Finance Blog number 1

The Bank of England may this week pause its 200 billion-pound ($317 billion) bond purchase plan and keep open the option of expanding it further as officials assess if the economic recovery is too anemic to last.

The bank will halt spending with newly created money for the first time since it began the so-called quantitative easing program in March last year, according to the median of 51 forecasts in a Bloomberg News survey. The central bank will release its decision on Feb. 4 at 12 p.m. in London.

Governor Mervyn King is juggling the threat of resurgent inflation against the risk of a relapse in growth after gross domestic product barely rose in the fourth quarter. Officials must also gauge if the economy may need more stimulus to weather reductions in the record budget deficit after the general election, which is due by June.

“I would be surprised if they say they’re going to stop” altogether, Patrick Minford, a former adviser to Margaret Thatcher and now an economics professor at Cardiff University, said in an interview. “This could be quite risky, particularly when governments are going to be taking rebalancing action on fiscal policy. The issue is whether the economy is strong enough to take withdrawal of quantitative easing.”

The pound fell against the dollar to its lowest level this year today, and traded at $1.5858 at 10:52 a.m. in London.

The economy expanded 0.1 percent in the last three months of 2009 as service and manufacturing businesses expanded just enough to end Britain’s deepest recession on record.

Uneven Recovery

Recent data have suggested an uneven recovery. Mortgage approvals unexpectedly dropped in December for the first time in more than a year, Bank of England showed today. Manufacturing expanded at the fastest pace in 15 years, according to a report from the Chartered Institute of Purchasing and Supply and Markit Economics.

“It’s certainly possible that the economy needs more policy support in the future,” said Jonathan Loynes, an economist at Capital Economics Ltd. “When you have a big fiscal tightening coming, which is likely from either party, unless you’ve got some underlying momentum in the economy you may want to loosen monetary policy further.”

Prime Minister Gordon Brown’s Labour Party has trailed the Conservative opposition for two years in voter opinion polls as both parties wage a campaign on plans to cut the budget deficit. The Conservatives led Labour by 11 points, according to an ICM Research Ltd. poll that finished on Jan. 24.

Budget Deficit

Chancellor of the Exchequer Alistair Darling said on Jan. 26 that the government will take steps to trim the 15.7 billion- pound deficit once the recovery gains traction. Cameron has pledged to start budget cuts immediately after the election.

While the prospect of a public spending squeeze looms, the global recovery may still buoy the economy as companies raise overseas sales and take advantage of the pound’s 17 percent drop on a trade-weighted basis since 2007. The Confederation of British Industry said today its index of export orders for small and medium-sized manufacturers rose to a two-year high in the quarter through January.

The pound’s weakness has stoked consumer prices, complicating the Bank of England’s task. The inflation rate jumped 1 percentage point in December, the most on record, to reach 2.9 percent. The central bank’s target is 2 percent.

Inflation Outlook

King said last month that inflation may accelerate further, though policy makers will look through that jump as they focus on the risk that it will slow below their goal because of slack in the economy created by the recession.

The case for adding to the bond-purchase program may strengthen if a pause in the plan results in a jump in bond yields, said Kit Juckes, chief economist at ECU Group Plc in London. He said a 50 basis-point increase in 10-year bond yields to about 4.5 percent may be “inevitable but not disastrous,” though a jump to 6 percent “would scare me.’

“The end of QE will be a pretty short-lived end if it’s really damaging gilt yields,” Juckes said. “QE is working, and pausing makes some sense to let it continue to work, but you really can’t rule out them coming back with more. This is a pathetic little recovery however you look at it.”

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Former U.S. Treasury Secretary Henry Paulson says in his new memoir that he was prepared to support a government backstop to prevent the bankruptcy of Lehman Brothers Holdings Inc. until he learned the firm’s assets were so mis- marked it would have guaranteed a loss to taxpayers.

Going into a Sept. 12, 2008, meeting at the New York Federal Reserve Bank with the leaders of the largest Wall Street firms, Paulson and then-New York Fed President Timothy Geithner agreed that “if a Bear Stearns-style rescue was the only option, we would take it,” the ex-secretary wrote in “On The Brink.”

Although the book isn’t scheduled for release until Feb. 1, Bloomberg News purchased a copy at a New York bookstore.

The government was able to facilitate the merger of Bear Stearns Cos., a failing New York investment bank, and JPMorgan Chase & Co. by having the Fed guarantee $29 billion of Bear Stearns’s assets. A similar rescue of Lehman proved impossible because a deal to sell the investment bank couldn’t be completed, Paulson wrote. The executives gathered at the New York Fed also concluded Lehman had overvalued its assets by at least $37 billion, he said.

“The toxic quality of Lehman’s assets would have guaranteed the Fed a loss,” Paulson 63, wrote, meaning the central bank couldn’t legally make a loan.

The U.K. government ultimately was responsible for forcing Lehman into bankruptcy, Paulson said. Lehman executives had reached a deal to sell the bank to Barclays Plc, a British bank, on Saturday, Sept. 13.

Chief Executives

The same day, the chief executives of the other New York banks gathered at the New York Fed had agreed their firms would, along with Barclays, collectively finance the Lehman shortfall, Paulson said. The group included Lloyd Blankfein of Goldman Sachs Group Inc., John Mack of Morgan Stanley, Jamie Dimon of JPMorgan Chase, Vikram Pandit of Citigroup Inc., Brady Dougan of Credit Suisse Group AG, and Robert Kelly of Bank of New York Mellon Corp. They agreed to backstop the deal even though under mark-to-market accounting rules, they would have to immediately recognize a $10 billion loss on the Lehman assets, he wrote.

The U.K. government, however, refused to waive a requirement that Barclays submit the deal to a shareholder vote, in spite of a personal plea by Paulson to Chancellor of the Exchequer Alistair Darling. Darling, Paulson wrote, was concerned that if Lehman’s bad assets hurt Barclays, it might affect the entire U.K. banking system.

“The British screwed us,” Paulson, a former chairman of Goldman Sachs, said he told the U.S. bankers the next day.

Accounts Frozen

The former Treasury secretary said he, Geithner, and Fed Chairman Ben S. Bernanke were well aware the bankruptcy of Lehman would cause havoc in financial markets, although the consequences were much worse than they had anticipated. That was in part because Lehman’s U.K. bankruptcy receiver, PricewaterhouseCoopers, froze all of the firm’s accounts in that country, refusing to transfer collateral back to Lehman creditors, Paulson said.

Panicked investors then tried to withdraw funds from other financial institutions, including Morgan Stanley and Goldman Sachs, and credit markets froze. Concerned that publicly admitting the government couldn’t help them would lead to a run that would bankrupt those firms, Paulson said he maintained at the time the government wouldn’t help because it would contribute to moral hazard, a belief the government would always bail out investors.

‘Strict Line’

“In retrospect I’ve come to see that I should have been more careful with my words,” Paulson wrote. “Some interpreted that to mean that we were drawing a strict line in the sand about moral hazard, and that we just didn’t care about a Lehman collapse or its consequences. Nothing could have been further from the truth.”

Paulson wrote that he personally liked Lehman chief executive Richard Fuld, and had made more than 50 phone calls to Fuld, discussing ways to save Lehman, in the months between the Bear Stearns rescue and Lehman’s bankruptcy.

Fuld “was direct and personable, a strong leader who inspired and demanded loyalty,” Paulson said. “But like many ‘founders’ his ego was entwined with the firm” and Fuld waited too long before making a serious effort to sell the company, Paulson wrote.

Bear Stearns savior Jamie Dimon is described in the book as “technically proficient and deeply self-assured.” Other bank executives, however, were convinced Dimon was working against them in an effort to put them out of business, Paulson wrote.

He praises Bernanke as “easily one of the most brilliant people I’ve known,” and Geithner, the current Treasury secretary, for his “keen analytical mind and a great sense of calm.”

‘Scary Smart’

Democratic Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, is “scary smart, ready with a quip and usually a pleasure to work with.” During the crisis, however, Senate Finance Committee Chairman Christopher Dodd, a Connecticut Democrat, was “distracted by his unsuccessful campaign” for president, Paulson said.

Much of the crisis played out during the 2008 presidential campaign, and Paulson said he spoke often with Democratic candidate Barack Obama. “I was impressed with him,” he wrote. “He was well informed, well briefed, and self-confident,” Paulson said. “The day after the election, Obama abruptly stopped talking to me.”

Sarah Palin

He spoke less frequently with Republican candidate Senator John McCain of Arizona, and he did not get along with vice presidential candidate Sarah Palin, then the governor of Alaska, according to the book.

“Right away she started calling me Hank” during the first briefing he gave her, Paulson said. While almost everyone addressed him by his nickname, “for some reason, the way she said it over the phone like that, even though we’d never met, rubbed me the wrong way.”

Paulson also wrote that Chinese officials were very helpful during the crisis. He spoke often with Wang Qishan, vice premier of China’s financial and economic affairs, who pledged his country wouldn’t sell its large holdings of U.S. Treasury and agency bonds.

Russia, however, tried to take advantage of the turmoil in U.S. markets, he wrote. While he was attending the Summer Olympic Games in Beijing in early August 2008, he learned that “top-level” Russian officials suggested to the Chinese that the two countries sell a large amount of the Fannie Mae and Freddie Mac bonds they owned in order to force the U.S. to bail out those firms.

The Chinese refused, Paulson said.

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Robert M. Mills has been named the new president and chief operating officer of University Housing Services Inc. in St. Petersburg, succeeding UHS founder William H. Mills Jr., who will remain as chairman and chief executive officer.

Robert Mills, who joined his father’s firm in 2002, was the executive vice president of the campus housing development company, responsible for the operational efficiency of the development process and directly involved in more than $300 million of on-campus development projects in the last eight years.

The leadership shift comes when the student housing industry has been faced with the ongoing challenge of finding viable ways to implement increasing demands for student housing with shrinking college budgets and financial options, UHS said in a release. Robert Mills is expected to focus on growing the company’s core student housing business by expanding both the company’s service offerings and geographic reach.

UHS has worked on more than 16 campus housing projects throughout the Southeast, according to the company’s Web site, including Florida Gulf Coast University, the Florida Institute of Technology and the University of North Alabama among others payday loans. UHS maintains a southeast regional office in Atlanta.

Robert Mills, who received a bachelor’s degree in building construction in 1987 from the University of Florida, previously worked for Beers Construction Co., rising to group vice president where he was responsible for meeting all the construction needs of both public and private higher-education institutional clients.

Before starting UHS, William Mills was owner, chairman and president of Federal Construction Co. fro 1982 to 1991, which would become one of the largest construction management firms in the Southeast before being sold to Trafalgar House.

Federal Construction was originally known as Mills & Jones Construction Co., founded by William Mills Sr. in 1946. That builder was responsible for buildings such as the Maas Brothers Department Store in St. Petersburg, the Florida Power Corp. headquarters in St. Petersburg and the original Busch Gardens outside of Temple Terrace.

William Mills Sr., who helped found UHS following the Federal Construction sale, died last June. He was 98.

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HoliMont Ski Resort is planning a $20 million expansion – the largest in its history – to increase the number of residential units surrounding the recreational complex.

Ultimately, the development calls for construction of 93 single-family homes, 72 condominiums, a 27,000-square-foot main chalet, several new slopes and lifts and a new outdoor skating rink. The work is expected to be done in phases during the next few years.

“We’re going to be cautious, and we definitely don’t want to put HoliMont at risk,” General Manager David Riley said.

The project follows the December opening of the $40 million Tamarack Club condo and hotel complex at Holiday Valley Ski Resort.

Between the two resorts, more than $60 million has been or soon will be invested in Ellicottville, which attracts not only Western New Yorkers but people from Ontario, Ohio and Pennsylvania.

“It’s encouraging,” said Corey Wiktor, executive director, County of Cattaraugus Industrial Development Agency. “HoliMont and Holiday Valley continue to work on projects that help refine and define their respective resorts.”

Despite a sluggish national economy, Riley said he is confident the demand is there for residential units – particularly those that allow buyers to “ski in and ski out” of HoliMont.

Last week, a 6,000-square-foot home in the Greer Hill subdivision that borders HoliMont’s Greer Hill run sold for more than $1.5 million to a Canadian buyer. The sale price set a record for the Ellicott-ville area.

“You look at sales like that and it tells you and me that there still is a lot of pent-up demand for real estate here,” Riley said, “even in this economy fast cash.”

The leveling off of the Canadian dollar is fueling development projects, as well, according to Wiktor.

“I think you are going to see a lot of investment in Ellicottville because of the Canadian dollar,” he said.

Much of HoliMont’s development will take place not in Ellicottville but in the neighboring Town of Mansfield. Officials there are nearly finished with their reviews.

“We’re definitely in the home stretch when it comes to all of our approvals,” Riley said, adding that he expects work to start this year on the first phase of residential units.

Based on early projections, he estimates it will take six to seven years to finish the residential units.

“The one thing we are not going to do is overleverage our membership and put HoliMont at risk,” Riley said.

Added Wiktor: “Traditionally, Holiday Valley and HoliMont do projects at incremental levels. You never see them biting off more than they can chew.”

HoliMont is the nation’s largest private membership ski resort with 4,400 skiers. More than 40 percent come from Canada and 25 percent come from Western New York. The remainder are from Ohio, Pennsylvania, Rochester and New England.

HoliMont was founded in 1964 as a private ski resort and companion to the larger Holiday Valley. It has more than 50 slopes and nine lifts and is open to the public on most weekdays. Weekends and holidays, it’s limited to resort members and their guests.

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The Toronto stock market headed for a lower open as oil prices fell on concerns about reduced demand and a stronger U.S. dollar.

The Canadian dollar was down 0.29 of a cent to 97.42 cents US.

U.S. futures also pointed to a negative open despite an earnings report from chip giant Intel Corp. after the market close that blew past expectations on earnings and revenue. But investors were less happy with results from JPMogan Chase, which beat earnings expectations but missed on revenue.

The Dow Jones industrial futures fell 44 points to 10,619, the Nasdaq futures declined 9.25 points to 1,879 and the S&P 500 futures were off 6.8 points to 1,138.4.

JPMorgan Chase earned US$3.28 billion or 74 cents a share during the final three months of 2009, primarily because its investment banking and trading businesses were still profiting from a 10-month market rally. The showing easily topping analysts expectations of 61 cents but total revenue fell below expectations and the company’s stock fell about two per cent in pre-opening trading.

“Even though actual earnings rose fourfold from a year earlier, investors are not happy with the fact that the retail bank operation still reported a loss for the quarter and boosted its loan loss reserves,” observed Andrew Pyle, investment adviser at ScotiaMcLeod in Peterborough, Ont.

“Well, after the almost unbelievable run higher in bank stocks last year you have to expect some disappointments along the way.”

Intel Corp. turned in a profit of US$2.3 billion or 40 cents a share, much higher than the 30 cents a share that analysts forecast. It also beat revenue forecasts and the number one maker of computer microprocessors delivered a bright profit outlook for 2010 short term personal loan.

Oil prices moved down for a fifth session with the February crude contract on the New York Mercantile Exchange 51 cents lower to US$78.88 a barrel.

The latest dip came even as the International Energy Agency predicted in its monthly report that oil demand will average 86.3 million barrels a day this year, or 1.4 million barrels a day more than in 2009.

The February bullion contract on the Nymex moved down $7 to US$1,136 and March copper was unchanged at US$3.39.

Before the markets open, the U.S. government provides two fresh readings on the economy.

The Labour Department is likely to report that consumer prices in December rose 0.2 per cent after rising 0.4 per cent in November, according to forecasts of analysts polled by Thomson Reuters. The report is also likely to show that consumer prices for 2009 posted their first annual drop since 1954.

Later in the morning, the Federal Reserve issues its report on production from factories, mines and utilities for December. Economists predict that industrial production rose 0.6 per cent, after rising 0.8 per cent the previous month.

Overseas, Japan’s Nikkei 225 stock average advanced 0.7 per cent while Hong Kong’s Hang Seng slipped 0.3 per cent.

London’s FTSE 100 index eased 0.24 per cent, Frankfurt’s DAX dropped 0.94 per cent while the Paris CAC 40 declined 0.6 per cent.

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French business confidence unexpectedly climbed in December to its highest level since March 2008 as Europe’s third-largest economy extended its recovery from the recession.

The Bank of France’s Business Sentiment Indicator for manufacturing advanced to 101 from 99 in November, according to an e-mailed statement today. Economists had expected the measure to remain unchanged, according to the median of five forecasts gathered by Bloomberg News.

The Paris-based central bank said the data suggest economic expansion of 0.5 percent in the fourth quarter, a decrease of 0.1 percentage point from its previous estimate. Declines in gauges for capacity utilization, total orders and production countered an improvement in order books, the central bank said.

“Businesses still remain skeptical and want to see what happens in the economy,” said Laurence Boone, chief French economist at Barclays Capital in Paris.

Finance Minister Christine Lagarde said last week that the government hopes to raise its growth forecast to at least 1 percent for 2010 from 0.75 percent as the recovery gains pace.

Industrial production grew more than twice what economists expected in November, gaining 1.1 percent from the previous month, statistics agency Insee said yesterday.

French businesses are benefiting from the economy’s return to growth in the second quarter of 2009 as well as government stimulus programs, even as increases in the euro and unemployment threaten the expansion.

On Jan. 6, Sodexo, the world’s second-biggest catering company, reported a smaller first-quarter revenue decline than some analysts expected and confirmed its annual profit target.

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Anheuser-Busch InBev said Thursday that it plans to fire 10 percent of its work force in Belgium, home to its international headquarters.

The world’s biggest beermaker blamed the cuts on Belgians drinking less beer. A total of 263 jobs out of about 2,700 will be lost. Cuts include 73 executives.

The company also planned to close a brewery in Luxembourg, moving production of beers like Diekirch and Mousel to other facilities. Job losses also come from changing distribution patterns.

One industry analyst said the layoffs reflect A-B InBev’s relentless focus on cutting costs, a pressure that would exist even without the $17 billion debt remaining from the $54.8 billion acquisition of Anheuser-Busch by InBev in 2008.

"These guys are just obsessive about constantly cutting costs. It’s just an obsession," Trevor Stirling, senior research analyst at Sanford Bernstein in London, told the Post-Dispatch on Thursday no teletrack payday loans.

The job cuts in Belgium show that A-B InBev does not expect to find all of its cost-savings by slashing jobs in St. Louis, home to the company’s North American headquarters.

But the company has wielded a heavy ax in St. Louis, slashing 1,000 employees from a work force that once numbered 6,000.

In Belgium, the job cuts were met with displeasure by a union official.

"InBev promised us that they will try to avoid forced layoffs through early retirement," Carlo Rombauts with the ABVV union told Bloomberg News, "but we’re contemplating actions right now."

Last March, A-B InBev said it hoped to ferret out $2.25 billion in cost-savings over the next three years.

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Romania’s central bank unexpectedly cut its main interest rate to the lowest since January 2008 after the appointment of a government ended months-old political turmoil and signs that lenders may resume payments of a bailout loan.

The Banca Nationala a Romaniei trimmed the monetary policy rate to 7.5 percent from 8 percent at its first meeting since last month’s presidential elections, the Bucharest-based bank said in an e-mail today. The decision was expected by only two of 11 economists in a Bloomberg survey. Seven predicted no change and two predicted a smaller cut.

“This is a small surprise in timing, but not in direction,” Raffaella Tenconi, the chief economist at Wood & Co. in Prague, said in an interview today. “With the new government already going forward to meet the IMF requirements, a loosening doesn’t change our view of a stable leu in the near term.”

Traian Basescu was re-elected president last month and re- appointed Prime Minister Emil Boc, ending a political stalemate that had left the country without a government since October. The International Monetary Fund, which is leading a $30 billion bailout loan to Romania, has said it may resume loan payments.

Recovering Economies

Economies throughout east Europe are recovering from recession or contractions are slowing as demand picks up from their main trading partners in western Europe. Romania aims for economic growth of as much as 1.5 percent this year after an estimated contraction of 7.5 percent in 2009.

“It is worth noting the continued slowdown in real terms of the annual dynamics of credit to the private sector, especially of the leu-denominated component, amid weak demand for loans against the background of the recession,” the bank said in a statement after today’s decision business cards.

The Romanian leu held its gains against the euro after the announcement and traded 0.2 percent stronger at 4.2071 per euro as of 12:50 p.m. in Bucharest, while the Bucharest Stock Exchange’s main benchmark BET index rose 2.5 percent to 4867.35.

The IMF and the European Union froze the bailout payments to Romania last October after Boc’s previous administration collapsed and the ruling coalition of parties disintegrated in feuding. The lenders said they would visit Romania again in January to discuss the new government’s economic program and 2010 budget plan.

The IMF has said it would only consider unfreezing the payments after Romania installed a new government and passed a 2010 budget plan. The new government was approved in Parliament on Dec. 23 and Parliament is scheduled to vote on the budget plan by Jan. 15.

Romania’s inflation rate rose in November for the first time in 10 months, the National Statistics Institute said on Dec. 11. The rate rose to 4.7 percent from 4.3 percent in October, mainly because of an increase in taxes on tobacco.

The central bank said that increases in tobacco prices last year contributed 1.8 percentage points to the annual inflation rate. Tobacco accounts for 4.6 percent of the basket of products the central bank uses in its consumer price index.

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Home price gains earlier this year flattened out in October, according to a report issued Tuesday.

The S&P/Case Shiller Home Price index, covering 20 of the largest metropolitan areas in the nation, was unchanged in October, after four consecutive months of gains. The index is down 7.3% from 12 months earlier.

"The turnaround in home prices seen in the spring and summer has faded," said David Blitzer, chairman of the Index Committee at Standard & Poor’s, in a statement. "Coming after a series of solid gains, these data are likely to spark worries that home prices are about to take a second dip," he said.

Just seven of the 20 cities recorded gains from a month earlier.

The modest gains earlier this year were in part propped up by government initiatives.

"We’ve seen recent stability because of low interest rates and the impact of the first-time homebuyers tax credit," said Pat Newport, a real estate analyst with IHS Global Insight.

Prices are down from their all-time highs set in 2006 by 29% for the 20-city index.

Among the 20 cities, the worst tumble was taken by Tampa during the month. Prices fell 1.6% from September. Chicago and Atlanta recorded 1% losses.

The biggest gainers were Phoenix, up 1.3%, and San Francisco, up 1.2%.

Las Vegas sellers continued to bleed. Prices there fell just 0.1% but that marked the 38th straight monthly decline. The market in Sin City is off 55.4% from its peak. You can buy a home in Las Vegas for the same price it sold for in October of 2000.

"In most of the hardest-hit markets, price declines are moderating," said Mike Larson, an analyst with Weiss Research.

Los Angeles recorded a rise of 0.3% and San Diego prices gained 0.4%. Miami, however, declined by 0.4%.

According to Larson, falling supplies of homes on the market are helping to stabilize conditions. "Inventories are plunging on the new-home side and going down for existing homes," he said.

Not that he’s ready to break out the champagne, even with the New Year close at hand. "The market is recovering but it will be an anemic recovery," he said. 

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South Korean manufacturers’ confidence rose for the first time in three months after the government raised its economic-growth forecast for Asia’s fourth-biggest economy.

An index measuring expectations for January climbed to 90 from 85 a month earlier, according to a survey of 1,488 manufacturers released by the Bank of Korea today in Seoul. A measure of non-manufacturing companies’ expectations was unchanged at 84 for the third straight month.

The economy will expand about 5 percent in 2010 after growing 0.2 percent this year, the Ministry of Strategy and Finance said this month, raising its forecasts. The country posted a current-account surplus for a 10th month in November, the central bank said yesterday.

South Korea’s economy expanded 3.2 percent in the third quarter, the fastest pace in seven years, boosted by exports and local spending. Overseas shipments will increase 9.3 percent in 2010, after declining 0.1 percent this year, the Bank of Korea said on Dec. 11.

Today’s report showed an index measuring the outlook for exports gained to 104 from 98 a month ago, and a gauge for the domestic sales outlook in January rose to 100 from 98.

The Bank of Korea surveyed the manufacturers and 802 non- manufacturers between Dec. 14 and Dec. 21.

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