European Markets & U.S. futures Rise
By Sarah Jones
July 9 (Bloomberg) — European stocks climbed for the first time in six days and U.S. futures gained after Alcoa Inc. kicked off the second-quarter earnings season by reporting results that beat analysts’ estimates.
Alcoa rallied 5.4 percent in German trading after the largest U.S. aluminum producer posted a smaller-than-estimated loss. Norsk Hydro ASA, Europe’s third-biggest aluminum maker, and Rio Tinto Group added more than 2 percent. Daimler AG and PSA Peugeot Citroen advanced after Bank of America Corp. upgraded European automakers to “overweight” and a report showed car sales in China surged the most in more than three years last month.
Europe’s Dow Jones Stoxx 600 Index increased 0.9 percent to 199.87 at 12:05 p.m. in London. The gauge has surged 27 percent since March 9 on speculation government measures will help to end the deepest global recession since World War II.
The earnings season has “started on the right note,” Monika Rosen, Vienna-based head of research at UniCredit Private Bank, said in a Bloomberg Television interview. “I am not sure you can make the entire trend just by Alcoa as they stand to profit from all these stimulus measures that are being put in place around the globe. So far so good.”
The Bank of England stuck to its plan to buy bonds with 125 billion pounds ($202 billion) of newly printed money today as officials wait to assess whether the worst of Britain’s recession is over.
U.K. Interest Rate
The Monetary Policy Committee kept the interest rate at 0.5 percent and refrained from expanding the asset-purchase plan, an outcome predicted by 20 of 36 economists in a Bloomberg News survey. The rest said officials would increase the bond-purchase program. Gordon Brown’s government has authorized the bank to spend a total of 150 billion pounds.
Standard & Poor’s 500 Index futures climbed 0.7 percent, indicating the benchmark gauge for U.S. equities may rebound from its lowest level since May 1. The MSCI Asia Pacific Index added less than 0.1 percent after falling for six days.
Alcoa increased 5.4 percent to $9.97. The company’s results beat estimates after production cuts and workforce reductions helped the company save money. The aluminum producer posted a loss excluding certain items of 26 cents a share, narrower than analysts’ average estimate for a 38-cent loss.
Norsk Hydro climbed 2.1 percent to 28.92 kroner. Rio Tinto added 3.8 percent to 1,967.5 pence, while Anglo American Plc gained 4.9 percent to 1,640 pence.
Second-Quarter Earnings
Profits fell an average 34 percent at S&P 500 companies in the second quarter and will decrease 21 percent from July through September, according to analyst projections compiled by Bloomberg. Earnings slumped 33 percent during the first three months of 2009, and plunged 61 percent from October through December 2008.
Daimler gained 3.2 percent to 24.40 euros and Peugeot gained 1.3 percent to 16.73 euros. Renault SA, France’s second- biggest automaker, climbed 1.2 percent to 23.12 euros. Bank of America raised its rating on European automakers to “overweight” from “neutral” on optimism the economy will recover this year.
Separately, China’s passenger-vehicle sales surged 48 percent in June, as government stimulus spending spurred a revival in the world’s third-largest economy.
Investors should switch into stocks in the euro region and pare holdings of U.K. shares, JPMorgan Chase & Co. advised, reversing a position it had held since December 2007.
“We see continental equities relatively benefiting from improving interest rate differential, less currency headwind than the U.K., improving relative earnings drivers and more favorable sector composition,” London-based strategist Mislav Matejka wrote in a report today.
Sacyr Surges
Sacyr Vallehermoso SA jumped 12 percent to 10.80 euros after a group it leads was named as front-runner on a project to expand the Panama Canal. The Panama Canal Authority said yesterday a $3.1 billion bid from the group, which also includes Impregilo SpA, made it the front-runner for a project to build a third set of locks on the waterway. Impregilo advanced 0.4 percent to 2.44 euros.
Electrolux AB rose 2.1 percent to 109 kronor. The world’s second-biggest appliance maker was upgraded to “buy” from “sell” at UBS AG, which said “pricing will hold up in coming quarters.”
SAP AG increased 3.2 percent to 28.83 euros after the world’s largest maker of business-management software was upgraded to “buy” from “neutral” at Bank of America, which said thee company “still further earnings upside from cost savings.”
WASHINGTON (AP) — House Democrats at work on health legislation are narrowing in on an income tax surcharge on the highest-paid wage earners to help pay the cost of subsidizing insurance for the 50 million who lack it.
Pushing to complete a comprehensive health care bill by Friday and bring it up for committee votes next week, House Democrats abandoned earlier money-raising proposals, including a payroll tax. They planned to meet behind closed doors Thursday to fine-tune the details.
The action in the House stood in contrast to the Senate, where Democrats edged away from their goal of passing health care legislation by early August amid heightening partisan controversy over tax increases and a proposed new government role in providing insurance to consumers.
As discussed in the tax-writing House Ways and Means Committee, the surtax would apply to individuals with adjusted gross income of more than $200,000 and couples over $250,000, according to officials involved in the discussion. Most spoke on condition of anonymity because the talks were private.
In addition, key lawmakers are expected to call for a tax or fee equal to a percentage of a worker’s salary on employers who do not offer health benefits.
Ways and Means Chairman Charles Rangel, D-N.Y., has said his committee needs to come up with $600 billion in new taxes to deliver on President Barack Obama’s goal of sweeping changes to the nation’s health care system to bring down costs and cover the 50 million uninsured. Hundreds of billions of dollars more would come from cuts to Medicare and Medicaid to pay for legislation expected to cost around $1 trillion over 10 years.
Top administration officials, including White House chief of staff Rahm Emanuel, conferred with Rangel’s committee Democrats on Wednesday as they met throughout the day.
“They know what I’m thinking about and I have no reason to believe I’ll have any problems with them on that part of the bill,” Rangel said of the tax proposals.
Rep. Shelley Berkley, D-Nev., a member of the panel, said the proposed surtax on high-income taxpayers appealed to her and others as a way to avoid a “nickel-and-dime” approach involving numerous smaller tax increases.
Lawmakers cautioned that no final decisions have been made, either by the tax-writing committee or by the Democratic leadership, which hopes to have legislation drafted by the end of the week and through the House by month’s end.
Smaller tax options remained possibilities, depending on the overall cost of the legislation, including a tax on sugared soft drinks and ending a tax break that drug companies receive for advertising.
In the Senate, New York Democrat Chuck Schumer told The Associated Press that he believes the “ultimate goal” is to have a bill by the end of the year that is signed into law by the president.
Separately, Republicans who met with Senate Majority Leader Harry Reid, D-Nev., said he expressed flexibility on the timetable, indicating that he was willing to allow more time before legislation is brought to the floor.
Oil Foils A 6 Day Losing Streak
LONDON (Reuters) – Oil rose by more than $1 on Thursday to edge back above $61 a barrel, halting a six-session losing streak which has seen prices decline by 15 percent on concerns about the timing of any economic recovery.
Prices hit a seven-week low just above $60 a barrel the previous day on bearish U.S. oil data which highlighted how weak demand is in the world’s largest energy consumer.
U.S. diesel and heating oil stocks have swelled to their highest level in almost 25 years after jumping by 3.7 million barrels last week, data from the Energy Information Administration (EIA) showed.
U.S. light crude for August delivery rose $1.01 a barrel to $61.15 by 0853 GMT (4:53 a.m. EDT), having lost more than 4 percent on Wednesday.
London Brent crude gained $1.24 to $61.67 a barrel.
“It’s no more than a mild correction from the earlier decline that reflected the EIA report,” said David Moore, commodity analyst with the Commonwealth Bank of Australia.
But he did not expect prices to fall much further, he added.
“There are still concerns about the outlook for demand, particularly in the U.S. But much of the possible decline in oil prices has already happened. If we did dip below $60, you would probably see some people who might see it as a buying opportunity,” Moore said.
The 15 percent drop in oil prices since the end of June was the longest and steepest decline so far in 2009. Prices had been rising since February, more than doubling from lows hit near $33 at the depth of the economic crisis as traders started to price in an eventual recovery.
But many analysts cautioned prices had gone ahead of the real economy, with unemployment still rising and global oil inventories mounting up.
The fragile state of the global economy dominated the first day of the annual G8 summit, with the United States, Japan, Germany, France, Britain, Italy, Canada and Russia acknowledging there were still significant risks to financial stability.
OPEC’s 2009 World Oil Outlook added to the gloom as it said world demand for oil may take years to recover from the slump in 2009 because of economic weakness and demand destruction.
The Organization of the Petroleum Exporting Countries (OPEC) said consumption of its crude will not return to 31 million barrels per day (bpd), the level it averaged in 2008, until 2013.
OPEC Secretary-General Abdullah al-Badri said on Wednesday oil prices — trading just above $60 per barrel — were “comfortable,” but were still below the $75 a barrel the producer group said at its May meeting could be achieved this year.
Retailers Report Weak June Sales
NEW YORK – Escalating job worries and rainy weather dampened shoppers’ appetite for buying summer staples like shorts and dresses, resulting in sharp sales declines for many merchants.
As merchants reported their monthly figures Thursday, the weakness appeared to cut across all sectors, particularly apparel merchants. Among the biggest disappointments so far were Limited Brands Inc., teen merchant Wet Seal Inc. and The Children’s Place Retail Stores Inc.
Even low-priced operator Costco Wholesale Corp. struggled with a same-store sales decline compared with a year ago when business was helped by stimulus rebate checks.
Same-store sales are sales at stores open at least a year and are considered a key indicator of a retailer’s health.
“Consumers are under severe pressure on the job front, so discretionary spending is just not happening, “said Ken Perkins, president of retail consulting firm Retail Metrics LLC.
“This is not setting up well for the back-to-school season.”
Rainy weather across a broad swath of the country had been a factor in depressing sales of seasonal goods last month, but clearly shoppers are increasingly being discouraged down by financial worries. The latest jobs report from the government, which showed shrinking wages and higher-than-expected job losses, is increasing concerns about consumers’ ability to spend in the critical months ahead. Merchants are relying more now on shoppers’ paychecks to fuel purchases because consumers’ two other key sources of funding — credit cards and home equity loans — have shrunk. But, seeing their earnings dwindle, shoppers are continuing to seek 70 percent discounts.
Job worries caused consumer confidence, as measured by the nonprofit Conference Board, to drop in June, reversing a three-month upward trend fueled by a stock market rally that also is fizzling.
Costco said Thursday that its June same-store sales dropped 6 percent but managed to meet Wall Street’s expectations.
The Issaquah, Wash.-based company said in a recorded message that some of its strongest categories included food and fresh food products, such as deli items, frozen food and candy. It experienced weakness in nonfood, discretionary categories.
But many mall-based apparel merchants fared worse.
Limited Brands struggled with a 12 percent drop in same-store sales last month; analysts surveyed by Thomson Reuters had expected a 7.9 percent decline.
Wet Seal posted an 11.1 percent drop in June, worse than the 9.1 percent decline that Thomson Reuters had expected.
The Children’s Place reported a 12 percent same-store sales decline in June; analysts had expected an 8.7 percent decline.
Costco Reports In Line Sales Down 6% For the Q
(Reuters) – Costco Wholesale Corp on Thursday reported an in-line 6 percent fall in sales, hit by a slide in demand during the recession for higher ticket items such as cameras and cell phones.
Analysts, on average, were expecting its same-store sales at stores open at least a year in June to fall 6 percent, according to Thomson Reuters data.
Same-store sales at its U.S. locations decreased 6 percent, while international division sales fell 3 percent.
Excluding the negative impact from gasoline price deflation, it said U.S. comparable sales would have been down 1 percent, while on a local currency basis it said international same-store sales increased 8 percent.
Customers pay an annual fee to shop at Costco’s warehouses, which sell everything from laptop computers and bulk-sized packages of toilet paper to fresh fruit and frozen dumplings. Many of the clubs also operate gas stations.
“Comparable sales results for June in merchandizing are very similar for all of our categories compared to our mostly recently reported month – with stronger sales results in foods, sundries, fresh foods, and slightly softer sales results in the non-food more discretionary categories,” Bob Nelson, Vice President Financial Planning & Investor Relations, said in a pre-recorded telephone message….
Anglo Irish Bank May Stop Interest Payments on Subordinated Debt
By Ian Guider and Louisa Nesbitt
July 9 (Bloomberg) — Anglo Irish Bank Corp. said it may stop interest payments on some of its subordinated notes as it seeks approval to redeem as much as $4.5 billion of the debt.
The lender, which was seized by the government in January, may halt coupon payments on 1.2 billion euros ($1.68 billion) and 800 million pounds ($1.3 billion) of Tier 1 notes from September, the Dublin-based bank said today in a statement. The securities are issued by banks as capital required by regulators to cushion against losses.
Stopping interest payments on Tier 1 securities was a condition set by the European Commission when it approved a capital injection, the statement said. The Irish government has pumped 3 billion euros into the bank, the country’s third biggest, to boost capital eroded by losses on property loans. The bank posted a loss for the six months to March 31 of 3.77 billion euros.
“Obviously every euro less offered to bondholders is a euro gained by the Irish taxpayer,” Scott Rankin, analyst at securities firm Davy, said in a research note today. “In making its decision, the government will have to balance this upside with the possible downside associated with annoying liquidity providers.”
The bank is “actively working” on a plan to buy back the Tier 1 notes, as well as 750 million euros and 300 million pounds of higher-ranking Tier 2 debt, the statement said. The offer is subject to regulatory and Department of Finance approval, it said.
Bond Buyback….
BoE Stays The Course of quantitative Easing
By Svenja O’Donnell
July 9 (Bloomberg) — The Bank of England stuck to its plan to buy bonds with 125 billion pounds ($202 billion) of newly printed money as officials assess whether the worst of Britain’s recession is over.
The nine-member Monetary Policy Committee, led by Governor Mervyn King, kept the interest rate at 0.5 percent and refrained from expanding its asset-purchase plan. Twenty of 36 economists in a Bloomberg News survey predicted the outcome. The rest said officials would increase it. Gordon Brown’s government has authorized the bank to spend a total of 150 billion pounds.
Britain’s recession probably eased in the second quarter and the economy may now be stagnating, the National Institute of Economic and Social Research said this week. King says evidence from the bank’s program seems “positive” so far, though the credit squeeze remains a threat to the recovery.
“The case has been made to stop and wait and see for a bit,” said Colin Ellis, an economist at Daiwa Securities SMBC Europe Ltd. and a former official at the central bank. “There are signs the economy is bottoming out and the mood music is getting better.”
Government bonds tumbled after the decision. The yield on the benchmark 4.5 percent gilt due March 2019 jumped as high as 3.764 percent as of 12:06 p.m. from 3.59 percent earlier today. It was 3.62 percent before the plan’s announcement in March. The pound rose as much as 0.6 percent to $1.6265.
The bank said policy makers “will review the scale of the program again at its August meeting, alongside its latest inflation projections.”
‘Encouraging’….
Treasury Taps 9 Money Managers For Toxic Asset Program, But PIMPCO Pulls Out
By Rebecca Christie
July 8 (Bloomberg) — The U.S. Treasury named BlackRock Inc., Invesco Ltd. and seven other managers for its Public- Private Investment Program, in an effort to remove as much as $40 billion in distressed assets from financial institutions.
The government will invest as much as $30 billion, and the nine participants may raise a total of $10 billion, the Treasury said today in a statement. GE Capital Real Estate, Marathon Asset Management LP and AllianceBernstein LP were also selected. Pacific Investment Management Co., which runs the world’s biggest bond fund, withdrew, citing “uncertainties regarding the design and implementation of the program.”
Today’s announcement is a scaled-down start for a program promoted in March as having the potential to absorb $1 trillion in devalued loans, mortgage-backed securities and other assets. Officials have indicated the purchases may now be less important after banks issued billions of dollars of new capital to shore up their balance sheets, and analysts note financial firms have already recorded $975 billion in writedowns and losses.
“Banks have written down their asset-backed securities holdings, pretty much to zero,” said Joseph Mason, a banking professor at Louisiana State University in Baton Rouge who previously worked at the Treasury’s Office of the Comptroller of the Currency. “There is nothing to get rid of there. At that point, you might as well sit and hold.”
Smaller Commitment…
FLR & DCP Win A $15 bln Contract In Afghanistan
By AUGUST COLE
DynCorp International Inc. and Fluor Corp. won Army contracts that could be valued at $15 billion over the next five years to build bases and other infrastructure for U.S. forces in Afghanistan.
The deals show how lucrative logistics contracts in Afghanistan will be, since the country has a far less developed infrastructure than Iraq. Each company could receive up to $7.5 billion, depending on the Pentagon’s needs.
KBR Inc. held the predecessor contract that covered Afghanistan, Iraq and elsewhere, but lost out in bidding for the new Afghanistan work. KBR could still be retained down the line. KBR said Wednesday it would request a briefing on the selection and would decide later whether to lodge a protest.
The Obama administration’s strategy in Afghanistan is at a turning point as Gen. Stanley McChrystal assesses how many troops are needed for a new counterinsurgency strategy.
Meanwhile, Pentagon acquisition officials are trying to make sure logistics contracts avoid the types of snafus and scandals that dogged work in Iraq.
Fluor, Aliso Viejo, Calif., said this latest round of work, on a large Army contract known as Logistics Civil Augmentation Program IV, will cover 74 bases in northern Afghanistan. It will include power, water, housing, construction services, base operations, and logistics support.
DynCorp, Falls Church, Va., said its first year of work, which will cover southern Afghanistan, will be valued around $644 million. DynCorp gave a conservative value for the total contract at about $5.9 billion for the next five years.
While the Obama administration has been pushing to bring thousands of systems-engineering and weapons-acquisition jobs back onto the government payroll, logistics work such as that won by Fluor and DynCorp hasn’t received the same level of attention, said David Berteau, who directs defense-industry research for the Center for Strategic and International Studies, a Washington think tank. “We’re clearly at the point where there’s a dependency on contractors by the military,” he said. “There’s not a lot being done to change that dependency.”
KBR’s previous work sparked criticism from lawmakers and government watchdogs that the work was poorly run. Houston-based KBR said it has worked to keep down costs, which were often high because of difficult and unpredictable wartime conditions.
Bond Holders On Subprime Flood The Market With Cheap Homes
By CARRICK MOLLENKAMP
The U.S. housing market is facing new downward pressure as holders of subprime-mortgage bonds flood the market with foreclosed homes at prices that are much lower than where many banks are willing to sell.
While nationwide figures are scarce, a review of thousands of foreclosures in the Atlanta area shows that trusts managing pools of securitized mortgages sold six times as many properties as banks during the six months ended March 31. And homes dumped by subprime bondholders sold for thousands of dollars less on average than bank-owned properties, the data show.
Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy.
“While the banks are trying frantically to get loans off their books, they face the problem of large shadow inventories of housing being dumped on the market, which would depress prices further,” said Anthony Sanders, real-estate finance professor at George Mason University in Fairfax, Va.
In the Atlanta area, hit hard by foreclosures and declining home values in the past two years, mortgage-backed securitization entities completed 6,260 foreclosures in last year’s fourth quarter and the first quarter of 2009, according to data compiled by Data Intelligence Corp., a Marietta, Ga., real-estate analytics firm which reviewed the records for The Wall Street Journal. That was more than double the 2,737 foreclosures by banks in the same period…..
BAC & JPM Takes Fixed Rate Card Holders To Variable Usury Rates
NEW YORK (Reuters) – Bank of America Corp (BAC.N) and JPMorgan Chase & Co (JPM.N) are switching some customers who have fixed-rate credit cards to potentially higher variable rates, acting before a new law takes effect that limits what card issuers can charge.
The largest U.S. banks, which are also the largest card issuers, plan to tie more cardholders’ rates to the prime rate, a benchmark that is traditionally 3 percentage points above the Federal Reserve’s key lending rate, the federal funds rate.
With the Fed’s target rate now in an abnormally low zero to 0.25 percent range to help lift the economy out of recession, the prime rate is 3.25 percent, a level last seen in 1955.
Yet when the central bank starts boosting its target rate, the prime rate should follow, boosting borrowing costs. That could help issuers absorb record amounts of customer defaults.
“Variable rates reflect Chase’s changing costs for funding credit card loans,” JPMorgan Chase spokeswoman Stephanie Jacobson said. “As a result, our customers may benefit from lower rates when the costs to Chase are decreased, or may experience higher rates as costs increase.”
Bank of America spokeswoman Betty Riess said switching to variable rates “enables us to better manage our business as market conditions change.” She said the variable rates will not “at this time” result in rate changes, and that customers will see the variable rates beginning on their August statements.
The Los Angeles Times earlier on Wednesday reported the changes. It said Citigroup Inc (C.N) and American Express Co (AXP.N), two other large card issuers, had no current plans to switch fixed-rate accounts to variable rates, but would not rule it out. Neither immediately returned calls seeking comment.
In May, U.S. President Barack Obama signed into law the Credit Card Accountability, Responsibility and Disclosure Act, setting new restrictions on card rates and fees.
That law was adopted in response to anger among consumer advocates and recession-strapped cardholders at an industry they say “nickels-and-dimes” many of the 90 million card-carrying households, especially those least able to afford high costs.
But card companies got a break because the law does not take full effect until next February, giving them a window to change some of their policies.
JPMorgan is based in New York, and Bank of America in Charlotte, North Carolina. They are expected to report second-quarter results on July 16 and July 17, respectively.
AIG In Talks With Met Life To Sell Alico for $15 bln
NEW YORK (Reuters) – American International Group Inc (AIG.N) has resumed talks to sell its American Life Insurance Co unit to MetLife Inc (MET.N) in a transaction that could help the stricken insurer raise more than $15 billion, the Financial Times said.
The preliminary talks over the unit known as Alico could break down, as they did earlier in the year when AIG and MetLife disagreed over the price, the newspaper said, citing people close to the situation.
AIG spokeswoman Christina Pretto declined to comment on what she called rumor and speculation. MetLife spokesman John Calagna declined to comment.
AIG is selling assets to help repay $83 billion of loans from the federal government, which has a nearly 80 percent stake in the New York-based company.
According to the newspaper, AIG, after receiving its latest federal bailout in March, halted sales talks for all or part of Alico with bidders including France’s Axa SA (AXAF.PA), Britain’s Prudential Plc (PRU.L) and the state investment fund China Investment Corp.
None of these entities is now interested, the newspaper said, citing the people.
Last month, AIG set plans to partially spin off Alico into a new unit partially owned by the Federal Reserve Bank of New York, which would take a $9 billion preferred stake.
While a spinoff could be a precursor to an initial public offering of Alico next year, a sale could allow the government to recoup some of its investment sooner.
Alico operates in more than 50 countries but generates more than half its revenue in Japan….
All The Jobs Created Since 2000 Are Gone
