"Mrs. Soper, FSA client, tells how it was when the family first came"
Willow Creek area, Malheur County, Oregon
Ilargi: Today I’ll adapt the Debt Rattle a little. For one, post it a few hours earlier than normal, with an overview of what the media have to say about yesterday’s Dow plunge, as well as this morning’s surge in oil prices to $142.
Later in the day, I’ll post updates on what happens as we go along; although I don’t really think we will, there is a distinct possibility that we’ll see a truly historic Friday. After all, the worst June for the Dow since 1930 (!!) is already quite a feat. The main reason I’m hesitant about a big breakdown today is that there is still so much -largely virtual- capital out there. Even if yesterday’s losses in financial companies’ stock, on average 4-5%, took a lot of that capital out.
Stoneleigh agrees that there may be a "last little rebound" in the works. But none of that is certain; if and when faith, hope and credibility disappear in the world of finance, things can move at lightning speed. One more issue: a lot of parliaments, houses of representatives and whatever they are called, throughout the rich world, are about to close for summer recess, leaving at least the impression that there's no-one left to guard the premises. That may be an added factor today and next week; government intervention is not at all out of the question.
Note: when it comes to the topic of credibility, a lot of the talk these days is focused on the Fed. Personally, when I think of credibility, I look primarily ate all the experts and analysts quoted by the mainstream media, whose predictions are habitually terribly wrong, 95%+ of the time, and who still, just the same, get called and quoted the next time, and the time after that, and so on. I can't think of any other field where that is the case; not even weather forecasts. I often wonder what that is all about; is no-one keeping a tab on these people?
Please check back through the day.
Update 3.00 PM EST
Wall Street crosses into bear market territory
Stocks tumbled Friday afternoon, with the Dow crossing into bear market territory, as record-high oil prices, a weak dollar and more financial market woes rattled investors. The Dow Jones industrial average lost 0.9% with about 90 minutes left in the session, after plunging 358 points Thursday to its lowest close in 21 months.
The selloff sent the blue-chip indicator to levels at least 20% below the fall highs, meaning it met the technical definition of a bear market. The broader Standard & Poor's 500 index fell 0.4%, dropping below its March levels to hover at a 22-month low. The tech-heavy Nasdaq composite fell 0.7%. The Nasdaq hit the technical definition of a bear market in March, falling 24% off its October highs, but has since recovered some of that.
All three major gauges posted losses in the early going, recovered and then slumped anew. Stocks fell to the lows of the session after Moody's said it could cut Morgan Stanley's long-term debt rating and oil prices hit a record $142.99 a barrel.
The oil market rally has sped up over the last few days, exacerbating worries about how the consumer and the economy will be able to withstand the spike in fuel costs. Oil, more than the credit crisis or any other macro issue, is dragging on the markets right now, said Charles Smith, chief investment officer at Fort Pitt Capital Group.
"The stock market I think views the commodity and energy mania as a permanent problem," Smith said. "The problems that come from higher and continually rising prices don't seem like they are going to end."
Moody's says Morgan Stanley may get downgrade
Moody's Investors Service may downgrade Morgan Stanley, the ratings agency said Friday, citing big trading losses recently that have undermined confidence in the investment bank's risk management.
Moody's placed the long-term ratings of Morgan Stanley and its subsidiaries under review for downgrade. The likely outcome of the review will be a downgrade of the firm's long-term rating to A1, the agency added. Morgan Stanley's senior, unsecured debt is currently rated Aa3. Roughly $200 billion of long-term debt would be affected by such a downgrade, Moody's noted.
Since the credit crisis erupted last year, New York-based Morgan Stanley's financial performance and risk management have been inconsistent, ranking below the levels expected of a Aa3-rated financial institution, Moody's said. Excluding recent gains from asset sales, the brokerage has reported a loss of nearly $1.4 billion before taxes over the past year, the agency added.
"Markets have clearly been challenging, but the firm has also incurred some expensive trading mishaps during the past year," said Peter Nerby, a Moody's Senior Vice-President. Morgan Stanley is making changes to the way it manages risk, Moody's said, adding that it's premature to conclude that these changes will be effective in light of the complexity of the task.
Consumer confidence nears all-time low
Consumer confidence sank to its third-lowest level ever in June, according to a study released Friday by Reuters and the University of Michigan.
The university's Index of Consumer Sentiment fell to 56.4 in June, down from 59.8 in May. Only April and May of 1980 scored lower - 52.7 and 51.7 respectively - since the survey began measuring consumer sentiment in 1952.
The University of Michigan's Index of Consumer Expectations, a key economic indicator that is used to predict recessions, fell to 49.2 in June from 51.1 a month earlier. The index had been declining since early 2007.
A majority of those surveyed said their economic situation had worsened in June, blaming high food and fuel prices. Consumers are also anticipating that the the price of gasoline will exceed $4.50 a gallon and average $5 a gallon for the next five years.
"Consumers held the bleakest inflation-adjusted income expectations since the question was first asked nearly a half century ago," said Richard Curtin, director of the Reuters/University of Michigan Surveys of Consumers statement. Those surveyed said they would postpone purchases because they were uncertain about future income and job prospects.
Continued drama leaves Fed a narrow path to safety
Like a summer blockbuster movie franchise, the latest instalment of the credit crunch assumed top billing on Wall Street this week and displaced the saga of the Federal Reserve and inflation.
The usual cocktail of audience-electrifying elements, from slumping stock prices, soaring credit insurance costs for financial companies, a surge in gold and not forgetting a powerful rally in short-term government bonds, duly kicked in. As a sequel to the original “Ides of March” when the collapse of investment bank Bear Stearns briefly posed a systemic threat to the financial system, this week’s events lack the shock value of originality.
After all, the Federal Reserve now provides a backstop for the banking system in the form of various liquidity measures. That takes financial armageddon off the table, but the menu remains rather unappetising for investors when they look at the financial system. As the months drag on, there is simply no escaping the zombie-like nature of the credit crunch; it remains a relentless scourge.
Even the Fed, which carefully crafted its policy statement to avoid choosing between the risks of sluggish growth and higher inflation this week,was at pains to emphasise that “financial markets remain under considerable stress”. This week, that stress, combined with oil’s record spike above $140 a barrel, helped push the S&P 500 back to its March low. Always the leader, the Dow Jones Industrial Average sliced straight on through and hit its lowest level in nearly two years.
While the Fed keeps the bond market guessing about its willingness to stop inflation in its tracks, deflation is wreaking havoc for banks and consumers with homes and cars. The prices for once highly sought-after abodes, hulking four-wheel drives and sports utility vehicles, and various securities that helped establish the dominance of US capital markets just keep on falling.
In turn, banks face further writedowns and consumers are increasingly being turned upside down financially by the fact that they now find themselves owing more debt than the value of their major assets. The carnage among banks exposed to the US consumer is visibly illustrated by the 20 per cent slump this month in the KBW index of commercial and regional institutions.
For the stock market, the links are highly visible in the slumping prices of companies – notably General Motors and Citigroup – which cater to finance and the consumer.The forces of asset-price deflation entail that the embattled consumer keeps pulling back from spending and leaves companies struggling to pass on higher input costs caused by rocketing oil prices. An ill wind is blowing through the stock market. Even transport stocks have dropped 11 per cent since making a new high earlier this
Oil jumps to new record near $142 as equities wilt
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 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.
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.
U.S. Stocks Plunge; Worst June For Dow Since 1930
U.S. stocks fell sharply Thursday with the blue-chip index enduring its worst June so far since 1930, and plunging to its lowest finish since Sept. 11, 2006, after getting slammed hard as crude soared to new highs and Goldman Sachs disparaged U.S. brokers and advised selling General Motors Corp.
"We're going to move in the opposite direction of oil, and General Motors is going to go out of business, at least according to Goldman Sachs," said Art Hogan, chief market strategist at Jefferies & Co. The Dow Jones Industrial Average (DJI) tumbled 358.41 points, or 3%, to 11, 453.42, leaving it down nearly 1,200 points, or 9.4%, for the month, with two trading days yet to go. As things stand, the month is the worst June so far since 1930 when the index declined 17.72%.
"It was the middle of March that the Bear Stearns debacle became public, sending the Dow to a low of 11,731. That level was broken within the first minute of trading today," wrote Kathy Lien, chief strategist of DailyFX.com. Cautious outlooks from Research In Motion Ltd., Oracle Corp. and Nike Inc. added to the gloom.
General Motors (GM) weighed most heavily on the blue chips, down 10.8%, after Goldman Sachs told clients to unload their positions in the face of the deteriorating automotive climate. . All of the Dow's 30 components closed in negative territory. "The real problem is even though [the] Fed attempted to be more hawkish, it was not supportive enough of the dollar," Hogan said.
Crude-oil futures climbed to new heights, as weakness in the U.S. dollar, influenced by the Federal Reserve's decision to stand pat on interest rates, sent prices past $140 a barrel. Crude for August delivery reached a high of $140.39 a barrel in electronic trading on Globex. The contract closed at a record $139.64 on the New York mercantile Exchange, up $5.09, or 3.8%, for the session after trading as high as $140.
"One thing is for certain, if crude continues to rally, stocks are dead," said Dale Doelling, chief market technician at Trends In Commodities.
"If stocks have another day like this tomorrow, then the fallout next week could include government intervention in the markets," said Doelling.
The S&P 500 Index (SPX) fell 38.82 points, or 2.9%, to 1,283.15, with all 10 of the index's industry groups losing ground.
Financials led sector declines, off 4.1%, followed by industrials, down 3.7%, and consumer discretionary, which declined 3.5%.
The Nasdaq Composite Index (RIXF) shed 79.89 points, or 3.3%, to 2,321.37. Volume on the New York Stock Exchange topped 1.5 billion, and declining stocks outdid those advancing more than 5 to 1. On the Nasdaq, nearly 998 million shares traded, and decliners raced beyond advancers 11 to 3.
The indexes furthered their losses as government data illustrated ongoing weakness in the labor market. . In addition, there was a 1% annualized increase in gross domestic product in the first quarter, slightly better than forecast. . "GDP and existing-home sales were stronger than expected, but jobless claims and the help-wanted index deteriorated, pointing to a weak non-farm payrolls report next Thursday," according to Lien.
U.S. stocks ended Wednesday with moderate gains after the Federal Reserve held interest rates at 2% and took a step toward preparing the market for rate hikes down the road. On the housing front, builder Lennar Corp. (LEN) narrowed its quarterly loss but said housing-market conditions will deteriorate. "I am asked regularly as to whether or not we are at the bottom, and I feel overall that we are not there yet," said Stuart Miller, Lennar's chief executive, in a conference call
Barclays warns of a financial storm as Federal Reserve's credibility crumbles
Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero".
"We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth."
Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility," said Mr Bond.
The grim verdict on Ben Bernanke's Fed was underscored by the markets yesterday as the dollar fell against the euro following the bank's dovish policy statement on Wednesday. Traders said the Fed seemed to be rowing back from rate rises. The effect was to propel oil to $138 a barrel, confirming its role as a sort of "anti-dollar" and as a market reproach to Washington's easy-money policies.
The Fed's stimulus is being transmitted to the 45-odd countries linked to the dollar around world. The result is surging commodity prices. Global inflation has jumped from 3.2pc to 5pc over the last year. Mr Bond said the emerging world is now on the cusp of a serious crisis. "Inflation is out of control in Asia. Vietnam has already blown up. The policy response is to shoot the messenger, like the developed central banks in the late 1960s and 1970s," he said.
"They will have to slam on the brakes. There is going to be a deep global recession over the next three years as policy-makers try to get inflation back in the box." Barclays Capital recommends outright "short" positions on Asian bonds, warning that yields could jump 200 to 300 basis points. The currencies of trade-deficit states like India should be sold.
The US yield curve is likely to "steepen" with a vengeance, causing a bloodbath for bond holders. David Woo, the bank's currency chief, said the Fed's policy of benign neglect towards the dollar had been stymied by oil, which is now eating deep into the country's standard of living. "The world has changed all of a sudden. The market is going to push the Fed into a tightening stance," he said.
The bank said the full damage from the global banking crisis would take another year to unfold. Rob McAdie, Barclays' credit strategist, said: "The core issues have not been addressed. We're still in a very large deleveraging cycle and we're seeing losses continue to mount. We think smaller banks will struggle to raise capital. We're very bearish - in the long-term - on high-yield debt. The default rate will reach 8pc to 9pc next year."
He said investors had taken their eye off the slow-motion disaster engulfing the US bond insurers or "monolines". Together these firms guarantee $170bn of structured credit and $1,000bn of US municipal bonds. The two leaders - MBIA and Ambac - have already been downgraded as the rating agencies belatedly turn stringent. The risk is further downgrades could set off a fresh wave of bank troubles. "The creditworthiness of many US financial institutions will decline in coming months," he said.
The bank warned that engineering and auto firms we're likely to face a crunch as steel and oil costs surge. "Their business models will have to be substantially altered if they are going to survive," said Mr McAdie. A small chorus of City bankers dissent from the view that inflation is the chief danger in the US and other rich OECD countries. The teams at Société Générale, Dresdner Kleinwort, and Banque AIG all warn that deflation may loom as housing markets crumble under record levels of household debt.
Bernard Connolly, global startegist at Banque AIG, said inflation targeting by central banks had become a "totemism that threatens to crush the world economy". He said it would be madness to throw millions out of work by deflating part of the economy to offset a rise in imported fuel and food prices. Real wages are being squeezed by oil, come what may. It may be healthier for society to let it happen gently.
American financial fiasco could take down world economy
Triple warnings this past week: the Royal Bank of Scotland fears a steep fall in the world stock market; the bank of all banks in the world, the BIS, Bank of International Settlements, in Switzerland, said that a worldwide depression is now a distinct possibility; Morgan Stanley, a leading American Investment firm, signaled similar pessimistic messages.
So what's happening out there? Frankly, all financial institutions are in deep trouble, and the reason is the American dollar. The situation is so dire that it's not going to make a hoot of difference who becomes the next president of the United States: it's beyond the power of the rulers of the American political and economic system to curtail severe damage to its entire economic enterprise. Neither Obama nor McCain can do anything to stem the disaster that will be fully employed by the end of this year.
Part of the cause is that the USA happens to be the most indebted nation on the planet and its people the least prepared to cope with peak oil and peak food. Even now Americans throw away up to 40 per cent of the food they buy, their high-powered and fuel-thirsty automotive park cannot be converted to more efficient vehicles for many years, while their exurban lifestyle makes car-sharing and mass transport impossible for most.
So what's so inevitable of the current monetary scene? The world's entire Gross domestic product is some $50 trillion, of which the USA accounts for about $13 trillion. However, it owes more than $2 trillion to foreigners, of which Japan and China carry about half and Great Britain some 10 per cent with the remainder divided over many countries. Canada has less than one per cent.
The American public carries $9 trillion in credit-card debt and even more in mortgages. Its national debt is close to $10 trillion while its Social Security and Medicaid has a future liability in excess of $50 trillion, burdening the average USA household with debt totaling more than $600,000. And then there are the outstanding derivatives! They grew from $100 trillion 5 years ago to $500 trillion in 2007.
Warren Buffet -- the world's richest man after Bill Gates and a most savvy investor -- wrote in 2002: "We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."
Now, when everything that can go wrong is going wrong, this financial WMD, this weapon of mass destruction, is no longer latent but out in the open ready to kill the American economy. According to the LEAP think tank, based in Europe -- subscriptions cost 200 Euro or $300 per year -- in the next six months all factors affecting the economy will converge, and create a perfect socio-economic hurricane.
The root of the problem is always money, basically the US dollar of which there are trillions too many in circulations, so many that its value is decreasing, and the world doesn't know what to do with them. It's this flood of money that drives up the price of all commodities, including oil, of course. Nobody wants more US dollars, unless its value increases.
But that can only happen when the US pushes up interest rates, which will cause the US economy to die within a few weeks, as the real estate market falls to zero by lack of affordable credit, interest on Adjustable Rate Mortgage loans skyrockets, drastically shrinking consumption, and corporate failures multiply exponentially and stock markets collapse.
No, higher interest rates are not the solution. However, to do nothing is not an option either, because soon nobody will accept U. S. dollars anymore. Basically the US has lost the ability to govern its own economic policy. Thanks to its trillions of debts, it is now powerless to avoid disaster. No wonder banks are getting nervous.
The immediate consequence of America's economic collapse will be the end of the war in Iraq, because, suddenly, as the greenback disappears as the world currency, the US will be forced to live within its means. Since the war is the most costly of all its undertakings, the troops will abruptly go home.
Curiously the WMDs -- the weapons of mass destruction -- were not in Iraq: they are in the heart of America, right on Wall Street. Pity the veterans and the wounded; there will be no money to look after them -- no pensions, no jobs, no medical care. Eventually a new financial system will emerge, but only after a period of tremendous turmoil and pain.
The Shrinking Influence of the US Federal Reserve
The United States Federal Reserve Bank, or Fed, seems as much a part of America as Coca-Cola or Pizza Hut. But at least one difference has become apparent in recent days. While the pizza chain and soft-drink maker are likely to expand their scope of influence in the age of globalization, the US central bank is finding that its power is shrinking.
No Fed chief in US history has been forced to submit to the kind of humiliation that Ben Bernanke is facing. This is partly down to circumstances. Inflation is going up and up, and this year's average will likely top 4 percent. But this time Mr. Dollar is also Mr. Powerless. He can raise interest rates in the fall, or he can pray, which would probably be the better choice. At least prayer would not prevent the US economy from growing, a highly likely outcome if interest rates go up.
After years of growth, the United States is now on the brink of a recession, one that is more likely to be deepened than softened by a tight money policy. Investments will automatically become more expensive, consumer spending will be curbed and economic growth will slow down, immediately affecting unemployment figures and wages. The textbook conclusion is that this will stabilize the value of money, because no one will dare demand higher wages or higher prices.
But the macroeconomics textbooks are no longer worth much in the age of globalization. Modern inflation is driven by the global scarcity of resources. Nowadays purchasing power exceeds purchasing opportunity. Most of all, there is not enough oil, and too few raw materials and food products. These increasingly scarce resources are becoming the focus of disputes among many people and billions of dollars are at stake.
This is why the price of a barrel of crude oil (159 liters) has increased from $25 (€16) in 2002 to $135 (€87) in 2008. And it is also why the price of corn has tripled in the same time period, while that of copper has almost quintupled. If the inflation introduced in the United States is excluded, a small miracle is revealed, namely something approaching price stability.
Adjusted for inflation, prices are in fact rising by only 2.3 percent. If this were the extent of it, the Fed chief could simply blink like an old watchdog and go back to sleep. Instead, he is barking loudly, which is his job. But he has lost his bite, because the Fed's interest rate policy can do nothing about the scarcity of goods.
Some of Bernanke's personal adversaries are also contributing significantly to his current humiliation. In the past, the chairman of the Federal Reserve was a pope among the priests of the financial elite. But unlike his predecessor Alan Greenspan, Bernanke is finding that his policies are not universally accepted, even within the Fed.
The last seven decisions reached by the Federal Open Market Committee, which sets monetary policy, were accompanied by a growing number of dissenting votes. Bernanke's critics say that with his policy of cheap money -- in other words, recurring rate reductions -- he in fact helped fuel the inflation problem he is now trying to combat.
Another problem for Mr. Dollar is that it will be several months before his actions take effect. Officials with the International Monetary Fund (IMF) have informed Bernanke about a plan that would have been unheard-of in the past: a general examination of the US financial system. The IMF's board of directors has ruled that a so-called Financial Sector Assessment Program (FSAP) is to be carried out in the United States. It is nothing less than an X-ray of the entire US financial system.
As part of the assessment, the Fed, the Securities and Exchange Commission (SEC), the major investment banks, mortgage banks and hedge funds will be asked to hand over confidential documents to the IMF team. They will be required to answer the questions they are asked during interviews.
Their databases will be subjected to so-called stress tests -- worst-case scenarios designed to simulate the broader effects of failures of other major financial institutions or a continuing decline of the dollar. Under its bylaws, the IMF is charged with the supervision of the international monetary system. Roughly two-thirds of IMF members -- but never the United States -- have already endured this painful procedure.
For seven years, US President George W. Bush refused to allow the IMF to conduct its assessment. Even now, he has only given the IMF board his consent under one important condition. The review can begin in Bush's last year in office, but it may not be completed until he has left the White House. This is bad news for the Fed chairman.
When the final report on the risks of the US financial system is released in 2010 -- and it is likely to cause a stir internationally -- only one of the people in positions of responsiblity today will still be in office: Ben Bernanke.
AIG Poised to Absorb $5 Billion Losses From Securities-Lending
American International Group Inc. plans to absorb losses for a dozen insurance units after their securities-lending accounts suffered $13 billion of writedowns tied to the subprime-mortgage collapse during the past year.
The world's largest insurer will assume as much as $5 billion of any losses on sales of the investments, up from a previous commitment of $500 million, said Christopher Swift, vice president for life and retirement services, in an interview. AIG also will inject an undisclosed amount of capital into some of the subsidiaries, he said.
Moody's Investors Service and A.M. Best Co. both cited the writedowns in May when they downgraded New York-based AIG's credit ratings. State regulators in Texas said they didn't know AIG was investing cash collateral from the securities-lending business in subprime-linked assets and were concerned the insurance units hadn't put aside enough capital to cover potential losses.
"We were aware of this portfolio, but we didn't have transparency on what was in it because it was off-balance sheet," said Doug Slape, chief analyst at the Texas Department of Insurance in Austin, which oversees three AIG insurers that have suffered about 60 percent of the writedowns.
The reduction of asset values in the securities-lending portfolio was part of the $38 billion in pretax writedowns that AIG reported during the past three quarters. That total included reductions of $20 billion on guarantees known as credit-default swaps and $18 billion on mortgage- and asset-backed securities, including some tied to subprime home loans. Most of the mortgage-related holdings are in the securities-lending pool.
The securities-lending business caters to banks and brokerages that borrow for themselves and clients to hedge trades, cover bets that a stock will fall and avoid trade- settlement failures. AIG's life-insurance subsidiaries invest their premiums in stocks and bonds. To make extra money, they lend out those securities through a central pool that invests cash collateral.
AIG said in regulatory filings that about $9 billion of the markdowns on mortgage-backed securities resulted from temporary market-value declines that it expects to be reversed. Those unrealized losses don't affect earnings
Lehman Sees Merrill Lynch Posting $5.4 Billion In 2Q Write-Downs
Lehman Brothers Holdings Inc. estimated Friday that Merrill Lynch & Co. will post a write-down of $5.4 billion during the second quarter, due mainly to the effect of the recent credit downgrades of monoline insurers.
Lehman's estimate was one of the largest on the Street so far, and showed that the effect of Ambac Financial Group Inc. and MBIA Inc. losing their triple-A ratings earlier this month will take its toll on investment banks exposed to the assets the firms insured.
Lehman said it increased its estimate of Merrill's second-quarter write-downs by $3 billion after conducting a "deeper review of the impact of the monoline insurer downgrades and subsequent sharp moves wider in their credit spreads." The firm also widened its second-quarter loss expectation for Merrill, to $ 2.78 a share from 64 cents a share. The average analyst estimate is for a loss of 39 cents a share, according to Thomson Reuters.
On Thursday, Goldman Sachs and Bernstein Research also predicted deeper write- downs and losses at Merrill. Goldman expects Merrill to write down $4.2 billion during the quarter, while Bernstein pegged it at $3.5 billion. Merrill shares fell 6.7% after the reports and amid a broad decline in financial shares. Merrill is scheduled to report its second-quarter results in mid-July.
Analysts Downgrade Rivals In a Cycle Turning Vicious
You cut me down? Wait 'til you see what I do to you. That is the game Wall Street analysts are playing, as they scramble to lower ratings on one another amid signs that their businesses are getting worse.
Thursday, the squabbling, which is beginning to feel like a schoolyard brawl, spilled over into the broader market, sparking a tumble of 3% in the Dow Jones Industrial Average and a drop of almost 4% in the Dow Jones index of major financial stocks.
To start things off, Goldman Sachs Group Inc. analysts downgraded shares of Citigroup Inc., which dropped 6.3%. Goldman also changed its view of the entire brokerage sector to "neutral" from "attractive," saying there were few near-term reasons to get excited. Then, Goldman itself was downgraded to "market perform" by analysts at Wachovia Corp. amid a gloomy outlook for its brokerage business, sending the investment bank's shares down 4%.
Adding to the frenzy, Sanford C. Bernstein & Co. said it now expects brokerage giant Merrill Lynch & Co. to post a loss of $1.07 a share this year, compared with its previous estimate of a profit of 56 cents a share, while predicting more mortgage-related write-downs and a need for more capital reserves.
"Based on most recent market data, we are now forecasting $3.5 billion in total write-downs," said Brad Hintz, a Bernstein analyst and former chief financial officer of Lehman Brothers Holdings Inc. In the past year and a half, Citigroup has seen $180 billion of market value evaporate, Merrill Lynch has seen $59 billion disappear and Lehman has lost almost $29 billion.
The moves by the analysts -- employees of financial firms themselves, many of whom underestimated the depth of the decline in earnings in recent quarters but now are turning more bearish -- come after financial shares have tumbled more than 40% in the past year. And they speak to the continuing nervousness about the sector, as well as how financials still seem to lead the market a full year after the credit bubble burst.
So why do analysts so often get it wrong about their own business? The flubs -- and the extent to which top executives of Merrill, Lehman and other major financial firms were caught flat-footed by the meltdown -- suggest that the risks embraced by traders and others within these firms aren't fully understood. Since the health of financials increasingly depends on imprecise valuations of hard-to-trade investments, and since more firms rely on trading bets rather than commissions and fees, the businesses have become harder both to manage and to forecast.
Mr. Hintz did reiterate a price target for Lehman that is about double its current price, a rare piece of good news for the sector. But he could muster only a compliment that was backhanded at best, saying that he "does not believe that Lehman Brothers will suffer the same fate as Bear Stearns," the brokerage firm that was acquired earlier this year for $10 a share by J.P. Morgan Chase & Co. after fighting for its life. Despite Mr. Hintz's backing, Lehman's stock tumbled 8.4%.
How bad is sentiment about the firms? "If the Goldman analyst was allowed to follow himself, it would not shock me if he would have downgraded his own firm," quipped Dirk van Dijk, director of research at Zacks Investment Research. Often, when investor sentiment is awful and there are few buyers for shares, it marks the nadir of a sector's stock performance.
But it is hard to predict any turnaround in financial firms until the housing market stabilizes and investors can put a better value on the assets held by those firms. Until then, earnings will be opaque and investors skeptical. The analyst-downgrade frenzy began in late August, when Goldman analysts lowered estimates on the firm's rivals. Merrill Lynch analysts were next, lowering ratings on three rivals later in the week, and they were quickly followed by earnings revisions from analysts at Lehman.
Still, until October, no analyst had "sell" on Citigroup, even though the bank's shares had dropped more than 20% in the 10 months leading up to November. That month, Meredith Whitney, then an analyst at CIBC and now at Oppenheimer, issued a scorching report, focusing on Citigroup's need for capital, a move that sent the bank's shares tumbling.
Even as brokerage analysts aggressively revised their expectations for financial-services firms, they still underestimated the depth of the decline in earnings in the fourth quarter of 2007 and first quarter of 2008. At the beginning of the fourth quarter, the Wall Street consensus was for a year-over-year profit drop of 7% for the investment banks in the Standard & Poor's 500-stock index, according to Thomson Reuters.
By the end of the quarter expectations were for a decline of 152% -- and that still fell short of the 235% drop that was reported. Mr. van Dijk of Zacks notes that analysts continue to reduce expectations: In the four weeks ended June 20, there were nearly three downgrades for every upward revision.
Gloom Descends Over Wall Street Again
Once more, gloom is descending over Wall Street. After rallying for a few hopeful months this spring, the stock market is sinking to its lowest level in years. Cracks are reappearing in the credit markets. The price of oil is rising from one record to another. And the analysts who seemed so confident a few weeks ago are predicting another round of steep losses at big financial companies like Citigroup.
On Thursday, the Dow Jones industrial average tumbled 358 points, its steepest decline in nearly three weeks. The blue-chip index closed at 11,453.42, its lowest since September 2006. One longtime member of the Dow industrials, the General Motors Corporation, plunged to its lowest since 1974.
Downgrades in the financial industry and fear over the deteriorating health of the auto sector were the immediate causes of Thursday’s sell-off. But the abrupt reversal in the markets — only five weeks ago the Dow was flying above 13,000 — reflects the realization among investors that the troubles plaguing the economy may be worse than initially feared.
While many regarded the Bear Stearns implosion in March as the moment of maximum pessimism in the financial markets, some analysts say bigger problems now lie ahead for the broader economy. The price of oil has skyrocketed, gaining $5 a barrel on Thursday and briefly rising above $140 for the first time.
The Federal Reserve, worried inflation will accelerate, strongly suggested this week that its long campaign of cutting interest rates is over. Americans feel worse about their economic prospects than at any time in the last 40 years, as measured by the Conference Board.
“Most analysts were looking for the economy and corporate earnings to rebound strongly in the second half of the year,” said Bruce A. Bittles, who oversees investment strategy at Robert W. Baird & Company. “That certainly does not appear to be the case.”
For some companies, the pessimistic turn has been punishing. General Motors fell 11 percent after its stock was downgraded on Thursday on speculation that auto sales would suffer from high oil prices. The closing price of G.M., $11.43, was the company’s lowest in 34 years. Chrysler, which is now privately held, was forced to deny rumors that the company was considering filing for bankruptcy.
The pain hit financial firms across the board. Lehman Brothers slipped 8.4 percent, and Bank of America lost 6.8 percent after announcing it would lay off 7,500 workers. Goldman itself received a downgrade from analysts at Wachovia, which said the bank faced a poor outlook over the summer. Goldman shares closed down 4 percent at $176.26.
A closely watched measure of expected volatility in stocks jumped 13 percent to its highest level since March. nThe 24-stock KBW Bank Index fell to its lowest level in almost a decade. Weaknesses also appeared in the credit market. Spreads on credit default swaps have widened greatly in the last month, as investors feel less confident that Wall Street’s top names will honor their debt obligations.
Some analysts said that the renewed anxieties about investment banks stemmed from a feeling that the Fed had done all it could do to quell the crisis. “Most of us were rooting for the Fed to save us by lowering interest rates and providing liquidity,” said Edward Yardeni, the investment strategist. “They did that, and we still have a significant problem in the credit system.”
In recent weeks, the prices of some mortgage-backed securities have slid back to their low levels of March as default rates on home loans continue to worsen, said Donald Brownstein, chief executive of Structured Portfolio Management, a hedge fund based in Stamford, Conn.
“I don’t think that there are many souls out there who think that we are out of the woods in terms of housing prices,” Mr. Brownstein said. “And since that is such a big, big part of the picture, it’s still not a pretty picture.”
Dow at Lowest Level of the Year as Bank Fears Push Shares Down
There was no relief in sight on Wall Street on Thursday, as a sharp dive in the stock markets only worsened as the afternoon wore on. The Dow Jones industrial average fell 358.41 points, or 3.03 percent, to 11,453.42, its lowest level of the year, after a discouraging report predicted trouble ahead for some of the nation’s biggest brokerage firms.
The early sell-off in the financial sector helped push the blue-chip index down, and then accelerated late in the day. The index slipped below its value at the height of the Bear Stearns collapse, a moment that many investors thought would be the bottom of a painful year in the markets.
The broader Standard & Poor’s 500-stock index slipped 2.9 percent, or 38.82 points, and the technology-heavy Nasdaq composite index was off nearly 3.3 percent, or 79.89 points. All three major markets are now down more than 12 percent for the year. The price of oil also shot up, briefly topping $140 a barrel, before closing up $5.09 at $139.64.
After rallying for a few hopeful months this spring, the stock market has begun to sink even lower than before. Signs of stress are returning to the credit markets, and the analysts who seemed so confident a few weeks ago are predicting another round of steep losses at big financial companies.
“Most analysts were looking for the economy and corporate earnings to rebound strongly in the second half of the year, and that certainly does not appear to be the case,” said Bruce Bittles, the chief investment strategist at Robert W. Baird.
The abrupt reversal — only five weeks ago the Dow was flying above 13,000 — reflects the realization among investors that the troubles plaguing the economy may be worse than initially feared. The near collapse of Bear Stearns in March was seen by many as a moment of maximum pessimism, but some analysts say bigger problems now lie ahead.
Thursday, a report from Goldman Sachs predicted a new round of write-downs at Citigroup and Merrill Lynch, and downgraded Citi to a strong “sell” rating. Shares of Citi fell $1.18 or 6.2 percent, to $17.67 and Merrill Lynch fell $2.41 or 6.8 percent, to $33.04.
An announcement by Bank of America after the markets closed reinforced the challenges ahead for banks and their employees. In a statement, Bank of America said it would cut about 7,500 jobs after the purchase of the mortgage lender Countrywide Financial was completed. The reduction, equal to about 2.9 percent of the combined staff, would take place over the next two years, the bank said.
A downgrade of General Motors also put pressure on stocks. Shares of G.M. were off by 10.77 percent, to $11.43, their lowest price in more than 33 years. Shares of rival Ford were down 3.24 percent, to $5.07. Many investors had hoped that the investment banks had suffered the worst of the credit squeeze. But Goldman’s report, released Thursday morning, downgraded the entire brokerage sector to “neutral,” a sign of decreasing confidence that played on investors’ already-frayed nerves.
Shares of Bank of America, JPMorgan Chase and Lehman Brothers all traded lower. It also became more expensive to guard against the risk of default on bonds from investment banks. Spreads on credit default swaps widened for most of the major brokerage firms, an indication decreased confidence in the financial stability of Wall Street’s marquee names.
Goldman itself suffered a downgrade at the hands of Wachovia, which said the bank faced a poor outlook over the summer. Shares of G.M. declined after an analyst at Goldman Sachs cut the company’s rating, and wrote that the car market could get even worse. The euro gained against the dollar.
Yields fell on the major Treasury notes, a sign that investors are moving to the relative safety of government bonds. Oil futures shot up after Chakib Khelil, the president of OPEC, the global oil cartel, said that prices could rise to $150 to $170 a barrel this summer. In addition, according to media reports, the head of Libya’s national oil company said the country might cut production because the market is well supplied.
Europe Business, Consumer Confidence Falls; Retail Sales Slump
European confidence dropped more than economists forecast this month and retail sales plunged, signaling that economic growth is continuing to cool even as the European Central Bank prepares to lift interest rates to a seven-year high to tackle inflation.
An index measuring sentiment in the euro area fell to 94.9, the lowest since May 2005, from 97.6 the previous month, the European Commission in Brussels said today. Separate reports showed European retail sales plummeted, while inflation accelerated in Germany and Spain.
Stocks fell in Europe today as oil climbed to a record above $140 a barrel and Carrefour SA, Europe's biggest retailer, scaled back its earnings forecast. With soaring food and energy prices boosting inflation, ECB President Jean-Claude Trichet has said the bank may raise the benchmark rate next week by a quarter point to 4.25 percent.
"The economy has hit the wall," said Ken Wattret, senior economist at BNP Paribas SA in London. ECB officials "run the risk of tipping the euro area into a recession" as the inflation outlook increases the risk that the central bank "may need to go beyond one rate rise." Confidence among the manufacturing, construction and retail industries across the 15 nations that share the euro declined this month, as did consumer sentiment, according to today's commission report.
The Bloomberg retail index, based on a survey of more than 1,000 executives compiled by Markit Economics, fell to 44 this month from 53.1 in May. A reading below 50 indicates contraction. Europe's manufacturing and services industries also contracted this month. The euro has increased 17 percent against the dollar in the last 12 months, threatening export growth, and was at $1.5770 today. The Dow Jones Stoxx 600 index fell 1.3 percent to 284.67 as of 11:29 a.m. in Brussels.
Separate figures today showed France's economy expanded less than initially estimated in the first quarter as household spending, the driving force of growth, stagnated. U.K. first- quarter growth was revised lower today. ECB council member Miguel Angel Fernandez Ordonez said today a July rate increase is not a certainty.
"Nothing is inevitable in life," Ordonez told reporters in Rome today. "What we said was that the increase is not certain, but possible." Still, the ECB remains focused on consumer-price growth, according to ECB Executive Board member Juergen Stark. He said yesterday the bank sees its primary aim as being to "firmly anchor inflation expectations."
Wall Street's Widening Credibility Gap
Credibility is in short supply on Wall Street. No one seems able to say definitively that the worst is over, and indeed a growing number of voices are saying the worst is yet to come.
On Thursday, Goldman Sachs' investment bank research analyst William Tanona cut his view on the brokerage sector to "neutral" from "attractive," after having upgraded the group after the mid-March implosion of Bear Stearns. With storm clouds darkening over the financial markets, Tanona now says that "fundamentals continue to deteriorate" and that recovery will take longer than originally thought.
Just three days ago, his colleagues in Goldman's strategy department reversed course and urged investors to "under weight" financial stocks in their portfolios, admitting they erred in recommending the sector in early May on a view that capital raising and government stimulus of the economy would benefit the stocks. "Our thesis was clearly wrong in hindsight," the strategists wrote. Worsening trends in the financial markets have made fibbers out of many a bank chief in recent weeks.
Fortis, the Belgian banking giant, pulled a 180 Thursday, saying it would raise $12.5 billion in capital, $2.3 billion of it through a share sale and the rest from scrapping its dividend and selling assets. Earlier, the company had said it didn't need to raise capital. Same thing with Merrill Lynch, which said earlier this year it didn't need more capital after raising $6 billion in January. In April, it sold another $9.6 billion worth of securities.
Lehman Brothers also said earlier it had adequate capital and then went out in early June and raised $6 billion, announcing the same day a wider than expected $2.8 billion second-quarter loss, all because of more write-downs. That came just weeks after Chief Executive Richard Fuld told shareholders at the annual meeting that the worst of the crisis was over. The credibility concerns with Lehman, stoked by Greenlight Capital's David Einhorn, cost Erin Callan her job as chief financial officer and Joseph Gregory his job as president.
Perhaps the biggest credibility gaffe this year came when Bear Stearns chief Alan Schwarz said on television that his firm was not experiencing a liquidity crisis, and within the week Bear Stearns had sought a rescue from the Federal Reserve and JPMorgan Chase. "Bank managements have been unusually lacking in knowledge about the depth of the problems in their companies," says Richard Bove, an analyst at Ladenburg Thalmann. "Their perception of events seems to be skewed by desire as opposed to reality."
Gloomy predictions are now piling on for the commercial banks, which are set to report second-quarter results in the coming weeks. Goldman's Tanona put Citi on Goldman's "conviction sell" list, recommending a paired short sale of Citi against a long buy of Morgan Stanley. The move sparked a broad sell-off in financial stocks, with Citi falling 6% by midday.
The carnage spread across the financial sector. Fortis was down 19%, Lehman down 6%, National City down 7%, MBIA down 11% and Washington Mutual down 6%. The Keefe Bruyette & Woods index of bank stocks, the BKX, was off 3%. Financials dragged the S&P 500 17% below the record it set back in November.
"There's a major credibility issue reflected today in the cratering of these stocks," says Michael Holland, chairman of Holland & Co. Tanona says he sees second-quarter write-downs of $9 billion at Citi, in line with the view of other analysts, who have put them in a range of $6 billion to $10 billion. The write-downs will come mostly from exposure to collateralized debt obligations and bond insurer counter-party holdings.
He also doesn't think Citi will be able to maintain its dividend at current levels, saying that cutting it would preserve $3.5 billion of capital. Citi has already cut its dividend this year. Had Tanona made the bearish call at the start of the second quarter in April, the payoff would have been larger. Shares of Citi fell 21% from April 1 to Wednesday.
Tanona lowered his estimate for Merrill Lynch as well, seeing $4.2 billion of write-downs. He continues to rate the firm's stock "neutral." Analysts now see Citi and Merrill reporting losses for the quarter and the year. At the beginning of April, the consensus view was for profits of 61 cents a share for Citi and $1.10 for Merrill. Now the consensus is a loss of 3 cents a share for Citi and 14 cents a share for Merrill, and those averages, tracked by Thomson Reuters, don't account for Goldman's estimate cuts Thursday. Tanona sees a loss of 75 cents a share for Citi and $2 for Merrill.
What's more, financial companies are running out of ways to raise capital without hitting existing shareholders. Ongoing write-downs may make Merrill's chief executive, John Thain, think twice about holding on to the company's stake in Bloomberg, the information and news service, which some value at $5 billion to $6 billion. "A sale of Bloomberg is increasingly likely if it has to raise additional capital," says CreditSights analyst David Hendler.
Troubles for UBS mount as Massachusetts files fraud charges
Massachusetts regulators filed civil fraud charges Thursday against UBS Financial Services for allegedly selling investments that it claimed were as safe as cash even though bank officials knew they were risky. The charges add to the headaches at UBS, the world's largest private banker, which is already reeling from $37 billion in losses on assets linked to subprime home loans.
In addition, U.S. prosecutors have vowed to intensify a broad criminal investigation of the Swiss bank and its clients after a former senior private banker at UBS pleaded guilty last week in Florida to helping wealthy American clients evade taxes. The complaint by the Massachusetts Securities Division says that the financial services arm of the Swiss bank knowingly let its brokers sell so-called auction-rate securities - a type of bond issued by nonprofits and municipalities - without warning investors that they might have trouble getting their money back.
These customers have now discovered "that they have been blindsided by the very people who were supposed to have their best interests at heart," the complaint said. The Boston Globe previously reported that UBS brokers were still making sales of the products early this year, when the firm knew the multibillion-dollar trading market for these securities was on the brink of collapse - another victim of the credit crisis that was then sweeping financial markets.
The market did indeed collapse on Feb. 13 and has remained virtually closed since then, leaving trapped investors with an estimated $220 billion worth of securities they cannot sell. UBS did not immediately comment on the charges. But a spokeswoman, Karina Byrne, has said previously: "UBS has been providing information to the Massachusetts Securities Division and we are committed to helping our clients who have been adversely affected by the unprecedented marketwide loss of liquidity in auction-rate securities."
The state wants UBS to return all investor funds in these investments and will seek to have the firm pay a fine. Last month, UBS agreed to buy back $37 million worth of these securities sold to 17 Massachusetts towns and cities and to the Massachusetts Turnpike Authority, under an agreement with the state's attorney general, Martha Coakley.
Little known before the market froze, auction-rate securities have ensnared the savings of thousands of investors across the United States, many of them retirees who put their life savings into the investments on the advice of their brokers. The Boston Globe has reported that UBS investment bankers were warning some large clients of the market's looming problems while, at the same time, continuing to permit brokers to sell the investments to individual investors without providing them with similar warnings.
As a result, clients seeking risk-free investments purchased securities that they were led to believe would be as safe as money-market funds. Even many brokers from UBS and other investment firms appear to have been surprised by the market's collapse. Massachusetts regulators have been investigating UBS and two other firms - Banc of America and Merrill Lynch - since March, shortly after the auction-rate markets failed. Those investigations are ongoing, according to a state official. New Hampshire regulators also are investigating UBS.
Auction-rate securities are primarily the long-term debt of student lenders and municipalities. They traded for years in private markets run by brokers, where weekly or monthly auctions reset the interest rates on the securities. Typically, those rates were a little higher than those of money-market funds. What most investors did not know was that the auction-rate market functioned only as long as buyers and sellers placed bids for the bonds on a routine basis.
The brokers who ran the auctions, including UBS, in February decided to stop trying to keep the auctions going by using their own funds to buy the bonds. In May, UBS stopped listing these investments under "cash" on customer statements and started listing them under the category of "fixed income," or bonds. The change is an acknowledgement that the securities were not equivalent to cash, but in fact carried risks, as do bonds, whose value can fluctuate.
In the tax evasion case, Bradley Birkenfeld, a former senior private banker for UBS, entered a guilty plea on June 19 before a judge in a U.S. district court in Ft. Lauderdale, Florida.
UBS fraud charges latest in securities saga
Massachusetts regulators on Thursday filed civil fraud charges against UBS in connection with the sale of its auction-rate securities. It's the latest salvo by regulators trying to recoup losses incurred when the $330 billion market for the products froze in February.
The lawsuit filed against the Swiss bank by Massachusetts Secretary of the Commonwealth William Galvin alleges that UBS "stepped up its sales campaign to investors even as, and because, large corporate cash managers were shunning auction-rate securities and its own inventory was ballooning."
The charges, if proven, would show what many critics of auction-rate securities have long suggested: that brokerages misled investors into making investments that were riskier than originally touted. Auction-rate securities are long-term debt that functioned as short-term investments which investors could sell at weekly or monthly auctions when rates reset. But as a casualty of the global credit crunch, many of these securities were effectively frozen in their accounts as the market in which they were auctioned came to a virtual standstill in February.
Now, many brokerages are holding the securities as they decide whether to redeem part or all of investors' stakes, or ride out the current credit climate and redeem them at a later date and for better value. But some investors hope to recoup at least some of their investment sooner rather than later, with two dozen class-action lawsuits filed against brokerages and regulators in nine states examining how the firms marketed the securities.
Other large banks facing scrutiny over the securities include Wachovia Corp., Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley. "For the holder who bought this as a cash equivalent, this is a mess," David Kotok, an analyst for Cumberland Advisors, wrote in a research note. "For the broker who sold it as a cash equivalent, it is a growing liability."
As such, the pressure on funds to redeem most or all of these securities has grown in recent months, with several marquee financial firms rolling out redemption plans and schedules. On Monday, wealth manager Eaton Vance said it would redeem about $310 million in auction-rate preferred securities for 15 of its municipal funds. That amount brings its redemption total to $3.6 billion, or more than 70% of its outstanding total as of February.
Private-equity firm BlackRock , too, has said it will refinance $1.6 billion of its tax-exempt ARPs by the end of July, allowing investors to regain access to as much as 40% of the securities' face value. After that refinancing is completed, BlackRock said it will have total redemptions of $2.4 billion, or about 25% of the total issued. But other major players, such as Lehman Bros. Holdings , Allianz SE Pimco and Pioneer Investments, haven't announced plans to redeem any of the $8 billion of ARPs they're estimated to be holding.
That refusal could signal further regulatory battles ahead, as class-action lawsuits become an option for investors looking to redeem all or part of these investments, analysts said. "Brokers are doing everything they can to avoid facing the issue. They wish it would just go away," Kotok said. "It won't. And it is about to get worse."
KB Home's Loss Widens As Home Prices, Sales Slump
KB Home's fiscal second-quarter loss nearly doubled as prices fell amid a continuing housing downturn and credit crisis.For the quarter ended May 31, KB Home reported a net loss of $255.9 million, or $3.30 a share, compared with a prior-year net loss of $148.7 million, or $1.93 a share.
The latest results included write-downs of $201.1 million, down from $223.9 million in the first quarter and $308.2 million a year ago. But the latest quarter also included a $98.9 million impact from writing down the value of deferred tax assets, which can be used to offset future profits. Revenue dropped 55% to $639.1 million. The mean estimate of analysts polled by Thomson Reuters was for a loss of 94 cents on revenue of $691.3 million.
New home deliveries fell 41% to 2,810 due to a reduction in active communities. The average selling price dropped 17% to $226,000. Net orders fell 42% to 4,200 as the result of a lower community count. The company's cancellation rate was 27%, down from 53% in the prior quarter and 34% in the year-ago quarter.
"Persistently poor demand for new homes during the second quarter amplified pricing pressures and diminished asset values in many of our served markets, requiring us to recognize additional non-cash charges for inventory and joint venture impairments, abandonments and the write-off of goodwill, all of which significantly reduced our operating results," said President and Chief Executive Jeffrey Mezger.
He added that potential new home buyers are hesitant to buy, but he expects them to eventually fuel a housing market recovery. KB Home shares fell as low as $15.76 in January from a high of more than $85 in 2005 and $41.63 a year ago. Earlier this week, home-builder stocks lost more ground after the Case-Shiller home price index estimated U.S. home prices have fallen 15% over the past year.
Ilargi: Uh... yes. You can get Americans to spend more, but only by giving money away. That they will have to pay it back later? Don’t tell.
Stimulus Boosts Consumer Spending
Consumer spending surged in May, fed by mounting inflation and the round of income-tax rebates unleashed to brace a soft economy. Personal consumption increased by 0.8% compared to the month before, the Commerce Department said Friday. That was the biggest gain since 1.0% in November 2007. April spending went up 0.4%, revised from a previously estimated 0.2% increase.
Personal income increased at a seasonally adjusted rate of 1.9% compared to the month before. That was the largest gain since 3.2% in September 2005. Income rose 0.3% during April, revised from a previously estimated 0.2% increase. Economists had forecast a 0.4% increase in personal income during May and a 0.7% climb in consumer spending.
Consumer spending makes up about 70% of U.S. gross domestic product, reflecting a big part of the economy. Climbing prices helped elevate spending last month. In fact, when adjusted for inflation, spending in May climbed 0.4% -- which was the largest gain of its kind since 0.5% in December 2006, yet much smaller than the unadjusted 0.8% increase in May spending.
Friday's data revealed a price index for personal consumption expenditures rose 0.4% in May compared to the prior month -- double the increase of 0.2% in April. Compared with a year earlier, the PCE price index climbed 3.1% in May. The year-over-year climb in April was 3.2%.
The Federal Reserve watches the year-over-year PCE price index excluding food and energy closely for signs of problematic inflation. Fed officials define their statutory goal of price stability as inflation of 1.5% to 2%. At their meeting Wednesday, policymakers at the bank decided to leave interest rates alone, citing inflation risk.
The Fed had slashed the fed-funds rate by 3.25 percentage points to 2.00% September through April to keep a housing slump and credit crunch from dragging the economy into recession, defined as two straight quarters of economic decline.
Data this week confirmed the economy in early 2008 didn't slump but grew -- sluggishly, yet still faster than its end-of-2007 speed. GDP rose 1.0% in the first three months of this year, nearly double its 0.6% rate of increase during the fourth quarter of 2007.
Middle Eastern and Asian investors flock into U.S. and European property
A wave of capital from the Middle East and Asia could be on its way into the ailing U.S. and European property markets, as a weak dollar and falling asset prices lure sovereign wealth funds and institutional investors. Since Japanese investors bought a string of U.S. office buildings in the 1980s, only to be burned by a market crash, global property investment flows have been mostly one way - from the West to Asia. But that looks likely to change.
"Instead of talking about emerging markets in Asia, now emerging markets could be in the U.S.," said Yu Lai Boon, chief investment officer of Dubai World, a state-owned investment firm. "As investors in the Middle East, we're seriously looking at the U.S. and European markets right now as the beginning of investment for the next golden era." Last year, North American investors pumped about $8.4 billion directly into Asian property, while the reverse flow reached only $2.7 billion, according to Jones Lang LaSalle. They handed over another $30 billion, triple the Asian contributions, to global property funds.
At a real estate conference this week, several executives said capital flows could become more balanced since Chinese, South Korean and Japanese investors are looking abroad. With the dollar down about 3 percent against the yen so far this year, and around 13 percent over the last 12 months, their spending power has been magnified. Investors are waiting for U.S. office blocks and shopping malls to suffer the fate of the London office market, which has fallen 18 percent in value since a peak last year.
U.S. commercial property prices dropped about 5 percent over the last year and would probably fall another 10 percent in the coming 12 months, said Asieh Mansour, chief economist at Deutsche Bank's property investment arm Rreef. A global credit crunch, sparked by the U.S. subprime mortgage crisis, has dried up the kind of private equity deals that buoyed commercial property in 2006 and early 2007.
And although office vacancies in many cities are low, the prospect of layoffs in the financial industry has cast a pall over future occupancy. "The dollar is so low that the U.S. is up for sale," Mansour said. "I've been on the phone with many Japanese investors who are doing due diligence and are very interested," she added. "They're mostly larger pension funds related to banks."
During the Japanese asset bubble in the late 1980s, many of the country's firms went abroad, investing heavily in the U.S. property market. The savings and loans crisis had caused office prices to fall as much as 70 percent. When the Tokyo market slid, however, Japanese investors lost money and had to sell U.S. assets. But the thirst for foreign investments is back.
In February, the largest Japanese property firm, Mitsui Fudosan, presented a plan to redevelop a site in London's West End. The firm expects overseas business to grow to 20 percent of its operating profit by 2016 from 7 percent now. The trading firm Marubeni has also teamed up with Sun Wah Group of Hong Kong to invest in Western property markets. But the newcomers are South Korean and Chinese.
Mirae Asset Maps Investment Management, a unit of the biggest South Korean mutual fund firm, bought the 43-story Citigroup Center in San Francisco for about $370 million in May. A fund manager at the firm said he was waiting for the right moment to pounce on more U.S. assets. "I think the West such as San Francisco is in a better condition than the East," said the fund manager, who asked not to be identified because of the commercial sensitivity of such negotiations. "There are more IT companies than financial companies, so the area is less affected by the subprime problems."
Flush with dollars from a huge trade imbalance, Chinese sovereign wealth funds are beginning to test the waters in New York real estate, said Scott Latham, an executive vice president at the property services firm Cushman & Wakefield in New York. The newly created China Investment Corp. has put together a four-person team for alternative investments, but their allocation will probably be less than 5 percent of the sovereign fund's $200 billion war chest.
"They are coming," Latham said. "We've seen them in the bidding process over the past four months on a number of assets we've handled." But Latham said the Chinese could be late starters. "I think that unlike the Middle Eastern sovereign wealth funds, they have not yet figured out an efficient way to get the money out of their country," he said.
Global mergers and acquisitions down 35 percent
Mergers and acquisitions bankers are bracing for more job cuts as volumes fail to recover from their first-quarter tumble, according to preliminary Thomson Reuters numbers released on Friday, and the outlook remains bleak for the rest of 2008.
Global M&A activity fell 35 percent in the year to date to $1.579 trillion (794,670 billion pounds), according to the first-half data, as the credit crunch kept buyout firms away from large deals and economic uncertainty made companies reluctant to push the button. Private equity buyout activity, which underpinned the recent M&A boom, fell 66 percent in Europe to $48 billion and slumped by 86 percent in the United States to $42 billion in the first half.
With inflation rising and no end in sight for economic woes in the U.S. and Europe, it seems unlikely that volumes will recover quickly to the record levels seen for the year until June 2007, observers said. "We won't see a boom like early 2007 again for another three or four years," said Hermann Prelle, joint-head of EMEA investment banking at UBS.
Several banks, including Citigroup and Goldman Sachs Group have already shed M&A jobs to try to adapt to the slower market, and there could be more cuts as the slowdown in activity eats into banks' income. In the U.S., the world's biggest economy, a slowdown and bleak outlook were compounded this week as U.S. consumer confidence hit a 16-year low and housing prices suffered a record annual drop.
The slowdown that started with the credit crunch last summer has spread and is now undermining much of the economic stability in Europe and the U.S. that allowed the M&A boom. Emerging markets could help take some sting off the crisis.
Western companies are continuing to invest in new countries for growth, and investors from Asia are entering Europe, either by buying whole companies or as passive investors.
India's Tata Motors agreed to buy Jaguar and Land Rover from U.S. auto giant Ford Motor in March for $2.3 billion. Multiple Chinese, Asian and Middle-eastern wealth funds have invested billions of dollars in cash-craving Western financial institutions. But the new entrants are unlikely to reach the scale needed to shift sentiment. "The market has seen a sharp slowdown in the U.S., in particular as it relates to financial sponsors activity," said Brett Olsher, co-head of global mergers and acquisitions at Deutsche Bank.
"The industry needs to make a call on whether business from emerging markets will step in to make up for those slowdowns, which it will to an extent, but not nearly enough to reverse the decline." Cross-border corporate mergers like InBev NV's $55 billion bid -- including debt assumed -- for U.S. rival Anheuser-Busch Cos and France Telecom SA's $48 billion approach to Swedish rival TeliaSonera AB make up the rest of those numbers, said bankers.
And while the mid-market private equity sector is still seeing deals, they are not big enough to keep the numbers -- and banker fees -- as high as they were. "We are still seeing a healthy number of deals -- albeit lower than the first half of last year -- but on average they are smaller than in the recent past, and that pattern seems likely to continue during the rest of the year," said Ian Hart, Citigroup's co-head of M&A for Europe, Middle-East and Africa.
It is unclear when U.S. and European M&A markets will recover, and bankers are mostly talking about early 2009 rather than the second half of 2008. Hence, some are encouraging clients to do deals soon or risk a worsening market. The hope for bankers is that clients think of doing deals now in relative uncertainty rather than wait in the hope of a quick end to the market slowdown.
"There are two schools of thought," said Merrill Lynch's Carlo Calabria. "The first is that M&A will come back toward the end of the year. The second is this may be the beginning of a bit of an ice age, and we should try to collect all the nuts."
Britain's savings rate plunges to lowest since 1959 as squeeze tightens
Families are saving at the weakest rate in almost half a century as the credit crunch squeezes into their incomes, official figures have shown. The saving ratio, which measures how much households are putting away for the future, more than halved in the first three months of the year to 1.1pc - the lowest level since 1959. Experts warned that this illustrated how families are being forced to dip deep into their savings in order to keep their finances afloat.
The figures, from the Office for National Statistics, will cause major concern within the City and Whitehall: a sharp fall in the savings ratio is usually a sign that the economy is about to suffer a serious slowdown. Experts at Capital Economics said there is now a "very real chance of a technical recession."
In a further sign that households are facing a major squeeze from higher mortgage costs, the rising cost of living and slow wage growth, the ONS said real disposable incomes - the broadest measure of families' standard of living - fell by 1pc in the first quarter of the year. It is the sharpest fall in nine years. Economists warned that it could fall even faster in the coming months.
Jonathan Loynes of Capital Economics said: "The fall in the household saving ratio from 3pc to just 1.1pc emphasises the threat to consumer spending as households tighten their belts in response to falling house prices. We still think that the [Bank of England] is far too sanguine on this."
In a further blow to Chancellor of the Exchequer Alistair Darling, the ONS also revised down its estimate of the economy's overall growth in the first quarter from 0.4pc to just 0.3pc - the weakest performance since the first quarter of 2005 and only half the growth rate achieved in the fourth quarter of 2007. Mr Darling has faced broad criticism for the growth forecasts he published in the Budget, which have been lambasted as over-optimistic by economists.
Where did it all go wrong? When Labour started telling lies
Not since Trivial Pursuit became an instant hit in the early 1980s has a parlour game so dominated the leisure hours of Britain's chattering classes. I'm referring, of course, to Where Did It All Go Wrong?, the pastime of choice for many who regarded Gordon Brown's expropriation of Number 10 as the precursor to a new phase of Labour hegemony.
One year on, with the Prime Minister's authority in ruins, pollsters and psephologists are picking through the rubble to find out WDIAGW? They are joined by academics, party activists and pundits of every persuasion. The blogosphere is filled with theories of bewildered supporters. Channel 4 commissioned an entire documentary in search of an answer. What a hoot! How long before WDIAGW? is adapted by Endemol as a celebrity quiz show?
Much conjecture centres on Mr Brown's personal and physical shortcomings. The Great Awkward is unable to take off when in danger. As was Pinguinus impennis, he is vulnerable to human hunters, especially those in the press and on opposition benches. Vicious types, such as Vince Cable, club him over the head with spiky humour, causing him to haemorrhage credibility.
"The trouble is, the electorate doesn't know the real Gordon," squawks the diminishing band of Brown loyalists. "He is not properly understood." One columnist suggested a more prominent role for Mrs Brown, largely on the basis that she's not Cherie Blair. Others call for fresh ideas and vision.
All of this misses the point about WDIAGW? The Great Awk has not suffered some sort of reverse evolution since moving next door. He was always clumsy and flightless. Yes, the hair is a bit greyer and the suits are smarter. But what you get is the same Gordon Brown who swept to power alongside Tony Blair in May 1997: a careerist with the charisma of an extinct species, whose idea of dialogue is to tell us what we think.
The key difference between then and now, and therefore the correct answer to WDIAGW?, rests not inside Brown's Downing Street eyrie, but with those who put him there. It has nothing to do with image; it's all about substance.
No amount of makeovers, re-launches or faked sincerity can change what has occurred. The public has worked out that just about everything Labour had promised on issues that really matter turned out to be untrue.
Not even Dickinson & Morris, established at Melton Mowbray in 1851, can match its impressive range of pork pies. For Mr Brown and the entire New Labour project, that is where it has all gone wrong. It is the falsehoods that dumped the party's poll ratings in the gutter. Goebbels' comment on the efficacy of propaganda will be familiar to many: "If you tell a lie big enough and keep repeating it, people will eventually come to believe it."
What is less well known is his qualifying observation: "The lie can be maintained only for such time as the state can shield the people from the political, economic and/or military consequences of the lie."
Labour's big lies on budgetary prudence, educational standards, support for the Armed Forces, the economic benefits of immigration, a referendum on the European constitution (alias the Lisbon treaty), figures on violent crime, weapons of mass destruction, the abolition of quangos, British jobs for British workers and tackling welfare abuse have been exposed for what they were: cynical manipulation of credulous voters.
The problem for Brown and his troupe of political pygmies is that they have exhausted the supply of veils behind which they once danced. They now stand stark naked before the electorate and it's not a pretty sight. The lies can no longer be maintained. There is no way of shielding people from their loss of democracy, rising costs, falling incomes and the betrayal of those who are paying in blood for Mr Blair's fiction.
The lies go on, naturally, but they have lost traction. Pledges that were once delivered with conviction now seem little more than an insult to the intelligence of decent folk whose patience has been exhausted by mendacity. Mr Brown's pursuit of prudence is a fantasy. In his Mansion House speech two years ago, he promised, "stability through a stable and competitive tax regime, and stability through a light-touch regulatory environment".
Since then, we've had a tax cut that turned out to be an increase, followed by a humiliating climbdown when it became apparent the Government was punishing the working poor. A one-legged stilts walker would seem more stable. Meanwhile, Alistair Darling will borrow at least £40 billion this year, probably £50 billion, far more than Britain spends on defence, to plug a hole in a set of numbers that looks like back-of-a-fag-packet accountancy.
As for regulation, the British Chambers of Commerce has worked out that compliance with red-tape is costing domestic business £66 billion a year, up from £30 billion in 2004 and £10 billion in 2001. Some of this is generated by the European Union, but plenty is home made. It's the light touch of a piledriver. Education Secretary Ed Balls is head boy at the black-is-white school of veracity. If he doesn't appreciate the facts, he changes them. He said recently: "All the evidence I have is that [educational] standards have been maintained." True or false?
The OECD reveals that Britain's secondary schools, after Labour's 10-year attack on excellence, have tumbled down an international league table of reading and mathematics. Education researchers at Durham University conclude that A-levels have been eroded by grade inflation.
A senior academic from Imperial College says that universities have to run catch-up classes for many students with excellent A-levels. And the National Audit Office reports that poor A-level results were the main reason why state school pupils fail to get into a decent university.
Home Office minister Liam Byrne still peddles the twaddle that immigrants have added billions to the size of the economy. Of course they have; that's what happens when there is a rapid increase in population. Per capita, however, we are no better off and may be poorer owing to social dislocation.
And, by the way, where did all these people come from? The Government, you may recall, told us in 2003 that 13,000 migrants would arrive in Britain after eight eastern European countries joined the EU. In the event, more than 600,000 turned up, perhaps as many as one million. A mistake or yet another lie?
Henry Ford said: "You can't build a reputation on what you are going to do." The Brown camp seems not to understand this. When it asks in a bewildered way, "where did it all go wrong?", it fails to recognise that it is real achievements, not false promises, that form the foundations of a lasting reputation. That's why Mr Brown's has crumbled.
Oxygen-starved oceans rapidly dying
The world's coastal oceans are in crisis, with oxygen-starved ''dead zones'' increasing by a third in just two years as global temperatures increase with climate change, according to the International Whaling Commission's latest scientific report.
Dead zones, caused by over-enrichment of waters by nutrients from run-off, sewerage and warming waters, represent ''the worst-case scenario for coastal biodiversity'' and are the ''severest form'' of ocean habitat degradation, the report says. The number of ocean dead zones has grown from 44 areas reported in 1995 to more than 400, with some of the worst oxygen-starved areas extending over 22,000sqkm.
Recent figures from the United Nations Environment Program estimate fertilisers, sewage and other other pollutants, combined with the impact of climate change, have led to a doubling in the number of oxygen-deficient dead zones every decade since the 1960s.
The growing list of dead zones includes waters in the Gulf of Mexico, South China Sea, Gulf of Finland, Adriatic Sea and areas of the Caribbean. The Black Sea between south-eastern Europe and Turkey which has one of the largest dead zones in the world, had 26 commercial fish species in the 1960s but now has only five.
A recent study listed New Zealand's oldest marine reserve, Cape Rodney, as one of the world's 10 worst-affected areas, and also listed coastal areas near Perth and around Tasmania both areas on whale migration routes as areas of emerging concern. The commission's 2008 State of the Cetacean Environment Report lists a growing number of concerns over the impacts of climate change and ocean pollution on the world's whales, dolphins and porpoises.
The report says low-oxygen waters at depths of 300m to 700m have expanded in tropical oceans over the past 50 years as the oceans warm. Areas previously rich in oxygen have become ''oxygen minimum zones'' containing less than 120 micromoles of oxygen per kilogram of water. It says these reduced oxygen areas will have ''dramatic consequences'' for marine ecosystems because fish, squid and crustaceans cannot survive in them.
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The worst-affected areas are in tropical regions of the Atlantic Ocean, west of Africa and the equatorial areas of the Pacific . The commission's report says skin diseases are now more frequent among whales and dolphins and may be linked to ocean pollution or climate change.
It says ocean surface warming and the southward displacement of Southern Ocean currents will reduce the feeding grounds of humpback, blue, fin, sperm and southern right whales. Climate modelling shows 30 per cent of ice cover will be lost in the West Antarctic Peninsula and the Weddell Sea. Whales will need to travel much further to reach the retreating Southern Ocean fronts.
No ice at the North Pole
It seems unthinkable, but for the first time in human history, ice is on course to disappear entirely from the North Pole this year.
The disappearance of the Arctic sea ice, making it possible to reach the Pole sailing in a boat through open water, would be one of the most dramatic – and worrying – examples of the impact of global warming on the planet. Scientists say the ice at 90 degrees north may well have melted away by the summer.
"From the viewpoint of science, the North Pole is just another point on the globe, but symbolically it is hugely important. There is supposed to be ice at the North Pole, not open water," said Mark Serreze of the US National Snow and Ice Data Centre in Colorado. If it happens, it raises the prospect of the Arctic nations being able to exploit the valuable oil and mineral deposits below these a bed which have until now been impossible to extract because of the thick sea ice above.
Seasoned polar scientists believe the chances of a totally ice-free North Pole this summer are greater than 50:50 because the normally thick ice formed over many years at the Pole has been blown away and replaced by huge swathes of thinner ice formed over a single year.
This one-year ice is highly vulnerable to melting during the summer months and satellite data coming in over recent weeks shows that the rate of melting is faster than last year, when there was an all-time record loss of summer sea ice at the Arctic. "The issue is that, for the first time that I am aware of, the North Pole is covered with extensive first-year ice – ice that formed last autumn and winter. I'd say it's even-odds whether the North Pole melts out," said Dr Serreze.
Each summer the sea ice melts before reforming again during the long Arctic winter but the loss of sea ice last year was so extensive that much of the Arctic Ocean became open water, with the water-ice boundary coming just 700 miles away from the North Pole. This meant that about 70 per cent of the sea ice present this spring was single-year ice formed over last winter.
Scientists predict that at least 70 per cent of this single-year ice – and perhaps all of it – will melt completely this summer, Dr Serreze said. "Indeed, for the Arctic as a whole, the melt season started with even more thin ice than in 2007, hence concerns that we may even beat last year's sea-ice minimum. We'll see what happens, a great deal depends on the weather patterns in July and August," he said.
Ron Lindsay, a polar scientist at the University of Washington in Seattle, agreed that much now depends on what happens to the Arctic weather in terms of wind patterns and hours of sunshine. "There's a good chance that it will all melt away at the North Pole, it's certainly feasible, but it's not guaranteed," Dr Lindsay said.
The polar regions are experiencing the most dramatic increase in average temperatures due to global warming and scientists fear that as more sea ice is lost, the darker, open ocean will absorb more heat and raise local temperatures even further. Professor Peter Wadhams of Cambridge University, who was one of the first civilian scientists to sail underneath the Arctic sea ice in a Royal Navy submarine, said that the conditions are ripe for an unprecedented melting of the ice at the North Pole.
"Last year we saw huge areas of the ocean open up, which has never been experienced before. People are expecting this to continue this year and it is likely to extend over the North Pole. It is quite likely that the North Pole will be exposed this summer – it's not happened before," Professor Wadhams said.
There are other indications that the Arctic sea ice is showing signs of breaking up. Scientists at the Nasa Goddard Space Flight Centre said that the North Water 'polynya' – an expanse of open water surrounded on all sides by ice – that normally forms near Alaska and Banks Island off the Canadian coast, is much larger than normal. Polynyas absorb heat from the sun and eat away at the edge of the sea ice.
Inuit natives living near Baffin Bay between Canada and Greenland are also reporting that the sea ice there is starting to break up much earlier than normal and that they have seen wide cracks appearing in the ice where it normally remains stable. Satellite measurements collected over nearly 30 years show a significant decline in the extent of the Arctic sea ice, which has become more rapid in recent years.