By Robert J. SamuelsonWednesday, October 22, 2008; Page A19
To: Voters Under 35
Subject: Your Future
Recommendation: Get Angry
You're being played for chumps. Barack Obama and John McCain want your votes, but they're ignoring your interests. You face a heavily mortgaged future. You'll pay Social Security and Medicare for aging baby boomers. The needed federal tax increase might total 50 percent over the next 25 years. Pension and health costs for state and local workers have doubtlessly been underestimated. There's the expense of decaying infrastructure -- roads, bridges, water pipes. All this will squeeze other crucial government services: education, defense, police.
You're not hearing much of this in the campaign. One reason, frankly, is that you don't seem to care. Obama's your favorite candidate (by 64 percent to 33 percent among 18- to 29-year-olds, according to the latest Post-ABC News poll). But he's outsourced his position on these issues to AARP, the 40 million-member group for Americans 50 and over.
Don't believe me? Go to the Web site, www.aarp.org. On Sept. 6, both Obama and McCain addressed an AARP convention celebrating the group's 50th birthday.
Click on the Obama video. You'll see some world-class pandering. There are three basic ways of reducing the costs of Social Security and Medicare: increase eligibility ages; trim benefits; and require recipients to pay more for their Medicare benefits (higher premiums, co-payments or deductibles). In his talk, Obama effectively rejected all three.
Or look at the September-October issue of AARP the Magazine, which has a "voters' guide." In it, Obama and McCain receive the opportunity to check boxes agreeing or disagreeing with AARP's positions on 11 issues. Obama checked agreement on 10. He's not an agent of change but a staunch defender of the status quo. Indeed, he would expand subsidies to the elderly by exempting from federal income taxes anyone 65 and over with $50,000 income or less.
McCain pandered, too. In his video, he praised AARP effusively. He didn't mention benefit cuts. But he hedged. He said today's system is "broken" and shouldn't be inflicted on future generations. In the voters' guide, he didn't check "agree" or "disagree" but merely described his positions. The hint is that, as president, he might try to curb retirement spending. There's a precedent; McCain voted against the Medicare drug benefit.
I am 62. Most of my friends are in their 50s, 60s and 70s. I wish everyone a pleasurable retirement. But we need to overhaul our government retirement programs for the common good and not just the good of the elderly. We have already waited so long that there's no way to do this without being unfair to someone -- overburdening the young or withdrawing promised benefits from older Americans. The present financial crisis, by reducing retirement savings, has made a hard job even harder. Still, these federal programs began as safety nets for the needy; now they've become subsidies for living long, regardless of need.
What the debate has lacked so far is a moral dimension. Obama says it's okay to raise taxes on those with incomes exceeding $250,000. Well, why should Social Security and Medicare beneficiaries with incomes of $250,000 get subsidies from the young making less? How about $200,000 or $100,000? What are acceptable eligibility ages? People live longer; they can work longer. Baby boomers cannot be excluded, because they are the problem.
There can be no "rewriting of the social contract" without benefit cuts, because paying today's benefits inevitably involves much higher taxes, massive deficits or draconian cuts in other government programs. Even with sensible benefit cuts, taxes will have to rise and there will be pressure on other programs.
What should you -- the young -- do? First, get angry -- at the media and think tanks for discussing this problem in misleading euphemisms (for instance, the problem is not an "entitlements crisis"; it's excessive benefits for the old); at the candidates for exploiting your innocence; and at yourself for your gullibility.
Next, start picketing AARP. It's the citadel of seniors' political power and the country's most powerful "special interest." It wields a virtual veto over roughly two-fifths of the federal budget. Your activist groups ought to be there every day with placards reading "Give Us Generational Justice" or "Get Off Our Backs." Ask direct questions of federal candidates about what benefits they'd cut, which they'd keep and why.
You need to appeal to the shame and guilt of older Americans by reminding them that their present self-absorption is not a victimless exercise. Only if older Americans act on their rhetorical pledges of worrying about their children will the political climate change. If you -- the young -- don't stand up for yourselves, believe me, your elders and your politicians won't.
Tuesday, October 28, 2008
Case-Shiller Housing Index
New York, October 28, 2008 – Data through August 2008, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, shows continued broad based declines in the prices of existing single family homes across the United States, a trend that prevailed throughout the first half of 2008 and has continued into the second half.
Once again, the indices have set new records, with annual declines of 17.7% and 16.6%, respectively. However, the acceleration in decline was only moderate in August. The July data reported annual declines of 17.5% and 16.3%, respectively.
"The downturn in residential real estate prices continued, with very few bright spots in the data," says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. "The 10-City Composite and the 20-City Composite reported record 12-month declines. Furthermore, for the fifth (5th) straight month, every region reported negative annual returns. This started when Charlotte, NC, was the last region to turn negative back in April 2008. Both the 10-City and 20-City Composites have been in year-over-year decline for 20 consecutive months. Of the 20 regions, 13 of them had their annual returns worsen from last month’s report. As seen throughout 2008, the Sun Belt markets are being hit the most. Phoenix and Las Vegas are both reporting annual declines in excess of 30%, and Miami, San Francisco, Los Angeles and San Diego are all in excess of 25%."
Nine of the 20 regions have record annual declines. Phoenix and Las Vegas are now returning -30.7% and -30.6% versus August 2007, respectively. Each of the California markets- Los Angeles, San Francisco, and San Diego- are down more than 25% from their values 12 months ago. Miami and Tampa, the two Florida markets, are down 28.1% and 18.1%, respectively.
For the August/July period only 2 regions, Cleveland and Boston, had positive returns. Cleveland returned +1.1% and Boston returned +0.1%. Boston has had positive monthly returns for each of the past five months. Dallas and Denver’s streaks of 4+ straight positive returning months ended in August. San Francisco was the biggest decliner for the month returning -3.5%. This worsened from its July/June return of -1.8%. From August 2007 to August 2008, Dallas and Charlotte have the best relative performance. Dallas is down 2.7% over the year and Charlotte is down 2.8%.
Once again, the indices have set new records, with annual declines of 17.7% and 16.6%, respectively. However, the acceleration in decline was only moderate in August. The July data reported annual declines of 17.5% and 16.3%, respectively.
"The downturn in residential real estate prices continued, with very few bright spots in the data," says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. "The 10-City Composite and the 20-City Composite reported record 12-month declines. Furthermore, for the fifth (5th) straight month, every region reported negative annual returns. This started when Charlotte, NC, was the last region to turn negative back in April 2008. Both the 10-City and 20-City Composites have been in year-over-year decline for 20 consecutive months. Of the 20 regions, 13 of them had their annual returns worsen from last month’s report. As seen throughout 2008, the Sun Belt markets are being hit the most. Phoenix and Las Vegas are both reporting annual declines in excess of 30%, and Miami, San Francisco, Los Angeles and San Diego are all in excess of 25%."
Nine of the 20 regions have record annual declines. Phoenix and Las Vegas are now returning -30.7% and -30.6% versus August 2007, respectively. Each of the California markets- Los Angeles, San Francisco, and San Diego- are down more than 25% from their values 12 months ago. Miami and Tampa, the two Florida markets, are down 28.1% and 18.1%, respectively.
For the August/July period only 2 regions, Cleveland and Boston, had positive returns. Cleveland returned +1.1% and Boston returned +0.1%. Boston has had positive monthly returns for each of the past five months. Dallas and Denver’s streaks of 4+ straight positive returning months ended in August. San Francisco was the biggest decliner for the month returning -3.5%. This worsened from its July/June return of -1.8%. From August 2007 to August 2008, Dallas and Charlotte have the best relative performance. Dallas is down 2.7% over the year and Charlotte is down 2.8%.
Boeing Settles Strike
SEATTLE, Oct. 27, 2008 -- Boeing [NYSE: BA] and the International Association of Machinists and Aerospace Workers today reached tentative agreement on a new four-year contract covering 27,000 employees in Washington, Oregon and Kansas. Union leadership is recommending that employees vote to ratify the contract.
The company retained the flexibility necessary to manage its business, while making changes to the contract language to address the union's issues on job security, pay and benefits. The offer provides general wage increases every year and increases pension benefits. In addition, Boeing is proposing no changes to the cost share employees currently pay for a selection of outstanding health care plans.
"This is an outstanding offer that rewards employees for their contributions to our success while preserving our ability to compete," said Scott Carson, president and CEO of Boeing Commercial Airplanes. "I thank both negotiating teams and the federal mediator for their hard work and commitment in reaching this agreement. We recognize the hardship a strike creates for everyone -- our customers, suppliers, employees, community and our company -- and we look forward to having our entire team back."
By mutual agreement, details of the agreement will be released first by the union. If employees vote to approve the offer, it will end the strike by approximately 27,000 employees in Washington, Oregon and Kansas.
The company retained the flexibility necessary to manage its business, while making changes to the contract language to address the union's issues on job security, pay and benefits. The offer provides general wage increases every year and increases pension benefits. In addition, Boeing is proposing no changes to the cost share employees currently pay for a selection of outstanding health care plans.
"This is an outstanding offer that rewards employees for their contributions to our success while preserving our ability to compete," said Scott Carson, president and CEO of Boeing Commercial Airplanes. "I thank both negotiating teams and the federal mediator for their hard work and commitment in reaching this agreement. We recognize the hardship a strike creates for everyone -- our customers, suppliers, employees, community and our company -- and we look forward to having our entire team back."
By mutual agreement, details of the agreement will be released first by the union. If employees vote to approve the offer, it will end the strike by approximately 27,000 employees in Washington, Oregon and Kansas.
Monday, October 27, 2008
Yum Brands Looking Good
Restaurants aren't appealing buys in these times of economic stress, but Yum! Brands (YUM) looks appetizing, nonetheless. The world's largest stable of restaurants owns and operates such fast-food chains as KFC, Pizza Hut, and Taco Bell in over 100 countries. Yum is a standout because not only is it seeing higher sales and earnings but it's also reinvigorating U.S. sales with healthier food, such as fish, veggies, and grilled chicken.
The key drivers of Yum's growth and profitability, though, are China and other foreign markets, which account for 50% of sales, says Rick Carucci, Yum's CFO. "Yum is a great way to gain exposure to China's booming economy and the other fast-growing international markets, while investing in the only stable segment of the restaurant industry," says Ann Northrop of Zacks Investment Research, who rates the stock a buy. China (20% of sales), where Yum has 3,000 KFC eateries, "offers immense growth potential," she adds.
Joseph Buckley of Bank of America (BAC) says Yum, a client, is well positioned to generate high returns on capital and give back to investors substantial amounts of cash via share repurchases and dividends. He rates the stock, now at 26.67, a buy, with a 12-month target of 43. Buckley figures Yum will earn $1.89 a share in 2008 on sales of $11.3 billion and $2.08 in 2009 on sales of $11.9 billion. Third-quarter sales beat expectations and were "reassuring," he notes.
The key drivers of Yum's growth and profitability, though, are China and other foreign markets, which account for 50% of sales, says Rick Carucci, Yum's CFO. "Yum is a great way to gain exposure to China's booming economy and the other fast-growing international markets, while investing in the only stable segment of the restaurant industry," says Ann Northrop of Zacks Investment Research, who rates the stock a buy. China (20% of sales), where Yum has 3,000 KFC eateries, "offers immense growth potential," she adds.
Joseph Buckley of Bank of America (BAC) says Yum, a client, is well positioned to generate high returns on capital and give back to investors substantial amounts of cash via share repurchases and dividends. He rates the stock, now at 26.67, a buy, with a 12-month target of 43. Buckley figures Yum will earn $1.89 a share in 2008 on sales of $11.3 billion and $2.08 in 2009 on sales of $11.9 billion. Third-quarter sales beat expectations and were "reassuring," he notes.
-Businessweek Gene Marcial
Merck 3rd Qtr 2008 Earnings Misses
Merck Reports Third-Quarter 2008 Financial Results
• Company Announces Third-Quarter 2008 Non-GAAP EPS of $0.80, Excluding 29 Cents
of Restructuring Charges; Third-Quarter GAAP EPS of $0.51
• 2008 Global Restructuring Efforts Expected to Reduce Workforce by 12 Percent;
Cumulative Savings of $3.8 to $4.2 Billion Expected from 2008 to 2013 and Pretax Costs
of $1.6 Billion to $2.0 Billion Through 2011
• JANUVIA and JANUMET, Treatments for Type 2 Diabetes, and ISENTRESS, Merck's
HIV Medicine, Deliver Strong Growth as Worldwide Launches Continue
• Merck Anticipates Full-Year 2008 EPS Range of $3.28 to $3.32, Excluding Certain
Items, and GAAP 2008 EPS Range of $3.45 to $3.55
• Merck Anticipates 2005 to 2010 Compound Annual Non-GAAP EPS Growth in Mid-to-
High Single-Digits, Excluding Certain Items; GAAP EPS Compound Annual Growth Rate
Expected to Increase by Double-Digits Over Same Period
• Company Announces Third-Quarter 2008 Non-GAAP EPS of $0.80, Excluding 29 Cents
of Restructuring Charges; Third-Quarter GAAP EPS of $0.51
• 2008 Global Restructuring Efforts Expected to Reduce Workforce by 12 Percent;
Cumulative Savings of $3.8 to $4.2 Billion Expected from 2008 to 2013 and Pretax Costs
of $1.6 Billion to $2.0 Billion Through 2011
• JANUVIA and JANUMET, Treatments for Type 2 Diabetes, and ISENTRESS, Merck's
HIV Medicine, Deliver Strong Growth as Worldwide Launches Continue
• Merck Anticipates Full-Year 2008 EPS Range of $3.28 to $3.32, Excluding Certain
Items, and GAAP 2008 EPS Range of $3.45 to $3.55
• Merck Anticipates 2005 to 2010 Compound Annual Non-GAAP EPS Growth in Mid-to-
High Single-Digits, Excluding Certain Items; GAAP EPS Compound Annual Growth Rate
Expected to Increase by Double-Digits Over Same Period
WHITEHOUSE STATION, N.J., Oct. 22, 2008 – Merck & Co., Inc. today announced financial
results for the third quarter of 2008, provided financial guidance for 2008 and 2010, and outlined additional steps in its continuing efforts to position the Company for success in a rapidly
evolving industry.
Merck reported non-GAAP (generally accepted accounting principles) earnings per
share (EPS) of $0.80 for the third quarter of 2008, excluding $0.29 of restructuring charges.
GAAP EPS for the third quarter were $0.51. Third quarter worldwide sales were $5.9 billion, a
decrease of 2 percent from the third quarter of 2007. Foreign exchange for the third quarter
favorably affected global sales performance by 4 percent. Net income for the third quarter of
2008 was $1,092.7 million compared with $1,525.5 million in the third quarter of 2007, which
include aftertax restructuring charges of $612 million and $117 million, respectively. For the first
nine months of 2008, worldwide sales were $17.8 billion and net income was $6,163.6 million.
results for the third quarter of 2008, provided financial guidance for 2008 and 2010, and outlined additional steps in its continuing efforts to position the Company for success in a rapidly
evolving industry.
Merck reported non-GAAP (generally accepted accounting principles) earnings per
share (EPS) of $0.80 for the third quarter of 2008, excluding $0.29 of restructuring charges.
GAAP EPS for the third quarter were $0.51. Third quarter worldwide sales were $5.9 billion, a
decrease of 2 percent from the third quarter of 2007. Foreign exchange for the third quarter
favorably affected global sales performance by 4 percent. Net income for the third quarter of
2008 was $1,092.7 million compared with $1,525.5 million in the third quarter of 2007, which
include aftertax restructuring charges of $612 million and $117 million, respectively. For the first
nine months of 2008, worldwide sales were $17.8 billion and net income was $6,163.6 million.
Thursday, October 23, 2008
Credit Card Debt - The Next Shoe To Drop, Bombs Away
The troubles sound familiar. Borrowers falling behind on their payments. Defaults rising. Huge swaths of loans souring. Investors getting burned. But forget the now-familiar tales of mortgages gone bad. The next horror for beaten-down financial firms is the $950 billion worth of outstanding credit-card debt—much of it toxic.
That's bad news for players like JPMorgan Chase (JPM) and Bank of America (BAC) that have largely sidestepped—and even benefited from—the mortgage mess but have major credit-card operations. They're hardly alone. The consumer debt bomb is already beginning to spray shrapnel throughout the financial markets, further weakening the U.S. economy. "The next meltdown will be in credit cards," says Gregory Larkin, senior analyst at research firm Innovest Strategic Value Advisors. Adds William Black, senior vice-president of Moody's Investors Service's structured finance team: "We still haven't hit the post-recessionary peaks [in credit-card losses], so things will get worse before they get better." What's more, the U.S. Treasury Dept.'s $700 billion mortgage bailout won't be a lifeline for credit-card issuers.
The big firms say they're prepared for the storm. Early last year JPMorgan started reaching out to troubled borrowers, setting up payment programs and making other adjustments to accounts. "We have seen higher credit-card losses," acknowledges JPMorgan spokeswoman Tanya M. Madison. "We are concerned about [it] but believe we are taking the right steps to help our customers and manage our risk."
But some banks and credit-card companies may be exacerbating their problems. To boost profits and get ahead of coming regulation, they're hiking interest rates. But that's making it harder for consumers to keep up. That'll only make tomorrow's pain worse. Innovest estimates that credit-card issuers will take a $41 billion hit from rotten debt this year and a $96 billion blow in 2009.
Those losses, in turn, will wend their way through the $365 billion market for securities backed by credit-card debt. As with mortgages, banks bundle groups of so-called credit-card receivables, essentially consumers' outstanding balances, and sell them to big investors such as hedge funds and pension funds. Big issuers offload roughly 70% of their credit-card debt.
But it's getting harder for banks to find buyers for that debt. Interest rates have been rising on credit-card securities, a sign that investor appetite is waning. To help entice buyers, credit-card companies are having to put up more money as collateral, a guarantee in case something goes wrong with the securities. Mortgage lenders, in sharp contrast, typically aren't asked to do this—at least not yet. With consumers so shaky, now isn't a good time to put more skin in the game. "Costs will go up for issuers," warns Dennis Moroney of the consultancy Tower Group.
Sure, the credit-card market is just a fraction of the $11.9 trillion mortgage market. But sometimes the losses can be more painful. That's because most credit-card debt is unsecured, meaning consumers don't have to make down payments when opening up their accounts. If they stop making monthly payments and the account goes bad, there are no underlying assets for credit-card companies to recoup. With mortgages, in contrast, some banks are protected both by down payments and by the ability to recover at least some of the money by selling the property.
THE BIG BOYS' BURDEN
Making matters worse, the subprime threat is also greater in credit-card land. Risky borrowers with low credit scores account for roughly 30% of outstanding credit-card debt, compared with 11% of mortgage debt. More than 45% of Washington Mutual's credit-card portfolio is subprime, according to Innovest. That could become a headache for JPMorgan Chase, which agreed on Sept. 25 to buy the troubled thrift's credit-card business and other assets for $1.9 billion. Says a JPMorgan spokeswoman: "
We are aware of the credit quality of [WaMu's] portfolios and will manage risk appropriately."
Credit-card losses are already taking a bite out of lenders' balance sheets. Bank of America, the nation's second-largest issuer behind JPMorgan, revealed on Oct. 6 that roughly $3 billion of its $184 billion credit-card portfolio has soured, a 50% increase from a year ago. At the same time the bank, which is also dealing with the broader financial tumult, said it would have to cut its dividend by 50% and raise $10 billion in fresh capital. The stock stumbled more than 25% the next day when investors largely scoffed at the new shares BofA was offering. "The good news for us is that we have the strength to get through this, but the bad news is that the earnings recovery does take a while," says BofA spokesman Bob Stickler. "We are prudently adjusting our underwriting standards to adapt to changing economic conditions."
Likewise, American Express (AXP), which caters to wealthier borrowers, upped its provisions for credit-card losses from $810 million to $1.5 billion in the latest quarter, a sign that even upscale consumers are having trouble. "We have enhanced our credit models and continue to prudently manage our risk by scaling back some card acquisition efforts and reducing credit lines where appropriate," says an AmEx spokeswoman.
The industry's practices during the lending boom are coming back to haunt many credit-card lenders now. Cate Colombo, a former call center staffer at MBNA, the big issuer bought by Bank of America in 2005, says her job was to develop a rapport with credit-card customers and advise them to use more of their available credit. Colleagues would often gather around her chair when she was on the phone with a consumer and chant: "Sell, sell." "It was like Boiler Room," says Colombo, referring to the 2000 movie about unscrupulous stock brokers. "I knew that they would probably be in debt for the rest of their lives." Unless, of course they default. Responds BofA spokeswoman Betty Riess: "The allegations do not reflect our practices. The bank has nothing to gain by extending credit to people who do not have the ability to pay us back."
Now regulators and politicians are trying to curb some of the industry's abusive practices by limiting interest rate hikes, abolishing certain fees, and cracking down on questionable billing practices. Under rules proposed by the Federal Reserve, a borrower would have a 21-day grace period before being hit with a late fee, instead of the few days offered by some firms now. A similar plan working its way through Congress would allow banks to increase rates only on consumers' future purchases—not existing balances. And under both proposals, credit-card companies would have to allocate account holders' payments equally to balances with different interest rates. Currently, firms first apply payments to the debt with the lowest rate, which means it takes longer and makes it costlier for consumers to pay off their debt.
LAST HURRAH
The Senate isn't expected to vote on the matter until early next year. The Fed's rules, currently being reviewed by the industry, could take effect around that same time. But lenders seem to be preparing for the worst-case scenario: an outright ban on some practices.
To get ahead of rules that would hamper their ability to reprice accounts, for example, many firms are jacking up interest rates. A survey of major issuers by consumer advocacy group Consumer Action found that 37% of firms have raised rates across the board, even for borrowers with relatively pristine credit records. "In anticipation of a federal crackdown, card companies are scouring their portfolios and tightening credit," says Tower Group's Moroney.
Even consumers like Michael Polemeni, who miss only a single payment, can find themselves in the crosshairs of credit-card companies. The independent computer specialist relied heavily on his credit cards for child support payments and business expenses. Polemeni generally made more than the minimum payment each month, carrying a $2,000-or-so balance. But in July he missed a payment, and Providian, owned by Washington Mutual, jacked up his rate from 9% to 30%. "I was shocked because I am a very good customer," say Polemeni, who paid off the full balance immediately. WaMu didn't return calls for comment.
Not everyone will be able to pay down their debts like Polemeni. And that could make for a vicious cycle: As credit-card companies raise rates, more consumers fall behind on their payments, which then hurts the issuers. Says Innovest's Larkin: "We are going to see the banks massively hit.
That's bad news for players like JPMorgan Chase (JPM) and Bank of America (BAC) that have largely sidestepped—and even benefited from—the mortgage mess but have major credit-card operations. They're hardly alone. The consumer debt bomb is already beginning to spray shrapnel throughout the financial markets, further weakening the U.S. economy. "The next meltdown will be in credit cards," says Gregory Larkin, senior analyst at research firm Innovest Strategic Value Advisors. Adds William Black, senior vice-president of Moody's Investors Service's structured finance team: "We still haven't hit the post-recessionary peaks [in credit-card losses], so things will get worse before they get better." What's more, the U.S. Treasury Dept.'s $700 billion mortgage bailout won't be a lifeline for credit-card issuers.
The big firms say they're prepared for the storm. Early last year JPMorgan started reaching out to troubled borrowers, setting up payment programs and making other adjustments to accounts. "We have seen higher credit-card losses," acknowledges JPMorgan spokeswoman Tanya M. Madison. "We are concerned about [it] but believe we are taking the right steps to help our customers and manage our risk."
But some banks and credit-card companies may be exacerbating their problems. To boost profits and get ahead of coming regulation, they're hiking interest rates. But that's making it harder for consumers to keep up. That'll only make tomorrow's pain worse. Innovest estimates that credit-card issuers will take a $41 billion hit from rotten debt this year and a $96 billion blow in 2009.
Those losses, in turn, will wend their way through the $365 billion market for securities backed by credit-card debt. As with mortgages, banks bundle groups of so-called credit-card receivables, essentially consumers' outstanding balances, and sell them to big investors such as hedge funds and pension funds. Big issuers offload roughly 70% of their credit-card debt.
But it's getting harder for banks to find buyers for that debt. Interest rates have been rising on credit-card securities, a sign that investor appetite is waning. To help entice buyers, credit-card companies are having to put up more money as collateral, a guarantee in case something goes wrong with the securities. Mortgage lenders, in sharp contrast, typically aren't asked to do this—at least not yet. With consumers so shaky, now isn't a good time to put more skin in the game. "Costs will go up for issuers," warns Dennis Moroney of the consultancy Tower Group.
Sure, the credit-card market is just a fraction of the $11.9 trillion mortgage market. But sometimes the losses can be more painful. That's because most credit-card debt is unsecured, meaning consumers don't have to make down payments when opening up their accounts. If they stop making monthly payments and the account goes bad, there are no underlying assets for credit-card companies to recoup. With mortgages, in contrast, some banks are protected both by down payments and by the ability to recover at least some of the money by selling the property.
THE BIG BOYS' BURDEN
Making matters worse, the subprime threat is also greater in credit-card land. Risky borrowers with low credit scores account for roughly 30% of outstanding credit-card debt, compared with 11% of mortgage debt. More than 45% of Washington Mutual's credit-card portfolio is subprime, according to Innovest. That could become a headache for JPMorgan Chase, which agreed on Sept. 25 to buy the troubled thrift's credit-card business and other assets for $1.9 billion. Says a JPMorgan spokeswoman: "
We are aware of the credit quality of [WaMu's] portfolios and will manage risk appropriately."
Credit-card losses are already taking a bite out of lenders' balance sheets. Bank of America, the nation's second-largest issuer behind JPMorgan, revealed on Oct. 6 that roughly $3 billion of its $184 billion credit-card portfolio has soured, a 50% increase from a year ago. At the same time the bank, which is also dealing with the broader financial tumult, said it would have to cut its dividend by 50% and raise $10 billion in fresh capital. The stock stumbled more than 25% the next day when investors largely scoffed at the new shares BofA was offering. "The good news for us is that we have the strength to get through this, but the bad news is that the earnings recovery does take a while," says BofA spokesman Bob Stickler. "We are prudently adjusting our underwriting standards to adapt to changing economic conditions."
Likewise, American Express (AXP), which caters to wealthier borrowers, upped its provisions for credit-card losses from $810 million to $1.5 billion in the latest quarter, a sign that even upscale consumers are having trouble. "We have enhanced our credit models and continue to prudently manage our risk by scaling back some card acquisition efforts and reducing credit lines where appropriate," says an AmEx spokeswoman.
The industry's practices during the lending boom are coming back to haunt many credit-card lenders now. Cate Colombo, a former call center staffer at MBNA, the big issuer bought by Bank of America in 2005, says her job was to develop a rapport with credit-card customers and advise them to use more of their available credit. Colleagues would often gather around her chair when she was on the phone with a consumer and chant: "Sell, sell." "It was like Boiler Room," says Colombo, referring to the 2000 movie about unscrupulous stock brokers. "I knew that they would probably be in debt for the rest of their lives." Unless, of course they default. Responds BofA spokeswoman Betty Riess: "The allegations do not reflect our practices. The bank has nothing to gain by extending credit to people who do not have the ability to pay us back."
Now regulators and politicians are trying to curb some of the industry's abusive practices by limiting interest rate hikes, abolishing certain fees, and cracking down on questionable billing practices. Under rules proposed by the Federal Reserve, a borrower would have a 21-day grace period before being hit with a late fee, instead of the few days offered by some firms now. A similar plan working its way through Congress would allow banks to increase rates only on consumers' future purchases—not existing balances. And under both proposals, credit-card companies would have to allocate account holders' payments equally to balances with different interest rates. Currently, firms first apply payments to the debt with the lowest rate, which means it takes longer and makes it costlier for consumers to pay off their debt.
LAST HURRAH
The Senate isn't expected to vote on the matter until early next year. The Fed's rules, currently being reviewed by the industry, could take effect around that same time. But lenders seem to be preparing for the worst-case scenario: an outright ban on some practices.
To get ahead of rules that would hamper their ability to reprice accounts, for example, many firms are jacking up interest rates. A survey of major issuers by consumer advocacy group Consumer Action found that 37% of firms have raised rates across the board, even for borrowers with relatively pristine credit records. "In anticipation of a federal crackdown, card companies are scouring their portfolios and tightening credit," says Tower Group's Moroney.
Even consumers like Michael Polemeni, who miss only a single payment, can find themselves in the crosshairs of credit-card companies. The independent computer specialist relied heavily on his credit cards for child support payments and business expenses. Polemeni generally made more than the minimum payment each month, carrying a $2,000-or-so balance. But in July he missed a payment, and Providian, owned by Washington Mutual, jacked up his rate from 9% to 30%. "I was shocked because I am a very good customer," say Polemeni, who paid off the full balance immediately. WaMu didn't return calls for comment.
Not everyone will be able to pay down their debts like Polemeni. And that could make for a vicious cycle: As credit-card companies raise rates, more consumers fall behind on their payments, which then hurts the issuers. Says Innovest's Larkin: "We are going to see the banks massively hit.
Weekly Jobless Claims
In the week ending Oct. 18, the advance figure for seasonally adjusted initial claims was 478,000, an increase of 15,000 from the previous week's revised figure of 463,000. It is estimated that the effects of Hurricane Ike in Texas added approximately 12,000 claims to the total. The 4-week moving average was 480,250, a decrease of 4,500 from the previous week's revised average of 484,750.
The advance seasonally adjusted insured unemployment rate was 2.8 percent for the week ending Oct. 11, unchanged from the prior week's unrevised rate of 2.8 percent.
The advance number for seasonally adjusted insured unemployment during the week ending Oct. 11 was 3,720,000, a decrease of 6,000 from the preceding week's revised level of 3,726,000. The 4-week moving average was 3,680,000, an increase of 44,250 from the preceding week's revised average of 3,635,750.
The advance seasonally adjusted insured unemployment rate was 2.8 percent for the week ending Oct. 11, unchanged from the prior week's unrevised rate of 2.8 percent.
The advance number for seasonally adjusted insured unemployment during the week ending Oct. 11 was 3,720,000, a decrease of 6,000 from the preceding week's revised level of 3,726,000. The 4-week moving average was 3,680,000, an increase of 44,250 from the preceding week's revised average of 3,635,750.
Wednesday, October 22, 2008
More Problems Ahead For Housing
CAPE CORAL, Florida (Reuters) – Long before she filed for bankruptcy, Ann Neukomm was "under water" -- she owed more on her mortgage than her house was worth -- a situation more and more Americans are finding themselves in.
As the financial crisis hits Main Street America, nearly one in six U.S. homeowners are finding themselves in the same position, threatening the U.S. economy with a new wave of foreclosures and bankruptcies.
About 12 million U.S. homeowners owe more than their homes are worth, compared with 6.6 million at the end of last year and slightly more than 3 million at the close of 2006, said Mark Zandi, chief economist at Moody's Economy.com.
"At the root it's 'the' problem," said Zandi. "If you're going to put your finger on the one thing that's gotten us into this fiasco, it's the fact that millions of homeowners are under water on their homes."
If, like Neukomm, these homeowners go into foreclosure, it would add to the oversupply of homes, delay a recovery in the housing market, and add to pressure on banks.
Already, U.S. consumer spending is slumping as homeowners find they can no longer take equity out of their homes to fund their lifestyles.
In a slowing economy, it doesn't take much to push an underwater mortgage into default.
"When you're under water and you have some kind of hit to your income or some kind of unintended expense, that's when you default. And so now we've got this noxious mix of millions of people under water and quickly rising unemployment," Zandi said.
Like Neukomm, 57, many people got into trouble by refinancing mortgages to pull out cash when rising property values made it seem like an almost risk-free deal.
She ended up filing for bankruptcy in May after failing to keep up with mortgage payments on her home in Cape Coral, a once-booming town in southwest Florida.
"It's a dirty word," said Neukomm of her bankruptcy and personal feelings of failure. "Nobody wants to say it."
WASTELAND
Cape Coral, built over swampland near Fort Myers on Florida's palm-fringed Gulf Coast, was fertile ground for the real estate boom, which peaked across much of the United States three years ago.
It is now a wasteland, with barren strip malls, a bloated inventory of unsold or abandoned homes and ubiquitous for-sale signs that speak volumes about the plunge in housing prices and surge in mortgage defaults that triggered the U.S. credit crunch last year.
With current home prices likely to decline on average by another 10 percent, Zandi said there will be 14.6 million homeowners under water by September next year.
"House prices have collapsed and you've got many homeowners who bought homes in the last three years who put very little down or have been borrowing against their homes," said Zandi. "That's causing this to rise very rapidly."
Economists like Zandi worry that the underlying housing crisis could eventually prove much more costly to the U.S. taxpayer than the $700 billion the U.S. government has pledged to recapitalize banks and buy up distressed debt from financial institutions.
"The government is going to have to start filling this negative equity hole and that's just going to be a direct cost to taxpayers," Zandi said. "This is going to be the really costly part, I think, for taxpayers."
While the U.S. government has focused its rescue on banks, it has done little to help individuals who are struggling to pay their mortgages, apart from the HOPE NOW program, which has facilitated a few hundred thousand mortgage restructurings.
The government may have no option but to step in, especially if a rising tide of foreclosures and falloff in property and other tax revenues endanger municipalities and local governments and force some into bankruptcy.
Both presidential candidates have outlined plans for relief for distressed homeowners but critics say they have been short on details and there appears to be little consensus about how best to help homeowners who are under water.
DREAM HOME
Among homeowners in danger is Virginia Washington, a 64-year-old medical secretary from California who bought her retirement home in the town of Tolleson, Arizona, in 1996.
"It was supposed to be my dream home, but it has turned out to be a nightmare," said Washington, who owes $207,000 on a house that is worth about $150,000.
Whereas many families that are now saddled with negative equity simply hand the keys back to the bank and walk away, Washington is haunted by the fear of losing the $65,000 in savings she put down as her deposit.
"Many people did not put any money down on a home and they feel free to walk away. But $65,000, there's no money tree that grows that kind of money," she said.
In Stockton, California, a town that has become a posterchild of the U.S. housing crisis, Zillow.com said nearly every homeowner who bought in 2006 is now under water.
There are countless other troublespots across the country.
Nationwide, for those who purchased U.S. homes since the beginning of 2003, nearly one in three now have negative equity. Nearly half of buyers who purchased in 2006 are under water.
Despite tighter credit and underwriting for home loans this year, Steve Berg, a managing director at research firm LPS Applied Analytics, said mortgages originated in 2008 were on par or trending worse than those originated last year or in 2006.
"Presumably the equity position of the borrowers in the loans originated this year should be better," Berg said in an interview. "That doesn't appear to be the case, and certainly not to the magnitude you'd expect."
Foreclosed homes already account for 50 percent of all home sales in some markets, according to Zillow.com, an online real estate research service.
For homeowners like Neukomm, any solution to the negative equity problem will be too late. Any day now, she says she expects to receive a letter giving her 21 to 30 days to abandon the house she bought back in 2000.
"I can make my credit card payments. I just can't do it with the house," she said, adding that she was now looking at rental properties in Cape Coral.
(Reporting by Tom Brown; Additional reporting by Tim Gaynor in Phoenix, Julie Haviv in New York and Emily Kaiser in Washington; Editing by Eddie Evans)
As the financial crisis hits Main Street America, nearly one in six U.S. homeowners are finding themselves in the same position, threatening the U.S. economy with a new wave of foreclosures and bankruptcies.
About 12 million U.S. homeowners owe more than their homes are worth, compared with 6.6 million at the end of last year and slightly more than 3 million at the close of 2006, said Mark Zandi, chief economist at Moody's Economy.com.
"At the root it's 'the' problem," said Zandi. "If you're going to put your finger on the one thing that's gotten us into this fiasco, it's the fact that millions of homeowners are under water on their homes."
If, like Neukomm, these homeowners go into foreclosure, it would add to the oversupply of homes, delay a recovery in the housing market, and add to pressure on banks.
Already, U.S. consumer spending is slumping as homeowners find they can no longer take equity out of their homes to fund their lifestyles.
In a slowing economy, it doesn't take much to push an underwater mortgage into default.
"When you're under water and you have some kind of hit to your income or some kind of unintended expense, that's when you default. And so now we've got this noxious mix of millions of people under water and quickly rising unemployment," Zandi said.
Like Neukomm, 57, many people got into trouble by refinancing mortgages to pull out cash when rising property values made it seem like an almost risk-free deal.
She ended up filing for bankruptcy in May after failing to keep up with mortgage payments on her home in Cape Coral, a once-booming town in southwest Florida.
"It's a dirty word," said Neukomm of her bankruptcy and personal feelings of failure. "Nobody wants to say it."
WASTELAND
Cape Coral, built over swampland near Fort Myers on Florida's palm-fringed Gulf Coast, was fertile ground for the real estate boom, which peaked across much of the United States three years ago.
It is now a wasteland, with barren strip malls, a bloated inventory of unsold or abandoned homes and ubiquitous for-sale signs that speak volumes about the plunge in housing prices and surge in mortgage defaults that triggered the U.S. credit crunch last year.
With current home prices likely to decline on average by another 10 percent, Zandi said there will be 14.6 million homeowners under water by September next year.
"House prices have collapsed and you've got many homeowners who bought homes in the last three years who put very little down or have been borrowing against their homes," said Zandi. "That's causing this to rise very rapidly."
Economists like Zandi worry that the underlying housing crisis could eventually prove much more costly to the U.S. taxpayer than the $700 billion the U.S. government has pledged to recapitalize banks and buy up distressed debt from financial institutions.
"The government is going to have to start filling this negative equity hole and that's just going to be a direct cost to taxpayers," Zandi said. "This is going to be the really costly part, I think, for taxpayers."
While the U.S. government has focused its rescue on banks, it has done little to help individuals who are struggling to pay their mortgages, apart from the HOPE NOW program, which has facilitated a few hundred thousand mortgage restructurings.
The government may have no option but to step in, especially if a rising tide of foreclosures and falloff in property and other tax revenues endanger municipalities and local governments and force some into bankruptcy.
Both presidential candidates have outlined plans for relief for distressed homeowners but critics say they have been short on details and there appears to be little consensus about how best to help homeowners who are under water.
DREAM HOME
Among homeowners in danger is Virginia Washington, a 64-year-old medical secretary from California who bought her retirement home in the town of Tolleson, Arizona, in 1996.
"It was supposed to be my dream home, but it has turned out to be a nightmare," said Washington, who owes $207,000 on a house that is worth about $150,000.
Whereas many families that are now saddled with negative equity simply hand the keys back to the bank and walk away, Washington is haunted by the fear of losing the $65,000 in savings she put down as her deposit.
"Many people did not put any money down on a home and they feel free to walk away. But $65,000, there's no money tree that grows that kind of money," she said.
In Stockton, California, a town that has become a posterchild of the U.S. housing crisis, Zillow.com said nearly every homeowner who bought in 2006 is now under water.
There are countless other troublespots across the country.
Nationwide, for those who purchased U.S. homes since the beginning of 2003, nearly one in three now have negative equity. Nearly half of buyers who purchased in 2006 are under water.
Despite tighter credit and underwriting for home loans this year, Steve Berg, a managing director at research firm LPS Applied Analytics, said mortgages originated in 2008 were on par or trending worse than those originated last year or in 2006.
"Presumably the equity position of the borrowers in the loans originated this year should be better," Berg said in an interview. "That doesn't appear to be the case, and certainly not to the magnitude you'd expect."
Foreclosed homes already account for 50 percent of all home sales in some markets, according to Zillow.com, an online real estate research service.
For homeowners like Neukomm, any solution to the negative equity problem will be too late. Any day now, she says she expects to receive a letter giving her 21 to 30 days to abandon the house she bought back in 2000.
"I can make my credit card payments. I just can't do it with the house," she said, adding that she was now looking at rental properties in Cape Coral.
(Reporting by Tom Brown; Additional reporting by Tim Gaynor in Phoenix, Julie Haviv in New York and Emily Kaiser in Washington; Editing by Eddie Evans)
Boeings 3rd Qtr 2008 Earnings Misses
Boeing Posts Lower Third-Quarter Results on Reduced Commercial Deliveries
Third-quarter revenues declined to $15.3 billion from $16.5 billion as labor strike
and supplier production problems pushed airplane deliveries out of the quarter
EPS declined to $0.96 per share, reduced by an estimated $0.60 on the lower
deliveries and by $0.08 due to tax adjustments
Backlog grew to a record $349 billion as near-term demand remains strong
Updated financial guidance to be provided after strike concludes
Third-quarter revenues declined to $15.3 billion from $16.5 billion as labor strike
and supplier production problems pushed airplane deliveries out of the quarter
EPS declined to $0.96 per share, reduced by an estimated $0.60 on the lower
deliveries and by $0.08 due to tax adjustments
Backlog grew to a record $349 billion as near-term demand remains strong
Updated financial guidance to be provided after strike concludes
AT&T 3rd Qtr 2008 Earnings Misses
Strong Wireless Gains, Sound Operational Execution Highlight AT&T's Third Quarter; Results Led by 2.4 Million iPhone 3G Activations, Rapid Wireless Data Growth
Dallas, Texas, October 22, 2008
>$0.55 reported earnings per diluted share versus $0.50 in the year-earlier quarter
>$0.67 adjusted earnings per diluted share — which includes $0.10 of pressure generated by strong performance from the Apple iPhone 3G initiative and $0.02 from hurricane-related expenses — compared with $0.71 in the third quarter of 2007
>2.4 million iPhone 3G devices activated in the quarter, approximately 40 percent of them to wireless customers who were new to AT&T; iPhone 3G delivering high-value subscribers with significantly higher ARPU and lower churn than postpaid subscriber average
>2.0 million net gain in total wireless subscribers to reach 74.9 million in service
>1.7 million net gain in retail postpaid wireless subscribers, up nearly 40 percent versus year-earlier third quarter; largest total for any quarter in AT&T's history
>50.5 percent growth in wireless data revenues from Internet access, messaging, e-mail and related services; total wireless revenues up 15.4 percent
>Strong ramp in AT&T U-verse TV subscribers, with a net subscriber gain of 232,000 to reach 781,000 in service; solidly on track to exceed 1 million subscribers in service by the end of 2008
>16.2 percent increase in wireline IP data revenues driven by expansion in AT&T U-verseSM services and growth in business products such as Virtual Private Networks (VPNs), managed Internet services and hosting
>Major turnaround and return to growth in wholesale revenues, reflecting solid demand from wireless carriers, Internet service providers and other customers
Dallas, Texas, October 22, 2008
>$0.55 reported earnings per diluted share versus $0.50 in the year-earlier quarter
>$0.67 adjusted earnings per diluted share — which includes $0.10 of pressure generated by strong performance from the Apple iPhone 3G initiative and $0.02 from hurricane-related expenses — compared with $0.71 in the third quarter of 2007
>2.4 million iPhone 3G devices activated in the quarter, approximately 40 percent of them to wireless customers who were new to AT&T; iPhone 3G delivering high-value subscribers with significantly higher ARPU and lower churn than postpaid subscriber average
>2.0 million net gain in total wireless subscribers to reach 74.9 million in service
>1.7 million net gain in retail postpaid wireless subscribers, up nearly 40 percent versus year-earlier third quarter; largest total for any quarter in AT&T's history
>50.5 percent growth in wireless data revenues from Internet access, messaging, e-mail and related services; total wireless revenues up 15.4 percent
>Strong ramp in AT&T U-verse TV subscribers, with a net subscriber gain of 232,000 to reach 781,000 in service; solidly on track to exceed 1 million subscribers in service by the end of 2008
>16.2 percent increase in wireline IP data revenues driven by expansion in AT&T U-verseSM services and growth in business products such as Virtual Private Networks (VPNs), managed Internet services and hosting
>Major turnaround and return to growth in wholesale revenues, reflecting solid demand from wireless carriers, Internet service providers and other customers
Tuesday, October 21, 2008
Bailout Greed
Trim Your Stash? Evan Hessel and Scott Woolley 10.02.08, 6:00 PM ET
Forbes Magazine dated October 27, 2008
A few of the heads of ruined Companies who lost their jobs but still made out like bandits.
Richard Fuld Lehman Bros------------- $172 mil
Kerry Killinger Washington Mutual------ $37
Martin Sullivan AIG-------------------- $36
Michael Perry Indymac Federal--------- $20
Kenneth Thompson Wachovia---------- $14
Daniel Mudd Fannie Mae--------------- $8
Richard Syron Fannie Mae--------------$7
Amounts represent bonus pay, severance and gains from stock sales from 2005 to the present.
Source: Forbes.
Forbes Magazine dated October 27, 2008
A few of the heads of ruined Companies who lost their jobs but still made out like bandits.
Richard Fuld Lehman Bros------------- $172 mil
Kerry Killinger Washington Mutual------ $37
Martin Sullivan AIG-------------------- $36
Michael Perry Indymac Federal--------- $20
Kenneth Thompson Wachovia---------- $14
Daniel Mudd Fannie Mae--------------- $8
Richard Syron Fannie Mae--------------$7
Amounts represent bonus pay, severance and gains from stock sales from 2005 to the present.
Source: Forbes.
Windfall Profits?
Senator Obama is pushing for windfall profits on corporations such as ExxonMobil. As a reminder, yes Exxon makes a lot of money ($40B after tax income or about 10% of revenues), but Exxon pays more in taxes than the bottom 1/2 of all taxpayers or about $62B. I think Exxon pays it's fair share (Tim).
Monday, October 20, 2008
The Real Great Depression
The Real Great Depression
The depression of 1929 is the wrong model for the current economic crisis
By SCOTT REYNOLDS
I assert in my book that as serious consumer demand and financial crisis led depressions go, the one that is developing will be epic. However, our current period is unlike the pre-1930s depression era. That depression was triggered by the crash of 1929 but primarily caused by bad monetary policy that exacerbated the debt deflation that followed from consumer over-indebtedness. Weakly structured consumer lending and manufacturing sectors led a sudden decline in consumer purchasing power. Demand crashed. The US depression was then quickly transmitted throughout the world via financial markets, then more slowly through disturbances in trade, which were multiplied by politically motivated disastrous trade policies, and finally war.
Our current episode has more in common with the 1870s depression which, as Nelson notes, was considerably worse. It was primarily caused by over-indebtedness in the commercial real estate sector, which mortgages were based on new forms of financing which were intermingled on the balance sheets of commercial banks with less rarefied assets that the banks added by making business loans. The era, as the poster to the left depicts, was one of broad based public participation in credit financed asset price inflation and speculation. When the commercial real estate market crashed, it took down the banks and caused the market for commercial credit to seize up, much as we are seeing today. Small businesses were hit especially hard. Unemployment spiked and a severe and lengthy depression ensued as financial markets throughout the world suffered, followed by international trade. The crisis emanated from Europe. It was the beginning of the end of Europe's dominance as the center of global economic power.
As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events. When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them. In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls "the real Great Depression." She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis. The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period. But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export train loads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America's heartland, undermining rapeseed, flour, and beef prices.
The crash came in Central Europe in May 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States — those with guaranteed contracts and the ability to make rebate deals with the railroads — the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices.
The Gilded Age in the United States, as far as industrial concentration was concerned, had begun. As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, "economic organization crumbled with some primeval upheaval." Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers — many former Civil War soldiers — became transients. The terms "tramp" and "bum," both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25-percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of 1873-74 demanding public work. In New York's Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania's coal fields in 1875, when masked workmen exchanged gunfire with the "Coal and Iron Police," a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews. Nationalistic political leaders (or agents of the Russian czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms followed in the 1880s, particularly in Russia and Ukraine. Heartland communities large and small had found a scapegoat: aliens in their own midst.The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time home buyers who signed up for adjustable rate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-derivative swap, which risk managers imagined would protect their investments. More than two million foreclosure filings — default notices, auction-sale notices, and bank repossessions — were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.) As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment. Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.In the end, the Panic of 1873 demonstrated that the center of gravity for the world's credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India. Beyond that I would not hazard a guess.
Scott Reynolds Nelson is a professor of history at the College of William and Mary. Among his books is Steel Drivin' Man: John Henry, the Untold Story of an American legend (Oxford University Press, 2006).
The depression of 1929 is the wrong model for the current economic crisis
By SCOTT REYNOLDS
I assert in my book that as serious consumer demand and financial crisis led depressions go, the one that is developing will be epic. However, our current period is unlike the pre-1930s depression era. That depression was triggered by the crash of 1929 but primarily caused by bad monetary policy that exacerbated the debt deflation that followed from consumer over-indebtedness. Weakly structured consumer lending and manufacturing sectors led a sudden decline in consumer purchasing power. Demand crashed. The US depression was then quickly transmitted throughout the world via financial markets, then more slowly through disturbances in trade, which were multiplied by politically motivated disastrous trade policies, and finally war.
Our current episode has more in common with the 1870s depression which, as Nelson notes, was considerably worse. It was primarily caused by over-indebtedness in the commercial real estate sector, which mortgages were based on new forms of financing which were intermingled on the balance sheets of commercial banks with less rarefied assets that the banks added by making business loans. The era, as the poster to the left depicts, was one of broad based public participation in credit financed asset price inflation and speculation. When the commercial real estate market crashed, it took down the banks and caused the market for commercial credit to seize up, much as we are seeing today. Small businesses were hit especially hard. Unemployment spiked and a severe and lengthy depression ensued as financial markets throughout the world suffered, followed by international trade. The crisis emanated from Europe. It was the beginning of the end of Europe's dominance as the center of global economic power.
As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events. When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them. In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls "the real Great Depression." She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis. The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period. But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export train loads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America's heartland, undermining rapeseed, flour, and beef prices.
The crash came in Central Europe in May 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States — those with guaranteed contracts and the ability to make rebate deals with the railroads — the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices.
The Gilded Age in the United States, as far as industrial concentration was concerned, had begun. As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, "economic organization crumbled with some primeval upheaval." Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers — many former Civil War soldiers — became transients. The terms "tramp" and "bum," both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25-percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of 1873-74 demanding public work. In New York's Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania's coal fields in 1875, when masked workmen exchanged gunfire with the "Coal and Iron Police," a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews. Nationalistic political leaders (or agents of the Russian czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms followed in the 1880s, particularly in Russia and Ukraine. Heartland communities large and small had found a scapegoat: aliens in their own midst.The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time home buyers who signed up for adjustable rate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-derivative swap, which risk managers imagined would protect their investments. More than two million foreclosure filings — default notices, auction-sale notices, and bank repossessions — were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.) As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment. Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.In the end, the Panic of 1873 demonstrated that the center of gravity for the world's credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India. Beyond that I would not hazard a guess.
Scott Reynolds Nelson is a professor of history at the College of William and Mary. Among his books is Steel Drivin' Man: John Henry, the Untold Story of an American legend (Oxford University Press, 2006).
The New Investment Strategy - Two views
1) If you wait for the robin, Spring is gone. (Start investing now, stocks are cheap)
2) The second mouse gets the cheese. (The market is still in turmoil, keep your powder dry, and wait until the smoke has cleared)
2) The second mouse gets the cheese. (The market is still in turmoil, keep your powder dry, and wait until the smoke has cleared)
Harley's Sub-Prime Mess
After going whole hog on credit, the motorcycle maker has tightened credit and begun pursuing some of its buyers
By Matthew Boyle
Not long ago, a national marketing campaign from motorcycle maker Harley-Davidson (HOG) addressed the sputtering economy with a heavy dollop of devil-may-care attitude. The tag line: "Screw It. Let's Ride.
Harley seems to have applied the same logic to its loan portfolio. In a pattern eerily similar to the housing bust, the $5.7 billion Milwaukee company used its in-house finance unit to chase after subprime borrowers, making it easy for them to buy $20,000 hogs with no money down. The risky lending—which forced Harley to take a $6.3 million write-down amid rising default rates and decreasing interest among buyers for its securitized loans—could foreshadow problems in other industries. Companies from retailers to blue-chip manufacturers such as Caterpillar (CAT), Deere (DE), and Boeing (BA) used finance arms to pump up sales and maintain an additional profit stream.
Harley-Davidson Fin-ancial Services (HDFS) has for years aggressively pitched retail bike loans to subprime borrowers, who now hold nearly a third of them. Now there's concern that the problems at HDFS could jeopardize the parent company's pristine credit rating. (BusinessWeek went to press before the company reported third-quarter results on Oct. 16, in which analysts expected earnings per share to decline 26%.) While acknowledging the "difficult environment," Harley spokesman Bob Klein says the subprime portion of the HDFS loan portfolio has remained between 25% and 30% since 2004. "Overall, the portfolio is very high quality," he says.
HDFS offers loans both to retail customers and Harley dealers, who finance the bikes that sit in their showrooms. Dealers can also earn incentives in the form of lower interest rates if they push a certain percentage of customers' loans and motorcycle insurance to HDFS. "We'd be crazy not to use [HDFS]," says Mark Barnett, a high-volume Harley dealer in El Paso, Tex., who says 83% of the new bikes he sells are financed through the unit. While HDFS made 38% of all retail loans for Harleys five years ago, that proportion now exceeds half.
ROARING GROWTH FOR HDFS
With credit markets frozen, Chief Executive James Ziemer faces some tough decisions. RBC Capital Markets analyst Edward Aaron argues that investors "need to know how [Harley] will raise capital to fund this business." BMO Capital Markets analyst Edward Williams says Harley is more vulnerable to a downturn because it "aggressively went after a lower-quality borrower" to gain market share against other lenders.
Indeed, between 2003 and 2006, the percentage of HDFS borrowers paying 15% or more in interest—an indicator of credit risk—increased from 8% to 19%, according to company reports. HDFS' share of Harley's operating income also grew to more than $200 million, about 15% of the company total, up from 7% in 2000.
The first sign of danger came early last year, when RBC's Aaron warned investors that loan delinquency rates were rising faster than normal, to more than 4%. While Harley trimmed production in response to slowing sales, it continued to go after marginal borrowers with promotions like 2007's "Stick it to the Man" campaign, which offered zero money down and teaser interest rates as low as 2.9%.
As long as HDFS could package loans and sell them as securities to investors, the strategy worked. In the first quarter of 2008, though, HDFS was forced to retain $54 million in loans no investor would touch. Even fewer buyers stepped forward in the second quarter as loan delinquencies kept rising.
SALES DOWN, JOBS CUT
Harley's finance arm has taken some steps to tighten lending to subprime customers. And its beefed-up loan collection staff is making more calls on weekends and evenings to chase down deadbeats. Klein says credit "may be less accessible" to customers with low credit scores and that HDFS has reduced its no-money-down financing offers, reserving them for the most creditworthy customers.
Softening demand for discretionary items such as motorcycles has exacerbated the woes at Harley's credit arm. Harley's U.S. retail sales were down 8.7% in the second quarter, and the company axed 730 workers earlier this year, its deepest workforce cut since the 1980s. Robust international growth rates are expected to weaken as the economic crisis spreads abroad.
Harley told investors last quarter that it remains committed to lending "across a broad credit spectrum," but analysts wonder how much longer the commitment to risky borrowers will last. "On one hand, you don't want to lose too much market share," says a buy side analyst. "But on the other hand, quite simply, you don't want to keep up your sales by extending credit to people who might default on payments."
A bright spot for HDFS is the particularly strong resale market for used Harleys just now, according to recent data from the National Automobile Dealers Assn. That reduces the severity of loan losses if HDFS is forced to repossess motorcycles. "The good thing about Harleys is they don't decline wildly in value," says Barnett, the Texas dealer.
Unfortunately, that can't be said of Harley-Davidson stock. The shares have lost half their value over the past two years.
The long term prospects are not good. Harley basically appeals to an aging market segment (Tim).
By Matthew Boyle
Not long ago, a national marketing campaign from motorcycle maker Harley-Davidson (HOG) addressed the sputtering economy with a heavy dollop of devil-may-care attitude. The tag line: "Screw It. Let's Ride.
Harley seems to have applied the same logic to its loan portfolio. In a pattern eerily similar to the housing bust, the $5.7 billion Milwaukee company used its in-house finance unit to chase after subprime borrowers, making it easy for them to buy $20,000 hogs with no money down. The risky lending—which forced Harley to take a $6.3 million write-down amid rising default rates and decreasing interest among buyers for its securitized loans—could foreshadow problems in other industries. Companies from retailers to blue-chip manufacturers such as Caterpillar (CAT), Deere (DE), and Boeing (BA) used finance arms to pump up sales and maintain an additional profit stream.
Harley-Davidson Fin-ancial Services (HDFS) has for years aggressively pitched retail bike loans to subprime borrowers, who now hold nearly a third of them. Now there's concern that the problems at HDFS could jeopardize the parent company's pristine credit rating. (BusinessWeek went to press before the company reported third-quarter results on Oct. 16, in which analysts expected earnings per share to decline 26%.) While acknowledging the "difficult environment," Harley spokesman Bob Klein says the subprime portion of the HDFS loan portfolio has remained between 25% and 30% since 2004. "Overall, the portfolio is very high quality," he says.
HDFS offers loans both to retail customers and Harley dealers, who finance the bikes that sit in their showrooms. Dealers can also earn incentives in the form of lower interest rates if they push a certain percentage of customers' loans and motorcycle insurance to HDFS. "We'd be crazy not to use [HDFS]," says Mark Barnett, a high-volume Harley dealer in El Paso, Tex., who says 83% of the new bikes he sells are financed through the unit. While HDFS made 38% of all retail loans for Harleys five years ago, that proportion now exceeds half.
ROARING GROWTH FOR HDFS
With credit markets frozen, Chief Executive James Ziemer faces some tough decisions. RBC Capital Markets analyst Edward Aaron argues that investors "need to know how [Harley] will raise capital to fund this business." BMO Capital Markets analyst Edward Williams says Harley is more vulnerable to a downturn because it "aggressively went after a lower-quality borrower" to gain market share against other lenders.
Indeed, between 2003 and 2006, the percentage of HDFS borrowers paying 15% or more in interest—an indicator of credit risk—increased from 8% to 19%, according to company reports. HDFS' share of Harley's operating income also grew to more than $200 million, about 15% of the company total, up from 7% in 2000.
The first sign of danger came early last year, when RBC's Aaron warned investors that loan delinquency rates were rising faster than normal, to more than 4%. While Harley trimmed production in response to slowing sales, it continued to go after marginal borrowers with promotions like 2007's "Stick it to the Man" campaign, which offered zero money down and teaser interest rates as low as 2.9%.
As long as HDFS could package loans and sell them as securities to investors, the strategy worked. In the first quarter of 2008, though, HDFS was forced to retain $54 million in loans no investor would touch. Even fewer buyers stepped forward in the second quarter as loan delinquencies kept rising.
SALES DOWN, JOBS CUT
Harley's finance arm has taken some steps to tighten lending to subprime customers. And its beefed-up loan collection staff is making more calls on weekends and evenings to chase down deadbeats. Klein says credit "may be less accessible" to customers with low credit scores and that HDFS has reduced its no-money-down financing offers, reserving them for the most creditworthy customers.
Softening demand for discretionary items such as motorcycles has exacerbated the woes at Harley's credit arm. Harley's U.S. retail sales were down 8.7% in the second quarter, and the company axed 730 workers earlier this year, its deepest workforce cut since the 1980s. Robust international growth rates are expected to weaken as the economic crisis spreads abroad.
Harley told investors last quarter that it remains committed to lending "across a broad credit spectrum," but analysts wonder how much longer the commitment to risky borrowers will last. "On one hand, you don't want to lose too much market share," says a buy side analyst. "But on the other hand, quite simply, you don't want to keep up your sales by extending credit to people who might default on payments."
A bright spot for HDFS is the particularly strong resale market for used Harleys just now, according to recent data from the National Automobile Dealers Assn. That reduces the severity of loan losses if HDFS is forced to repossess motorcycles. "The good thing about Harleys is they don't decline wildly in value," says Barnett, the Texas dealer.
Unfortunately, that can't be said of Harley-Davidson stock. The shares have lost half their value over the past two years.
The long term prospects are not good. Harley basically appeals to an aging market segment (Tim).
Thursday, October 16, 2008
Industrial Production And Capacity
Industrial production dropped 2.8 percent in September, as hurricanes Gustav and Ike and a strike at a major producer of civilian aircraft severely curtailed output. For the third quarter as a whole, industrial production decreased at an annual rate of 6.0 percent. Manufacturing production fell 2.6 percent in September. The output of mines plunged 7.8 percent, as crude oil and natural gas operations in the Gulf of Mexico were suspended because of the hurricanes. The output of utilities rose 2.2 percent, as temperatures returned to more normal levels in September after a relatively cool August.
The estimated effect of the disruptions from the hurricanes on total industrial production in September is about 2-1/4 percentage points. In addition to reductions in oil and gas extraction, hurricane-related shutdowns of petroleum refineries and petrochemical producers factored significantly in the decline; other manufacturing industries with storm outages made smaller contributions to the drop in output. The strike in the commercial aircraft industry contributed an estimated 1/2 percentage point to the overall decrease in industrial production.
At 107.3 percent of its 2002 average, total industrial production in September was 4.5 percent below its level of a year earlier. The capacity utilization rate for total industry fell to 76.4 percent in September, a level 4.6 percentage points below its average level from 1972 to 2007.
The estimated effect of the disruptions from the hurricanes on total industrial production in September is about 2-1/4 percentage points. In addition to reductions in oil and gas extraction, hurricane-related shutdowns of petroleum refineries and petrochemical producers factored significantly in the decline; other manufacturing industries with storm outages made smaller contributions to the drop in output. The strike in the commercial aircraft industry contributed an estimated 1/2 percentage point to the overall decrease in industrial production.
At 107.3 percent of its 2002 average, total industrial production in September was 4.5 percent below its level of a year earlier. The capacity utilization rate for total industry fell to 76.4 percent in September, a level 4.6 percentage points below its average level from 1972 to 2007.
Consumer Price Index Beats The Street Slightly
October 16, 2008
On a seasonally adjusted basis, the CPI-U was virtually unchanged (0.0 percent) in September following a 0.1 percent decrease in August. The index for all items less food and energy increased 0.1 percent in September after increasing 0.2 percent in August.
On a seasonally adjusted basis, the CPI-U was virtually unchanged (0.0 percent) in September following a 0.1 percent decrease in August. The index for all items less food and energy increased 0.1 percent in September after increasing 0.2 percent in August.
Producer Price Index Misses Slightly
October 15, 2008
The Producer Price Index for Finished Goods fell 0.4 percent in September, seasonally adjusted. This decline followed a 0.9 percent drop in August and a 1.2 percent increase in July. Prices for finished goods less foods and energy advanced 0.4 percent after rising 0.2 percent a month earlier.
The Producer Price Index for Finished Goods fell 0.4 percent in September, seasonally adjusted. This decline followed a 0.9 percent drop in August and a 1.2 percent increase in July. Prices for finished goods less foods and energy advanced 0.4 percent after rising 0.2 percent a month earlier.
Johnson&Johnson 3rd Qtr 2008 Earnings Beats The Street
Johnson & Johnson Reports 2008 Third-Quarter Results
NEW BRUNSWICK, N.J., Oct 14, 2008 /PRNewswire-FirstCall via COMTEX News Network/ -- Sales of $15.9 Billion Increased 6.4% Versus a Year Ago; EPS was $1.17 Excluding 2007 Special Items, 2008 Third-Quarter EPS Increased 10.4%* Johnson & Johnson today announced sales of $15.9 billion for the third quarter of 2008, an increase of 6.4% as compared to the third quarter of 2007. Operational growth was 3.3% and the positive impact of currency was 3.1%. Domestic sales were up .4%, while international sales increased 13.1%, reflecting operational growth of 6.5% and a positive currency impact of 6.6%.
Net earnings and diluted earnings per share for the third quarter of 2008 were $3.3 billion and $1.17, respectively. The third quarter of 2007 included an after-tax restructuring charge of $528 million associated with a cost improvement program. Excluding this charge, net earnings for the current quarter and diluted earnings per share represent increases of 7.6% and 10.4 %, respectively, as compared to the same period in 2007.
* The Company increased its earnings guidance for full-year 2008 to $4.50 - $4.53 per share, which does not include the impact of any in-process research and development charges or other special items.
"Johnson & Johnson continues to achieve solid earnings results despite the impact that generic products have had on our Pharmaceutical business," said William C. Weldon, Chairman and Chief Executive Officer. "Of note was the strong sales performance of our Consumer segment and the solid sales results in our Medical Devices and Diagnostics segment."
Worldwide Consumer sales of $4.1 billion for the third quarter represented a 13.1% increase over the prior year with operational growth of 9.4% and a positive impact from currency of 3.7%. Domestic sales increased 11.2%, while international sales increased 14.7%; 8.1% from operations and 6.6% from currency.
NEW BRUNSWICK, N.J., Oct 14, 2008 /PRNewswire-FirstCall via COMTEX News Network/ -- Sales of $15.9 Billion Increased 6.4% Versus a Year Ago; EPS was $1.17 Excluding 2007 Special Items, 2008 Third-Quarter EPS Increased 10.4%* Johnson & Johnson today announced sales of $15.9 billion for the third quarter of 2008, an increase of 6.4% as compared to the third quarter of 2007. Operational growth was 3.3% and the positive impact of currency was 3.1%. Domestic sales were up .4%, while international sales increased 13.1%, reflecting operational growth of 6.5% and a positive currency impact of 6.6%.
Net earnings and diluted earnings per share for the third quarter of 2008 were $3.3 billion and $1.17, respectively. The third quarter of 2007 included an after-tax restructuring charge of $528 million associated with a cost improvement program. Excluding this charge, net earnings for the current quarter and diluted earnings per share represent increases of 7.6% and 10.4 %, respectively, as compared to the same period in 2007.
* The Company increased its earnings guidance for full-year 2008 to $4.50 - $4.53 per share, which does not include the impact of any in-process research and development charges or other special items.
"Johnson & Johnson continues to achieve solid earnings results despite the impact that generic products have had on our Pharmaceutical business," said William C. Weldon, Chairman and Chief Executive Officer. "Of note was the strong sales performance of our Consumer segment and the solid sales results in our Medical Devices and Diagnostics segment."
Worldwide Consumer sales of $4.1 billion for the third quarter represented a 13.1% increase over the prior year with operational growth of 9.4% and a positive impact from currency of 3.7%. Domestic sales increased 11.2%, while international sales increased 14.7%; 8.1% from operations and 6.6% from currency.
CSX 3rd Qtr 2008 Earnings Meets The Street
CSX Third Quarter Highlights:
• Earnings Per Share from continuing operations up 40 percent
• Revenues up 18 percent; operating income up 31 percent
• Operating ratio improves 250 basis points
JACKSONVILLE, Fla., (Oct. 14, 2008) – CSX Corporation [NYSE: CSX] today reported
third quarter 2008 earnings from continuing operations of $382 million, or 94 cents per
share. This represents a 40 percent increase from the same period last year. In 2007, CSX
reported third quarter earnings of $297 million from continuing operations, or 67 cents per
share.
“CSX delivered impressive financial results in a challenging economy,” said Michael J.
Ward, chairman, president and CEO. “Our resilient business portfolio and disciplined
operations continue to generate substantial earnings growth for shareholders.”
Revenue increased 18 percent to nearly $3 billion, with nine of the company’s 10 market
segments producing revenue gains despite ongoing softness in the housing and automotive
sectors of the economy. Those gains were led by shipments of export coal, grain, ethanol
and metals, as well as strong yields and fuel recovery in all markets.
Revenue growth and moderating fuel costs, combined with the company’s continued focus
on productivity and cost control, increased operating income by 31 percent to $733 million,
despite the impact of recent storms. In addition, the operating ratio improved 250 basis
points to 75.2 percent, which represents a third quarter record.
• Earnings Per Share from continuing operations up 40 percent
• Revenues up 18 percent; operating income up 31 percent
• Operating ratio improves 250 basis points
JACKSONVILLE, Fla., (Oct. 14, 2008) – CSX Corporation [NYSE: CSX] today reported
third quarter 2008 earnings from continuing operations of $382 million, or 94 cents per
share. This represents a 40 percent increase from the same period last year. In 2007, CSX
reported third quarter earnings of $297 million from continuing operations, or 67 cents per
share.
“CSX delivered impressive financial results in a challenging economy,” said Michael J.
Ward, chairman, president and CEO. “Our resilient business portfolio and disciplined
operations continue to generate substantial earnings growth for shareholders.”
Revenue increased 18 percent to nearly $3 billion, with nine of the company’s 10 market
segments producing revenue gains despite ongoing softness in the housing and automotive
sectors of the economy. Those gains were led by shipments of export coal, grain, ethanol
and metals, as well as strong yields and fuel recovery in all markets.
Revenue growth and moderating fuel costs, combined with the company’s continued focus
on productivity and cost control, increased operating income by 31 percent to $733 million,
despite the impact of recent storms. In addition, the operating ratio improved 250 basis
points to 75.2 percent, which represents a third quarter record.
PepsiCo 3rd Qtr 2008 Earnings Miss
PepsiCo Reports Third-Quarter 2008 Results
1) Net Revenue Growth of 11 Percent, Driven by Strong Performance in PepsiCo Americas Foods and PepsiCo International
2) Company Delivered $0.99 EPS ($1.08 consensus); Excluding Commodity Mark-to-Market Impact, EPS was $1.06
3) Announces Productivity for Growth Initiative to Generate Pre-tax Savings of More Than $1.2 Billion Over the Next 3 Years; Majority of Savings to Be Invested in Brand Building, Long-Term R&D, Innovation and Growth Initiatives in Key Markets
4) Identifies Potential Foreign Exchange Impact to its Full-Year 2008 EPS Guidance
1) Net Revenue Growth of 11 Percent, Driven by Strong Performance in PepsiCo Americas Foods and PepsiCo International
2) Company Delivered $0.99 EPS ($1.08 consensus); Excluding Commodity Mark-to-Market Impact, EPS was $1.06
3) Announces Productivity for Growth Initiative to Generate Pre-tax Savings of More Than $1.2 Billion Over the Next 3 Years; Majority of Savings to Be Invested in Brand Building, Long-Term R&D, Innovation and Growth Initiatives in Key Markets
4) Identifies Potential Foreign Exchange Impact to its Full-Year 2008 EPS Guidance
Wednesday, October 15, 2008
Obama's Tax Reduction Plan? It's A Spending Plan
Obama’s Tax Cut is Actually a Spending Increase, Says Non-Partisan Group
Wednesday, October 15, 2008
By Matt Cover
(CNSNews.com) – Democratic presidential candidate Barack Obama’s plan to cut taxes on 95 percent of taxpayers would effectively increase government spending by an average of $64.8 billion a year and effectively raise income tax rates for many Americans, even on some earning $20-$50,000 per year, according to the non-partisan Tax Policy Center. The heart of Obama’s tax cut proposal is in his use of refundable tax credits, which the Center describes as “credits available to eligible households even if they have no income tax liability” -- in short, refunds available even to those who don’t pay taxes. These refunds are claimed on tax returns and are paid to all taxpayers who qualify for them, regardless of whether they owe taxes or not. These refunds have the ability of reducing a taxpayer’s liability below zero, meaning they can get a refund without actually paying taxes.
In real numbers, 60.7 million people who have no tax burden at all will receive refunds from Obama, while only 33.8 million people, who pay approximately 40 percent of income taxes, will get any kind of refund. Twenty percent of taxpayers, who pay 87.5 percent of total income taxes, will actually see after-tax income decline under Obama by nearly two percent, according to the Center.
By using these refunds, Obama is able to claim that he is giving a tax cut to 95 percent of households, although only 62 percent of households pay any income taxes at all. This means that Obama’s tax plan calls for giving money to some households that do not pay taxes, including a plan to make community college “essentially free” and pay 10 percent of the interest on all mortgages. The problem with Obama’s characterization that his proposals are tax cuts is that refundable credits are calculated as outlays, or direct spending, not as reductions in tax rates, according to the Center. This means that, in budgetary terms, some of Obama’s tax cuts are actually spending increases.
The Tax Policy Center estimates that Obama’s spending proposals will be so large that they effectively eliminate income taxes for 15 million households, increasing the percentage of households that pay no taxes from 37.8 percent to 48.1 percent.
1) Obama’s biggest refund, and the one most likely to go to non-taxpayers, is his Making Work Pay credit, which would give $500-$1000 to everyone making under $200-250,000 a year. This proposal, which the Tax Policy Center says is “intended to offset the regressivity of payroll taxes,” would cost taxpayers $323.4 billion during Obama’s first term, if elected. The credit would be applied to those making as little as $8,100 per year: the equivalent of working approximately 20 hours per week at $7.25 per hour, the level of the federal minimum wage during Obama’s presidency.
2) Obama’s second refund is his Universal 10% Mortgage Interest credit, which will automatically refund 10 percent of mortgage interest, up to $800, for taxpayers who do not itemize deductions. Currently, taxpayers who itemize deductions may deduct mortgage interest from their taxes. This new refund would amount to a $13 billion subsidy for taxpayers who do not itemize.
3) Obama’s third new refund is the American Opportunity credit, which will provide up to $4,000 in refunds to cover the costs of college tuition. The Obama campaign Web site says that this refund is aimed at “making community college essentially free and covering 2/3 of the cost of public 4-year college.” This refund would cost $58.2 billion during Obama’s first term, according to the Center.
4) Obama also plans to expand the child and dependent care credit, by making it refundable and extending it to cover up to 50 percent of the cost of child care, up to $3,000. This proposal would cost an estimated $10.6 billion during an Obama first term and would disproportionately benefit those who pay little or no taxes, according to the Center.
5) Obama would also make the Savers Credit refundable, expanding it to “match 50% of the first $1,000 of savings for families that earn under $75,000,” per year, according to the Obama campaign. The Saver’s Credit is a non-refundable credit which offers low-income taxpayers up to a $1000 refund on contributions they make toward a 401(k) or IRA retirement account. Combined with his proposals to mandate enrollment in 401(k)s and require employers who do not offer them to establish IRAs for workers would carry a Center-estimated cost of $92.3 billion during Obama’s first term.
6) Obama would further expand an already refundable credit, the Earned Income Tax Credit, in three ways. The Earned Income Tax Credit is a refundable credit for low-income workers designed to give refunds to people who may have dependents but do not pay income taxes. First, Obama’s plan would extend the credit’s phase-in range for childless workers, or lower the income level required to qualify for the credit, by increasing to $6,300 the amount of income that can be used to calculate the credit. Second, he would extend the credit’s phase-out range for childless workers, raising the income ceiling on the credit. Phase-in and phase-out ranges are the maximum and minimum income levels needed to qualify for the credit. Obama would extend the phase-out level to $9,825. Third, he would increase the size of the refund available by increasing rates from 7.65 percent to 15.3 percent for childless workers, and from 40 percent to 45 percent for couples with more than three children. According to the Center, these expansions would cost an estimated $19.3 billion over four years.
These programs would apply to most workers making less than $200,000 a year for singles and $250,000 a year for couples, but not evenly. Most of the benefits of Obama’s plan would go to the bottom 40 percent of wage earners, a group that, according to the Congressional Budget Office and the Tax Policy Center, pays zero percent of the nation’s income taxes.
In fact, Obama’s refunds get smaller as tax burdens get larger, which means that while it is true that 95 percent of workers will receive some form of tax refund from Obama, they will not all receive a full refund, because Obama relies on phase-in and phase-out proposals to target his refunds toward the lowest-earning tax brackets. It is these phase-out requirements that result in a general decrease of the refunds for people earning over $75,000 per year, according to the Center. This bracket includes nearly 40 percent of all Americans and nearly 20 percent of total income taxes. When compared with current law, people earning $20,000-$50,000 a year will see their effective tax rates -- the amount of money the taxpayer actually ends up paying the government -- increase on average under Obama’s plan, according to Tax Policy Center figures. Most households making $30,000-$75,000 will not see a reduction in their taxes under Obama’s plan relative to current law, according to the Center. In fact, the only strata that will see a majority of its effective tax burden reduced under Obama are those making less than $30,000 per year and those making $75,000-$200,000 per year.
Wednesday, October 15, 2008
By Matt Cover
(CNSNews.com) – Democratic presidential candidate Barack Obama’s plan to cut taxes on 95 percent of taxpayers would effectively increase government spending by an average of $64.8 billion a year and effectively raise income tax rates for many Americans, even on some earning $20-$50,000 per year, according to the non-partisan Tax Policy Center. The heart of Obama’s tax cut proposal is in his use of refundable tax credits, which the Center describes as “credits available to eligible households even if they have no income tax liability” -- in short, refunds available even to those who don’t pay taxes. These refunds are claimed on tax returns and are paid to all taxpayers who qualify for them, regardless of whether they owe taxes or not. These refunds have the ability of reducing a taxpayer’s liability below zero, meaning they can get a refund without actually paying taxes.
In real numbers, 60.7 million people who have no tax burden at all will receive refunds from Obama, while only 33.8 million people, who pay approximately 40 percent of income taxes, will get any kind of refund. Twenty percent of taxpayers, who pay 87.5 percent of total income taxes, will actually see after-tax income decline under Obama by nearly two percent, according to the Center.
By using these refunds, Obama is able to claim that he is giving a tax cut to 95 percent of households, although only 62 percent of households pay any income taxes at all. This means that Obama’s tax plan calls for giving money to some households that do not pay taxes, including a plan to make community college “essentially free” and pay 10 percent of the interest on all mortgages. The problem with Obama’s characterization that his proposals are tax cuts is that refundable credits are calculated as outlays, or direct spending, not as reductions in tax rates, according to the Center. This means that, in budgetary terms, some of Obama’s tax cuts are actually spending increases.
The Tax Policy Center estimates that Obama’s spending proposals will be so large that they effectively eliminate income taxes for 15 million households, increasing the percentage of households that pay no taxes from 37.8 percent to 48.1 percent.
1) Obama’s biggest refund, and the one most likely to go to non-taxpayers, is his Making Work Pay credit, which would give $500-$1000 to everyone making under $200-250,000 a year. This proposal, which the Tax Policy Center says is “intended to offset the regressivity of payroll taxes,” would cost taxpayers $323.4 billion during Obama’s first term, if elected. The credit would be applied to those making as little as $8,100 per year: the equivalent of working approximately 20 hours per week at $7.25 per hour, the level of the federal minimum wage during Obama’s presidency.
2) Obama’s second refund is his Universal 10% Mortgage Interest credit, which will automatically refund 10 percent of mortgage interest, up to $800, for taxpayers who do not itemize deductions. Currently, taxpayers who itemize deductions may deduct mortgage interest from their taxes. This new refund would amount to a $13 billion subsidy for taxpayers who do not itemize.
3) Obama’s third new refund is the American Opportunity credit, which will provide up to $4,000 in refunds to cover the costs of college tuition. The Obama campaign Web site says that this refund is aimed at “making community college essentially free and covering 2/3 of the cost of public 4-year college.” This refund would cost $58.2 billion during Obama’s first term, according to the Center.
4) Obama also plans to expand the child and dependent care credit, by making it refundable and extending it to cover up to 50 percent of the cost of child care, up to $3,000. This proposal would cost an estimated $10.6 billion during an Obama first term and would disproportionately benefit those who pay little or no taxes, according to the Center.
5) Obama would also make the Savers Credit refundable, expanding it to “match 50% of the first $1,000 of savings for families that earn under $75,000,” per year, according to the Obama campaign. The Saver’s Credit is a non-refundable credit which offers low-income taxpayers up to a $1000 refund on contributions they make toward a 401(k) or IRA retirement account. Combined with his proposals to mandate enrollment in 401(k)s and require employers who do not offer them to establish IRAs for workers would carry a Center-estimated cost of $92.3 billion during Obama’s first term.
6) Obama would further expand an already refundable credit, the Earned Income Tax Credit, in three ways. The Earned Income Tax Credit is a refundable credit for low-income workers designed to give refunds to people who may have dependents but do not pay income taxes. First, Obama’s plan would extend the credit’s phase-in range for childless workers, or lower the income level required to qualify for the credit, by increasing to $6,300 the amount of income that can be used to calculate the credit. Second, he would extend the credit’s phase-out range for childless workers, raising the income ceiling on the credit. Phase-in and phase-out ranges are the maximum and minimum income levels needed to qualify for the credit. Obama would extend the phase-out level to $9,825. Third, he would increase the size of the refund available by increasing rates from 7.65 percent to 15.3 percent for childless workers, and from 40 percent to 45 percent for couples with more than three children. According to the Center, these expansions would cost an estimated $19.3 billion over four years.
These programs would apply to most workers making less than $200,000 a year for singles and $250,000 a year for couples, but not evenly. Most of the benefits of Obama’s plan would go to the bottom 40 percent of wage earners, a group that, according to the Congressional Budget Office and the Tax Policy Center, pays zero percent of the nation’s income taxes.
In fact, Obama’s refunds get smaller as tax burdens get larger, which means that while it is true that 95 percent of workers will receive some form of tax refund from Obama, they will not all receive a full refund, because Obama relies on phase-in and phase-out proposals to target his refunds toward the lowest-earning tax brackets. It is these phase-out requirements that result in a general decrease of the refunds for people earning over $75,000 per year, according to the Center. This bracket includes nearly 40 percent of all Americans and nearly 20 percent of total income taxes. When compared with current law, people earning $20,000-$50,000 a year will see their effective tax rates -- the amount of money the taxpayer actually ends up paying the government -- increase on average under Obama’s plan, according to Tax Policy Center figures. Most households making $30,000-$75,000 will not see a reduction in their taxes under Obama’s plan relative to current law, according to the Center. In fact, the only strata that will see a majority of its effective tax burden reduced under Obama are those making less than $30,000 per year and those making $75,000-$200,000 per year.
Insurance Stock Warning
Many life insurance companies will be taking deferred acquisition cost (DAC) charges when they release earnings this quarter. This may cause an investor panic and a major selloff in the group.
DAC Charge - Deferred acquisition costs represent the costs that an insurer spends to acquire a customer when it issues a policy. Those costs are capitalized on the balance sheet as an asset and then expensed over the life of the policy as the premium is earned. When a company establishes this account it must make assumptions about investment returns, mortality, policy lapses and expenses. If actual experience differs materially from these assumptions used, then the company must "unlock" its deferred acquisition costs to reflect reality. If a company has lower investment returns than what was modeled into its assumptions, then it must accelerate the recognition of the deferred acquisition costs, and take a charge to reflect it. Since this is an asset account, it reduces book value. (To learn more, read Testing Balance Sheet Strength.)
Two Breeds of DAC - There are two types of unlocking of deferred acquisition costs: prospective and retrospective. Retrospective unlocking refers to a change in the previous profit estimates to the actual profits in the current quarter, while prospective unlocking is based on an annual review by a company, where they adjust assumptions used in models to estimate future profits. This fall in the equity markets has cut actual investment returns, which forces the retrospective unlocking, and some companies may adjust models this quarter, which will trigger the prospective unlocking. Several companies have already announced deferred acquisition cost charges this quarter. Prudential Financial (NYSE:PRU) announced on October 9, 2008, that it was taking a pre-tax charge of $380 million or 68 cents per share related to its individual annuity business. MetLife (NYSE:MET) also took a deferred acquisition cost charge of $105 million or 14 cents per share.Fixed Income DeclineThis is not the only issue facing insurers, as they also hold large investment portfolios of fixed income securities that are used to pay off claims. These portfolios have declined in value the last three months and insurers must recognize the decline in value as well. Hartford Insurance Group (NYSE:HIG) was one insurer taking a large loss on its investment portfolio. The company announced in early October that the net realized loss would range from $7.05-7.25 per share, or $2.1 billion to $2.2 billion. Its next earnings report is expected after market close October 29, 2008.Lincoln Financial Group (NYSE:LNC) also wrote down the value of its portfolio with net realized losses on investments and derivatives in a range of $140-160 million, or 55-60 cents per diluted share. Even more worrisome was a net unrealized loss of $1.8-2.0 billion. Total revenue reported for the three months ending June 30, 2008 was $2.58 billion which was down 3.4% from the same period in 2007. Net income was down 66.8% in the most recent quarter from $376 million in 2007 to $125 million in 2008. On an earnings per share basis that's a drop to 48 cents per share from $1.37 per share. Current quarter results are expected October 28, 2008.Standard and Poor's also recognized the issues impacting the life insurance industry and revised its outlook to' negative' from 'stable', citing "expectations of higher-than-normal credit losses, lower fee-based revenue and a reduced financial flexibility".Bottom LineInvestors should brace themselves. The latest issue to hurt the life insurance sector will be the acceleration of deferred acquisition costs as a result of lower investment return assumption - both real and future.
By Eric FoxEric J. Fox, is the founder of Brittain Capital Management, LLC., which is the manager of the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at the Stock Market Prognosticator and Under the Buttonwood Tree. At the time of writing Eric Fox did not own shares in any of the companies mentioned in this article.
DAC Charge - Deferred acquisition costs represent the costs that an insurer spends to acquire a customer when it issues a policy. Those costs are capitalized on the balance sheet as an asset and then expensed over the life of the policy as the premium is earned. When a company establishes this account it must make assumptions about investment returns, mortality, policy lapses and expenses. If actual experience differs materially from these assumptions used, then the company must "unlock" its deferred acquisition costs to reflect reality. If a company has lower investment returns than what was modeled into its assumptions, then it must accelerate the recognition of the deferred acquisition costs, and take a charge to reflect it. Since this is an asset account, it reduces book value. (To learn more, read Testing Balance Sheet Strength.)
Two Breeds of DAC - There are two types of unlocking of deferred acquisition costs: prospective and retrospective. Retrospective unlocking refers to a change in the previous profit estimates to the actual profits in the current quarter, while prospective unlocking is based on an annual review by a company, where they adjust assumptions used in models to estimate future profits. This fall in the equity markets has cut actual investment returns, which forces the retrospective unlocking, and some companies may adjust models this quarter, which will trigger the prospective unlocking. Several companies have already announced deferred acquisition cost charges this quarter. Prudential Financial (NYSE:PRU) announced on October 9, 2008, that it was taking a pre-tax charge of $380 million or 68 cents per share related to its individual annuity business. MetLife (NYSE:MET) also took a deferred acquisition cost charge of $105 million or 14 cents per share.Fixed Income DeclineThis is not the only issue facing insurers, as they also hold large investment portfolios of fixed income securities that are used to pay off claims. These portfolios have declined in value the last three months and insurers must recognize the decline in value as well. Hartford Insurance Group (NYSE:HIG) was one insurer taking a large loss on its investment portfolio. The company announced in early October that the net realized loss would range from $7.05-7.25 per share, or $2.1 billion to $2.2 billion. Its next earnings report is expected after market close October 29, 2008.Lincoln Financial Group (NYSE:LNC) also wrote down the value of its portfolio with net realized losses on investments and derivatives in a range of $140-160 million, or 55-60 cents per diluted share. Even more worrisome was a net unrealized loss of $1.8-2.0 billion. Total revenue reported for the three months ending June 30, 2008 was $2.58 billion which was down 3.4% from the same period in 2007. Net income was down 66.8% in the most recent quarter from $376 million in 2007 to $125 million in 2008. On an earnings per share basis that's a drop to 48 cents per share from $1.37 per share. Current quarter results are expected October 28, 2008.Standard and Poor's also recognized the issues impacting the life insurance industry and revised its outlook to' negative' from 'stable', citing "expectations of higher-than-normal credit losses, lower fee-based revenue and a reduced financial flexibility".Bottom LineInvestors should brace themselves. The latest issue to hurt the life insurance sector will be the acceleration of deferred acquisition costs as a result of lower investment return assumption - both real and future.
By Eric FoxEric J. Fox, is the founder of Brittain Capital Management, LLC., which is the manager of the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at the Stock Market Prognosticator and Under the Buttonwood Tree. At the time of writing Eric Fox did not own shares in any of the companies mentioned in this article.
Monday, October 13, 2008
A Free Market Bailout Help - Repatriation
Autodesk suggests incentives to repatriate foreign cash. "To Ease Crisis, Tech Leader Wants More Funds Headed Home".
BECAUSE CREDIT IS FROZEN AND CASH IS AS SCARCE AS A Chicago Cubs' World Series game, Autodesk Chief Exec Carl Bass thinks the government must go further in letting companies bring their foreign cash home at a reduced tax rate.
This so-called repatriation of money would relax U.S. tax rules to allow American corporations to inject billions into U.S. banks that are now deposited offshore. The benefits would be twofold, Bass says. It would pump liquidity into the American financial system and could help refill Uncle Sam's depleted coffers. A week ago, the Internal Revenue Service, in a liberalization of its policies, said that companies could borrow these funds from their foreign units for as long as 60 days three times a year without paying the 35% corporate rate they normally face. The change could help tide over companies that have had trouble issuing commercial paper, though some of the details remain unclear.
Even so, cash "continues to pile up offshore [and] getting more money back to American banks is a good thing," says Bass, a vocal proponent of repatriation.
The CEO has significant incentive to tap Autodesk's overseas funds. Nearly three-quarters of the San Rafael, Calif. software maker's almost $1 billion in cash is held in offshore banks. Many American corporations with overseas subsidiaries, including a lot of leading Silicon Valley companies, such as Hewlett-Packard (ticker: HPQ) and Symantec (SYMC), carry hefty cash balances abroad.
The practice isn't illegal or a tax dodge. The companies are required to pay taxes to the foreign governments in the countries in which they do business, but usually at rates much lower than those charged in the U.S., says J.D. Foster, a senior fellow at the Heritage Foundation, a Washington, D.C., think tank.
If the parent company wants to use the cash in the U.S., the federal government can charge the corporation the balance between what was paid to the foreign government and what is owed the U.S. at domestic tax rates. "It effectively creates a barrier to bringing the money home" and promotes an inefficient use of capital, Foster maintains.
The IRS previously has allowed companies to borrow from foreign units twice a year for no longer than 30 days. Bass contends that, with fewer restrictions, he and his peers could use the cash to hire American workers, acquire start-ups and buy back shares. Private-equity investors and venture capitalists would likely support the measure because it would provide capital for buyouts at a time when exits and new fund-raising will be difficult. Additional cash could help offset the deflation in stock as a currency for deals amid crushed share prices, Bass argues.
Staggering: Although Apple and other market leaders rallied Friday, it was the Nasdaq's worst week since 9-11. The index fell 15%, to close at 1650.
"You would see a huge wave of mergers and acquisitions," says Paul Wick, managing partner of J&W Seligman and head of its technology group. "It's just a huge opportunity," adds Wick, whose funds own Autodesk shares.
But Heritage's Foster isn't so sure. He points to a temporary measure in 2004 that offered American companies one-year relief of the tax burden and isn't convinced it did all that much good. "It didn't appear to have the expected results," Foster says.
At the time, it was estimated that roughly $800 billion in profits were parked offshore. About 850 companies brought back roughly $360 billion during that tax holiday. There's no firm estimate of how much money is now in banks offshore but it's safe to assume it's well above $800 billion.
Bass asserts that the last tax holiday did work, adding that it could be even more effective this time. Under proposals he supports, U.S. companies would pay some tax to repatriate their money, most likely splitting the difference between U.S. corporate tax rates and those that would have gone to foreign tax collectors. The CEO argues that the "downside is negligible." "We don't owe it to the U.S. government [if kept abroad], and we will never [U.S.] pay taxes on it," Bass adds.
Bass thinks repatriation measures will get added attention once a new administration takes office.
BECAUSE CREDIT IS FROZEN AND CASH IS AS SCARCE AS A Chicago Cubs' World Series game, Autodesk Chief Exec Carl Bass thinks the government must go further in letting companies bring their foreign cash home at a reduced tax rate.
This so-called repatriation of money would relax U.S. tax rules to allow American corporations to inject billions into U.S. banks that are now deposited offshore. The benefits would be twofold, Bass says. It would pump liquidity into the American financial system and could help refill Uncle Sam's depleted coffers. A week ago, the Internal Revenue Service, in a liberalization of its policies, said that companies could borrow these funds from their foreign units for as long as 60 days three times a year without paying the 35% corporate rate they normally face. The change could help tide over companies that have had trouble issuing commercial paper, though some of the details remain unclear.
Even so, cash "continues to pile up offshore [and] getting more money back to American banks is a good thing," says Bass, a vocal proponent of repatriation.
The CEO has significant incentive to tap Autodesk's overseas funds. Nearly three-quarters of the San Rafael, Calif. software maker's almost $1 billion in cash is held in offshore banks. Many American corporations with overseas subsidiaries, including a lot of leading Silicon Valley companies, such as Hewlett-Packard (ticker: HPQ) and Symantec (SYMC), carry hefty cash balances abroad.
The practice isn't illegal or a tax dodge. The companies are required to pay taxes to the foreign governments in the countries in which they do business, but usually at rates much lower than those charged in the U.S., says J.D. Foster, a senior fellow at the Heritage Foundation, a Washington, D.C., think tank.
If the parent company wants to use the cash in the U.S., the federal government can charge the corporation the balance between what was paid to the foreign government and what is owed the U.S. at domestic tax rates. "It effectively creates a barrier to bringing the money home" and promotes an inefficient use of capital, Foster maintains.
The IRS previously has allowed companies to borrow from foreign units twice a year for no longer than 30 days. Bass contends that, with fewer restrictions, he and his peers could use the cash to hire American workers, acquire start-ups and buy back shares. Private-equity investors and venture capitalists would likely support the measure because it would provide capital for buyouts at a time when exits and new fund-raising will be difficult. Additional cash could help offset the deflation in stock as a currency for deals amid crushed share prices, Bass argues.
Staggering: Although Apple and other market leaders rallied Friday, it was the Nasdaq's worst week since 9-11. The index fell 15%, to close at 1650.
"You would see a huge wave of mergers and acquisitions," says Paul Wick, managing partner of J&W Seligman and head of its technology group. "It's just a huge opportunity," adds Wick, whose funds own Autodesk shares.
But Heritage's Foster isn't so sure. He points to a temporary measure in 2004 that offered American companies one-year relief of the tax burden and isn't convinced it did all that much good. "It didn't appear to have the expected results," Foster says.
At the time, it was estimated that roughly $800 billion in profits were parked offshore. About 850 companies brought back roughly $360 billion during that tax holiday. There's no firm estimate of how much money is now in banks offshore but it's safe to assume it's well above $800 billion.
Bass asserts that the last tax holiday did work, adding that it could be even more effective this time. Under proposals he supports, U.S. companies would pay some tax to repatriate their money, most likely splitting the difference between U.S. corporate tax rates and those that would have gone to foreign tax collectors. The CEO argues that the "downside is negligible." "We don't owe it to the U.S. government [if kept abroad], and we will never [U.S.] pay taxes on it," Bass adds.
Bass thinks repatriation measures will get added attention once a new administration takes office.
Market Movers - Indicators
October 15 - September Retail Sales (consensus -0.7%)
-------------September PPI (-0.5%)
-------------August Business Inventories (0.5%)
October 16 - September CPI (0.1%)
-------------September Industrial Production (-0.8%)
-------------September Capacity Utilization (77.9%)
October 17 - September Housing Starts (870K)
-------------Michigan Sentiment (65.0%)
-------------September PPI (-0.5%)
-------------August Business Inventories (0.5%)
October 16 - September CPI (0.1%)
-------------September Industrial Production (-0.8%)
-------------September Capacity Utilization (77.9%)
October 17 - September Housing Starts (870K)
-------------Michigan Sentiment (65.0%)
Market Movers - Earnings
The earnings season ramps up.
October 14 - PepsiCo 3Q (consensus $1.08)
-------------CSX 3Q ($0.94)
-------------Intel 3Q ($0.34)
-------------Johnson&Johnson 3Q ($1.11)
October 15 - JP Morgan Chase 3Q ($-0.08)
-------------eBay 3Q ($0.41)
-------------Coca-Cola 3Q ($0.77)
-------------Wells Fargo 3Q ($0.43)
October 16 - PNC 3Q ($1.09)
-------------PPG 3Q ($1.29)
-------------United Technologies 3Q ($1.32)
-------------Capital One 3Q ($1.01)
-------------IBM 3Q ($2.02)
-------------Harley Davidson 3Q ($0.79)
-------------Google 3Q ($4.80)
October 17 - Schlumberger 3Q ($1.26)
-------------Honeywell 3Q ($0.96)
October 14 - PepsiCo 3Q (consensus $1.08)
-------------CSX 3Q ($0.94)
-------------Intel 3Q ($0.34)
-------------Johnson&Johnson 3Q ($1.11)
October 15 - JP Morgan Chase 3Q ($-0.08)
-------------eBay 3Q ($0.41)
-------------Coca-Cola 3Q ($0.77)
-------------Wells Fargo 3Q ($0.43)
October 16 - PNC 3Q ($1.09)
-------------PPG 3Q ($1.29)
-------------United Technologies 3Q ($1.32)
-------------Capital One 3Q ($1.01)
-------------IBM 3Q ($2.02)
-------------Harley Davidson 3Q ($0.79)
-------------Google 3Q ($4.80)
October 17 - Schlumberger 3Q ($1.26)
-------------Honeywell 3Q ($0.96)
New FDIC Protection Limits
Savings have new, temporary protections
Sunday, October 12, 2008 3:37 AM
By Michelle Singletary
Everywhere I go, I can feel the tension. People are naturally concerned about their investment portfolios, but increasingly they're worried about the safety of their cash.
With a number of major bank failures and takeovers, many people are wondering how much of their cash is protected.
On Oct. 3, President Bush signed the Emergency Economic Stabilization Act of 2008. It raised the amount of money in bank and savings accounts that the Federal Deposit Insurance Corp. covers from $100,000 to $250,000 per depositor.
However, here's why you have to pay attention to all the fine details of the plans to "protect" our cash. The increase in the FDIC coverage is only temporary. The basic FDIC deposit insurance limit will return to $100,000 after Dec. 31, 2009. The legislation did not increase coverage for retirement accounts, which continues to be $250,000.
The new law also temporarily increased the insurance limit to $250,000 on accounts in federal credit unions and the majority of state-chartered credit unions.
Federal credit unions are regulated by the National Credit Union Administration, an independent federal agency. It operates and manages the National Credit Union Share Insurance Fund, which insures the deposits of nearly 89 million accounts in all federal credit unions and the overwhelming majority of state-chartered credit unions.
In nine states, 163 state-chartered credit unions offer coverage from American Share Insurance, a private insurance company. The company insures up to $250,000 per account. If you have an account at a credit union with this insurance, it is not guaranteed by the federal government. However, Dennis R. Adams, president and chief executive of ASI, says depositors with its coverage should not be worried about their accounts. "We have a good track record and good financial statements," Adams said. "Credit unions are not the source of the problems today."
Before the FDIC limits were raised, the Treasury Department announced it would provide protection for cash stashed in money-market mutual funds, which are offered by mutual-fund companies. These funds are not the same as money-market accounts offered by banks, which are FDIC-insured.
The federal government says it will guarantee that investors receive $1 for each money-market fund share held as of the close of business on Sept. 19. The program covers only money-market funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, are publicly offered, are registered with the Securities and Exchange Commission, and maintain a stable share price of $1. Taxable and nontaxable funds are covered.
The guarantee will be triggered if a participating fund's net asset value falls below $0.995, commonly referred to as "breaking the buck."
But the program will exist initially for three months; the Treasury secretary can extend the program up to the close of business on Sept. 18, 2009.
With all these temporary government solutions, the word for the day is diversify.
Michelle Singletary writes for the Washington Post Writers Group.
Sunday, October 12, 2008 3:37 AM
By Michelle Singletary
Everywhere I go, I can feel the tension. People are naturally concerned about their investment portfolios, but increasingly they're worried about the safety of their cash.
With a number of major bank failures and takeovers, many people are wondering how much of their cash is protected.
On Oct. 3, President Bush signed the Emergency Economic Stabilization Act of 2008. It raised the amount of money in bank and savings accounts that the Federal Deposit Insurance Corp. covers from $100,000 to $250,000 per depositor.
However, here's why you have to pay attention to all the fine details of the plans to "protect" our cash. The increase in the FDIC coverage is only temporary. The basic FDIC deposit insurance limit will return to $100,000 after Dec. 31, 2009. The legislation did not increase coverage for retirement accounts, which continues to be $250,000.
The new law also temporarily increased the insurance limit to $250,000 on accounts in federal credit unions and the majority of state-chartered credit unions.
Federal credit unions are regulated by the National Credit Union Administration, an independent federal agency. It operates and manages the National Credit Union Share Insurance Fund, which insures the deposits of nearly 89 million accounts in all federal credit unions and the overwhelming majority of state-chartered credit unions.
In nine states, 163 state-chartered credit unions offer coverage from American Share Insurance, a private insurance company. The company insures up to $250,000 per account. If you have an account at a credit union with this insurance, it is not guaranteed by the federal government. However, Dennis R. Adams, president and chief executive of ASI, says depositors with its coverage should not be worried about their accounts. "We have a good track record and good financial statements," Adams said. "Credit unions are not the source of the problems today."
Before the FDIC limits were raised, the Treasury Department announced it would provide protection for cash stashed in money-market mutual funds, which are offered by mutual-fund companies. These funds are not the same as money-market accounts offered by banks, which are FDIC-insured.
The federal government says it will guarantee that investors receive $1 for each money-market fund share held as of the close of business on Sept. 19. The program covers only money-market funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, are publicly offered, are registered with the Securities and Exchange Commission, and maintain a stable share price of $1. Taxable and nontaxable funds are covered.
The guarantee will be triggered if a participating fund's net asset value falls below $0.995, commonly referred to as "breaking the buck."
But the program will exist initially for three months; the Treasury secretary can extend the program up to the close of business on Sept. 18, 2009.
With all these temporary government solutions, the word for the day is diversify.
Michelle Singletary writes for the Washington Post Writers Group.
Friday, October 10, 2008
GE Meets The Street
Fairfield, Conn., Oct. 10, 2008 – GE announced today third quarter 2008 earnings from continuing operations of $4.5 billion, or $.45 per share, down 12% and 10%, respectively, from third quarter 2007, driven primarily by a decrease in financial services earnings. Third quarter revenues from continuing operations were $47.2 billion, up 11%.
GE Chairman and CEO Jeff Immelt said, “On September 25, we revised our third-quarter and full-year 2008 guidance to reflect the current volatile environment. Reported earnings are fully in line with guidance, and we have continued to take decisive steps to strengthen GE in a tough environment. “Our infrastructure and media businesses continued to see signs of strength,” Immelt said. “Energy Infrastructure led the quarter with a 31% increase in segment profit based on broad-based global demand and double-digit increases in orders and services. NBC Universal grew segment profit 10%, its eighth straight quarter of growth.
3Q 2008 Earnings In Line with 9/25/08 Revised Guidance (Continuing Operations)
............................................................9/25 Forecast........................... Actual
Earnings per share....................................$.43-$.48.................................$.45, (10%)
Industrial segment earnings (ex. C&I)...........+10-15%..................................+12%
Financial services earnings.......................~$2.0 billion...............................$2.0 billion, (38%)
Infrastructure orders................................+10%........................................+9%
Commercial paper......................................<$90 billion............................$88 billion
Board-approved plan to maintain dividend at $1.24 per share through 2009
Other Highlights (Continuing Operations)
Industrial organic revenue growth of 10%; total organic revenue growth of 3%
Global revenue growth of 14%; global industrial revenue growth of 20%
Total orders backlog of $170 billion; equipment backlog up 19%; service backlog up 22%
ROTC of 17%; Industrial CFOA growth of 5%
Higher loss provisions of $0.5 billion
Cable and films had a solid quarter, and the success of the Beijing Olympics showed the value of the network model. Technology Infrastructure grew segment profit 2%, with Aviation’s strong performance partially offset by a challenging quarter at Healthcare.
“Overall industrial growth should continue based on solid orders. Infrastructure orders grew 9%, with 5% growth in equipment and 16% growth in service,” Immelt said. “Our total orders backlog stands at $170 billion, up 20% from last year. We are encouraged by our sustained orders growth in services, as these revenues are reliable with attractive margins even in a period of economic volatility.
“Our financial services business generated $2 billion of earnings, consistent with our revised
expectations. While GE Capital is not immune from the current environment, we continued to
outperform our financial services peers. We are improving our margins and focusing these
businesses on the right products and markets. GE Capital is on track to earn over $9 billion for the year,” Immelt said.
“In addition, GE has taken proactive steps to reduce leverage and improve liquidity, consistent with being one of six Triple-A-rated industrial companies in the U.S. We have raised $15 billion of committed capital that makes the Company more secure in the short term, but could be used to play offense in the long term,” Immelt said.
Third Quarter 2008 Financial Highlights:
Earnings from continuing operations were $4.5 billion, down 12% from $5.1 billion in the third
quarter of 2007. EPS from continuing operations was $.45, down 10% from last year. Segment profit fell 11% in the quarter, as strong 31% growth at Energy Infrastructure was more than offset by a 33% decline at Capital Finance.
Including the effects of discontinued operations, third quarter net earnings were $4.3 billion ($.43 per share) in 2008 and $5.6 billion ($.54 per share) in the third quarter of 2007.
Revenues grew 11% to $47.2 billion. GE Capital Services’ (GECS) revenues grew 2% over last year to $18.4 billion. Industrial sales were $28.9 billion, an increase of 17% from the third quarter of 2007. Cash generated from GE operating activities in the first nine months of 2008 totaled $13.6 billion, down 18% from $16.7 billion last year, reflecting a $3.6 billion decrease in GECS’ dividends primarily due to a non-repeat $2.7 billion special dividend and a third quarter 2008 reduction in the GECS dividend rate to 10% of earnings. The Company had solid Industrial cash flow from operating activities of $11.3 billion, an increase of 5%, for the first nine months of 2008.
“We are on track to meet our September 25 revised guidance for the full year, adjusted for dilution,” Immelt said. “We have taken a number of steps to protect investors from the downside risk in financial services, and we have ways to mitigate potential disruptions in infrastructure and media markets, but the environment remains challenging. We have big backlogs, great products, stable service revenue, strong operating discipline, an unmatched global position and multiple revenue streams. As a result, the Company is well positioned to perform in a very difficult environment, and our Board has approved our plan to sustain the GE dividend through 2009,” Immelt said. GE will discuss preliminary third quarter 2008 results on a conference call and Webcast at 8:30 a.m. ET today. Call information is available at www.ge.com/investor, and related charts will be posted there prior to the call.
GE Chairman and CEO Jeff Immelt said, “On September 25, we revised our third-quarter and full-year 2008 guidance to reflect the current volatile environment. Reported earnings are fully in line with guidance, and we have continued to take decisive steps to strengthen GE in a tough environment. “Our infrastructure and media businesses continued to see signs of strength,” Immelt said. “Energy Infrastructure led the quarter with a 31% increase in segment profit based on broad-based global demand and double-digit increases in orders and services. NBC Universal grew segment profit 10%, its eighth straight quarter of growth.
3Q 2008 Earnings In Line with 9/25/08 Revised Guidance (Continuing Operations)
............................................................9/25 Forecast........................... Actual
Earnings per share....................................$.43-$.48.................................$.45, (10%)
Industrial segment earnings (ex. C&I)...........+10-15%..................................+12%
Financial services earnings.......................~$2.0 billion...............................$2.0 billion, (38%)
Infrastructure orders................................+10%........................................+9%
Commercial paper......................................<$90 billion............................$88 billion
Board-approved plan to maintain dividend at $1.24 per share through 2009
Other Highlights (Continuing Operations)
Industrial organic revenue growth of 10%; total organic revenue growth of 3%
Global revenue growth of 14%; global industrial revenue growth of 20%
Total orders backlog of $170 billion; equipment backlog up 19%; service backlog up 22%
ROTC of 17%; Industrial CFOA growth of 5%
Higher loss provisions of $0.5 billion
Cable and films had a solid quarter, and the success of the Beijing Olympics showed the value of the network model. Technology Infrastructure grew segment profit 2%, with Aviation’s strong performance partially offset by a challenging quarter at Healthcare.
“Overall industrial growth should continue based on solid orders. Infrastructure orders grew 9%, with 5% growth in equipment and 16% growth in service,” Immelt said. “Our total orders backlog stands at $170 billion, up 20% from last year. We are encouraged by our sustained orders growth in services, as these revenues are reliable with attractive margins even in a period of economic volatility.
“Our financial services business generated $2 billion of earnings, consistent with our revised
expectations. While GE Capital is not immune from the current environment, we continued to
outperform our financial services peers. We are improving our margins and focusing these
businesses on the right products and markets. GE Capital is on track to earn over $9 billion for the year,” Immelt said.
“In addition, GE has taken proactive steps to reduce leverage and improve liquidity, consistent with being one of six Triple-A-rated industrial companies in the U.S. We have raised $15 billion of committed capital that makes the Company more secure in the short term, but could be used to play offense in the long term,” Immelt said.
Third Quarter 2008 Financial Highlights:
Earnings from continuing operations were $4.5 billion, down 12% from $5.1 billion in the third
quarter of 2007. EPS from continuing operations was $.45, down 10% from last year. Segment profit fell 11% in the quarter, as strong 31% growth at Energy Infrastructure was more than offset by a 33% decline at Capital Finance.
Including the effects of discontinued operations, third quarter net earnings were $4.3 billion ($.43 per share) in 2008 and $5.6 billion ($.54 per share) in the third quarter of 2007.
Revenues grew 11% to $47.2 billion. GE Capital Services’ (GECS) revenues grew 2% over last year to $18.4 billion. Industrial sales were $28.9 billion, an increase of 17% from the third quarter of 2007. Cash generated from GE operating activities in the first nine months of 2008 totaled $13.6 billion, down 18% from $16.7 billion last year, reflecting a $3.6 billion decrease in GECS’ dividends primarily due to a non-repeat $2.7 billion special dividend and a third quarter 2008 reduction in the GECS dividend rate to 10% of earnings. The Company had solid Industrial cash flow from operating activities of $11.3 billion, an increase of 5%, for the first nine months of 2008.
“We are on track to meet our September 25 revised guidance for the full year, adjusted for dilution,” Immelt said. “We have taken a number of steps to protect investors from the downside risk in financial services, and we have ways to mitigate potential disruptions in infrastructure and media markets, but the environment remains challenging. We have big backlogs, great products, stable service revenue, strong operating discipline, an unmatched global position and multiple revenue streams. As a result, the Company is well positioned to perform in a very difficult environment, and our Board has approved our plan to sustain the GE dividend through 2009,” Immelt said. GE will discuss preliminary third quarter 2008 results on a conference call and Webcast at 8:30 a.m. ET today. Call information is available at www.ge.com/investor, and related charts will be posted there prior to the call.
Thursday, October 9, 2008
Nokia - A Great Stock Pick?
Trading now at about $16.00 and off it's 52 week high of $42.22 it might be time to buy Nokia, the world's leading handset maker. Forward P/E is 7.55 and it pays a 4.70% dividend (Tim).
ESPOO, FINLAND - If being first mover meant anything, Anssi Vanjoki and his colleagues at Nokia (NOK) would already rule the mobile Web. Way back in 1996, the Finnish company launched a prototype phone with a "dangerometer," which used software and satellite technology to match your location to an online database of crime statistics. If you strayed into a dodgy neighborhood, the meter would turn from green to red, and an icon popped up inviting you to buy life insurance online.
Vanjoki, a Nokia executive vice-president, chuckles as he recalls the farfetched idea. Yet he and his team at Nokia headquarters, on a quiet cove outside Helsinki, are convinced the day they've long hoped for has finally arrived. After a decade of false starts and half-kept promises, the Net is breaking free of its desktop chains and going mobile. "The next generation of the Web is going to be all about the small multimedia computer and not the PC," says Vanjoki.
There's increasing evidence that he's right. The number of people who use their phones to cruise the Web is surging worldwide, with the figure in the U.S. rising 36% over the past year, to 40 million, according to researcher Nielsen. Phones are getting better at handling data, their Web-surfing software is easier to use, and rates for mobile surfing are plummeting. In addition, wireless operators have loosened their grip on what customers can do with mobile phones, making it easier for people to install their own software and buy services from third parties. "The mobile Web is set to take off because the barriers are coming down," says Tim Berners-Lee, inventor of the Web and director of the standards-setting World Wide Web Consortium.
TAILORED FOR EVERY MARKET
Vanjoki may have had an early vision of this emerging future, but lately Apple (AAPL) has led the way in realizing it. The company's iPhone, with its iconic touchscreen design and near-magical software, has turned millions of U.S. users on to the mobile Net. Just a year after debuting its first phone, Apple has snatched the spotlight from Nokia and rivals like Research In Motion (RIM).
Now, Nokia is striking back. The company is launching its first mass-market touchscreen phone this month. The 5800 will have a shape and screen similar to the iPhone, but its price will be about a third less than the Apple device. In addition, the Nokia phone will come with a year-long music service subscription that will let customers download and keep all the music they want from the four major record labels. Nokia plans a steady stream of touchscreen phones in the coming months, an effort aimed at overwhelming Apple and others with devices for different customer segments and price ranges in local markets around the world. "We're able to do this faster than anyone else," says Vanjoki. "We have a localizing machine that spans all countries."
That's easy to forget with all the euphoria surrounding the iPhone. Nokia is still far and away the biggest and most influential player in this industry. The iPhone may win the hearts and fill the pockets of jet-setters and gadget hounds, but they're a relatively small group. Nokia will sell nearly half a billion handsets this year—50 times the number of iPhones Apple hopes to sell. The Finnish company already is well entrenched in the chaotic streets of Lagos, the rice paddies along the Ganges, and in factories and schools from São Paulo to Shanghai. Its phones are ubiquitous in areas where people have never heard of Apple.
So for much of humanity, it will be Nokia, far more than its American rivals, that will define the mobile Net. "We touch so many consumers," says Vanjoki. "They expect Nokia to offer them new things."
New Jobless Claims Down Slightly
In the week ending Oct. 4, the advance figure for seasonally adjusted initial claims was 478,000, a decrease of 20,000 from the previous week's revised figure of 498,000. It is estimated that the effects of Hurricane Gustav in Louisiana and the effects of Hurricane Ike in Texas added approximately 17,000 claims to the total. The 4-week moving average was 482,500, an increase of 8,250 from the previous week's revised average of 474,250.
The advance seasonally adjusted insured unemployment rate was 2.7 percent for the week ending Sept. 27, unchanged from the prior week's unrevised rate of 2.7 percent.
The advance number for seasonally adjusted insured unemployment during the week ending Sept. 27 was 3,659,000, an increase of 56,000 from the preceding week's revised level of 3,603,000. The 4-week moving average was 3,563,250, an increase of 31,750 from the preceding week's revised average of 3,531,500.
The advance seasonally adjusted insured unemployment rate was 2.7 percent for the week ending Sept. 27, unchanged from the prior week's unrevised rate of 2.7 percent.
The advance number for seasonally adjusted insured unemployment during the week ending Sept. 27 was 3,659,000, an increase of 56,000 from the preceding week's revised level of 3,603,000. The 4-week moving average was 3,563,250, an increase of 31,750 from the preceding week's revised average of 3,531,500.
Wednesday, October 8, 2008
Wal-Mart September Same Store Sales
Wal-Mart Reports September Sales
BENTONVILLE, Ark., Oct. 8, 2008 --- Wal-Mart Stores, Inc. (NYSE: WMT) reported net sales for the five- and 35-week periods ending Oct. 3, 2008, and Oct. 5, 2007, respectively, as follows (dollars in billions).
--------------------------------------------Percent------------------------------------Percent
-------------------10/3/2008--10/5/2007---Change-----10/3/2008-----10/5/2007-------Change
Walmart U.S.------22.482-------21.447-------4.8%--------165.123--------154.744-------6.7%
Sam's Club---------4.391--------4.066--------8.0%--------31.439---------29.244--------7.5%
International------9.356---------8.718--------7.3%--------66.810----------57.730-----15.7%--------------Total Company----36.229-------34.231-------5.8%--------263.372--------241.718-------9.0%
BENTONVILLE, Ark., Oct. 8, 2008 --- Wal-Mart Stores, Inc. (NYSE: WMT) reported net sales for the five- and 35-week periods ending Oct. 3, 2008, and Oct. 5, 2007, respectively, as follows (dollars in billions).
--------------------------------------------Percent------------------------------------Percent
-------------------10/3/2008--10/5/2007---Change-----10/3/2008-----10/5/2007-------Change
Walmart U.S.------22.482-------21.447-------4.8%--------165.123--------154.744-------6.7%
Sam's Club---------4.391--------4.066--------8.0%--------31.439---------29.244--------7.5%
International------9.356---------8.718--------7.3%--------66.810----------57.730-----15.7%--------------Total Company----36.229-------34.231-------5.8%--------263.372--------241.718-------9.0%
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