Business News

Benchmark crude for September delivery was up 24 cents to $70.76 a barrel by late afternoon in Singapore in electronic trading on the New York Mercantile Exchange. On Thursday, the contract added 36 cents to settle at $70.52.

Oil prices have oscillated near $71 a barrel for about two weeks as investors weigh lackluster U.S. consumer demand against expectations the economy could rebound strongly next year from recession.

The Commerce Department said Thursday that retail sales slipped 0.1 percent last month, while economists had expected a gain of 0.7 percent. The Labor Department said initial jobless claims grew more than expected to a seasonally adjusted 558,000.

In other Nymex trading, gasoline for September delivery rose 1.15 cents to $2.03 a gallon and heating oil gained 0.79 cent to $1.91. Natural gas for September delivery jumped 2.9 cents to $3.37 per 1,000 cubic feet.

In London, Brent prices rose 42 cents to $73.90 a barrel on the ICE Futures exchange.

Hong Kong’s GDP Rises Signaling an End To The Recession

By Sophie Leung

Aug. 14 (Bloomberg) — Hong Kong climbed out of a yearlong recession as trade improved, adding to signs that the global economy is recovering.

Gross domestic product rose a seasonally adjusted 3.3 percent in the second quarter from the previous three months, after dropping 4.3 percent in the first quarter, the government said today. The median estimate in a Bloomberg News survey of seven economists was for a 1.2 percent gain.

The Hang Seng Index has gained 84 percent from this year’s low in March as China’s record lending and 4 trillion yuan ($585 billion) stimulus package help the city, which is a hub for trade and finance. Hong Kong’s government raised its forecast for this year’s GDP to a contraction of between 3.5 percent and 4.5 percent today from a previous estimate of a 5.5 percent to 6.5 percent decline.

“This rebound has largely been ‘Made in China,’” said Brian Jackson, a senior strategist at Royal Bank of Canada in Hong Kong. “Exports to the mainland have picked up, while easy liquidity conditions there have contributed to recent gains in Hong Kong’s asset prices, providing a strong boost to Hong Kong consumers.”

The economy shrank 3.8 percent in the second quarter from a year earlier, after a 7.8 percent drop in the previous three months. The first-quarter contraction from the previous three months was the worst since data began in 1990.

‘Bumpy’ Recovery

The government cut its inflation forecast for the year to 0.5 percent from 1 percent.

Financial Secretary John Tsang said the economy will “hopefully improve further in the second half,” adding that the city can’t afford to be complacent because of uncertainties in the global economy.

The path of recovery will be “bumpy,” said government economist Helen Chan.

Across the Asia Pacific, South Korea and Australia have bounced back after economic contractions and Singapore has climbed out of a recession as the worst global slump since the Great Depression eases. In Europe, Germany and France unexpectedly emerged from recessions in the second quarter, according to reports yesterday.

In contrast, Spain’s economy shrank more than estimated last quarter, a report showed today……..

Gaming Console Companies See Sales Slumping

By Adam Satarino and Anna Kitanaka

Aug. 14 (Bloomberg) — Sony Corp. and Nintendo Co. sales led a fifth-straight monthly decline in the U.S. video-game market, adding to pressure to reduce prices for players as the consumers to cut spending on consoles and games.

July sales of Nintendo’s Wii console tumbled 55 percent to and those of Sony’s PlayStation 3 slumped 46 percent, researcher NPD Group Inc. said yesterday. Microsoft Corp.’s Xbox 360 sales slipped 1 percent after gaining 9.5 percent in June. Total sales of hardware, software and accessories in the world’s largest video-game market fell 29 percent to $848.9 million, NPD said.

The worst global recession since the Great Depression and the absence of new hit titles contributed to the decline. Earlier yesterday, the Commerce Department reported sales at U.S. retailers unexpectedly fell in July for the first time in three months. Executives at the two largest video-game publishers, Activision Blizzard Inc. and Electronic Arts Inc., said this month that they expect game sales to be even or down compared with last year.

“The challenge for Sony PS3 is the price point,” Mia Nagasaka, a Tokyo-based analyst at Barclays Plc, said by phone today. “In the near term, the company may announce a price cut in hardware,” and it may be enough to spur demand, she said. Nintendo may miss its hardware target this fiscal year ending March 2010, even after the introduction of the Wii “Sports Resorts” in July, Nagasaka said.

Sony lost 0.6 percent to 2,690 yen on the Tokyo Stock Exchange as 12:44 p.m. local time, while Nintendo was unchanged at 25,370 yen in Osaka trading. Microsoft, based in Redmond, Washington, gained 0.4 percent to $23.62 in Nasdaq Stock Market trading yesterday.

Consoles Hardest Hit

Kyoto-based Nintendo maintained its sales forecast of 26 million units for the 12 months ending March 2010, the company said on July 30.

July hardware sales tumbled 37 percent to $280.9 million while software sales fell 26 percent to $436.9 million, according to Port Washington, New York-based NPD.

The drop compares to a 30 percent growth last year on sales of the Wii console and games “NCAA Football 09,” “Wii Fit” and “Guitar Hero: On Tour.”

“In the previous year, strong game titles were concentrated in the last half, but this year, there were more in the first six months,” said Daisuke Nakata, a spokesman at Sony’s gaming unit in Tokyo. “We’re waiting for the titles scheduled to come out after September, so we anticipate the PlayStation Portable and PS3 will bounce back with the year-end sales war.”

New-Title Boost

The video-game slump may abate as companies introduce new titles, including today’s release of “Madden NFL,” said Anita Frazier, an NPD Group analyst.

“While year-to-date results are weak, there are some big titles set to be released over the next several months, including ‘Madden’ this month, which should help spur sales,” Frazier said.

Last month, Nintendo reported Wii console sales fell 57 percent in the second quarter. Sony said PlayStation 3 slid 31 percent. The two companies won’t be able to meet annual sales targets without cutting the price of the $249.99 Wii and $399.99 PS3, Michael Pachter, an analyst with Wedbush Morgan Securities in Los Angeles, said in a note to investors this week.

Price Cuts

A drop in the prices will likely come by October, Pachter said. Microsoft, which has already reduced the price of its least-expensive Xbox to $199.99, also may introduce an upgrade for the console, Pachter said…….

Does Europe’s CPI Signal Deflation ?

By Simone Meier

Aug. 14 (Bloomberg) — European consumer prices dropped more than initially estimated in July as energy costs decreased and rising unemployment prompted households to cut spending.

Prices in the 16-member euro region fell by a record 0.7 percent from the year-earlier month after declining 0.1 percent in June, the European Union statistics office in Luxembourg said today. The decline exceeded the 0.6 percent estimate published on July 31 and the median forecast of 30 economists surveyed by Bloomberg News. In the month, prices declined 0.7 percent.

Companies from Carrefour SA to Unilever have offered discounts to encourage consumers to spend just as a 39 percent drop in oil prices over the past year pushes down inflation. The European Central Bank on Aug. 6 kept its key interest rate at a record low to support the economy, with President Jean-Claude Trichet saying inflation will turn positive later this year.

“We’re in an environment of continued downward price pressures, given rising unemployment,” said Mario Jung, an economist at BHF Bank in Frankfurt. “The environment will remain very weak even with an economic recovery. It’s not enough for companies to push through higher prices.”

The core inflation rate, which excludes volatile energy and food costs, eased to 1.3 percent in July, the lowest in three years, from 1.4 percent in June. Energy prices dropped 14.4 percent in July from a year ago and fell 1.8 percent from the previous month.

‘Tough’ Conditions

Adding to signs of waning price pressures, European producer prices dropped a record 6.6 percent in July from a year earlier. In Germany, Europe’s largest economy, consumer prices posted their first annual drop in more than 22 years in July and wholesale prices plunged a record 10.6 percent.

The headline inflation rate may rise in the coming months as the impact of the oil-price decline from a July 2008 record begins to fade, said Eoin O’Callaghan, an economist at BNP Paribas in London.

The core rate “should continue to grind lower as the wide output gap continues to weigh on prices,” he said. “This should progressively challenge the view that deflationary risks in the euro area are limited.‘”

Unilever, the world’s second-largest consumer-goods maker, said on Aug. 6 that price cuts helped boost Western European sales in the second quarter. Paris-based Carrefour, Europe’s largest retailer, last month reported a second straight drop in quarterly sales due to “tough” conditions in France and Spain.

‘Confident’

Evidence is mounting that the worst of the recession may be over. The euro-area economy contracted 0.1 percent in the second quarter after shrinking 2.5 percent in the previous three months, while Germany and France returned to growth, data showed yesterday.

Henkel AG, the German maker of Persil detergent, on Aug. 5 forecast a “slightly better” performance from its adhesives unit in the current quarter. L’Oreal SA said on July 30 that second-quarter sales gained 2.6 percent. The Paris-based company is “confident” performance will keep improving in 2009, Chief Executive Officer Jean-Paul Agon said that day.

Even as growth recovers, rising unemployment may restrain consumer spending. The euro-area jobless rate increased to 9.4 percent in June, the highest in a decade. European retail sales fell for a 14th month in July, the Bloomberg purchasing managers index showed on July 30.

The ECB, which aims to keep inflation just under 2 percent, has cut its benchmark rate to a record low of 1 percent and started buying as much as 60 billion euros ($86.4 billion) of covered bonds to stimulate lending and boost the economy. The Frankfurt-based bank forecasts that euro-region inflation will average 0.3 percent this year and around 1 percent in 2010.

“At the moment, rates are appropriate,” Trichet said in an interview with Bloomberg Television in Frankfurt on Aug. 6. “We are very keen on avoiding deflationary risk and avoiding inflationary risk in the medium term.”

Does Your Bank Hold More Than 5% of Their Assets in Toxic Waste ?

By Ari Levy

Aug. 14 (Bloomberg) — More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.

The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.

“At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.

Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of “problem banks,” which stood at 305 in the first quarter.

Cash Drain

Nonperforming loans can eat into a company’s earnings and deplete cash, leaving banks below the minimum capital levels required by regulators. Three lenders with nonaccruing ratios of at least 6.2 percent as of March were closed last week. Chicago- based Corus Bankshares Inc., Austin-based Guaranty Financial Group Inc. and Colonial BancGroup Inc. in Montgomery, Alabama, each with ratios of at least 6.5 percent, said in the past month that they expect to be shut.

“This is a fairly widespread issue for the larger community banks and some regional banks across the country,” said Mix of LECG, where William Isaac, former head of the Federal Deposit Insurance Corp., is chairman of the global financial services unit.

Ratios above 5 percent don’t always lead to failures because banks keep capital cushions and set aside reserves to absorb bad loans. Banks with higher ratios of equity to total assets can better withstand such losses, said Jim Barth, a former chief economist at the Office of Thrift Supervision. Marshall & Ilsley and Synovus said they’ve been getting bad loans off their books by selling them.

Exclusions

Bloomberg’s list was compiled by screening U.S. banks for nonperforming loans of 5 percent or more, and then ranked by assets. The list excluded U.S. territories and lenders that have already failed. Also left out were the 19 lenders that underwent the Treasury’s stress tests in May; they were deemed “too big to fail” and told by regulators that government capital was available to keep them in business.

Excluding the stress-test list, banks with nonperformers above 5 percent had combined deposits of $193 billion, according to Bloomberg data. That’s almost 15 times the size of the FDIC’s deposit insurance fund at the end of the first quarter.

About 2.6 percent of the $7.74 trillion in bank loans outstanding in the U.S. at the end of March were nonaccruing, the highest in 17 years, according to the most recent data from the FDIC. Nonaccrual loans peaked at 3.27 percent in the second quarter of 1991, during the savings and loan crisis, and averaged 1.54 percent over the past 25 years.

‘Off the Charts’

“These numbers are off the charts,” said Blake Howells, an analyst at Becker Capital Management in Portland, Oregon, referring to the nonperforming loan levels at companies he follows. Banks are losing the “ability to try and earn their way through the cycle,” said Howells, who previously spent 13 years at Minneapolis-based U.S. Bancorp.

Corus, with more than two-thirds of its loans nonperforming, has the highest rate among publicly traded banks. The company said last month that it’s “critically undercapitalized” after five consecutive quarterly losses tied to defaults on condominium construction loans. Randy Curtis, Corus’s interim chief executive officer, didn’t respond to calls for comment.

Marshall & Ilsley, Wisconsin’s biggest bank, reduced its nonperforming loans last month to 5.01 percent from 5.18 percent after selling $297 million in soured loans, mostly residential mortgages in Arizona, the Milwaukee-based company said Aug. 10.

Deadline for Nonperformers

The bank has “been very aggressive in identifying and tackling credit challenges,” Chief Financial Officer Greg Smith said in an Aug. 12 interview. Smith said 26 percent of loans classified as nonperforming are overdue by less than the industry’s typical standard of 90 days. With those excluded, the ratio would be around 3.7 percent, he said.

Synovus, plagued by defaulting construction loans in the Atlanta area, said nonperforming loans rose to 5.4 percent in the second quarter from 5.2 percent the previous period. Disposals of nonperforming assets reached $404 million in the quarter ended in June, the Columbus, Georgia-based company said.

Synovus is selling troubled loans and will continue its “aggressive stance on disposing of nonperforming assets” as long as the level is elevated, spokesman Greg Hudgison said in an e-mailed statement.

Michigan Home

Flagstar is based in Troy, Michigan, the state with the nation’s highest unemployment rate. Flagstar has $16.4 billion in assets and reported last month that 11.2 percent of its loans were nonperforming; about two-thirds were home mortgages. Flagstar CFO Paul Borja didn’t return repeated calls for comment.

The bank’s allowance for loan losses was 5.4 percent of total loans at the end of the second quarter, compared with 3.3 percent at Synovus and 2.8 percent at Marshall & Ilsley, according to company filings. All three reported at least three straight quarterly deficits.

The FDIC doesn’t comment on lenders that are open and operating and doesn’t disclose which banks are on its problem list. The agency will probably impose an emergency fee on the more than 8,200 banks it insures in the fourth quarter to replenish the insurance fund, the second special assessment this year, Chairman Sheila Bair said last week. The FDIC attempts to sell deposits and assets of seized banks to healthier firms to avoid eroding the fund, said agency spokesman David Barr.

Capital Levels

To determine which banks are most troubled, regulators compare the ratio of nonperforming loans to the percentage of equity a firm has relative to its assets, said Barth, the former OTS economist. A company with 5 percent nonperforming loans and equity of 8 percent is better positioned than one with the same amount of troubled loans and equity of 4 percent, he said.

Flagstar’s equity-to-assets ratio in the second quarter was 5.4 percent, Synovus’s was 8.9 percent and Marshall & Ilsley, which raised $552 million through a stock sale in June, was at 11 percent, according to the banks.

The three lenders that failed last week — Florida’s First State Bank and Community National Bank and Oregon’s Community First Bank — all had nonperforming loans above 6 percent and equity ratios below 4.5 percent.

“The nonperforming ratio, in and of itself, should be a great concern,” said Barth, a professor of finance at Auburn University in Alabama and senior finance fellow at the Milken Institute in Santa Monica, California. “It becomes even more troublesome when it goes above 3 percent and the equity-to-asset ratio is quite low.”

Toast Time

While 5 percent can be “fatal” for home lenders, commercial real estate lenders may be able to withstand higher rates, said William K. Black, former lawyer at the Federal Home Loan Bank of San Francisco and the OTS. Commercial loans carry higher interest rates because they’re riskier, he said.

“At the 5 percent range, you’re probably hurting,” said Black, an associate professor of economics and law at the University of Missouri-Kansas City. “Once it gets around 10 percent, you’re likely toast.”

BA Halts The Dream Liner Plant

By PETER SANDERS

Boeing Co. has encountered new flaws in the production of its 787 Dreamliner aircraft that have led it to order work to be halted at a plant in Italy that was making parts of the fuselage, the company confirmed Thursday night.

It is unclear how the work stoppage, ordered almost two months ago, will impact the delivery of the 787, which is already two years behind schedule.

The production flaw found in the Italian factory is the latest issue to beset the 787. On the same day that the company ordered work to be stopped at the fuselage plant, Boeing announced in a conference call that it had found a separate structural flaw where the wings meet the body of the plane. That flaw set back the Dreamliner’s first test flight. Boeing still hasn’t rescheduled the plane’s maiden flight or updated its delivery schedule.

Though Boeing officials knew about the problem at the fuselage plant at the same time, they never mentioned it publicly.

The work-stoppage order is detailed in a letter written on June 23 by Boeing to Alenia Aeronautica in Naples. Boeing officials instructed them to stop manufacturing the two mid-fuselage sections it builds for the 787 after flaws in the fuselage’s composite skin were discovered.

The existence of the work stoppage and the letter were first reported on the FlightBlogger Web site, which covers the aviation industry.

The problems with the center barrel of the plane’s body could “lead to significant degradation of the structure,” the letter said, according to the report on the Web site. Alenia is one of hundreds of global subcontractors Boeing is using to build the 787.

Boeing downplayed the significance of the problem. In a statement emailed Thursday night, a Boeing spokeswoman said “a modification needed to accommodate these findings is already designed and being installed” on the affected fuselage parts……

The Bug Sucks up 42% of The 911 Maker

After a 10-month wild ride, German auto makers Volkswagen AG and Porsche Automobil Holding SE Thursday said they reached a broad agreement to merge the premium sportscar manufacturer into VW.

VW said it will pay as much as €3.3 billion ($4.7 billion) to take a 42% stake in Porsche’s core sports-car arm by the end of 2009, a precursor to a full merger of Porsche’s holding company with VW in 2011.

Porsche was forced into VW’s arms when its bold attempt to buy …

Prices Are Still Getting Cut on Homes

By Julie Haviv

NEW YORK (Reuters) – One in four U.S. homes for sale on August 1 had their prices marked down at least once since landing on the market, data compiled by real estate website Trulia.com showed on Friday.

A total of 24.4 percent of homes had their prices reduced in July, up from June’s 23.6 percent. The average discount was 10 percent from the original price, or $40,173 of a median house value, Trulia.com said in its monthly price report obtained exclusively by Reuters prior to its release.

The average markdown dropped slightly from June’s 10.4 percent, Trulia said.

These lowered prices, however, are not necessarily a negative.

“Competition heats up in the summer as more inventory comes onto the market,” Pete Flint, Trulia co-founder and CEO, said in an interview with Reuters.

“Sales are increasing but prices are still falling,” Flint said.

“Homes that are priced competitively are the ones that are selling in today’s market,” he said.

Nationwide, in dollar terms, $27.8 billion has been reduced for all homes for sale on the market on August 1 and this number has increased by $700 million during the past month, Trulia said.

Of the luxury homes, categorized by those costing $2 million or more, 25 percent have seen a reduction, up from 24.3 percent. The average decrease for a luxury home was 14 percent off the original asking price, the data showed.

For homes listed for less than $2 million, 25 percent have seen a reduction, up from 24 percent. The deduction, however, was only 9 percent off the original asking price, the data showed.

“Inventory levels continue to grow in the luxury market,” Flint said. “As inventory levels grow, I expect price reductions to continue to grow in the luxury segment.”

Cities showing significant increases in percentage of listings with price cuts from June 1 to Aug 1 include Fresno, California and Colorado Springs, Colorado, which showed a 67 percent and 27 percent increase in price reductions, respectively, Trulia said.

Kansas City, Missouri; Oklahoma City, Oklahoma; and Albuquerque, New Mexico showed a 25 percent, 24 percent and 22 percent increase in price reductions, respectively, during this time period, the data showed.

Cities showing signs of recovery, with significant declines in percentage of listings with price reductions from June 1 to Aug 1, include Dallas, Texas and Las Vegas, Nevada, which showed 42 percent and 33 percent fewer price reductions, Trulia said.

Louisville, Kentucky; Los Angeles, California; and Washington, D.C. showed 33 percent, 19 percent and 17 percent fewer price reductions, respectively, during this time period, the data showed.

SGP Wins Approval For A New Drug

Cleared for schizophrenia, bipolar disorder* Saphris expected to be available in Q4

NEW YORK, Aug 14 (Reuters) – Schering-Plough Corp (SGP.N) said on Friday that U.S. regulators had approved its Saphris antipsychotic drug, adding a potential blockbuster product as the company is soon to be bought by Merck & Co (MRK.N).

The Food and Drug Administration cleared Saphris for acute treatment in adults of schizophrenia and for episodes associated with the severe bipolar I disorder. The drug, also known as asenapine, is expected to be available in the fourth quarter, Schering said.

Schering has projected sales of Saphris could exceed $1 billion a year.

Saphris is a type of atypical antipsychotic, a class of drugs that target various brain receptors. Such drugs have raised some concerns over their side effects, which can include problems with weight gain, metabolism and blood fat levels.

But company studies showed fewer patients given Saphris gained weight or saw higher cholesterol levels compared with rival drugs, Schering has said.

Other antipsychotics include Johnson & Johnson’s (JNJ.N) Risperdal and Eli Lilly’s (LLY.N) Zyprexa.

The approval comes after an FDA advisory panel in July backed Saphris as a safe and effective therapy for the two mood illnesses.

Merck said in March that it would buy Schering for $41 billion. The deal won shareholder approval last week, and the companies said it remained on track to close in the fourth quarter. (Reporting by Lewis Krauskopf; Editing by Lisa Von Ahn)

Rail Data Still Off The Tracks

Another ding against the v-shaped recovery crowd as intermodal rail traffic comes in 16.6% lower than last year.  Rail data down, retail sales down, jobless claims up = stock market down UP.  That makes sense.  The AAR reports:

WASHINGTON, Aug. 13, 2009 — The Association of American Railroads today reported that rail traffic continues to reflect the down economy. For the week ended Aug. 8, 2009, U.S. railroads reported originating 274,633 cars, down 16 percent compared with the same week in 2008. Regionally, carloadings were down 14.1 percent in the West and 18.8 percent in the East. Intermodal volume of 195,014 trailers or containers on U.S. railroads was down 16.6 percent from the same week last year. Container volume fell 10.8 percent and trailer volume dropped 38.1 percent. Total volume on U.S. railroads for the week ending August 8 was estimated at 29.3 billion ton-miles, off 14.8 percent from the same week last year.

Click for larger image

All 19 carload freight commodity groups were down from last year, with declines ranging from 6.1 percent for chemicals to 48.3 percent for metals and metal products. For the first 31 weeks of 2009, U.S. railroads reported cumulative volume of 8,159,672 carloads, down 18.9 percent from 2008; 5,764,816 trailers or containers, down 17.1 percent, and total volume of an estimated 868.3 billion ton-miles, down 18 percent.

What Does China’s Market Signal To Investors ?

Back in February we asserted our opinion that China was becoming a leading indicator.   They were the primary driver of the 2003-2007 bull market and their economy and stock markets clearly led the way into the bear market of 2008.   Their markets bottomed in late 2008 while U.S. and European markets lagged.  We are now beginning to see the first real signs of deterioration since the Shanghai began its incredible 100% move since the trough.

As we detailed in July, it’s highly unlikely that the Shanghai bubble of 2007 will end any differently than previous bubbles.  In fact, it would be an anomaly. The likelihood of a long and drawn out recovery period is extremely high:

As China becomes the engine of global growth and a leading indicator of economic activity you have to wonder if China isn’t forecasting the next leg down in the market.  As I type, the Shanghai is shaving another 3% off the index….U.S. indices, however, remain completely oblivious to the move just as they were at the 2007 peak and the 2008 bottom….