Finance Blog number 1

All of a sudden, it’s a bull market. The Dow Jones Industrial Index has risen by 21% since March 9, just crossing the traditional 20% threshold that some chart-watchers use to separate a mere rally from the real thing, But this three-week old may not live to a ripe age.

The previous Dow (INDU) rally started after the November 2008 rescue of Citigroup (C, Fortune 500), lasted until the New Year and came a mere 0.8 percentage points short of qualifying as a bull market - before yielding to a 28% rout. The current recovery has largely been a vote of confidence in a subsequent U.S. banking system rescue, along with massive government help.

Will this upward market movement prove more durable than the last? Mathematically, it has the advantage of starting from a much lower base. From Thursday’s close, the Dow will have to rise a further 14% just to match the 2009 high, hit on January 2.

The economic case is less clear. True, after the nationalization of financial risk through guarantees and money-printing, panic over a possible imminent financial sector collapse looks overdone. And while GDP in the first quarter of 2009 looks to have been substantially lower than in the fourth quarter of 2008, the pace of decline seems to have slowed fast cash advance.

But the global downward economic momentum remains strong. The International Monetary Fund doesn’t expect growth to return until "the course of 2010". While waiting, profits are going to be slaughtered.

Profits at non-financial U.S. corporations fell by 9% in 2008. In severe recessions, the average drop is more like 25%, according to BNP Paribas. Globally, the rate at which analysts are cutting their earnings forecasts - a fairly accurate indicator of current profit, according to Soci

Social and economic gaps between whites and blacks persist in the United States despite an atmosphere that led to the election of President Barack Obama, an Urban League report said.

Blacks remain twice as likely as to be unemployed, three times more likely to live in poverty and more than six times as likely to be imprisoned, according to the group’s annual State of Black America issued Wednesday.

The report urges President Obama to tackle the critical challenges of the times, including unemployment, home foreclosures, education and health care reform.

"As the Obama administration ushers in a new era of hope, change, and to some extent, unity for this nation, many are asking whether racial barriers have now been erased in America. Are discrimination, division and inequality antiquated relics of the past? For a quick answer to that question, one has but to review some of the sobering statistics," the report said.

The group’s equality index shows the status of blacks at 71% that of whites. It says economics "remains the area with the greatest degree of inequality," with social justice, health and education following.

"The analysis shows that while important gains were made, both for blacks and whites, in each of these areas during the 1990s expansion, there was actually a loss of ground in median household income, poverty and homeownership during the 2001-2007 expansion, known as the jobless recovery," the report’s executive summary said.

The report contains essays touching on a variety of themes and issues.

One, from Gwendolyn Grant of the Urban League of Kansas City, warns that the "historic" election of President Obama, the nation’s first black president, "may cause us to fall prey to a false sense of accomplishment and self-satisfaction, and that apathy and complacency may set in."

"We must use this moment to reinvigorate the movement and re-engage the nation in a struggle to finish the job of equality, liberty and justice for all. So as we move past this historic moment, let us not repeat the history of our greatest popular movements and allow injustice to prevail, simply because a black family lives in the White House online payday loans."

She proposes that a movement to foster equality for blacks in all realms of American life should be "fashioned" after ideas promulgated by the Obama campaign. They are blending personal responsibility, "principled ideas" with pragmatism, and building grass-roots movements crossing racial, ethnic, generational, gender and regional lines,

"We must use this moment to reinvigorate the movement and re-engage the nation in a struggle to finish the job of equality, liberty and justice for all ," she said.

The report lists policy recommendations in the areas of home ownership, jobs, health and education. Here are some of them.

• Increased funding for underskilled workers’ job training programs.
• Steering workforce investment dollars to construction industry jobs.
• Funding infrastructure development for public building construction and renovations of schools, community centers, libraries, recreation centers, parks.
• Creating temporary public service employee program.
• Passing a homebuyers bill of rights that would protect and educate consumers and provide homebuying help.
• Restoring a small business loan program and continue tax credit funding.
• Implementing "a comprehensive and universal health insurance system for all Americans."
• Developing "a comprehensive health infrastructure for the delivery of health education, prevention and intervention initiatives" for blacks.
• Studying health care in the criminal justice system as it relates to black inmates.
• Examining economic, sociologic and environmental contributors to "chronic health conditions."
• Funding in full No Child Left Behind.
• Guarantee access to high quality early education for 3- and 4-year-olds.

 

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WASHINGTON — Pointing with dismay to the AIG debacle, the nation’s top economic officials argued Tuesday for unprecedented powers to regulate and even take over financial goliaths whose collapse could imperil the entire economy. President Barack Obama agreed and said he hoped "it doesn’t take too long to convince Congress."

Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, in a rare joint appearance before a House committee, said the messy federal intervention into American International Group demonstrated a need to regulate complex non-bank financial institutions just as banks are now regulated by the Federal Deposit Insurance Corp.

"AIG highlights broad failures of our financial system," Geithner told the House Financial Services Committee. "We must ensure that our country never faces this situation again."

But the two appeared divided over where the authority should reside. Geithner suggested that his Treasury Department’s powers be expanded. Bernanke was noncommittal, even suggesting the FDIC.
Both officials sought to channel the widespread public outrage over the millions of dollars AIG spent in post-bailout bonuses into support for regulatory overhaul. Geithner was expected to lay out more details on the administration’s plan Thursday when he appears again before the committee payday loans.

Democrats in the Senate say the administration wants the proposal on taking over non-banks to move separately from the larger financial industry regulatory bill, to get it going more quickly.

The government has given AIG more than $180 billion in bailout funds since it first intervened Sept. 16. The U.S. now owns nearly 80 percent of the insurer.

"If a federal agency had had such tools on Sept. 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders and impose haircuts on creditors and counterparties as appropriate," Bernanke said.

Bernanke said it was "highly inappropriate to pay substantial bonuses." He said he had asked that the payments be stopped but was told that they were mandated by contracts.

"I then asked that suit be filed to prevent the payments," he said. But Bernanke said his legal staff counseled against this action "on the grounds that Connecticut law provides for substantial punitive damages if the suit would fail."
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General Electric (GE, Fortune 500) shares have been dogged by worries about GE Capital, and after a six-hour presentation on the finance unit the company quelled fears about transparency but could not put to rest fears about future losses.

On Friday, the day after the presentation, GE was down more than 6% while the Dow rose lightly in midday trading.

During Thursday’s event, which included a 176-page presentation and question and answer period, chief financial officer Keith Sherin said GE Capital might not earn $5 billion for 2009 as previously forecast. But he said the unit would be profitable or break even in the first quarter and for all of 2009.

The presentation went a long way toward fixing the company’s damaged credibility. "They’re unfreezing relations with shareholders and closing the gap between what they disclose about GE Capital and what people want to know," says Peter Cohan, a venture capitalist, management consultant and GE shareholder.

Cohan says the company lost credibility with investors over the last year because it said it would not raise capital, would not lose its AAA, and would not slash its dividend and then had to backtrack on those statements, sometimes soon after making them.

"The presentation was like their Glasnost, and it should be beneficial over the long term," Cohan says.

GE gave unprecedented detail about how it runs each segment of GE Capital and how it stress tests these business lines and comes up with its capital cushion against losses.

The presentation also dispelled fears about the company’s ability to borrow money in the public markets. It has raised 93% of what it needs to take care of the long-term debt that matures this year, and it is racing to raise money for 2010 before government programs to back debt expire this year.

Two worries still remain for analysts and investors like Cohan: stress testing and earnings quality payday loans.

For its stress test, GE Capital uses Federal Reserve projections that in 2009 unemployment will average 8.4% and the economy will shrink by 2%, and that in a worse case scenario unemployment will hit 8.9% and GDP will shrink by 3.3%.

Deutsche Bank analyst Nigel Coe points out that Deutsche Bank economists think GDP will shrink by 3.9% in 2009 and that average unemployment will hit 10%, leading him to believe that GE will come in at the lower end of expectations.

Nick Heymann, a Sterne Agee analyst and former GE auditor, says the company will likely have to raise its loss provisions over the next four to six quarters, leaving him to wonder just how feasible it is to place a value on GE.

As for earnings, Sherin says GE Capital will earn between $2 billion and $2.5 billion this year under a scenario whereby unemployment averages 8.4% and GDP contracts by 2%. He expects it to break even should unemployment hit 8.9% and GDP shrink by 3.3%.

A lot of that money comes from tax credits for losses taken at GE Capital. Under the best case scenario, tax credits account for up to $2.1 billion of the estimated $2 billion to $2.5 billion in earnings. Under the more severe stress case, tax credits would contribute up to $4.5 billion to the bottom line, allowing the company to break even.

"The main question that remains is, can the company earn its way through elevated losses on the portfolio without having to raise equity capital," wrote Credit Suisse’s Nicole Parent. "Uncertainty around magnitude and timing of the losses at [GE Capital] make that difficult to assess."  

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The auditors of YTB International Inc. have raised concerns about the company’s future and its financial controls, the Wood River-based online travel seller disclosed this week. And the exodus of agents, whose fees to operate travel websites provide most of YTB’s revenue, continued.

YTB’s annual report, released this week, is the latest sign of trouble at the company. Its star has fallen fast since August, when California Attorney General Jerry Brown accused the company of deceptive marketing in a lawsuit filed days before its huge annual convention at the Edward Jones Dome.

In the filing, YTB reported a $4.5 million loss in 2008, after a $3.2 million gain the year before, and the company had just $1.2 million in cash at year’s end.

That, coupled with the weak economy and "substantial uncertainties" around YTB, led auditors from UHY LLP in St. Louis to question the company’s future. Auditors also criticized YTB’s internal financial controls, saying the company’s board had too little control over management’s spending and that executives had signed contracts without proper board approval.

In August, a Post-Dispatch investigation detailed millions of dollars worth of business deals in recent years between YTB and companies owned by its executives and board members, including a small Illinois bank that has since been taken over by the state no teletrack payday loans.

YTB said it will right its financial ship through cost-cutting and better use of technology. The company said it has begun requiring board review of any spending worth more than $100,000 a year, or more than $50,000 with a company insider.

It’s also seen a sharp drop in the ranks of its "referring travel agents," from about 130,000 in August to 92,000 at year’s end. Those agents pay $500 up front and $50 a month for a website through which they sell travel, and they provide about three-quarters of YTB’s $162 million in revenue. Those numbers fell quickly after the California lawsuit, which is still in court, as well as a class-action suit from former agents in federal court in East St. Louis.

YTB said it has spent about $1 million fighting the suit in California.

tlogan@post-dispatch.com | 314-340-8291
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NEW YORK — Stocks retreated Thursday as financial shares fell for the first time in three days. Commodities, however, surged the most this year, and the dollar weakened against the euro.

The Standard & Poor’s 500 index dropped 1.3 percent to 784.04. The Dow Jones industrial average lost 85.78 points, or 1.2 percent, to 7,400.80. The Russell 2000 index of small companies slumped 1.1 percent to 413.26.

Thursday’s was only the second losing trading session out of the past eight. Through Wednesday, the S&P 500’s 14-day relative strength index, a measure of whether stocks have risen too far too fast, was at its highest level since October 2007.

"Everyone’s holding their breath and asking whether this rally has legs to it or not," said Keith Wirtz, chief investment officer at FifthThird Asset Management in Cincinnati. "A lot of money is still on the sidelines."

Financial shares had risen in seven of the previous eight days, advancing 54 percent from March 6.

JPMorgan Chase & Co., the biggest U.S. bank by market value, fell 8 percent Thursday to $24.95. Morgan Stanley declined 13 percent to $21.04, and Goldman Sachs Group Inc. slid 5.7 percent to $99.30.

The Fed’s plan to lower interest rates by buying $1.2 trillion in mortgage-backed securities and government bonds has some on Wall Street speculating on inflation.

"We may end up with higher inflation down the road," said New York-based David Tien of Fischer Francis Trees & Watts fast cash advance. "The biggest winner will be commodity currencies followed by the euro."

The dollar slid 1.4 percent to $1.3666 per euro. It touched $1.3738, the weakest level since Jan. 9.

Precious metal prices rose as investors sought a hedge against inflation.

Silver futures for May jumped $1.585 an ounce, or 13 percent, to $13.52, the most since 1979. Gold futures for April delivery surged $69.70, or 7.8 percent, to $958.80 an ounce, the biggest increase since September.

Energy prices also rose on speculation that the Fed’s steps will spur demand for raw materials. Benchmark crude for April delivery surged $3.47, or 7 percent, to settle at $51.61 a barrel on the New York Mercantile Exchange.

Other stocks that moved substantially or traded heavily Thursday included:

•Citigroup Inc., down 48 cents at $2.60: The struggling bank plans to increase the number of its common shares outstanding and may execute a reverse stock split.

•FedEx Corp., up $2.05 at $45.10: Quarterly profit tumbled 75 percent on severe weakness in the global economy and the package delivery company will cut more jobs.

•Alcoa Inc., up 92 cents at $6.40: The aluminum maker expects to raise $1.3 billion from stock and convertible note sales, and a JPMorgan analyst upgraded shares.
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OTTAWA – The Canadian economy is shrinking faster than at any time since the Great Depression and will contract 9.1 per cent in the current quarter, says a new report from Merrill Lynch on the heels of fresh evidence of how badly the auto sector has been hurt.

Merrill economist David Wolf issued the prognosis for the Canadian economy today after Statistics Canada reported that wholesale sales in the automotive sector fell 23 per cent in January.

As a result, the country’s wholesale sales that month were down 4.2 per cent – far more than economists had generally expected. Excluding the auto sector, the decline would have been a more moderate but still serious 0.9 per cent.

Wolf, long one of the most pessimistic of Canada’s major forecasters, predicted the economy will shrink 9.1 per cent in the first three months of this year and a total of three per cent for 2009 as a whole.

Economists have warned that the first quarter of 2009, especially January and February, would likely post the current recession’s worst numbers – although few are as gloomy as Merrill Lynch.

Statistics Canada’s most recent numbers are in line with those forecasts, however, and much worse than the Bank of Canada’s prediction of a 4.8 per cent retreat, which was more pessimistic than private-sector economists when the prediction was made in January.

Since then, central bank governor Mark Carney has conceded that the Canadian economy is weaker than forecast, but has not issued a new projection.

Prime Minister Stephen Harper, speaking at an event in Toronto, said he would not get into the specifics of forecasts – saying he has can’t remember a time since he’s been in public office where economists have been "so all over the map."

He said that the root problem that needs to be fixed is the global financial system which, he said, will be discussed by leaders at an upcoming meeting of G-20 countries.

"The Canadian economy cannot turn the corner on recession until we see a fixing or significant improvement in the American financial system, and the global financial system more generally."

Shortly after Harper’s comments, the U.S. central bank announced that it will buy up to US$300 billion of long-term government bonds and buy more mortgage securities in an effort to shore up the American financial system.

The Federal Reserve also left a key bank lending rate at a record low of between zero and 0.25 per cent – meeting expectations.

On Tuesday, former Bank of Canada governor David Dodge said he disagreed with his successor at the central bank, Mark Carney, in thinking that Canada’s economy will start to recover quickly or rebound strongly in 2010.

But Wolf’s forecast takes the doom and gloom to a new level in predicting a 9.1 per cent first quarter contraction and a three per cent retreat for 2009 as a whole. By comparison, the worst quarterly contraction during the 1990-91 slump was 5 low cost payday loans.9 per cent.

"The quarterly data only goes back to 1961, but this probably is the worst since the 1930s," Wolf said today.

"What hasn’t gone wrong? Clearly we are in a period of unprecedented co-ordinated global slump. And while Canada has its structural merits, the fact of the matter is Canada is a small, open, commodity-producing economy that is highly sensitive to global economic conditions."

Wolf says the economy will begin growing again in the second half of 2009 – and his 2.2 per cent growth projection for 2010 is actually rosier than many.

But by then, Wolf said, Canada will be in such a deep hole that the economy won’t return to where it stood in 2007 until at least 2011.

Liberal finance critic John McCallum said the new forecasts show that Harper is "hopelessly out of touch."

McCallum noted that Canada lost over 200,000 jobs in the first two months of this year and said the government may have to do more than the $40-billion in stimulus spending over two years that’s contained in the most recent budget.

Bank of Montreal economist Benjamin Reitzes also said the first quarter is likely to be worse than BMo’s previous forecast of a 6.2 per cent retreat, noting the Statistics Canada wholesale sales report today showed a 4.2 per cent decline in January, worse than the consensus of minus 2.7 per cent.

The federal government tabled a $40-billion stimulus budget in late January, but spending won’t begin in earnest until next month – the start of the fiscal year – too late to help the first-quarter.

Ministers in Ottawa and the Ontario government have also been poised to provide billions of dollars in assistance to General Motors of Canada and Chrysler Canada if the automakers meet certain requirements, including lowering their labour costs.

"The very weak wholesale numbers, combined with the record drop in manufacturing sales volumes, point to a second consecutive monthly decline in GDP (gross domestic product) of as much as one per cent," Reitzes said.

"The extreme weakness to start the quarter points to downside risk to our already below consensus call of minus 6.2 per cent (annualized) for quarter one real GDP."

In dollar terms, wholesale sales fell to $41.1 billion in January, as the automotive products sector fell to $5 billion from $6.5 billion, and motor vehicles crashed to $3.37 billion from $4.8 billion, a 30 per cent drop-off.

Other than the auto sector, wholesale sales fell a more moderate 0.9 per cent, Statistics Canada said.

Wholesale sales volume also fell 4.2 per cent, the agency said.

The agency says the sales decline reflected both lower export demand for Canadian goods and weaker sales in Canada.

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Wayne and Delores Barr Weaver will present a check today to the St. Johns Riverkeeper to help the organization mount a legal challenge to plans to withdraw millions of gallons of water from the river daily.

The check presentation comes seven months after the Weavers challenged the organization to raise money, pledging $150,000 if the Riverkeeper could raise $300,000

“There were over 1,000 different donors and some, obviously, in the tens of thousands, but there were people who sent 10 bucks, five bucks,” said Riverkeeper Neil Armingeon.

The Riverkeeper, along with the City of Jacksonville and St. Johns County, is fighting a permit application by Seminole County in Central Florida to withdraw up to 5 credit report.5 million gallons of water from the river daily. A judge ruled against the Riverkeeper in January on a legal challenge, recommending the permit be approved. In April the application will be ruled on by the St. Johns River Water Management District. All the wrangling in court has been expensive.

“We incurred a substantial legal bill,” Armingeon said.

Not all of the money will go to pay legal bills. Some of it will be spent on educating the public about the river and the dangers it faces.

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China said it will make it easier for its companies to invest overseas as cheaper commodity and share prices encourage bargain-hunting in industries from autos to energy.

The approval process will be simplified and mainly handled by local rather than central government, Ministry of Commerce spokesman Yao Jian said at a briefing in Beijing today. The procedures take effect May 1, a separate statement said.

China announced $22 billion of planned overseas spending last month, including a $19.5 billion investment in Rio Tinto Group, the world’s third-largest mining company. China’s outbound foreign direct investment may top inflows this year for the first time, Standard Chartered Plc says.

“The ‘Going Out’ policy to encourage more of China’s firms to invest overseas has been in place for a number of years,” said Stephen Green, head of China research at Standard Chartered in Shanghai. “We believe that 2009 will be the year when it really gains some scale.”

In 2008, China’s overseas investment doubled to $52.2 billion, including financial-sector investment, according to the commerce ministry. This year, in February alone, the total was $65 billion, according to a tally by Standard Chartered.

Eighty-five percent of applications for outbound investment that previously needed central government approval will be handled by local authorities in future, Yao said.

Energy, Minerals

The commerce ministry will scrutinize investment plans of more than $100 million and those which involve multiple countries, the ministry said in a separate statement. Provincial commerce authorities will vet smaller deals and those involving energy and minerals, it said.

China’s Minmetals Group is awaiting shareholder and government approvals for a A$2.6 billion ($1.7 billion) takeover of Melbourne-based OZ Minerals Ltd., the world’s second-largest zinc mining company.

Hunan Valin Iron & Steel Group agreed in February to buy a A$1.2 billion ($776 million) stake in Australia’s third-largest iron ore exporter Fortescue Metals Group Ltd payday loans. to secure supplies of the raw material.

China Shipping (Group) Co., the nation’s second-biggest sea-cargo company, said last week that it was looking for opportunities to buy assets overseas as shipping lines and port operators struggle with slumping world trade.

A strong currency, cheaper commodity prices and the need for many foreign companies to pay off debt are creating “the perfect opportunity” for China’s firms to ramp up investment abroad, Standard Chartered’s Green said.

‘Flurry of Deals’

“The beginning of 2009 has seen a flurry of deals in which Chinese investors have secured ownership or long-term supply contracts to such things,” he added.

Cnooc Ltd., China’s biggest offshore oil explorer, is seeking opportunities to acquire overseas assets made cheaper by the global financial crisis, Chairman Fu Chengyu said March 5. China, the world’s second-largest energy consumer, entered into oil-for-loans accords with Venezuela, Brazil and Russia last month.

Automakers are being to encouraged to make overseas acquisitions, according to Miao Wei, vice minister of the Ministry of Industry and Information Technology.

Today’s announcement came after China’s government said last week that it will simplify approvals for overseas capital entering the nation by giving local governments more authority to approve such spending.

More outbound investment “will help to improve China’s balance of payments while China is still running a relatively large trade surplus,” Yao said.

Foreign direct investment in China fell 15.8 percent in February, the fifth straight monthly decline, as companies cut spending to weather the global financial crisis, the commerce ministry said today.

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NEW YORK — AT&T Inc. is negotiating new contracts that cover 112,500 union workers, including more than 3,000 in the St. Louis area, and looks set to take advantage of the recession to reduce its health care costs.

The last time this batch of regional contracts with the Communications Workers of America was up for negotiation, five years ago, there was a four-day strike that was seen as a minor victory for the union. But this time, the economic meltdown may have shifted the balance of power decidedly toward the employer.

While the phone company’s overall results are holding up well in the recession, the contracts cover AT&T’s shrinking wired phone business, rather than the growing cell phone division.

Dallas-based AT&T wants concessions on health benefits, saying the wireline workers pay far fewer of their health care costs than employees on the mobile phone side. Retirees’ health benefits are also likely to be affected.
After talking to management, UBS analyst John Hodulik wrote last week that a strike is likely but that the company would come out on top.

Management employees have received extensive training to keep the company running if there is a strike, Hodulik said.

And Sanford Bernstein analyst Craig Moffett said the union’s war chest is likely badly depleted by the weak stock market.

AT&T could reap large savings on its health care costs. AT&T spends $5.5 billion a year on health care; its 2008 revenue was $124 billion.

Communications Workers of America spokeswoman Candice Johnson said Hodulik’s report was "way premature" because talks have just started.

"We are focused on productive talks," she said payday loans for bad credit. "We’re not talking publicly about issues at this time, but AT&T is doing well financially, even in these economic times. AT&T should be a leader in maintaining quality jobs and quality benefits."

About 3,200 AT&T employees in the St. Louis area are covered by the core contract that’s being renegotiated, a spokeswoman from CWA Local 6300 said.

AT&T’s health care proposals have clearly touched a nerve among the union’s members. The website of the Communications Workers’ District 4, which covers the Midwest, said members showed up at work in scrubs, wearing Band-Aids, in wheelchairs and on crutches last week to show their displeasure.

"It’s clear from their proposal, the company isn’t really interested in fixing the health care problem. Their solution is massive cost-shifting to us," a bargaining update said.

AT&T spokesman Walt Sharp said the workers covered by the expiring contracts pay 8 percent of their yearly health care costs, compared with the national average of 34 percent. Their total health care costs are also higher because the benefits structure doesn’t promote responsibility, he said. The company wants to phase in a deductible at a level determined by an employee’s wages.

Meanwhile, AT&T employees are well-paid, compared with the competition, Sharp said.

A 2007 survey by the Bureau of Labor Statistics puts the hourly wages of phone company line installers and repairers at $26.80 per hour, compared with $19.50 per hour at cable TV service providers.

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