Since the stock market rally reached a pinnacle nearly two weeks ago, the Dow Jones Industrial Average has lost about 3.3% while the Standard & Poor’s 500 Index has fallen about 3.7%. And if this week’s earnings report come in below expectations, the rally that helped stock prices surge more than 50% could come to an abrupt end.

Fortunately, many of the companies set to report earnings this week are traditionally strong performers and for the most part, companies that have weathered the financial crisis. But not all of them have met Wall Street’s expectations.

The quarterly results for five companies in particular – Yum! Brands Inc. (NYSE: YUM), Alcoa Inc. (NYSE: AA), Costco Wholesale Corp. (Nasdaq: COST), Monsanto Corp. (NYSE: MON) and PepsiCo Inc. (NYSE: PEP) – will of particular interest to investors.

Yum! Brands Inc.

Scheduled to report today (Tuesday), the Louisville, Ky.-based Yum! will be one of the first companies to report its quarterly take.

As owner of the Taco Bell, Kentucky Fried Chicken (KFC) and Pizza Hut brands, Yum! is the world’s largest restaurant company. Even more impressive, the company has beaten the market’s consensus forecast in the last four quarterly reporting periods.

Analysts’ estimates for the quarter ending September 2009 range from a low of 52 cents a share to a high of 63 cents a share, with a consensus of $0.59 a share. Yum will lean heavily on its international business if it’s going to continue its trend of topping analysts’ estimates.

Yum! is a well balanced company with about 41% of its 2008 operating profit coming from the United States and the rest from overseas – particularly China.

By 2013, China will account for 40% of Yum’s operating profit – up from 28% in 2008 – while the United States and the rest of the world will each account for a 30% share, according to company projections.

KFC, in particular, has long seen its most robust growth coming from China, with less than 10% of its franchises on the mainland accounting for more than a quarter of the company’s earnings.

Yum! added 328 new restaurants in the second quarter, including 118 in Mainland China.

“Yum!’s global growth potential, consistent performance and track record of generating strong free cash flow give us the confidence and ability to return significant cash to our shareholders even in these challenging economic times,” said Yum! Chief Executive Officer David Novak.

An analyst with Credit Suisse Group AG (NYSE ADR: CS) earlier this week told Barron’s that Yum! shares deserve a better premium because of its large international footprint and ongoing reallocation of capital.

Yum! shares should trade at a premium to their peer group and could climb nearly 25%, a the analyst said.

Shares of Yum! surged 5.13% yesterday to close at $34.85.

Alcoa Inc.

Though its release comes a day after Yum’s, Alcoa’s quarterly report marks the unofficial start of earnings season.

Hit hard by the collapse of commodities prices and sluggish industrial demand, Alcoa has missed earnings expectations in three of the past four quarters. And the company’s latest earnings report will likely show that its struggles continued, albeit at a slower pace.

Alcoa is expected to report a net loss of 12 cents per share for the three months that ended in September. That’s down substantially from a profit of 37 cents a share in the same period last year, but would be a marked improvement on the 32 cents a share loss the company posted in the second quarter.

Indeed, Alcoa’s earnings will provide an important look at just how far global demand for industrial metals has come. Hopes are high, as Alcoa stock has surged more than 143% since mid-March.

Deutsche Bank AG (NYSE: DB) analyst Jorge Beristain has increased his rating of Pittsburgh-based Alcoa to “Buy” from “Hold” and increased his price target to $17 from $12.

The upgrade partially reflects Deutsche Bank’s higher price projections for base metals. The bank sees base metal prices climbing an average of 31% next year, on account of strong third-quarter “price surges” and increased demand from China, Beristain said in a note to clients.

“China’s seemingly insatiable appetite for industrial raw materials has led to record high imports in many metals and a consequent tightening in market balances,” he said.

Alcoa’s stock rose 4.68% in trading yesterday, to close at $13.42 a share.

Costco Wholesale Corp.

Costco is the largest membership warehouse club chain in the world by sales volume. That makes it an ideal choice for cost-conscious consumers. Costco has enjoyed seven straight years of earnings growth, but the company’s past two quarters have disappointed investors.

The third time might be the charm for the nation’s largest warehouse chain. William Blair & Co. LLC analyst Mark Miller last month upgraded the stock to “Outperform” from “Market Perform” and after the company stepped up sales in August.

Sales at established locations declined 2%, beating Wall Street expectations for a larger 5.7% decline.

“With the step-up in sales during August and positive takeaways from our meeting last week with [Costco Chief Financial Officer] Richard Galanti and [Vice President of Financial Planning and Investor Relations] Bob Nelson, we are more confident that sales and earnings could meaningfully surpass Street expectations over the next year,” said Miller.

Like Yum!, Costco could receive a significant bump from its overseas operations, as recent store openings in Asia have been strong and the dollar has weakened.

For the third quarter, the average analysts’ estimate is for a profit of 76 cents a share – a 17% drop from the 92 cents a share it earned in the same quarter last year.

Costco CEO Jim Sinegal said earlier this month in an interview with Motley Fool that he expects his company to turn around regardless of whether or not the economy experiences a quick recovery.

“We can always blame bad sales on weather and on economic conditions and everything else,” he said. “But when we have the right merchandise out on the floor, it sells. … [We] don’t like the fact that the [average customer] basket is down, but we certainly like the fact that the customers are coming back more frequently and, as things turn, they will start to buy again. Now it is on us to get the hot merchandise.”

Costco stock edged up 0.73% yesterday to close at $56.88 a share.

Monsanto Co.

As the world’s largest producer of genetically modified seeds, Monsanto is a closely watched biotech bellwether. Like Alcoa, Monsanto was hit in recent quarters by a drop in commodities prices, as well as a drop in demand for its products.

However, the company announced an acquisition, a partnership, and a divestiture in its fiscal fourth quarter. It is expected to squeeze out a one cent per share profit, compared to three cents per share loss in the same quarter last year.

Monsanto’s acquisition of WestBred LLC – a Montana-based company that specializes in wheat germplasm – will bring wheat into its seeds and traits portfolio, and its joint venture with Dole Fresh Vegetables, Inc. will put more genetically modified vegetables on Monsanto’s plate. Meanwhile, Monsanto’s divestiture of its global sunflower assets to Syngenta brought in $160 million.

The company also shed 9,000 employees in a bid to cut costs, and despite being heavily targeted by anti-trust groups and chief rival E.I. du Pont de Nemours & Co. (NYSE: DD), Monsanto insists it’s on track to more than double its 2007 profit by the year 2012.

“We have committed to using our technology to double yields in our three core crops – corn, soybeans and cotton – by 2030, while reducing our use of key resources by one-third per unit produced,” said Monsanto Chairman and CEO Hugh Grant. “Innovation has us well on our way to achieving this, with our most robust pipeline ever. We’re on the verge of an unprecedented technology explosion that will deliver the types of products growers want most – those that offer greater yield and value.”

By 2012, Monsanto expects its gross profit from its core seeds and traits business to be between $7.3 billion and $7.5 billion – about 2.5 times its 2007 level. Grant said this increase will be facilitated by the development of seven new “high impact technologies” that by 2020 will boost revenue by $3 billion.

Monsanto has reported better-than-expected earnings in the past three quarters, and at Monday’s close of $74.85 a share is an undervalued stock according to Morningstar.

“Monsanto is a fierce competitor that continues to dominate a market that it essentially created more than a decade ago,” said Morningstar senior analyst Ben Johnson. “Through its ongoing commitment to research and development and assertive capital allocation, the company has positioned itself to grow value for its shareholders over the long haul.”

PepsicCo Inc.

Of all the companies reporting this week, PepsiCo has generated the most buzz. Bullish speculators yesterday piled into PepsiCo call options after Deutsche Bank raised its earnings for the salty-snack-and-soda giant.

Call volume surged by nearly 700%, according to optionMonster.

Deutsche Bank raised its price target for PepsiCo shares, which closed yesterday at $60.85, to $70 from $66. The bank maintained its buy rating on the stock, and said shares have been negatively affected by an “unwarranted deal overhang” related to the company’s acquisition of Pepsi Bottling Group Inc (NYSE: PBG).

PepsiCo in August said it would merge with Pepsi Bottling, as well as invest in Russia, during the three months that ended in September, and is expected to post a profit of $1.02 per share – four cents per share less than a year ago. Revenue for the quarter is expected to come to $11.3 billion, about the same as last year.

PepsiCo has only missed expectations in one of the past four quarters, and by just two cents at that.

Source: The Five Stocks to Watch This Week

Now, JPMorgan Chase & Co.  (NYSE: JPM) has issued a report suggesting that investment-banking returns on capital will be sharply down over the next few years. Perhaps this will be only a moderate downturn.

However, there’s also a good chance that labor-cost pressures – combined with tightening margins – will take the likes of JPMorgan and Goldman Sachs Group Inc. (NYSE: GS) down a path similar to that of General Motors Corp. (NYSE: GRM) and Chrysler Group LLP, both of which earlier this year declared bankruptcy.

Challenging Headwinds

JPMorgan anticipates that the regulatory changes that are likely to take place over the next year or so will reduce investment banks’ return on equity (ROE) to around 11% – down from its previous forecast of 15%.

More capital will be needed for trading activity, which naturally reduces the return on capital from that activity. However, there will also be effects from new transparency requirements on derivatives. (Most – if not all – derivatives will have to be traded and cleared across central exchanges.) And tighter limits on commodities positions will prevent firms from cornering less-active markets.

This effect will be concentrated on investment banks themselves – firms such as Goldman Sachs and Morgan Stanley (NYSE: MS) – as well as on the investment banking activities of such firms as Credit Suisse Group AG (NYSE: CS), Deutsche Bank AG (NYSE: DB), Citigroup Inc. (NYSE: C), and JPMorgan Chase.

Old-fashioned commercial banking, on the other hand, will likely become somewhat more profitable. That’s because the sharp reduction in securitization activity has reduced the excessive competition for much of the lending business. It’s also improved the lending business profitability.

Investment banks will have to reduce their headcount by another 3% from present levels and cut their overall cost per employee by another 15%, to around $543,000 in 2011, according to the JPMorgan study.

What agony! (Actually, that joke is not quite fair – the cost per employee includes the building, the equipment and all the fancy information services, so the take-home is much less. Even so, these guys – at least those who keep their jobs – won’t starve.)

The New Reality

We are so used to investment banking growing and becoming increasingly more profitable – on virtually an uninterrupted basis – that we have never even considered what might happen if that trend were to reverse.

Even after last year’s crash, Goldman Sachs reported record second quarter profits in 2009. Spreads in all kinds of trading widened dramatically and Goldman found its market share dramatically increased after the demise of Lehman Brothers Holdings Inc. (OTC: LEHMQ).

But here’s the thing: The trillions of dollars poured into the markets by the U.S. Treasury Department and the U.S. Federal Reserve were the driving force behind those profits. Investment banks like Goldman weren’t just given a level playing field – they were given one that was essentially (and artificially) cleared of obstacles. Even the few “competitors” that remained were hobbled by their past mismanagement.

Investment banking is not particularly difficult or intellectually challenging. And the proliferation of new and complex products that turbocharged the profit growth of investment banks during the past few decades won’t continue. Any new financial product will be forced to run a gauntlet of regulatory bureaucrats before being allowed to emerge.

Had the credit-default swap (CDS) been invented today, can anyone doubt that it would have been fenced in by restrictions so onerous that the damaging derivative would have never made it to market? The painful memories of last year’s near-unraveling of the global financial markets are still fresh. So it’s unlikely that investment banks would be able to get the regulatory nod for a big-risk strategy that is likely to result in a taxpayer bailout.

The bottom line is clear: The reduction in U.S. investment banking profitability is likely to be permanent, with various rent-seeking scams blocked. In this post-crisis era, investment pools from China, the Middle East and other parts of Asia – backed by increasingly sophisticated financial players in those markets – will acquire the necessary capabilities to enter the market and further reduce the returns of domestic investment banks.

We have seen this before: An industry, previously very profitable, finds itself hemmed in by government restrictions and its most-profitable products get regulated out of existence. Foreign competition enters the market and grinds away at the domestic market share.

The natural reduction of competitors doesn’t happen, as one or more are bailed out by taxpayers and survive to continue competing for the business.  Legacy costs of remuneration promises made when things were better place an ever-increasing burden on the industry’s returns. Reducing the work force pay becomes very difficult, as the workers have great power over production and resist the necessary downsizing of their excessive pay.

Sound familiar? Last time, it was the U.S. auto industry, and the eventual result was the bankruptcy of GM and Chrysler. Reducing pay to a work force when market conditions become harsh is extremely difficult, if now downright impossible.

Of course, investment bankers have no United Automobile Workers (UAW) representing them. But shareholders will know from past experience that the investment-banking work force’s ability to suck up available profits is huge, whereas losses suddenly devolve back on shareholders.

Don’t forget, militant autoworkers could only beat up “scabs” when their livelihood was threatened. Militant traders could re-jig the computer systems so that the trading algorithms worked backwards, producing losses instead of profits. In an era of credit default swaps and millisecond trading, this could wipe out shareholders in half an hour of frantic activity before anyone realized what had gone wrong in an era of credit default swaps and millisecond trading.

It may take a couple of decades for the investment banking business to decline, as it did for the much larger U.S. auto industry. But by 2030, collapse could loom.

The comparison isn’t a stretch. In fact, it wasn’t just a ticker-symbol letter – “G” – that  the two companies shared: GS for Goldman Sachs, and GM when General Motors was still a public company. It turns out that their underlying business models also shared similar strategic flaws. And those flaws put the two on a similar path to ruin at the hands of forces that grew out of the crises in their particular industries – crises that they each helped create.

Source: Could Goldman Sachs Share GM’s Fate?

The financial services industry in the United States and Europe is still reeling from the financial crisis, shedding tens of thousands of jobs each month – even a year after the crisis hit its apex.

However, recent evidence suggests that the financial services industry in Asia – particularly China, which was largely isolated from the toxic assets that caused the crisis – is starting to rebound.

Indeed, many global financial firms are picking up hiring in Asia even as broad unemployment continues to rise. The reason: These financial firms want to be most active in the region of the world that has the best potential for growth, as well as the best opportunities for profit.

“The death of the industry has been greatly exaggerated,” Matthew Hoyle, founder of Matthew Hoyle Financial Markets, a Hong Kong-based headhunter for the banking and hedge fund industries, told the New York Times. “I am actually quite excited about the prospects for the rest of the year,” adding that “Things have picked up here — unlike in Europe and the United States, where that’s absolutely not the case,” he added.

Financial firms slashed 19,000 jobs in August – the 21st consecutive monthly drop for the industry, according to payroll processing firm Automatic Data Processing (ADP). The finance and insurance sector has shed 332,000 jobs since the recession began in December 2007. And the losses will likely keep piling on.

Labor Department data set to be released today (Friday) is expected to show the U.S. unemployment rate surged to 9.6% in August after dipping to 9.4% in July. From December 2007 to July 2009, the economy as a whole shed 6.7 million jobs.

“There’s a gradual improvement in labor markets underway in the sense that the monthly losses are diminishing,” said Joel Prakken, chairman of Macroeconomic Advisors LLC and an ADP spokesman. “The disappointing news it that we have several more months to go of job losses.”

There’s a similar story unfolding in Europe, as well. The unemployment rate across the 27 European Union countries rose to 9% in July from 8.9% in June, while the unemployment rate for the 16 countries that use the euro jumped to 9.5%, according to Eurostat.

As in the United States, many of the job losses have been sustained in the financial services sector. European banks and financial firms have cut 140,000 jobs since the third quarter of 2007, according to data compiled by Bloomberg.

About 84,000 European finance jobs are expected to hit the chopping block this year, according to a recent report by City of London Corp.That’s nearly ten times the number of finance jobs the region lost in 2008.

As the Europe’s largest employer of financiers, the United Kingdom will be most affected. It is expected to lose up to 35,000 finance jobs this year.

Employment at British, French and German financial services firms won’t return to its early-2008 highs until at least 2013 the report said. Even then, the United Kingdom will have 10,000 fewer finance jobs than it did in 2008.

The EU financial services industry employed about 1.4 million people and was worth about $315 billion (219 billion euros) at its peak in 2008, according to City of London. However, the entire industry will shrink 6.2% in 2009 and not return to growth until 2011.

“I’m fairly optimistic on the financial sector returning to profitability, but that won’t necessarily feed through to dramatic employment growth,” Alistair Milne, a senior finance lecturer at London’s Cass Business School, told Bloomberg.

Financial firms will be focused on “growth efficiency” over the next four years and “earning money out of the staff they’ve got at traditional businesses” such as fixed income, equity trading and derivatives trading, Milne said.

Asian Growth a Beacon for Financial Firms

While the financial services sectors in the United States and Europe continue to shrink, finance firms operating in Asia are already rebuilding.

Standard Chartered Bank said last month that it would recruit 850 bankers in the next 12 to 18 months. The majority of those hires will take place in China, but significant numbers will also to be added in Singapore and Malaysia.

“We have aspirations to double the industry growth rate and double our customer numbers in three years,” Foo Mee Har, Standard Chartered’s global head of premium banking, told the Telegraph.

Household wealth in Asia, outside Japan, was expected to grow by 12% annually until 2012, she added.

Meanwhile, HSBC Holdings PLC (NYSE ADR: HBC) said last week that it is recruiting more than 100 staff members in Hong Kong, and it plans to add 1,000 employees in mainland China this year.

Vincent Cheng Hoi-chuen, chairman of HSBC’s Asia-Pacific unit, even said that his company hopes Shanghai will grow into a financial center that rivals Hong Kong.

“I sincerely hope that Shanghai will become a financial center, as China is able to have two centers, given its size,” he said. “There should be enough capacity for companies to list in both or either market at the same time, despite more and more companies planning to go public in the capital market.”

And Australia and New Zealand Banking Group, which competes with Standard Chartered, expects to increase its staff in the retail banking business in China more than 10-fold to over 500 by 2012. The company is currently moving ahead with a plan to open more than 20 branches in the country by 2012, up from three currently.

In addition to these recently released plans:

• Bank of America Corp. (NYSE: BAC) added five senior staff to its Asia Pacific Commodities team and JP Morgan Chase & Co. (NYSE: JPM) added seven members to corresponding Asia commodities unit.
• Credit Suisse Group AG (NYSE: CS) added nine specialists to its Asia sales and trading business. (Credit Suisse’s Asia-Pacific operations are on track to contribute 25% of the firm’s total revenue in coming years.)

• And Citigroup Inc. (NYSE: C) said it plans to expand its commodity team in Asia at a “double-digit” pace in a bid to capitalize on rising demand for raw materials.

“Asia will be the biggest contributor to growth in commodity consumption,” Ananth Doraswamy, regional head of commodities, toldBloomberg in an interview from Singapore. “We will need more people in energy trading and metal sales, as well as agricultural products.”

A survey by Singapore-based recruiting firm Robert Walters showed that job advertisements in Hong Kong, Singapore, China and Japan jumped 6.4% in the April-June quarter from the three months prior, the New York Times reported.

That’s not surprising considering that unemployment in Hong Kong, Singapore, and Japan – at 5.4%, 3.3%, and 5.7% respectively – are still relatively low when compared to the United States and Europe. And while unemployment is still an issue in China, that country’s economy expanded by 7.9% in the second quarter, exceeding most analysts’ expectations, and lending credence to Beijing’s goal of 8% annual growth.

Indeed, the finance industry seems to have found greener pastures in Asia, where economic growth is still taking place.

“Asia is seen as a growth market,” Robert Walters’ Mark Ellwood toldThe Times. “Companies are not going out all guns blazing again, but there is once again an appetite to hire in certain areas.”

Finance Jobs Going Where the Growth Is – Asia ]]> http://www.contrarianprofits.com/articles/finance-jobs-going-where-the-growth-is-%e2%80%93-asia/20377/feed 0 http://www.contrarianprofits.com/articles/is-venezuela%e2%80%99s-stagflation-the-beginning-of-the-end-for-chavez/20321 http://www.contrarianprofits.com/articles/is-venezuela%e2%80%99s-stagflation-the-beginning-of-the-end-for-chavez/20321#comments Wed, 02 Sep 2009 20:02:26 +0000 Jason Simpkins http://www.contrarianprofits.com/?p=20321 It wasn’t long ago that Venezuelan President Hugo Chavez’s decision to nationalize state oil company Petroleos de Venezuela SA (PDVSA) resulted in a failed coup that very nearly cost him his post.

Now, Chavez’s aggressive economic policies are again being called into question, this time as the country slides into what could be a protracted period of stagflation, which is defined by the exasperating mixture of torpid economic growth and high inflation.

Before that, however, the period from 2004-2007 was marked by rapid economic growth – punctuated by a miraculous 19.42% burst in 2004. Since that time, unfortunately, Venezuelans have watched as their standard of living was slowly eroded by restrictive price controls, rapid inflation, unsustainable public spending, and widespread nationalizations that have…

Wall Street cheered the announcement as Boeing’s stock soared more than 6% in New York trading after the company said it still expects the 787 to be profitable.

The rally came despite news that costs for the first three test planes would be charged-off as having no commercial value, resulting in an estimated pretax charge of $2.5 billion, or $2.21 a share, in the third quarter. Boeing said the charge wouldn’t affect its cash flows.

“This new schedule provides us the time needed to complete the remaining work necessary to put the 787’s game-changing capability in the hands of our customers,” said Boeing Chief Executive Officer Jim McNerney.

The 787, already two years behind its original schedule, was scheduled for its first test flight in the second quarter of 2009, but the flight was delayed so Boeing could address newly discovered structural problems. The latest development marks the seventh delay in the production cycle for the highly anticipated plane.

“The real challenge for Boeing is to actually stick to this revised 787 timetable — something it has been unable to do in the past.” Rob Stallard, a New York-based analyst with Macquarie Capital Inc., wrote in a note to clients obtained by Bloomberg News.

All Nippon Airways Co. Ltd. (OTC: ALNPY), which is scheduled to take delivery of the first 787, was quick to register displeasure with the latest delay.
“We understand the need to make the best and safest aircraft possible and appreciate that delays due to engineering issues of the current nature must be solved in order to move forward and achieve this,” ANA said in an emailed statement obtained by Reuters. “However, as launch customer and future operator of the 787, the length of this further delay is a source of great dismay, not to say frustration.”

The repeated delays have cost Boeing millions of dollars in penalties and concessions to customers.

Major airlines have used the delays as bargaining chips to squeeze concessions from the plane maker on delivery dates, incremental payment schedules and even the final purchase price.

Some airlines have gone so far as to threaten to cancel orders for the 787, as well as larger 777s, because of delays caused by disruptions at Boeing.
“Boeing doesn’t realize how much they’re hurting their customers’ plans,” Akbar Al Baker, chief executive officer of Qatar Airways WLL told The Wall Street Journal at the Paris Air Show in June. It’s now uncertain when that airline might receive the first of 30 787s it had ordered to be delivered starting in 2011.

The fastest selling plane in history, the Dreamliner has racked up over 900 orders since it was announced in 2005, largely based on fuel efficiency.  With recent cancellations that number is now closer to 850.

In addition to technical problems, getting the plane to production has also been hampered by major labor disruptions.  A prolonged strike by machinists in 2008 was largely responsible for an 8% drop in aircraft sales.  Commercial aircraft generated $28.3 billion of Boeing’s $60.9 billion in sales last year, behind only defense contracts.

“Work stoppages over the past several years have cost Boeing $9 billion in revenue and $2 billion in lost profits,” Sen. Mike Hewitt, R-Wash. told the Spokesman Review.

The setbacks in bringing the plane to production have had a “significant impact” on company finances, Boeing Chief Financial Officer James Bell said in an Aug. 20 memo to employees obtained by Bloomberg.

Despite Thursday’s market rally, Boeing’s stock has lost more than half its market value since the 787’s first delay in October 2007.  At least seven Wall Street analysts have downgraded the stock since last December, including Credit Suisse (NYSE: CS) and Barclays Capital PLC (ADR NYSE: BCS).

Source: Boeing Will Test Dreamliner in 2009 but Delays Delivery, Again

• Declining manufacturing and construction sectors contributed tothe United Kingdom’s gross domestic product to fall by 2.4% in the first quarter, the most in more than 50 years, The New York Times reports. Citigroup Inc. (NYSE: C) economist Michael Saunders said the second quarter, which ended yesterday (Tuesday), would also probably show contraction but the recession should be nearing its end soon. Despite this, he said, “I don’t think the recovery will be strong in the U.K.”

• The hemorrhaging in the housing market is slowing as The Standard & Poor’s/Case-Shiller index of 20 major cities showed the smallest monthly decline in prices since June 2008. The index dropped by 18% in April from the year before, but for the third month in a row it was not a record decline. “It seems that some stabilization may be appearing in some of the regions,” S&P index committee Chairman David M. Blitzer told The Associated Press. A rising unemployment rate and foreclosures could halt any substantial turnaround as the number of homeowners at least two months behind or in foreclosure jumped in the first quarter from the previous quarter, the Treasury Department said yesterday (Tuesday).

• General Motors Corp. (OTC: GMGMQ) was in bankruptcy court seeking approval to sell its best assets to a new, smaller company supported by billions in government loans and unburdened by old debts. Judge Robert Gerber sorted through several motions pertaining to GM’s plan to emerge from bankruptcy as a leaner company, cutting off some arguments with “please do not duplicate any other objections,” according to an AFP report. Should the 850 objections by creditors be dismissed and GM emerges from bankruptcy, creditors can appeal.
• Fears of rising food costs were partially quelled as farmers planted an unexpectedly large crop of corn and soybeans this year, according to an Agriculture Department report. A record 77.5 million acres of soybeans were planted through June, while 87 million acres of corn were planted, up 1 million acres from last year and the second largest corn acreage in more than 60 years. The corn boost is giving new life to ethanol producers, who are slowly starting to ramp up production and look at reopening plants that were shut down last year when grain prices skyrocketed and oil prices fell, Advance Trading Inc. commodity research analyst Brian Basting told The Associated Press. “It appears to be a slow healing process” in the ethanol industry, Basting said. “We’re seeing the (profit) margins creep back into positive territory.”

• American International Group Inc. (NYSE: AIG) got a new board of government-approved directors at its annual meeting yesterday in New York, Reuters reports. The U.S. Treasury Department or the trustees overseeing the government’s stake in the company recommended the election of at least seven board members. Outgoing Chief Executive Officer Edward M. Liddy said he was confident the new board would name a new chairman and CEO. The U.S. government owns an almost 80% stake in AIG.

• Troubled Japanese chipmaker Elpida Memory Inc. has received a $1.7 billion bailout in public and private funds. The move is meant to salvage Japan’s only major maker of dynamic random access memory chips used in PCs, as well as 6,000 workers at Elpida, which suffered record losses last year when semiconductor demand went south. “It’s a fine balance,” Credit Suisse Group AG (NYSE ADR: CS) Chief Equity Strategist Shinichi Ichikawa toldThe New York Times. “Japan has decided it must save Elpida for the sake of Japanese industry,” but “going too far means keeping zombie companies alive.”

Source: Investment News Briefs Wednesday July 1, 2009

Nickel peaked above $5.50 before it too declined, but it managed to eke out a gain late, closing at $5.3206/lb., up just over a penny. Zinc traded mostly sideways, ending at $0.6744/lb., up less than a half-cent. Aluminum also wound up at $0.6744/lb., down less than a quarter-cent, while lead posted a modest gain to $0.6362/lb., up just under a penny.

Copper backed off its gains, falling from a 2-week high as declining equities and a strengthening dollar were the main drivers of the day, along with perhaps a bit of profit taking after several days of higher prices. The metal had moved up12% in the previous four sessions on speculation that manufacturing will rebound.

As one trader commented, “We’ve moved up for the last couple of days and I’d say it’s probably profit taking. But I don’t think the selling was based on anything too noteworthy.”

Volume was light, and with London closed on Monday, some traders see a market mood where holiday mode persists for a few more days.

In any event, the supply situation continues to be supportive. Copper inventories monitored by the LME dropped again yesterday, falling by 3,775 metric tons, to 394,925 tons.

But, “Prices have reached a top,” wrote Eliane Tanner, an analyst at Credit Suisse Group (NYSE:CS) in Zurich. She predicted a drop “in the weeks ahead.”

Citigroup analysts agreed, writing that, “Copper has run way ahead of its fundamentals.”

In company news, Xstrata (LON:XTA) reported that copper output in the first quarter of 2009 fell 1.3% percent from the same period a year earlier, to 217,092 metric tons, while production of coal, nickel, platinum and zinc in concentrate all rose.

Source: Traders Await Inventory Figures

• A day after posting better-than-expected quarterly earnings, Goldman Sachs Group Inc. (GS) sold $5 billion in stock to repay federal bailout money. All totaled, Goldman sold 40.65 million in shares at $123 a piece, 5.5% below Monday’s closing price, Reuters reported. Goldman received a total of $10 billion from the Troubled Asset Relief Program.
• Amsterdam-based Royal Phillips Electronics NV (PHG) said its cost-reduction program will save the company more than 500 million euros ($664 million) this year, Bloomberg reported. The announcement came with its quarterly earnings report, in which Europe’s largest consumer-electronics maker reported its second-consecutive loss.

• First quarter earnings for pharmaceutical and health care retail giant Johnson & Johnson (JNJ) fell, but beat estimates by cutting costs, Reuters reported. The company $3.51 billion, or $1.26 a share, in the first quarter compared with $3.6 billion, or $1.26 a share, in the first quarter last year. Johnson & Johnson reaffirmed its 2009 profit forecast of $4.45 to $4.55 a share.

• Singapore’s economy may shrink 6% to 9% this year, the government said in its third reduced forecast this year. To counter contraction, the government will adjust the trading range of the Singapore dollar. “The situation is really dire and the central bank’s policy will improve sentiment and help the economy,” Vishnu Varathan, an economist at Forecast Singapore Pte., told Bloomberg.

• Discover Financial Services (DFS), will cut 500 jobs in May, or 4% of its workforce, Reuters reported, citing company sources. Discover, the fourth-largest U.S. credit card network, last month posted a deeper-than-expected quarterly operating loss, cut its dividend and set aside more money to cover bad loans as defaults increase.

• In a sign bankers are gaining confidence that the worst of the financial crisis is over, the London inter-bank offered rate (LIBOR) for three-month dollar loans is dropping at the fastest pace since January, Bloomberg reported. Debt strategists at Credit Suisse Group AG (ADR: CS) Societe Generale SA (ADR: SCGLY) and Royal Bank of Canada (RY), three of the 16 banks that provide the data that sets Libor each day, say the declines will continue.

• Weak demand and a supply glut could cloud the coal industry’s prospects for the rest of the year, even as U.S. coal miners are likely to show strong quarterly profits this month, Reuters reported. But big U.S. coal producers should weather the economic downturn because they sold much of this year’s production at higher prices negotiated before the recession hit last September. Coal prices are expected to stay low throughout 2009 until production cuts by major miners begin to restrict the coal supply.

• Madoff Securities International Ltd., filed for bankruptcy protection in Florida under Chapter 15 of the federal bankruptcy code. The code is designed to block U.S. lawsuits against foreign companies reorganizing overseas that have U.S. operations, Bloomberg reported. Bernard Madoff pleaded guilty last month to 11 counts including fraud and money laundering for directing the largest Ponzi scheme ever.

Source: Global Investment News Briefs Wednesday April 15, 2009

Japanese exports fell by 45.7% in January from a year ago – the steepest decline since 1957 – as exports to three of Japan’s biggest overseas markets fell by record levels. Exports to the United States fell by 52.9%, exports to Europe declined by 47.4%, and exports to Asia dropped by 46.7%, Japan’s Ministry of Finance reported.

The sharp drop in exports has had a crushing impact on Japan’s trade deficit, which grew for a fourth straight month to a record $9.84 billion (¥952.6 billion). But the impact on the nation’s leading corporations has been even more devastating.&

Many Japanese blue chips, such as Toyota Motor Corp. (ADR: TM) and Sony Corp. (SNE), have been saddled with plummeting profits and forced to reduce capital expenditure and employment.

“The pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted,” Yasuhide Yajima, a senior economist at NLI Research Institute, told The New York Times.

While automakers General Motors Corp. (GM) and Chrysler LLC have been emasculated by rising unemployment and slumping confidence in the United States, Japanese carmakers are faring little better. Japan’s auto exports, which account for 20% of all the country’s exports, plunged 66% from last year.

Toyota, the world’s biggest automaker, said earlier this month that it would likely post a $4.9 billion (450 billion yen) operating loss for the year ending March. The company has never before posted an annual loss.

Toyota said earlier this month that it would cut pay for factory executives and eliminate bonuses for all salaried production unit staff. The company has also created an optional program for assembly workers who wish to leave voluntarily and offer voluntary buyouts to plant workers in North America.

Toyota has slashed global production by 43% last month, the most since 1987.

Meanwhile Sony posted a loss of $19.9 million (17.96 billion yen) for its fiscal third quarter ended Dec. 31, with net profit falling 95%. The company has forecast an annual operating loss of $2.9 billion.

Japan’s gross domestic product (GDP) shrank at an annual 12.7% pace in the fourth quarter of 2008, and the unemployment rate jumped half a point to 4.4% in December.

“My friends tell me that factories in the normally highly industrialized Osaka area have shifted to 15-day-a-month production schedules, and many salary men (Japan’s iconic office superheroes) are being encouraged to seek ‘arubaito‘ – or part-time work – to make ends meet,” said Money Morning Investment Director Keith Fitz-Gerald. “And those are the people who are still fortunate to have jobs.”

Shorting the Yen

In addition a dearth of global demand for its products, Japan has also been plagued by a rising yen, which has made its products more expensive to foreign countries. However, the yen has quickly reversed course with deterioration of Japan’s economy.

The yen has tumbled 6.4% against the dollar this year, according to Bloomberg News. Last year, bolstered by its safe haven status, the currency rose the most of 171 currencies tracked by Bloomberg, climbing 23% versus the dollar and 29% against the euro. The yen has traditionally been viewed as one of the world’s “safe haven” currencies.

“With Japan’s trade data deteriorating sharply now, the Japanese yen is finally following suit,” Mansoor Mohi-Uddin, chief currency strategist at UBS AG (UBS) wrote in a note to clients yesterday (Wednesday). “Japan’s currency potentially has a lot further to slide if investors stop perceiving the yen as a safe haven and trade the currency instead on Japan’s worsening export numbers.”

Bob Parker, who helps oversee $600 billion as chairman of Credit Suisse Asset Management (ADR: CS) in London, told Bloomberg that there’s a “reasonable probability of a breakout” that will drive the yen down 3% to 100 per dollar.

“That’s why shorting the yen may wind up being one of the most fundamentally successful investment choices we can make in today’s mad markets,” said Money Morning’s Fitz-Gerald.

Japan’s Exports are Halved by Crisis, Boosting the Odds for a Drop in the Yen

However, some critics say they were surprised that the proposal is more ambitious – and more expensive – than initially expected, and includes controversial changes to bankruptcy laws that could cause the mortgage market to freeze up.

In fact, an Obama administration official told Reuters the total plan commits up to $275 billion for housing, including $50 billion from funds already committed in the country’s financial sector bailout.

Headlining the plan is a $75 billion Homeowner Stability Initiative, aimed at helping 4 million to 5 million struggling homeowners refinance their mortgages which are owned or guaranteed by mortgage giants Fannie Mae (FNM) or Freddie Mac (FRE).

A second piece of the program would help 3 million to 4 million additional homeowners cut monthly mortgage payments to sustainable levels by providing incentives to any participating lender to lower monthly interest rates.

Obama billed his two-pronged effort as critical to stanching the relentless run of foreclosures, which is key to turning around the recession-bound economy.
“In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen,” President Obama said while announcing his plan in Arizona, a state hard hit by the housing crunch.

But critics feel the proposals will have a minimal impact on homeowners who are behind on their mortgage. And most say Obama’s plan won’t make banks more willing to lend to consumers with less-than-perfect credit scores or meager downpayments.

“It’s like a new captain of the Titanic after it has hit the iceberg,” Guy Cecala, publisher of Inside Mortgage Finance, told MSNBC. “What can he do? Rearrange seating on the lifeboats?”

Housing Crisis Key to Recovery

Obama’s plan was created comes in response to a housing crisis that has acted like an anchor on U.S. growth, spawning a recession that started last December and shows no signs of letting up.

The housing crisis has played a central role in the financial and credit turmoil now spread across the globe, with many U.S. homeowners hamstrung by mortgages they cannot pay.

That has led to record foreclosures in the past year, swelling the glut of properties on the U.S. market, forcing down home values and crimping the wallets of homeowners unable to refinance or sell their homes. For instance:

• The housing market lost an estimated $3.3 trillion in value last year and almost one in six owners owed more than their homes were worth, according to online data provider Zillow.com.
• At the end of last year, slightly more than 9% of all home loans in the United States were in arrears, or already in foreclosure, according to the Mortgage Bankers Association, Reuters reported.
• A total of 8.1 million U.S. homes, or 16% of all households with mortgages, could fall into foreclosure by 2012, according to a report by Credit Suisse Group AG (ADR:CS).

The President says his program will finally stop the bleeding and help turn around an economy staggered by a withering recession.

“It will give millions of families resigned to financial ruin a chance to rebuild,” Obama said. “By bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

The plan exists in several key parts.

Boost Funding for Fannie & Freddie

The first part of the President’s plan calls for the Treasury Department to double its financial support for Fannie and Freddie to allow them to refinance homeowners with mortgages valued at more than 80% of the homes’ values.

The Treasury plans to provide as much as $200 billion in capital to ensure that Fannie and Freddie, the government-sponsored enterprises (GSEs) that guarantee home loans for millions, can stabilize markets and hold loan rates down.

In order to assure adequate funding, the Treasury said it was increasing its preferred stock purchase agreements with the two government-controlled companies from $100 billion to $200 billion, Bloomberg News reported.

It also said it was taking the limit on the size of the mortgage portfolios the two companies can hold and boosting the cap on each to $900 billion, an increase of $50 billion. It’s also increasing their debt ceilings.

This part of Obama’s plan is designed to give relief to homeowners struggling with deflated property values and/or interest-rate “re-sets,” by allowing the big mortgage companies financing leeway.

“The plan I’m announcing focuses on rescuing millions of families in traditional mortgages who are under water or close to it … and to keep mortgage rates low so that families can secure loans with affordable monthly payments,” Obama said.

$75 Billion Incentive for Lenders

A key second part of the plan involves providing $75 billion in incentives to lenders, making them responsible for lowering interest rates so a borrower’s monthly mortgage payment is no more than 38% of his or her pre-tax income.  After that the government program would match the amount reduced by the lender to bring a homeowner’s payments down to 31% of their pre-tax income, MarketWatch reported.

If a lender is unable to get a homeowner’s payment down to 31%, it can also lower the principal owed on the mortgage and take advantage of government assistance.

As part of the initiative, servicers will receive $1,000 for each loan modification, as well as additional government funding for each month the borrower stays current on the loan. Homeowners can also receive $1,000 annually for five years as part of the program, as long as they stay current on their loan payments.

Funding of $50 billion for this part of the program will come from the Troubled Asset Relief Program (TARP) and $25 billion will come from Fannie Mae and Freddie Mac, said a Treasury official.

Overall, the Obama administration’s summary of the plan said the plan could offer a buffer of as much as $6,000 against declining value on the average home.

Fight in Congress Looms Over Bankruptcy Law Changes

One controversial part of the plan is a proposed law that allows judges to rewrite the terms of a mortgage for homeowners who land in bankruptcy court – changes in law that can be made only by Congress.

Without such a law, people are being forced into foreclosure, even though they would be “potentially … better off, and the bank would be better off, and the community would be better off, if they’re at least making some payments, but they’re not able to make all the payments necessary,” President Obama said.

But some in the mortgage industry – and many on Wall Street – say that such a law, known as “cram down” in bankruptcy lingo, would cause the mortgage market to seize up, because investors would stop buying mortgage-backed securities out of fear a judge could unilaterally change the terms of the deal the securities were created around, MSNBC reported.

“It could significantly destabilize the marketplace,” Steve O’Connor, the Mortgage Bankers’ senior vice president of government affairs, told reporters.

Builders Confirm Need for Action

Meanwhile, as if to underscore the timing of Obama’s plan for an ailing housing market, U.S. builders broke ground in January on the fewest number of houses on record, as housing starts plunged 17% last month to an annual rate of 466,000, Bloomberg reported.

If nothing else, the new housing program signals the Obama administration plans to take a more aggressive stance on foreclosure relief than the Bush administration, which supported voluntary efforts by the mortgage industry to ease the housing crisis.

“The problem with the build-up in inventory is coming from the increasing number of foreclosures,” Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts, said in a Bloomberg interview. “It’s about time the government intervened so directly in the problem.”

Source: Bankruptcy Law Changes Part of Obama’s $275 Billion Housing Plan