GDP: Prior -5.5% / Mkt Expects -1.5% / Actual -1%… Chicago PMI: Prior 39.9 / Mkt Expects 43 / Actual 42… Plus A Pdocast From Jim Rogers on The Outlook in China

Jim Rogers:

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GDP Headline Comes In Better Than Expected, But Revision To Q1 Worsens

By Shobhana Chandra

July 31 (Bloomberg) — The U.S. economy shrank at a slower pace in the second quarter, a sign the worst recession since the Great Depression is winding down.

Gross domestic product contracted at a less-than-projected 1 percent annual rate after shrinking 6.4 percent in the prior three months, the most in 27 years, Commerce Department figures showed today in Washington. Revisions showed the economic downturn last year was even deeper than previously estimated.

Profits at companies from Caterpillar Inc. to Dow Chemical Co. signal the slump is easing as government efforts to revive lending and President Barack Obama’s stimulus gain traction. Consumer spending, which accounts for 70 percent of the economy, may take time to recover as job losses mount, eroding the growth analysts anticipate will start this quarter.

“We’re well on our way to a recovery but, inevitably, it’ll be choppy,” Joseph LaVorgna, chief U.S. economist at U.S. Deutsche Bank Securities in New York, said before the report. “The consumer is taking a back seat as we still have major job losses. The labor market really needs to show a lot of improvement.”

The economy was forecast to shrink at a 1.5 percent pace, according to the median estimate of 78 economists surveyed by Bloomberg News. Estimates ranged from a 0.7 percent gain to a decline of 2.9 percent.

GDP was down 3.9 percent from the second quarter in 2008, the biggest drop since quarterly records began in 1947. Last quarter’s decline was the fourth in a row, also the longest losing streak on record.

Benchmark Revisions

Benchmark revisions showed the world’s largest economy contracted 1.9 percent from the fourth quarter of 2007 to the last three months of 2008, compared with the 0.8 percent drop previously on the books.

The GDP report is the first for the quarter and will be revised in August and September as more information becomes available.

Consumer spending, which accounts for more than two-thirds of the economy, fell at a 1.2 percent pace, more than forecast, following a 0.6 percent increase in the prior quarter. Purchases were forecast to drop 0.5 percent, according to the survey median.

The economy has lost 6.5 million jobs since the recession began in December 2007, and economists surveyed by Bloomberg this month forecast the jobless rate will exceed 10 percent by early 2010.

“The United States economy has found bottom but will be slow in recovering as unemployment continues to be a drag on consumer spending,” Andrew Liveris, chief executive officer of Midland, Michigan-based Dow, said in a statement yesterday.

Better Profits

Second-quarter profit at Dow and at Peoria, Illinois-based Caterpillar, topped analysts’ estimates. Caterpillar, the world’s largest maker of construction equipment, said last week that stimulus programs in countries such as China were helping stabilize sales.

The trade gap shrank last quarter, contributing 1.4 percentage points to growth, preventing a steeper decline. The gap between exports and imports fell to $347.8 billion at an annual pace from $378.5 billion.

Inventories dropped at a record $156 billion annual pace, subtracting 0.8 percentage point from growth. They dropped at a $127.4 billion pace the prior quarter.

Leaner stockpiles set the stage for recovery in production.

Less Inventory

“With inventory levels in an ultra-lean state, businesses should start adding inventories in the second half of the year as the economy begins to show signs of life,” said Ellen Zentner, senior economist at Bank of Tokyo-Mitsubishi UFJ Ltd.

General Motors Co. and Chrysler Group LLC, both out of bankruptcy, are among firms set to ramp up production as government efforts lift demand.

The “cash-for-clunkers” trade-in program begun this month has spurred 16,351 new-vehicle sales so far, the Transportation Department said on July 29. The plan, which set aside $1 billion, ran through the money six days after it began, a sign of its success, Senator Debbie Stabenow said yesterday. Lawmakers had expected the program to generate about 250,000 vehicle sales and to have enough money to last to about Nov. 1.

Today’s GDP report showed the slump in business investment slowed last quarter, while residential construction kept plummeting.

Recent reports showed the housing slump, which helped trigger the financial crisis last year, and the decline in manufacturing have eased. Housing starts rose in June and industrial production shrank at the slowest pace in eight months, according to government reports this month.

Inflation

The Federal Reserve’s preferred inflation gauge, climbed at a 2 percent annual pace last quarter, less than forecast. The measure, which is tied to consumer spending and strips out food and energy costs, rose at a 1.1 percent annual pace the prior quarter.

Economists project the economy will grow at an average 1.5 percent pace from July to December, according to a Bloomberg survey taken in early July.

The Standard & Poor’s 500 Index and Dow Jones Industrial Average are up 12 percent since July 10 on better-than- anticipated earnings at companies from Motorola Inc. to 3M Co.

The country “may be seeing the beginning of the end of the recession,” Obama said this week. Even so, “we know the tough times aren’t over.”

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Asian Markets Continue The Dance Of The Bulls

By Patrick Rial and Masaki Kondo

July 31 (Bloomberg) — Asian stocks rose, sending the MSCI Asia Pacific Index to a fifth monthly gain, as earnings from Sony Corp. and Datang International Power Generation Co. and a commodities rally spurred confidence economies are recovering.

Sony, the maker of Vaio computers and PlayStation 3 game consoles, jumped 6.8 percent in Tokyo after cost cuts led to a smaller-than-expected loss. Datang, China’s No. 2 electricity producer, jumped 5.4 percent in Hong Kong after saying first half profit likely rose more than 50 percent. Rio Tinto Group, the world’s third-largest mining company, rallied 4 percent in Sydney following a jump in prices of copper, nickel and oil.

The MSCI Asia Pacific climbed 1.5 percent to 111.55 as of 7:27 p.m. in Tokyo, the highest since Sept. 26. The benchmark rose 8 percent in July, capping a 58 percent rally from the lowest in more than five years in March.

“An earnings and economic recovery in the second half was rather like a wishful thought,” said Yoshinori Nagano, a senior strategist at Tokyo-based Daiwa Asset Management Co., which oversees the equivalent of $90 billion. “That’s getting more likely now and increasing investors’ appetite for risk assets.”

Japan’s Nikkei 225 Stock Average rose 1.9 percent to 10,356.83. The broader Topix gained for an 11th day, the longest winning streak since May 1990. All Asian benchmarks climbed.

Still, reports today showed Japan’s jobless rate rose to a six-year high, and consumer prices fell by a record in June, raising concern any economic recovery will be muted. Nintendo Co. tumbled after falling console sales pushed profits lower, and Mazda Motor Corp. slumped after a third straight quarterly loss.

‘Unexpected Profits’

Futures on the Standard & Poor’s 500 Index rose 0.2 percent in trading today. Earnings reports from Motorola Inc. and MasterCard Inc. propelled the S&P 500 to a 1.2 percent gain yesterday to 986.75, the highest level in almost nine months.

Sony added 6.8 percent to 2,675 yen, the steepest gain this month. The company reported a first-quarter net loss that was less than half analysts’ estimates. Nomura Holdings Inc. lifted its rating on the stock to “buy” from “neutral,” citing better-than-forecast results at the finance unit and cost cuts.

“Losses are shrinking, and some companies are unexpectedly turning profits, painting a bright picture,” said Kazuhiro Takahashi, a general manager at Daiwa Securities SMBC Co. in Tokyo. “Investors will have to start paying attention not only to the fruits of cost cuts, but also the outlook for a sales rebound that’s coming.”

Datang International rose 5.4 percent to HK$5.09. The power producer said in a preliminary earnings statement that profit rose more than 50 percent in the six months through June on rising revenues and tariff changes. Sino Land Co., a Hong Kong property developer, climbed 5.1 percent to HK$15.82 after Morgan Stanley recommended buying the city’s developers.

Yamato, Nippon Express

Yamato Holdings Co., Japan’s largest parcel-delivery company, jumped 8 percent to 1,407 yen, the highest close in more than a year. The company lifted its full-year net income forecast by 6.8 percent. Rival Nippon Express Co., which reported earnings today, climbed 6.6 percent to 435 yen.

Taiwan Semiconductor Manufacturing Co. rose 5.2 percent to NT$58.9 in Taipei, the biggest gain in two months. The world’s largest custom-chip maker forecast sales and profitability that exceeded analysts’ estimates.

Kikkoman Corp. surged 7.1 percent to 1,107 yen, the highest since Oct. 22. First-quarter net income at Japan’s biggest soy- sauce maker rose 20 percent from a year earlier, the company said yesterday.

Industrial Bank of Korea, South Korea’s largest lender to small- and medium-sized companies, gained 4.4 percent to 14,100 won after second-quarter profit exceeded analyst estimates.

Outpacing U.S., Europe

The MSCI Asia Pacific has surged 58 percent since March 9, outpacing gains of 46 percent by the S&P 500 and 43 percent by Europe’s Stoxx 600 Index. Accelerating growth in China, rising industrial production in Japan, and a rally in commodities prices have helped boost shares throughout the region.

Stocks in the MSCI Asia Pacific are currently valued at 24.5 times estimated earnings, compared with 18 times at the start of the year.

Rio Tinto rose 4 percent to A$60.40 in Sydney. BHP Billiton Ltd., the world’s largest mining company, advanced 1.9 percent to A$37.85. Woodside Petroleum Ltd., Australia’s second-largest oil producer, gained 2.7 percent to A$45.70.

Crude oil soared 5.7 percent in New York yesterday, the biggest gain since April 9. The Reuters/Jefferies CRB Index jumped 3.9 percent, the steepest advance since March 19.

Nintendo, the world’s biggest maker of handheld game players, slumped 4.6 percent to 25,590 yen after falling Wii and DS console sales caused net income to slide by more than half last quarter. UBS AG initiated a “short-term sell” recommendation on the company.

Mazda, Japan’s second-largest car exporter, sank 6.1 percent to 248 yen. The company had a loss of 21.5 billion yen ($264 million) last quarter as sales fell 45 percent.

Cycle & Carriage Bintang Bhd., a Malaysian distributor of Mercedes-Benz vehicles, jumped 39 percent to the highest in almost three years after declaring a special dividend.

European Markets Trade Mixed

By Adria Cimino

July 31 (Bloomberg) — European stocks fluctuated before a report that may show the U.S. economy shrank at a slower pace last quarter, offsetting comments from Deutsche Bank AG Chief Executive Officer Josef Ackermann that the financial crisis “is not over.”

JCDecaux SA, the world’s second-largest seller of outdoor ads, surged 13 percent after results exceeded estimates and Credit Suisse Group AG strategists recommended European media stocks. Air France-KLM Group, Europe’s biggest airline, slid 5.6 percent after reporting a first-quarter loss. Eni SpA, Italy’s largest oil company, dropped 6.3 percent after second-quarter profit slumped 76 percent.

The Dow Jones Stoxx 600 Index was little changed at 225.23 as of 11:15 a.m. in London, having swung between gains and losses at least 14 times. The measure is heading for its third week of gains after companies including Goldman Sachs Group Inc., Roche Holding AG and Intel Corp. reported earnings that exceeded analysts’ forecasts and U.S. Federal Reserve Chairman Ben S. Bernanke said the world’s largest economy is showing “tentative signs of stabilization.”

“I’m a little surprised by the two-week rally,” Philippe Gijsels, a senior structured equity strategist at Fortis Global Markets in Brussels, said in a Bloomberg Television interview. “Profits are more or less OK. At the final part of the year, revenues have to kick in. Investors risk disappointment.”

U.S. Economy

Futures on the Standard & Poor’s 500 Index added 0.2 percent today. Gross domestic product in the U.S. probably contracted at a 1.5 percent annual rate from April to June after dropping 5.5 percent the prior quarter, a sign the worst recession in half a century is winding down, economists said before a Commerce Department report due at 8:30 a.m. in Washington.

“We have stepped away from the precipice,” President Barack Obama told reporters in the Oval Office yesterday. “We were in a position where we could have gone into a great depression. I think those fears have abated.”

Asian stocks rose today, sending the MSCI Asia Pacific Index to a fifth monthly advance, as earnings from Sony Corp. and Datang International Power Generation Co. and a commodities rally spurred confidence the economy is recovering.

China’s Shanghai Composite Index capped a 15 percent rally in July, the biggest gain since August 2007 and its seventh straight month of gains, as government spending and record bank lending spur a rebound in the world’s third-largest economy.

European Earnings

More than half of per-share earnings at European companies that have reported results since July 8 beat projections, according to Bloomberg data. Profits in the Stoxx 600 fell 37 percent on average in the period, while 90 out of 171 companies have reported better-than-estimated results.

Deutsche Bank’s Ackermann said rising delinquencies among consumer and corporate loans are the next wave of the financial crisis, and may affect banks that have avoided losses so far.

“This crisis has consisted of a series of earthquakes, with changing epicenters,” Ackermann said late yesterday at an event in Zurich. “Bad loans are the next wave. Banks that have fared relatively well so far will also be affected by this.”

JCDecaux jumped 13 percent to 14.19 euros after posting earnings before interest and taxes of 49.5 million euros ($70 million), better than the average estimate of 37.2 million euros in a Bloomberg survey.

United Business Media Ltd. rose 12 percent to 414.75 pence after the publisher of Information Week and owner of PR Newswire increased its dividend more than analysts expected.

A gauge of European media stocks climbed 1.6 after Credit Suisse strategists raised their recommendation on the industry to “overweight” from “underweight” as they became more optimistic that businesses geared to economic growth may outperform.

Eni, Air France

Eni sank 6.3 percent to 16.59 euros, leading a measure of oil and gas companies to the biggest decline among 19 industries on the Stoxx 600. The company said net income fell to 830 million euros from 3.44 billion euros a year earlier as the global recession sapped demand for crude and fuel. Adjusted net income of 900 million euros missed analysts’ forecasts.

Total SA declined 3.3 percent to 38.67 euros. Europe’s third-largest oil producer reported a 54 percent drop in profit and said output fell after the global recession eroded energy demand, offsetting gains from new projects.

Air France retreated 5.6 percent to 8.69 euros. The carrier posted a first-quarter net loss of 431 million euros as the recession wreaked havoc on passenger traffic, fares and cargo handling. The median of five estimates compiled by Bloomberg was for a loss of 194 million euros.

Michelin, PPR

Michelin & Cie. surged 4.3 percent to 49.53 euros. The world’s second-largest tiremaker reported a first-half net loss of 119 million euros, narrower than analysts’ expectations for a 320 million-euro loss.

PPR SA soared 9.9 percent to 78.09 euros after the French owner of Gucci reported first-half profit that beat analyst estimates, helped by strengthening luxury sales in Asia.

Grupo Ferrovial SA, Spain’s second-biggest construction company, fell 6.6 percent to 24.19 euros after announcing it will absorb highway unit Cintra Concesiones de Infraestructuras de Transporte SA via a reverse takeover. Cintra surged 14 percent to 5.82 euros.

Oil Slips Below $67

LONDON (AP) – Oil prices traded below $67 a barrel Friday as a stock market rally in the U.S. and Asia fizzled out in Europe and as investors braced for a key economic growth figure out of the U.S.

Benchmark crude for September delivery was down 32 cents to $66.62 a barrel by midday European time in electronic trading on the New York Mercantile Exchange. On Thursday, the contract rose $3.59, or 5.6 percent, to settle at $66.94.

Traders have gotten whiplash this week as prices jerked up and down on investor uncertainty about the strength of the global economic recovery.

“Sentiment is very fragile,” said David Moore, commodity strategist at Commonwealth Bank of Australia in Sydney. “Going forward, we’re going to be looking at a seesawing market.”

Crude investors were cheered by a jump in stock markets in the U.S. on Wednesday and in Asia on Thursday, but that rally came to an end Friday in Europe, where investors booked profits before the weekend.

Markets will be focusing Friday on the first estimate for second quarter U.S. gross domestic product – many analysts predict it shrank at an annualized rate of 1.5 percent, a vast improvement from the 5.5 percent recorded in the prior three month period.

Any surprises, however, could cause some market volatility, analysts say.

While the worst of a severe recession may be over, investors are cautious about a rebound this year. Signs of weak gasoline consumption and high crude inventories have dampened enthusiasm.

“When there’s an indicator from the U.S. that suggests the recovery will be slow to emerge, prices get knocked back a bit,” Moore said. “I think oil over the next few months will probably have a downward bias.”

In other Nymex trading, gasoline for August delivery fell 2.07 cents to $1.97 a gallon and heating oil fell 0.87 cent to $1.76. Natural gas for August delivery fell 4.3 cents to $3.7 per 1,000 cubic feet.

In London, Brent prices fell 31 cents to $69.80 a barrel on the ICE Futures exchange.

Cash For Clunkers Stimulates Buying As Program May Have Already Run Out of Funds

WASHINGTON (AP) – The government’s popular “cash for clunkers” program may be running out of money after only a matter of days as car shoppers flock to dealerships to take advantage of the rebates.

The White House said Thursday it was assessing its options amid concerns the $1 billion budget for rebates for new car sales may have been depleted. The program officially began last week and has been heavily publicized by automakers and dealers.

Transportation Department officials called lawmakers earlier Thursday to alert them of plans to suspend the program as early as Friday. But a White House official said later the program had not been suspended and they were reviewing their options to keep the program funded.

White House press secretary Robert Gibbs said they were working to “assess the situation facing what is obviously an incredibly popular program. Auto dealers and consumers should have confidence that all valid CARS transactions that have taken place to date will be honored.”

Dubbed the Car Allowance Rebate System, or CARS, the program offers owners of old cars and trucks $3,500 or $4,500 toward a new, more fuel-efficient vehicle, in exchange for scrapping their old vehicle. Congress last month approved the plan to boost auto sales and remove some inefficient cars and trucks from the roads.

The program was scheduled to last through Nov. 1 or until the money ran out, but few predicted it would be depleted in days. Through late Wednesday, 22,782 vehicles had been purchased through CARS and nearly $96 million had been spent.

But dealers raised concerns about large backlogs in the processing of the deals in the government system. A survey of 2,000 dealers by the National Automobile Dealers Association found about 25,000 deals had not yet been approved by the government, or nearly 13 trades per store.

It suggested that with about 23,000 dealers taking part in the program, car dealers may already have surpassed the 250,000 vehicle sales funded by the $1 billion program.

“There’s a significant backlog of ‘cash for clunkers’ deals that make us question how much funding is still available in the program,” said Bailey Wood, a spokesman for the dealers association.

The reports that the CARS program could be suspended created confusion among many dealers, who had showrooms filled with car shoppers looking to scrap their gas guzzlers.

Alan Helfman, general manager of River Oaks Chrysler Jeep in Houston, said he was worried that the government wouldn’t pay for some of his clunker deals. His dealership has completed paperwork on about 20 sales under the program, but in some cases the titles haven’t been obtained yet or the vehicles aren’t on his lot.

“There’s no doubt I’m going to get hammered on a deal or two,” Helfman said.

The clunkers program was set up to boost U.S. auto sales and help struggling automakers through the worst sales slump in more than a quarter-century. Sales for the first half of the year were down 35 percent from the same period in 2008, and analysts are predicting only a modest recovery during the second half of the year.

So far this year, sales are running under an annual rate of 10 million light vehicles, but as recently as 2007, automakers sold more than 16 million cars and light trucks in the United States.

Lawmakers said they would try to find additional funding for the program, which under the legislation could grow to $4 billion for the funding of up to 1 million new car sales.

Rep. Edward Markey, D-Mass., who developed the legislation, said he would work with the Obama administration to keep the program going “until it reaches its goal of helping consumers take 1 million gas guzzlers off the road.”

Others suggested using unspent economic stimulus funding. “I can think of no better use for unspent stimulus dollars that are gathering dust than financing ‘Cash for Clunkers,'” said Rep. Fred Upton, R-Mich. Michigan lawmakers planned to meet on Friday to discuss the program.

Brendan Daly, a spokesman for House Speaker Nancy Pelosi, D-Calif., said they would work with “the congressional sponsors and the administration to quickly review the results of the initiative.”

General Motors Co. spokesman Greg Martin said the automaker hoped “there’s a will and way to keep the CARS program going a little bit longer.”

European CPI Data Fell While Unemployment Rose

By Emma Ross-Thomas

July 31 (Bloomberg) — European consumer prices fell by the most in at least 13 years in July after energy costs declined and unemployment rose to the highest in a decade.

Prices in the euro region dropped 0.6 percent from a year earlier, the most since the data were first compiled in 1996, the European Union statistics office in Luxembourg said today. That exceeded the 0.4 percent decrease forecast by economists, according to the median of 32 estimates in a Bloomberg survey. Unemployment rose to 9.4 percent in June, the highest since 1999, a separate report showed.

More than 3 million people have joined the euro region’s jobless rolls in the last year, and the Organization for Economic Cooperation and Development expects the unemployment rate to reach 12 percent in 2010. As consumers and companies reduce spending to weather the worst recession in more than 60 years, inflation is also being pushed lower by a 50 percent drop in the price of crude oil over the last year.

“The larger-than-expected drop in inflation and the unrelenting rise in unemployment should serve as a stark reminder to the ECB that medium-term inflation risks in the euro zone are tilted to the downside,” said Martin van Vliet, senior economist at ING Bank in Amsterdam.

The European Central Bank aims for inflation to be just under 2 percent and ECB President Jean-Claude Trichet has said he expects inflation to “temporarily remain negative” before turning positive by year end. While the central bank says mid- to long-term price expectations are “anchored,” a European Commission measure of those expectations fell in July to the lowest since at least 1990, a report showed yesterday.

‘Deflationary Environment’…..

Banks Complain of Excessively HarshProbation Set by Regulators

By DAMIAN PALETTA and DAN FITZPATRICK

Federal regulators have escalated the number of wounded banks they have essentially put on probation, with some of the targeted banks complaining that the action is too harsh.

The Federal Reserve and the Office of the Comptroller of the Currency, two of the primary U.S. banking regulators, have issued more of the so-called memorandums of understanding so far this year than they did for all of 2008, according to data obtained from the agencies under Freedom of Information Act requests.

At the current rate of at least 285 so far, the Fed, OCC and Federal Deposit Insurance Corp. are on track to issue nearly 600 of the secret agreements for the full year, compared with 399 last year. Memorandums of understanding can force financial institutions to increase their capital, overhaul management or take other major steps.

Such sanctions typically aren’t publicly disclosed to avoid possibly rattling depositors and shareholders. Institutions hit with memorandums this year range from giant Bank of America Corp. to regional bank Colonial BancGroup Inc., based in Montgomery, Ala., to Berkshire Bancorp Inc., a New York bank with just 12 branches.

The sharp increase comes as Congress considers changes proposed by the Obama administration that would overhaul the way the U.S. government oversees banks. Many bankers and analysts believe those changes would result in an even more assertive regulatory apparatus. Regulators have been criticized for going too easy on banks and securities firms.

Regulators say getting tougher now could prevent some struggling banks from failing as borrowers fall behind on their payments and the U.S. economy slogs through recession. A total of 64 banks have failed this year, up from 25 in 2008.

“Regulators’ natural response is: Oh my goodness, we’ve got to toughen up,” Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said in an interview.

Some bankers counter that the regulatory squeeze is making it even harder for them to make good loans that would help them recover. Others say banks are being forced to meet arbitrary standards that exceed what regulators normally require. “It’s frustrating and aggravating,” said Pat Sheaffer, chairman and chief executive officer of Riverview Bancorp Inc., of Vancouver, Wash., which has $920 million in assets and 18 branches.

In January, the Office of Thrift Supervision issued Riverview a memorandum of understanding that requires the bank to increase its total risk-based capital, a measurement of financial strength, to 12% from 10.7% as of Dec. 31. Mr. Sheaffer said there was little dialogue with the agency before the requirement was imposed.

The OTS didn’t return phone calls seeking comment.

James Miller Jr., CEO of Fidelity Southern Corp., said he was surprised to be hit with a memorandum of understanding in December because the Atlanta bank’s exposure to residential real estate is low in comparison to other banks in the area.

Regulators want Fidelity to reduce its residential real-estate construction lending to no more than 100% of total capital, down from about 120%. Since the agreement, the bank has lowered its exposure to 110%.

“I am not about to say anything about my regulators,” Mr. Miller said. The bank got $48.2 million in capital from the taxpayer-funded Troubled Asset Relief Program right after it signed the memorandum. “I concluded that regulators were satisfied with how we were running our bank,” he added.

Steven Rosenberg, Berkshire’s chief executive, disagreed when regulators approached him about a memorandum of understanding that would change how certain assets are classified and the amount of reserves set aside to cover potential losses. He relented and then disclosed the agreement publicly.

“You don’t fight with the guys who regulate you,” Mr. Rosenberg said……

Bears Say Not So Fast On a Housing Bottom

Housing bears immediately tried to poke holes in the surprisingly good numbers in the May Case Shiller report.

The most widespread bear argument, that the rise was just seasonal, is weak: Even the seasonally adjusted numbers were the best in three years.

Two other arguments, however, are more persuasive.

Whitney Tilson of T2 Partners calls the May numbers “the mother of all head fakes.”  He–and the two analysts below–think house prices will resume their decline in the fall.  We’re in that camp, too…

Bear Case 1: The Seasonal Adjustments Are Too Weak

The first argument against reading too much into the May numbers, made by Calculated Risk, is that the “seasonal adjustment” factor used by Case Shiller is not strong enough.  Under this theory, a more appropriate seasonal adjustment would have showed a steeper decline in seasonally adjusted May numbers.

To support this argument, Calculated Risk plots the non-seasonally adjusted Case Shiller numbers (blue) and the seasonally adjusted ones (red).  He notes that, during the 1990s, the seasonally adjusted numbers smoothed the seasonal variations to a relatively flat line (as they should).  In the nutty 2000s, however, the seasonal adjustments produced wild swings that almost tracked the non-seasonal adjustments–thus defeating the purpose of attempting to “seasonally adjust” the numbers at all.

Thus, in Calculated Risk’s opinion, house prices will start falling sharply again in the fall, when the seasonal boost peters out.

Bear Case 2: It’s Just A Mix Issue

The second bear argument, made by Mark Hanson, is even more persuasive.  In a nutshell, Hanson argues that the strong Case Shiller numbers were just due to a temporary seasonal change in the mix of houses sold–with bigger, more expensive houses becoming a larger percentage of the sales than they were in the winter.

In 2008, Mark’s argument goes, foreclosures climbed steadily through the year.  Most foreclosures in 2008 were on lower-end, subprime houses that plummeted in price as banks dumped them at distressed prices.  This year, however–at least in California–foreclosures have stayed relatively flat (at a high level).

Meanwhile, the organic sales market–sellers who actually want to sell–picks up each summer.  In recent years, with most foreclosures taking place at the low-end of the market, the organic sales market has tended to include higher-priced houses that aren’t sold in distress.

Last summer, rising low-priced foreclosures overwhelmed the seasonal spike in high-priced organic sales, so average houses prices kept falling.  This year, however, with flatter foreclosures, the seasonal spike in organic sales is having a far larger impact.  Thus, in the past few months, the median sale price has risen.

In other words, Hanson attributes the rise in the Case Shiller index to a seasonal mix issue, not a bottoming in national prices.

Here’s Mark’s argument in detail:

[The numbers here correspond to the numbers on the chart below, which is data from California only]

1. Previous to 2007, organic sales were the housing market. Foreclosure-resales made up 5% at most.

2. Prices were at a peak through mid 2007.

3. Foreclosure resales (sold through a realtor channel) began infesting the mix — organic sales and median prices began to drop sharply.

4. Foreclosure resales keep rising for over a year while and prices continued to fall as the median price was pulled towards the foreclosure-related resale market price. In September 2008, they overtake organic sales. By Nov 2008, foreclosure resales peaked due to maximum demand from investors and first timers, foreclosure moratoriums, etc.

5. In Jan 2009, after a 55% house price drop, median prices level out as the early purchase season begins and organic sales begin to increase. Additionally, foreclosure-related resale inventory has been held artificially low due to moratoriums and/or servicers keeping inventory off the market on purpose.  In April 2009, CA median house prices bottom.

6. Going into the busy season, organic sales bounce hard (just like they did the year prior), hit an inflection point in May and reclaim the mix in June.

7. Median house prices began to turn upward in May — moving toward the organic market price — shortly after organic sales began to reclaim the mix. (See pink line leading yellow line beginning at ‘6’.

See Also:
It’s True!  The Housing Market Really Is Getting Less Bad
July Housing Report: Plenty More Downside

Silicon Valley Woes

Unemployment in the Valley is now higher than it was after the dotcom bust.

The job market is so bad that some folks are giving up, quitting the tech industry, and going into healthcare (and green-tech, which isn’t exactly thriving right now, either).

Desperately awaiting the next big tech boom…

Pui-Wing Tam, Wall Street Journal: For much of last year, unemployment in Silicon Valley remained under control as the tech industry initially held up in the downturn. But by late last year, tech spending had weakened, and companies such as eBay Inc. were announcing layoffs.

As a result, Silicon Valley’s unemployment rate — which was below California’s average and largely tracked the national average last year — has soared, surpassing the state average in May. By June, the area’s unadjusted unemployment rate was 11.8%, worse than California’s 11.6% and the national rate of 9.7%, according to the latest figures from California’s Employment Development Department. The rate of job losses was particularly steep in sectors such as semiconductor manufacturing, where employment dropped more than 13% in June from a year earlier.

Only a few segments of Silicon Valley’s economy are now showing growth. Employment in the local health-care sector rose 4.2% in June from a year ago, according to the EDD. The clean-technology industry — which covers energy efficiency and alternative energy, such as solar and wind power — is also still attracting investment, pulling in $1.2 billion in venture-capital funding in the second quarter.

Read the whole thing >

Shaky Bond Auctions Notice China Not Present

By LIZ RAPPAPORT and JAMES T. AREDDY

Shaky auctions of Treasury notes this week reignited concerns about whether the government can attract buyers from China and elsewhere to soak up trillions in new debt.

A fuse was lit this week when traders noted China’s apparent absence from direct participation in two Treasury bond auctions. While China may have bought Treasurys just before the auctions, market participants read the country’s actions as a worrying sign that China and other foreign investors may be ratcheting back purchases at a time when the U.S. is seeking to fund a $1.8 trillion budget deficit.

This week alone, the U.S. deluged the bond market with more than $200 billion in record-size sales. The U.S. has had little trouble finding buyers in recent months. But that demand is fading, and the Treasury market has become volatile. Many are selling in favor of riskier assets such as corporate bonds, stocks or even higher-yielding debt of other countries. This portends higher interest rates for the Treasury, and it may need to find alternative sources of cash like issuing more inflation protected Treasury bonds.

Tension on Wall Street trading desks began building late last week when the Treasury surprised the market with plans for a record week of sales. A Monday sale of $90 billion in Treasury bills with maturities of as much as a year went well. But China appeared absent from the following two sales, which totaled $81 billion of debt, traders say.

By Thursday morning, trading-desk heads were frantically working with clients to ensure a better fate for the $28 billion seven-year note auction. It did fare far better, allaying some concerns.

“We believe by maintaining the deepest, most liquid market in the world, we will continue to attract capital from a broad array of investors,” said Andrew Williams, a spokesman for the Treasury Department.

The seven-year Treasury note rose after the auction, gaining 3/32 point Thursday to 99 25/32, which lowered its yield to 3.285%. The 10-year Treasury also gained in price on the day, up 6/32 to yield 3.641%.

Details about the auctions aren’t revealed by the government until weeks later. Overseas buyers initially are lumped together into a category known as “indirect bidders,” giving little insight into the origins of demand. It may be months until more thorough data on foreign-government buying are released by the U.S. Treasury. Foreign investors had been substantial bidders in recent Treasury auctions, even though their holdings of Treasury debt had started to wane. But this week’s auctions renewed worries that central banks and other buyers will start selling more aggressively.

“If this trend continues, it could reflect foreign buyers’ increasing concerns about the creditworthiness of the U.S.,” said James Bianco, president of Bianco Research……

Rail Traffic Update

Still no signs of recovery in the real economy.  Rail traffic for the latest week reported yet another huge year over year decline of 17.9%.  The comps should get easier as we move into the third and fourth quarter, but make no mistake – the “better than expected” earnings are not a sign of a v-shaped recovery, but rather an overly pessimistic group of analysts.

The AAR reports:

WASHINGTON, July 30, 2009 — The Association of American Railroads today reported that rail carloadings for the week ended July 25, 2009 continue to show slight improvement, but rail traffic remains down compared with the same period last year. U.S railroads reported originating 273,943 cars, down 17.4 percent compared with the same week in 2008. Regionally, carloadings were down 15.6 percent in the West and 20 percent in the East.

Intermodal volume of 193,332 trailers or containers was down 17.9 percent from the same week last year. Container volume fell 12.1 percent and trailer volume dropped 39.1 percent. Total volume on U.S. railroads for the week ending July 25 was estimated at 29.3 billion ton-miles, down 16.3 percent from the same week last year.

All 19 carload freight commodity groups were down from last year with declines ranging from 2.9 percent for nonmetallic minerals to 57.9 percent for metallic ores.

For the first 29 weeks of 2009, U.S. railroads reported cumulative volume of 7,610,311 carloads, down 19.1 percent from 2008; 5,376,118 trailers or containers, down 17.2 percent, and total volume of an estimated 809.7 billion ton-miles, down 18.1 percent.

Japan’s Unemployment Rises To a Six Year High

Unemployment in Japan has risen to its highest level for six years, sparking fears that the country’s recovery is being hampered by deflation and weak demand at home.

The number of people out of work has risen 31% in the last year to 3.48 million, pushing the jobless rate up to 5.4% in June from 5.2% a month earlier. Job availability also fell to a record low of 43 positions for every 100 job seekers, the government said today.

The grim unemployment data was accompanied by a warning that prices fell at a record pace last month, showing that deflationary pressures are haunting the world’s second biggest economy. Core consumer prices, which do not include food, dropped by a record 1.7% in the year to June.

But the Nikkei stock average defied the gloomy data and gained 1.9% to close at a 10-month high of 10356. The gains were seen as a reflection of better-than-expected earnings results from some major Japanese companies this week.

While recent upturns in exports and factory output suggest that companies may be over the worst of the recession, the effects have yet to be felt among workers and families.

Figures showed that average monthly household income fell 3.2% in June from last year, although spending rose by a modest 0.2%, mainly due to higher housing, transport and healthcare costs.

About 70% of the fall in consumer prices was attributed to lower fuel costs, but with those omitted, the cost of living still dropped 0.7%.

Fears of job losses, coupled with falling wages, have locked spending in a downward spiral for the past four months. Analysts expect the trend to continue, even after the full impact of lower fuel costs is felt.

Azusa Kato, an economist at BNP Paribas, said: “The problem is that price falls are spreading to various categories such as food and household items.

“Consumers are increasingly leaning towards low prices. In other words, deflationary expectations are taking hold in both businesses and households.”

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Scrolling Headlines From Yahoo in Play

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D

NEW YORK (MarketWatch) — Dominion Resources Inc. /quotes/comstock/13*!d/quotes/nls/d (D 34.50, -0.04, -0.12%) said Friday net income rose to $454 million, or 76 cents a share, from $298 million, or 51 cents a share in the year-ago period. Operating earnings rose to $406 million, or 68 cents a share from $289 million, or 50 cents per share for the same period a year ago. Revenue rose to $3.45 billion from $3.4 billion. Analysts expected earnings of 64 cents a share in the latest period. Dominion expects third-quarter operating earnings in the range of 88 cents to 93 cents a share, below the Wall Street target of 98 cents a share

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WY

Q2 EPS loss ex-items 59 cts tops Street’s forecast

* Sales down 36 percent to $1.39 bln

NEW YORK, July 31 (Reuters) – Forest products company Weyerhaeuser Co (WY.N) on Friday posted a wider second-quarter loss, hurt by weak demand from the construction industry, but results topped Wall Street expectations.

For the period ended June 30, the company posted a net loss of $106 million, or 50 cents per share, compared with a loss $96 million, or 45 cents per share, in the year-earlier period.

Excluding one-time items, Weyerhaeuser posted a loss of 59 cents per share, beating analysts expectations for a loss of 69 cents, according to Reuters Estimates.

Sales at the Federal Way, Washington-based company fell 36 percent to $1.39 billion. (Reporting by Matt Daily and Ernest Schneyder; Editing by Derek Caney)

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ITT

WHITE PLAINS, N.Y. (AP) — ITT Corp. said Friday its second-quarter profit and revenue fell 9 percent, but results widely beat analyst expectations and the defense contractor raised its 2009 profit guidance.

Shares rose in premarket trading.

Net income was $201.4 million, or $1.10 per share, down from $221 million, or $1.19 per share, in the same quarter last year.

Excluding special items, income from continuing operations was $1.06 per share, which ITT said was better than expected due primarily to productivity improvements and non-operating benefits.

Revenue for the quarter ended June 30 was $2.78 billion, down from $3.06 billion in the second quarter of 2008.

Analysts surveyed by Thomson Reuters expected earnings of 80 cents per share on revenue of $2.7 billion.

ITT raised its full-year adjusted earnings-per-share guidance to a range of $3.50 to $3.70 from a previous forecast of $3.20 to $3.60. The company sees 2009 revenue of $10.8 billion to $11 billion.

Analysts expect ITT to earn $3.44 per share on revenue of $10.86 billion.

Revenue at ITT’s fluid technology business was $869 million, down 15 percent from the year-ago period. Defense electronics and services business revenue was $1.6 billion, about flat compared with the same quarter last year.

And revenue at the motion and flow control business was $308 million, down 30 percent, the company said.

Shares rose $1.93, or 4 percent, to $50.20 ahead of Friday’s market open.

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CVX

SAN RAMON, Calif.–(BUSINESS WIRE)–Chevron Corporation (NYSE: CVX – News) today reported earnings of $1.75 billion ($0.87 per share – diluted) for the second quarter 2009, compared with $5.98 billion ($2.90 per share – diluted) in the 2008 second quarter. Foreign-currency effects reduced earnings in the 2009 quarter by $453 million, compared with a benefit to income of $126 million a year earlier.

For the first half of 2009, earnings were $3.58 billion ($1.79 per share – diluted), down 68 percent from $11.14 billion ($5.38 per share – diluted) in the first six months of 2008.

Sales and other operating revenues in the second quarter 2009 were $40 billion, compared with $81 billion in the year-ago quarter. First-half 2009 revenues were $75 billion, versus $146 billion in the corresponding 2008 period. The decline in both comparative periods was primarily due to lower prices for refined products, crude oil and natural gas.

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ASX

Sees Q3 shipments up 15 percent from Q2, ASP flat

* Expects strong consumer demand for game consoles

* Stock jumps 6.8 percent, outpacing main board advance (Recasts with quotes and details)

TAIPEI, July 31 (Reuters) – Taiwan’s ASE (2311.TW), the world’s largest chip packaging and testing company, became the latest chip firm in Taiwan to express optimism on its third-quarter outlook because of growing demand.

Advanced Semiconductor Engineering Inc (ASE) (ASX.N) said on Friday that its third-quarter shipments would rise 15 percent from the second quarter, while its average selling price (ASP) could be flat in the same period.

“In the third quarter, (demand in) the general consumer market should be strongest, followed by communications devices, with the PC market relatively slow,” ASE chief financial officer Joseph Tung told an investor conference, where he explained his company’s second-quarter results and gave third-quarter guidance.

Tung said demand for game consoles was robust.

ASE, which counts Broadcom (BRCM.O), Freescale and Mediatek (2454.TW) among its major clients and books about a third of its revenue from consumer products, put its 2009 capital spending forecast at around $200 million, which Tung said was similar to his previous forecast.

ASE beat market expectations with a net profit of T$1.674 billion for April-June, even though profit was down 31 percent from a year earlier. [nTPU001548] It swung from a first-quarter net loss of T$1.57 billion.

Citing strong demand for computers and other consumer devices that require chips, TSMC (2330.TW) and UMC (2303.TW), the world’s two biggest contract chipmakers, also flagged a stronger third quarter earlier this week. [ID:nTP261512] [ID:nTP182537]

ASE, whose second-quarter gross profit margin rose to 21.7 percent from 4.9 percent in the first quarter, released the results after the Taipei stock market closed on Friday.

ASE shares jumped 6.8 percent, outpacing the main TAIEX’s 0.7 percent gain. ASE and smaller rival Siliconware (2325.TW) encase silicon chips in plastic packages so that they can be connected to circuit boards.

AU

JOHANNESBURG, SOUTH AFRICA–(Marketwire – 07/31/09) – AngloGold Ashanti Limited (NYSE:AU – News) reported an 11% increase in second quarter adjusted headline earnings to a record, after improved performance from its Tanzanian and Ghanaian regions helped boost production.

Adjusted headline earnings increased to $167m, or US47 cents a share in the three months to 30 June, compared with $150m, or US42 cents, in the previous quarter.

“We saw a strong operating performance across most of the operations and a nice sweetener from our received gold price,” Chief Executive Officer Mark Cutifani said. “We’re seeing the results of our interventions in the continued improvements at Obuasi and the early signs of a recovery at Geita are also very encouraging for us.”

AngloGold Ashanti’s production during the period rose to 1.127Moz at a total cash cost of $472/oz, from 1.103Moz at $445/oz in the prior quarter. Higher production and lower costs were realised in South America and in Africa, outside of South Africa.

The company has appointed new management this year to oversee its operations in Ghana and Tanzania, part of its strategy to ensure appropriate skills at each level in the organization. Obuasi reported a 10% rise in production to 101,000 ounces and a 16% drop in cash costs to $589/oz, while Geita posted a 43% increase in production to 63,000 ounces and a 14% decline in costs.

The company’s West Wits operations in South Africa raised production by 7%, despite the large number of public holidays around Easter and the general election. The Vaal River operations, however, reported a 15% decline in output and a commensurate increase in costs, largely due to safety-related stoppages.

Eight of our colleagues tragically lost their lives across the company’s operations during the quarter. This safety performance is a matter for concern and AngloGold Ashanti’s management has intensified its efforts to improve overall safety across its operations. Interventions have been made with teams that have had the highest accident rates to effect rapid improvements. A broader strategy to better the organisation’s safety performance will be implemented in the first quarter of 2010. It is important to note that AngloGold Ashanti’s lost time injury frequency rate, a broad measure of overall safety performance, declined 19% during the quarter to its lowest level ever. There have been no fatalities since June 2.

The safety stoppages, combined with mill repairs in the first quarter at Geita and lower-than-anticipated recoveries from the Cripple Creek & Victor in the U.S., have necessitated the adjustment of full-year guidance to 4.7Moz – 4.8Moz from the original target of 4.9Moz – 5.0Moz. For the third quarter, production is estimated at 1.2 million ounces at a total cash cost of approximately US$530 per ounce, assuming an average rand exchange rate of R8.10 to the US dollar for the quarter.

The average price received during the quarter increased by 5% to $897/oz, achieving a 3% discount to the spot price.

Following the successful issue of a five-year convertible bond and receipt of the first tranche of the proceeds from the sale of its Boddington stake, the company used $797m of its internal cash reserves to restructure its hedge book during July.

“We’ve worked hard to strengthen our balance sheet and that gave us the flexibility to skin the hedge book by getting it well below one year’s production,” Cutifani said. “The market fundamentals are extremely robust for gold, so we decided to move aggressively sooner rather than later.”

The restructuring affected about 1.4 million ounces, reducing the overall hedge commitment to 4.47 million ounces at July 25, less than one year’s production. The committed ounces are expected to decline further, to 4.1 million ounces by the end of 2009, a year ahead of target.

The company now expects to achieve a 7% discount to spot gold prices at $950/oz gold price, with the hedge book reducing by approximately 800,000oz a year, until it winds up at the end of 2014.

CPN

LONDON (MarketWatch) — Calpine Corp. /quotes/comstock/13*!cpn/quotes/nls/cpn (CPN 13.64, +0.60, +4.60%) said that it swung to a second-quarter net loss of $78 million, or 16 cents a share. Last year, the firm posted a profit of $197 million, or 41 cents a share. Operating revenue dropped to $1.47 billion, from $2.8 billion a year ago. “Because the execution of our hedging strategy, improvements in operations and sustainable cost-cutting have been better than expected, we are raising and tightening our projected 2009 adjusted earnings before interest, tax, depreciation and amortization to $1.675 billion to $1.725 billion,” the firm said. It was previously forecasting EBITDA of $1.6 billion to $1.7 billion.

CEG

LONDON (MarketWatch) — Constellation Energy /quotes/comstock/13*!ceg/quotes/nls/ceg (CEG 29.03, +0.13, +0.45%) said Friday it made 4 cents a share in the second quarter vs. 95 cents a share in the year-earlier period. The company raised its earnings guidance for the full year to $3.10 to $3.30 a share. Adjusted earnings, which exclude one-time items, fell to $1.08 from $1.82 in the same period a year earlier.

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The benefits of a new health care plan

By DAVID M. CUTLER, J. BRADFORD DELONG and ANN MARIE MARCIARILLE

The big threat to growth in the next decade is not oil or food prices, but the rising cost of health care. The doubling of health insurance premiums since 2000 makes employers choose between cutting benefits and hiring fewer workers.

Rising health costs push total employment costs up and wages and benefits down. The result is lost profits and lost wages, in addition to pointless risk, insecurity and a flood of personal bankruptcies.

Sustained growth thus requires successful health-care reform. Barack Obama and John McCain propose to lead us in opposite directions — and the Obama direction is far superior.

Sen. Obama’s proposal will modernize our current system of employer- and government-provided health care, keeping what works well, and making the investments now that will lead to a more efficient medical system. He does this in five ways:

– Learning. One-third of medical costs go for services at best ineffective and at worst harmful. Fifty billion dollars will jump-start the long-overdue information revolution in health care to identify the best providers, treatments and patient management strategies.

– Rewarding. Doctors and hospitals today are paid for performing procedures, not for helping patients. Insurers make money by dumping sick patients, not by keeping people healthy. Mr. Obama proposes to base Medicare and Medicaid reimbursements to hospitals and doctors on patient outcomes (lower cholesterol readings, made and kept follow-up appointments) in a coordinated effort to focus the entire payment system around better health, not just more care.

– Pooling. The Obama plan would give individuals and small firms the option of joining large insurance pools. With large patient pools, a few people incurring high medical costs will not topple the entire system, so insurers would no longer need to waste time, money and resources weeding out the healthy from the sick, and businesses and individuals would no longer have to subject themselves to that costly and stressful process.

– Preventing. In today’s health-care market, less than one dollar in 25 goes for prevention, even though preventive services — regular screenings and healthy lifestyle information — are among the most cost-effective medical services around. Guaranteeing access to preventive services will improve health and in many cases save money.

– Covering. Controlling long-run health-care costs requires removing the hidden expenses of the uninsured. The reforms described above will lower premiums by $2,500 for the typical family, allowing millions previously priced out of the market to afford insurance.

In addition, tax credits for those still unable to afford private coverage, and the option to buy in to the federal government’s benefits system, will ensure that all individuals have access to an affordable, portable alternative at a price they can afford.

Given the current inefficiencies in our system, the impact of the Obama plan will be profound. Besides the $2,500 savings in medical costs for the typical family, according to our research annual business-sector costs will fall by about $140 billion. Our figures suggest that decreasing employer costs by this amount will result in the expansion of employer-provided health insurance to 10 million previously uninsured people.

We know these savings are attainable: other countries have them today. We spend 40% more than other countries such as Canada and Switzeraland on health care — nearly $1 trillion — but our health outcomes are no better.

The lower cost of benefits will allow employers to hire some 90,000 low-wage workers currently without jobs because they are currently priced out of the market. It also would pull one and a half million more workers out of low-wage low-benefit and into high-wage high-benefit jobs. Workers currently locked into jobs because they fear losing their health benefits would be able to move to entrepreneurial jobs, or simply work part time.

In contrast, Sen. McCain, who constantly repeats his no-new-taxes promise on the campaign trail, proposes a big tax hike as the solution to our health-care crisis. His plan would raise taxes on workers who receive health benefits, with the idea of encouraging their employers to drop coverage. A study conducted by University of Michigan economist Tom Buchmueller and colleagues published in the journal Health Affairs suggests that the McCain tax hike will lead employers to drop coverage for over 20 million Americans.

What would happen to these people? Mr. McCain will give them a small tax credit, $5,000 for a family and $2,500 for an individual, and tell them to navigate the individual insurance market on their own.

For middle- and lower-income people, the credits are way too small. They are less than half the cost of policies today ($12,000 on average for a family), and are far below the 75% that most employers offering coverage contribute. Further, their value would erode over time, as the credit increases less rapidly than average premiums.

Those already sick are completely out of luck, as individual insurers are free to deny coverage due to pre-existing conditions. Mr. McCain has proposed a high-risk pool for the very sick, but has not put forward the money to make it work.

Even for those healthy enough to gain coverage in the individual insurance market, the screening, marketing and individual underwriting that insurers do to separate healthy from sick boosts premiums by 17% relative to employer-provided insurance, well beyond the help offered by the McCain tax credit.

The immediate consequences of the McCain plan are even worse. The McCain plan is a big tax increase on employers and workers. With the economy in recession, that’s the last thing America’s businesses need.

Finally, Mr. McCain does nothing to bend the curve of rising health-care costs downward. He does not fund investments in learning, rewarding and preventing. Eliminating state coverage requirements will slash preventive service availability.

The high cost-sharing plans he envisions will similarly discourage preventive care. And as he does nothing about the hidden costs of the uncovered — expensive ER visits, recurring conditions resulting from inadequate follow-up care.

Everyone agrees our health-care financing system must change. But only one candidate, Barack Obama, has real change we can believe in.

Mr. Cutler is professor of economics at Harvard and an adviser to Barack Obama’s presidential campaign. Mr. DeLong is professor of economics at University of California, Berkeley. Ms. Marciarille is adjunct law professor at McGeorge School of Law.

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Minoj Ladwa

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World Markets Rise on Earnings

By Stuart Wallace

July 30 (Bloomberg) — Stocks rose in Asia and Europe and U.S. futures advanced after companies from BT Group Plc to Honda Motor Co. reported earnings that beat analysts’ estimates. Metals led gains in commodities as China’s central bank damped speculation it will curb lending.

The MSCI World Index, a gauge of 23 developed markets, added 0.6 percent at 11.45 a.m. in London, rebounding from two consecutive declines. Copper, aluminum and crude oil rose for the first time in three days and the pound gained against the dollar, the euro and the yen.

“Economies are saying things are OK and earnings are saying that they are at the trough,” said Georgina Taylor, an equity strategist at Legal & General Group Plc in London, which oversees $460 billion worldwide.

More than half of the 141 European companies in the Dow Jones Stoxx 600 Index that reported earnings have beaten estimates, while more than two-thirds of the S&P 500 Index’s constituents have exceeded forecasts so far. China’s central bank said today it will use market tools to control lending growth and affirmed a “moderately loose” monetary policy, easing concern that lending will be restricted.

Europe’s Stoxx 600 Index increased 1.2 percent as BT Group Plc and Alcatel-Lucent SA rallied on better-than-estimated profits. An index of executive and consumer sentiment in the 16 nations that use the euro rose to the highest since November, the European Commission said. The MSCI Asia Pacific Index climbed 0.9 percent.

U.S. Futures Rise

Futures on the Standard & Poor’s 500 Index added 0.8 percent, suggesting the benchmark index for U.S. equities will rebound from yesterday’s 0.5 percent decline.

The MSCI Emerging Markets Eastern Europe Index jumped as much as 2.3 percent, led by Russian oil and gas companies. OAO Gazprom, the world’s biggest natural-gas company, climbed 3.5 percent after Interfax reported Russia decided not to raise the export tariff on gas from next year, citing an unidentified government official.

The MSCI Emerging Markets Index of equities in 22 developing economies added 0.2 percent, after declining 1.7 percent yesterday.

The Turkish lira appreciated 1.4 percent against the U.S. currency, leading gains among 26 emerging-market currencies tracked by Bloomberg, on the prospect of further interest-rate cuts. The country may lower its benchmark interest rate by as much as 1.25 percentage points, Morgan Stanley said in a note. South Africa’s rand strengthened 1.4 percent compared with the dollar, the biggest gain since July 20.

Copper Rallies

Copper for delivery in three months advanced 1.7 percent to $5,508 a metric ton on the London Metal Exchange. Aluminum, nickel, tin, lead and zinc also rose. China is the world’s largest consumer of copper, aluminum and iron ore.

“The tightening of bank lending has been the major fear in the minds of copper importers and dealers,” Lin Xu, an analyst at China International Futures Co. in Shenzhen, said by phone today. “The reiteration of a loose monetary policy from the central bank helped sentiment.”

The Chinese government introduced a 4 trillion yuan ($585 billion) stimulus package last year and loosened credit restrictions to offset slumping exports by stimulating domestic demand. U.S. authorities have pledged as much as $12.8 trillion to revive economic growth following the collapse of credit markets in August 2007.

Crude Oil Advances

Crude oil for September delivery added 1.2 percent to $64.08 a barrel on the New York Mercantile Exchange. Soybeans advanced 1.8 percent and corn gained 1.2 percent in Chicago trading. White sugar rose 1.1 percent on the Liffe exchange in London, while robusta coffee and cocoa rose.

The dollar fell against 11 of its 16 most-traded peers after a government report showed Japanese manufacturers boosted production for a fourth month, sapping demand for the U.S. currency as a refuge. The Dollar Index dropped as much as 0.6 percent.

Treasuries fell, with the yield on the seven-year note rising 4 basis points to 3.34 percent before a $28 billion sale of the securities. The 10-year note yield increased 3 basis points to 3.69 percent.

European bonds declined, with the yield on the two-year German note rising 3 basis points to 1.35 percent, near the highest sine June 30.

The pound snapped a two-day decline against the dollar, rising 0.7 percent, and advanced for a fourth day versus the euro after Nationwide Building Society reported a bigger-than- forecast increase in house prices during June.

The cost of protecting European investment-grade corporate bonds in the credit-default swaps market fell to near the lowest in a year. The Markit iTraxx Europe index dropped 4.75 basis points to 89.5, according to JPMorgan Chase & Co. prices, signaling an improvement in perceptions of credit quality.

Contracts on the high-yield Markit iTraxx Crossover index declined 29 basis points to 625, JPMorgan prices show.

Oil Stays Steady in Overnight Trade

By ALEX KENNEDY p {margin:12px 0px 0px 0px;}

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