7 percent, to $10.70.
Advancing issues led decliners by a 3 to 1 basis on the New York Stock Exchange, where volume came to 343.3 million shares.
The Russell 2000 index of smaller companies rose 9.43, or 1.34 percent, at 713.57.
Overseas, Japan's Nikkei stock average fell 18.52, or 0.14 percent, to 12,914.66. Britain's FTSE 100 rose 1.98 percent, Germany's DAX index rose 2.51 percent, and France's CAC-40 rose 1.97 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com

Oil Falls to $118 as Global Economy Slows, Storm Danger Abates

2008-08-05T08:56:00.000-07:00

Aug. 5 (Bloomberg) -- Crude oil fell to $118 a barrel amid signs demand may be curtailed by slowdowns in the U.S. and European economies.
Oil dropped as much as 2.8 percent as the services sectors in the U.S. and U.K. contracted in July, and European retail sales declined by the most in at least 13 years in June. Tropical Storm Edouard made landfall today on the Texas coast. Early estimates showed it left oil rigs and refineries undamaged.
``Demand numbers have been weak here for quite a period of time,'' said Roger Read, an analyst at Natixis Bleichroeder Inc. in Houston. Today's numbers ``may confirm expectations, but they're not a shock to the system.''
Crude oil for September delivery fell $2.37, or 2 percent, to $119.04 a barrel at 11:22 a.m. on the New York Mercantile Exchange.
Oil has lost $27 since touching a record of $147.27 a barrel in New York on July 11 as unprecedented fuel costs prompted U.S. consumers to limit spending. Yesterday, the UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials fell 3.5 percent, its biggest loss since March.
U.S. fuel demand averaged 20.2 million barrels a day during the past four weeks, down 2.4 percent from a year earlier, the Energy Department said July 30.
Service industries in the U.S. shrank in July for a second straight month, signaling the slowdown in growth broadened. U.K. services from banks to airlines also contracted in July, and factory production unexpectedly dropped for a fourth month in June, evidence the economy may be shrinking.
European Data
European retail sales dropped by the most in at least 13 years in June as a surge in oil and food costs left consumers with less money to spend on other goods.
``We were down big overnight, and it really started on the European soft market data on manufacturing,'' said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. ``Retail sales were pretty lousy, leading everyone to surmise that the European economy isn't immune to the slowdown here in the U.S.''
The dollar rose to a six-week high against the euro before a Federal Reserve meeting today at which policy makers may leave interest rates on hold and highlight concern about inflation. The dollar traded at $1.5487 per euro, and touched $1.5463 the strongest since June 18.
Gold, platinum and wheat dropped on speculation slower growth will curb demand and as a stronger dollar dulled the appeal of commodities as an inflation hedge.
Oil dropped to its lowest level since May 5 as Edouard's wind speeds remained below hurricane strength when it struck the Texas coast. Edouard was blowing toward Galveston, Texas, with winds as fast as 65 miles (100 kilometers) per hour, prompting the evacuation of some oil and gas rigs.
Idled Output
U.S. producers idled less than 1 percent of oil output and 7.2 percent of natural gas production in the Gulf of Mexico because of Edouard, the U.S. Minerals Management Service said yesterday.
``Very little oil production seems to have been shut in by Edouard,'' said Christopher Bellew, a senior broker at Bache Commodities Ltd. in London. ``Gasoline stocks are high enough to limit any crisis from refinery shutdowns, so the market's returning its attention to the weak demand picture.''
Hurricane forecasters from Colorado State University today raised the number of Atlantic storms they expect this year to 17, including nine hurricanes, five of them major. The hurricane season, which runs through Nov. 30, should be ``much more active'' than those between 1950 and 200, the report said.
Gasoline Stockpiles
U.S. gasoline stockpiles are 3 percent above their five-year seasonal norm at 213.6 million barrels, according to the Energy Department. The department will probably say gasoline supplies fell 1.75 million barrels last week in its weekly report tomorrow, a Bloomberg survey predicted.
Gasoline for September delivery lost 2.98 cents, or 1 percent, to $2.9704 a gallon on the Nymex after touching $2.9242 a gallon, the lowest since May 2. Futures fell 13 percent last month, the biggest drop since September 2006, as a slowing economy cut demand for the motor fuel.
Regular gasoline at the pump, averaged nationwide, fell 1 cent to $3.871 a gallon, AAA, the nation's largest motorist organization, said today on its Web site. Pump prices reached a record $4.114 a gallon on July 17, as higher prices curbed demand.
Brent crude for September settlement fell $2.10, or 1.7 percent, to $118.58 a barrel on London's ICE Futures Europe exchange. Earlier, it touched $116.91 a barrel.
Kuwait ``isn't worried'' about the recent price decline and doesn't expect the Organization of Petroleum Exporting Countries to reduce production quotas when it meets next month, Oil Minister Mohammed al-Olaim said in an interview today.

Oil jumps to new record near $142 as equities wilt

2008-06-27T03:13:00.000-07:00

Friday, June 27, 2008; 5:37 AM

LONDON (Reuters) - Oil leapt to a new record high near $142 a barrel on Friday, extending gains after surging nearly 4 percent in the previous session, as tumbling global stock markets triggered a wider commodities rally.

U.S. light crude for August delivery was $1.71 up at $141.35 a barrel by 5:25 a.m. EDT, off highs of $141.71. London Brent crude was $1.56 up at $141.39, off highs of $141.98.

World stocks fell to a three-month low as a fast deteriorating global inflation picture fanned concerns over the outlook for corporate profits, hastening the rush of investors' funds into commodities.

"It has a lot to do with asset allocations. The equity markets are under serious pressure, breaking support levels. When equities are going nowhere, the money is parked into commodities," said Olivier Jakob at Petromatrix.

The MSCI main world equity index <.MIWD00000PUS> fell more than 0.6 percent to its lowest since March, with the index on track for the worst monthly performance in percentage terms since September 2002, according to Reuters data.

By contrast, commodities fared better, with gold steady near a one-month record high while U.S. corn futures jumped to a fresh record high.

CURB SPECULATION

Oil's latest surge comes despite moves in the U.S. to curb energy market speculation.

U.S. lawmakers on Thursday have approved legislation which directs the Commodity Futures Trading Commission (CFTC), the futures market regulator, to use all its authority including emergency powers to "curb immediately" the role of excessive speculation in energy futures markets.

Oil prices have doubled from $70 a year ago on supply disruptions and geopolitical tensions in the Middle East. Rising flows of cash into commodities from investors seeking to hedge against inflation and the weak dollar have also added to gains.

"It may be months away before the legislation comes into effect but just the fact that it was passed is definitely enough to give the market a little bit of a bearish sentiment," said Toby Hassall, analyst at Commodities Warrants Australia.

Oil, which had been trading in a range for most of the week, broke out of that range after Libya said it was studying possible options to cut output in response to potential U.S. actions against OPEC countries.

"We are studying all the options," Libya's most senior oil official, Shokri Ghanem, told Reuters, adding oil producers needed protection from what he viewed as U.S. attempts to extend its jurisdiction beyond its territory.

OPEC President Chakib Khelil's comments that prices could reach $170 a barrel in the coming months, also fuelled the rally. "I forecast prices probably between $150 and $170 during this summer. That will perhaps ease towards the end of the year," he told France 24 television.

Talks between oil workers and Chevron continued in Nigeria, with the oil minister saying he was confident a deal could be reached, but union officials left open the possibility of a strike early next week.

Latest Honda Runs on Hydrogen, Not Petroleum

2008-06-18T00:39:00.000-07:00

TAKANEZAWA, Japan — It looks like an ordinary family sedan, costs more to build than a Ferrari and may have just moved the world one step closer to a future free of petroleum.

On Monday, Honda Motor celebrated the start of production of its FCX Clarity, the world’s first hydrogen-powered fuel-cell vehicle intended for mass production. In a ceremony at a factory an hour north of Tokyo, the first assembly-line FCX Clarity rolled out to the applause of hundreds of Honda employees wearing white jump suits.

Honda will make just 200 of the futuristic vehicles over the next three years, but said it eventually planned to increase production volumes, especially as hydrogen filling stations became more common. On Monday, Honda announced its first five customers, who included the actress Jamie Lee Curtis.

Honda said even the small initial production run represented progress toward a clean-burning technology that many rejected as too exotic and too expensive to gain wide acceptance.

“Basically, we can mass produce these now,” said Kazuaki Umezu, head of Honda’s Automobile New Model Center, where the FCX Clarity is built. “We are waiting for the infrastructure to catch up.”

Fuel-cell vehicles have been a sort of holy grail of the auto industry, offering the promise of driving without emitting air-polluting exhaust. Fuel cells work by combining hydrogen and oxygen from ordinary air to make electricity, in a process whose only byproducts are water and heat. They have drawn renewed attention in an era of climate change, $140 a barrel oil, and rising competition for dwindling fossil fuels.

“This is a must-have technology for the future of the earth,” said Takeo Fukui, Honda’s president. “Honda will work hard to mainstream fuel-cell cars.”

Fuel cells have an advantage over electric cars, whose batteries take hours to recharge and use electricity, which, in the case of the United States, China and many other countries, is often produced by coal-burning power plants.

Honda says its FCX Clarity can be filled easily at a pump, can drive 280 miles on a tank, almost as far as a gasoline car. It also gets higher fuel efficiency than a gasoline car or hybrid, the equivalent of 74 miles a gallon of gas, according to the company.

But the technology has faced many hurdles, not the least of which has been the prohibitive cost of the fuel cells themselves. Honda says it has found ways to mass produce them, which promises to drive down costs through economies of scale. On Monday, it showed reporters its fuel-cell production line, which resembled a semiconductor factory more than an auto plant with its humming automated machinery and white smocked workers in dust-free rooms.

Mr. Fukui said the cars cost several hundred thousand dollars each to produce, though he said that should drop below $100,000 in less than a decade as production volumes increase. In the meantime, the car company will be effectively subsidizing its customers, who will lease the vehicles for $600 a month. That is not much more than the leasing price of one of Honda’s top Acura line of luxury cars.

At Monday’s ceremony, Mr. Fukui presented an oversize key to the first FCX Clarity customer, a film producer from Los Angeles on hand for the occasion. Honda said it would offer the car in Southern California first because the state has been a leader in building hydrogen filling stations.

Honda said the five had been chosen after the company got a wave of queries from American consumers when it publicized the car last year. On Monday, Honda also announced three dealerships near Los Angeles that will be the first to start leasing FCX Claritys.

Fuel-cell vehicles have been a big gamble for Honda, which has spent the last 16 years and millions of dollars — the company will not say exactly how much — developing them. For a time, the company was criticized for pouring money into unproven technologies while refusing to follow the rest of the industry into large sport utility vehicles and pickup trucks.

Now, with gas prices soaring, Honda is in an enviable position of not being burdened with large inventories of gas-guzzling full-frame trucks that require hefty incentives to sell, or the factories that build them. Analysts have said Honda and the rival Japanese carmaker Toyota have seized a commanding lead in more efficient, green technologies like hybrids as well as fuel cells.

Honda says one big breakthrough was shrinking the size of its fuel cells. In the FCX Clarity, they fit in a box-shaped unit the size of a desktop PC that weighs about 150 pounds, less than half of their size a decade ago.

The FCX Clarity’s fuel-cell unit can generate up to 100 kilowatts of electricity, enough to accelerate the car from zero to 60 miles an hour in less than nine seconds, and give it top speeds of 100 miles an hour, Honda says. Even at high speed, the FCX Clarity, a four-door sedan that looks like a sleeker version of the Accord, drives with the hushed whine of a golf cart.

Honda said a big remaining hurdle to true mass production is the lack of filling stations that sell hydrogen. Even in California, where the state government has led a push to build hydrogen stations, there are still very few public stations, Honda said. That will make it hard to drive the car far from home, limiting its appeal, the company said.

For now, the first batch of customers seem drawn by the car’s novelty as much as anything else. The first owner, the film producer Ron Yerxa, said he did not plan to drive it far, just to work and to eat out — far enough to draw the admiration of passers-by.

“When I drive it to breakfast, people will ask about it,” Mr. Yerxa said. “They’ll want one, too.”

Microsoft Made $8 Billion Offer to Yahoo Before Google Accord

2008-06-14T03:33:00.000-07:00

By Amy Thomson

June 14 (Bloomberg) -- Microsoft Corp. made a final proposal to Yahoo! Inc. before the Internet company forged an agreement with rival Google Inc., offering to buy $8 billion of Yahoo shares at $35 each and acquire its search-engine business.

Microsoft, the world's biggest software maker, would have paid $1 billion for the search unit, President Kevin Johnson said yesterday in an e-mail to employees. The discussions were the most recent round of talks that began with an unsolicited bid for the whole company on Jan. 31.

The Microsoft proposal would have challenged Google's dominance in Internet searches by forming a long-term partnership with Yahoo, according to the e-mail. The deal would generate more revenue for three years than what Yahoo gets from its own ad system, Johnson said.

``This partnership would have created a stronger competitor to Google, providing greater choice and innovation for advertisers, publishers and consumers,'' Johnson said.

The company opposes Yahoo's partnership with Google, the largest search engine, because the deal will consolidate more than 90 percent of the market, Johnson said in the e-mail. Yahoo will let Google run ads beside some of its search results.

Microsoft, based in Redmond, Washington, rose 83 cents, or 2.9 percent, to $29.07 yesterday in Nasdaq Stock Market trading. The shares have declined 18 percent this year. Yahoo shares, little changed this year, fell 5 cents to $23.47.

Less Attractive?

Yahoo turned down the Microsoft offer because it undervalued the search business and the company as a whole, said a person familiar with the talks who asked not to be identified. The agreement would have locked Yahoo into an exclusive deal for 10 years, while only offering higher returns for three, the person said. The Google accord lets Yahoo work with other companies.

Yahoo spokeswoman Diana Wong didn't immediately return a call seeking comment.

Microsoft has said its offer for Yahoo's search business is still on the table and that it's no longer pursuing a full acquisition of the Sunnyvale, California-based company.

Its latest proposal would have added more than $1 billion to Yahoo's operating income, more than doubling it in the first year of operation, Microsoft said. The combination of search platforms also would have reduced engineering and development costs. The plan would transfer $9 billion in total to Yahoo, Johnson said.

Alternative Deal

Microsoft had agreed to discuss an alternative transaction with Yahoo after dropping its bid of $47.5 billion, or $33 a share, on May 3. The company made a $31-a-share offer three months earlier, touting the deal as a way for the No. 2 and No. 3 U.S. search engines to gain ground on Google.

The arrangement with Google will add about $800 million a year to sales, Yahoo said this week. The companies will delay implementing the program, which covers search results in the U.S. and Canada, for up to three and a half months to give the U.S. Justice Department time for review.

The deal may add as much as $450 million in operating cash flow in the first 12 months, Yahoo said. The partnership isn't exclusive, meaning that other companies will be able to sell ads that appear on Yahoo's pages. Yahoo's revenue last year was $6.97 billion.

Billionaire investor Carl Icahn has demanded that Yahoo approach Microsoft about a full acquisition at $34.375 a share. He has nominated candidates to replace Yahoo's board at its annual meeting on Aug. 1. Icahn owned 10 million shares of Yahoo and the option to purchase an additional 49 million as of May 15.

Icahn, 72, has accused Yahoo Chief Executive Officer Jerry Yang and the board of sabotaging Microsoft's acquisition plan after Yahoo adopted an employee-severance plan that would compensate workers displaced by a change in control. The plan would have cost Microsoft an additional $2.4 billion, Icahn said. Yahoo said the price would be no more than $845 million.

Icahn has the backing of BP Capital LLC Chairman T. Boone Pickens and hedge-fund manager John Paulson. He has said he is open to a deal with Google as long as it can be canceled to allow Microsoft to acquire the company.

Yahoo would have to pay as much as $250 million to dissolve the advertising accord.

To contact the reporter on this story: Amy Thomson in New York at athomson6@bloomberg.net