Tuesday, September 30, 2008

It takes a blogosphere

The charity smackdown was intense - and attracted some of the biggest stars of the blogosphere. Michael Arrington of TechCrunch offered to match reader donations. If he won, Fred Wilson, a renowned New York venture capitalist and author of tech blog avc.om, promised to give the grand prize - a lunch with Yahoo’s (YHOO) Jerry Yang - away to a reader (quipped Arrington: “Fred Wilson must be stopped.”). And Allthingsd.com’s Kara Swisher videotaped her two young kids asking for cash.

In the end, an obscure blog called TomatoNation left them in the dust. With just 100,000readers, author Sarah Buntig raised more than $100,000 in donations. In all, the site that hosted the contest last year, DonorsChoose.org, raised $420,000 to help fund education.

Now comes the second philanthropic showdown. Starting Oct. 1, bloggers will compete to raise funds for DonorsChoose.org, which lets donors school projects to fund. Arrington, Wilson and Swisher are back in the ring along with Net celebrity Julia Allison (nonsociety.com), former Microsoft tech evangelist Robert Scoble (Scobleizer.com), and a host of others. It’s not just A-listers, though. Any blogger can join, and as Buntig demonstrated, sometimes a small group of passionate people can outgun a massive audience.

As media sponsor, Fortune will keep you updated on who’s ahead - and what crazy and creative tactics bloggers are using to raise money.

There’s a good reason techies love Donorschoose.org. As Fortune wrote in February, the site is part tech and part business with a strong do-gooding bent. Started by former teacher Charles Best in 2000, it has grown from a New York City experiment to an efficient alternative funding source for teachers nationwide.

Here’s how it works: teachers register with the site and upload projects they want sponsored. Recent examples include podcast equipment for a high school journalism class in Newton, Kan. ($582 needed), basic art supplies like paint and magic markers for a fourth-grade class in Brooklyn ($370), and a bass guitar for an after-school music program in Los Angeles ($723). DonorsChoose acts as the middle man, purchasing the materials and shipping them and a disposable camera to the teachers who made the requests. (Donors later receive thank-you notes from the students along with photos.)

Last year, with the help of an $11 million “investment” (read: donation) from Web heavyweights like eBay (eBay) founder Pierre Omidyar, Yahoo cofounder David Filo, Silicon Valley venture capitalist Vinod Khosla and Netflix (NFLX) founder Reed Hastings, the site moved beyond a dozen or so states and geographic areas to offer services to every school in the country. So far, Donorschoose.org has raised $24 million to get support to 1.4 million students in 50 states. Nearly 60,000 projects have been funded. And that’s only the beginning of Best’s vision for the organization.

Here’s where you come in. Starting Wednesday, check out the Blogger Challenge on Donorschoose.org/bloggers. Make a donation - and help your favorite blogger win. Or if you’re a blogger yourself, join the challenge, and see if you can best the blogging A-list in your fundraising. The winner gets a good old-fashioned dose of media attention, a priceless prize for any blogger.

The competition is bound to get rough, and hilarious. Here at Fortune.com, we’ll keep you updated on Techland.

Obama urges higher deposit insurance

Democratic presidential candidate Barack Obama Tuesday proposed expanding federal deposit insurance for families and small businesses as a way to convince lawmakers who voted against the $700 billion federal bailout plan to change their minds.

"One step we could take to potentially broaden support for the legislation and shore up our economy would be to expand federal deposit insurance for families and small businesses across America who have invested their money in our banks.

"The majority of American families should rest assured that the deposits they have in our banks are safe," Obama said in a statement put out by his presidential campaign.

"That is why today, I am proposing that we also raise the FDIC limit to $250,000 as part of the economic rescue package - a step that would boost small businesses, make our banking system more secure and help restore public confidence in our financial system."

Currently, deposits of up to $100,000 are guaranteed by the government's Federal Deposit Insurance Corporation.

Obama said he will talk to leaders and members of Congress later Tuesday to offer his idea and urge them to act without delay to pass a rescue plan.

Economic rescue package
Monday, the House of Representatives - defying leaders of both parties, the White House and both presidential nominees - voted down the economic rescue plan by 228 to 205 margin.

The Illinois senator urged lawmakers to try again on the bailout proposal and warned of grave consequences if nothing is done.

"Continued inaction in the face of the gathering storm in our financial markets would be catastrophic for our economy and our families. At this moment, when the jobs, retirement savings and economic security of all Americans hang in the balance, it is imperative that all of us, Democrats and Republicans alike, come together to meet this crisis.

Monday, September 29, 2008

Why the bailout bombed

Barely containing his temper, Virginia's Eric Cantor, deputy whip for the House Republicans, stepped to the microphone this afternoon to blame the bailout defeat on House Speaker Nancy Pelosi's "failure to listen" and her charged partisan rhetoric in condemning President George Bush's "budgetary recklessness" and "anything-goes mentality."

If only it were that simple. If only the failure of the White House to muster enough votes from its own party to avert what it calls looming financial disaster could be blamed on a few ill-chosen words uttered on the House floor by San Francisco's hyper-partisan speaker.

In fact, Monday's surprise defeat of the $700 billion rescue package - meant to blunt a burgeoning financial crisis - can be traced to a failure on the part of the president and his treasury secretary, Henry Paulson, to fully appreciate the ferocity of the popular revolt they touched off nine days ago.

Republicans today voted against the measure by two to one. With only 60% of Democrats also voting in favor, the plan to have the government buy up hundreds of billions in assets, mostly mortgage-backed securities, went down to defeat.

The voters said no
The reality is that conservative House members were less interested in the ear-ache they got from Pelosi than the earful they've been getting from constituents.

Calls to Congressional offices have been running overwhelmingly against the rescue - just five weeks before constituents go to the polls to vote on their members. In the week since Paulson and Federal Reserve Chairman Ben Bernanke rushed to Capitol Hill urging Congress to ward off a financial collapse by passing a bailout within 48 hours, they've argued that the situation is urgent and that financial markets are in crisis.

But the dire warnings didn't provide enough political cover for lawmakers facing voter wrath. They may have even backfired in some cases, stirring suspicion that the White House and Treasury were over-blowing the magnitude of the crisis to shove through unprecedented intervention in the financial markets that would benefit Wall Street's fat cats.

On the House floor today, voting members raised a host of concerns about the bailout package - from the burden it would leave on future taxpayers to fears that it "could permanently and fundamentally change the role of government in the American free enterprise system," in the words of Rep. Jeb Hensarling (R-Texas), a leader of dissenting Republicans.

'A tough vote'
But outside of staunch opponents like Hensarling, there were many fence-sitters who, as of Monday morning, the White House had assumed were in its column. Pelosi may not have helped, but the plan died because Republicans weren't willing to ignore a revolt among the folks back home and cast a rushed vote on a massively complex subject with an almost unfathomable price tag.

"If on the substance, you're undecided, then the politics tips you into the 'no' category," Rep. Jim McCrery of Louisiana, a Republican who supported the package, told Fortune. "It was a tough vote politically in their view."

McCrery's own experience leading up to the vote provides insight into what the White House was up against. McCrery is the ranking Republican on the House Ways and Means Committee. He's a Shreveport lawyer known for immersing himself in the details of complex tax and entitlement issues. He's one of the chamber's most thoughtful and studious lawmakers - and he's retiring, so he's less interested in playing it safe politically than figuring out what's right to do for the country.

McCrery has been cramming on the state of today's credit markets, reading everything he could get his hands on, consulting with every expert he could find. "It's been like drinking from a fire hose," he said.

I asked McCrery if his yes vote meant that he was now persuaded that the country faced a dire financial emergency requiring a $700 billion market intervention. His answer: "I'm still not knowledgeable enough about the credit markets."

Faced with competing views from competing experts on a subject that no one outside a few top economists understands, McCrery threw his lot in with Paulson and Bernanke. "I had to pick a group of experts whose opinion I was going to go with," McCrery said.

And for those lawmakers who have their doubts - or are in dicey districts and in danger of losing their seats come November - there are plenty of economic experts to choose from on the other side, starting with the group of 200 economists who signed a letter opposing the Paulson plan. Former FDIC Chairman William Isaac was on the Hill yesterday, peddling his own, radically more limited federal assistance plan, to the House Republican Study Group.

So those Republicans who sided with their constituents and voted against their President - but only by a close call - will find themselves the object of intense courting in the days ahead.

Both Pelosi and the Republican leadership say they are eager to try again to pass a bill, probably later in the week. "We'd like to find a way," said Republican Whip Roy Blunt, "to deliver enough Republican votes to make this happen."

Consumer spending loses steam

Personal spending stagnated in August as the slowing economy continued to weigh on consumers, according to a government report released Monday.

The Commerce Department reported Monday that personal spending was virtually unchanged in August. Economists had forecast a 0.2% increase in personal spending.

Spending has not been this weak since February, when it was also flat.

Personal income, meanwhile, increased by 0.5% in August after a revised 0.6% decline in July. Economists surveyed by Briefing.com were expecting income to have grown by 0.2% last month.

After adjusting for taxes and certain price changes, however, real disposable income contracted 0.9%, according to the report.

"With the labor market remaining very weak, slow to negative growth in disposable income will most likely plague the consumer for at least the next six months," said Adam York, an economist at Wachovia Economics Group.

Consumer spending increased in May and June thanks to billions of dollars in payments sent to Americans as part of the Economic Stimulus Act of 2008.

The stimulus package was aimed at boosting consumer spending, which makes up the bulk of economic activity. But that spending waned as the stimulus program wound down.

The government said Friday that gross domestic product, the broadest measure of the nation's economic health, expanded at an annual rate of 2.8% in the April-June quarter, down from the 3.3% growth rate previously estimated.

With consumer spending accounting for two-thirds of the nation's GDP, "it's pretty clear now that were looking at a negative GDP number this quarter," said Bob Brusca, an economist at Fact and Opinion Economics.

Brusca noted that energy prices were subdued in August and that contributed to the income growth registered in the month. But he warned that "with weakness creeping into the economy, the outlook for income growth is not very good."

Monday's report comes as Congress prepares to vote on a controversial $700 billion bailout of the financial system.

The plan would use tax dollars to buy up bad mortgage-related assets from Wall Street companies in a effort to stabilize the financial markets and prevent further damage to the economy.

3 Tax breaks we love (but can't afford)

For some strange reason, the government keeps writing me checks. Every year Uncle Sam hands me cash to help with my family's health insurance. I also get free money as a reward for buying stocks to fund my own retirement.

Okay, I don't actually receive any checks. I'm just enjoying some of the many tax breaks aimed at the middle and upper-middle class. The insurance premiums my employer pays are 100% tax-free, a benefit I wouldn't enjoy if I had to buy coverage myself. When I save in my 401(k), I get a valuable tax deferral.

These are subsidies, the same as if the money went straight into my bank account. Although tax subsidies often support mom-and-apple-pie stuff like saving and home ownership, they don't serve the public good nearly as well as you might think.

And they aren't exactly a free gift. "It all has to be made up by higher taxes on our other income," says Leonard Burman of the nonpartisan Tax Policy Center. "Or by higher taxes on our kids because we aren't actually paying our bills."

The lost revenue also makes it tougher for the government to do other things we might wish it could, such as cover the uninsured. Let's take a closer look at three of the tax code's biggest bonuses:

2007 Health insurance subsidy cost: $134 billion
If you've ever wondered how employers became responsible for most Americans' health care, here's your answer. The tax code essentially gives you a discount on insurance, as long as you buy it at work. The better your plan - and the higher your tax bracket - the bigger the benefit.

There's one huge social advantage to this setup: Company health plans pool risk, with healthier employees' premiums covering the costs of sicker folks. A downside, many economists say, is rising costs overall. With most of us paying for our health care indirectly via insurance, we have less incentive to seek out cheaper treatment options.

2007 Mortgage subsidy cost: $85 billion
As every realtor will remind you, you can deduct the interest you pay on up to $1 million in mortgage debt on a first or second home. Does this promote home ownership? Doubtful. As a presidential tax reform panel noted in 2005, our 69% ownership rate is about the same as in Canada, Britain and Australia, which don't have the deduction.

Many would-be buyers enjoy no subsidy because they don't earn enough to itemize - Burman says they may even find it harder to buy insofar as the subsidy raises prices.

If anything, said the panel, the deduction may simply encourage higher-income people to take out bigger loans for bigger houses. This overinvestment in real estate might actually hurt the economy because it soaks up money that could have been put to more productive use.

2007 IRA and 401(k) subsidy cost: $135 billion
Again, you can't quibble with the goal: The government should do everything it can to encourage people to prepare for retirement. Yet these programs have proved most valuable for affluent families, who likely would have saved anyway.

According to a study co-authored by Burman, about 70% of the break for 401(k)s and similar vehicles goes to the top 20% of earners. Low- and middle-income earners just aren't putting a lot into 401(k) plans.

Now I've picked on three programs that are worth a lot to most Money Magazine readers. Before you get your hackles up, rest assured that they're all pretty safe. Few politicians will touch these popular tax perks with a 10-foot pole. (Your taxes may simply be raised some other way.)

That's partly cowardice. It's also true that unwinding these things can create new problems. For example: John McCain wants to replace the current insurance subsidy with a tax credit for all, but his version could cause some people with health problems to lose coverage.

So why sweat this stuff? Because this country is facing big long-term deficits. That's led to calls to cut spending on programs like Social Security and Medicare.

But as an analysis from AARP notes, those benefits are shared much more broadly than these tax breaks. If sacrifices are needed, shouldn't it all be on the table?

Huge European bank fails

Dutch-Belgian bank and insurance giant Fortis NV was given a 11.2 billion euro ($16.4 billion) lifeline to avert insolvency as part of a wider bailout plan agreed to by Belgium, the Netherlands and Luxembourg, officials said Sunday.

Belgium's Prime Minister Yves Leterme said the bailout shows account holders and investors that Fortis will not be allowed to fall victim to the global credit crisis.

Leterme announced the deal after weekend talks between the three countries, European Union and national banking officials.

The deal will force the bank -- which has headquarters in both Brussels and the Dutch city of Utrecht -- to sell its stake in Dutch bank ABN Amro, which it partially took over last year. Fortis paid 24 billion euros for its share of ABN.

Fortis Chairman Maurice Lippens will be forced to resign and will be replaced by a candidate from outside the company, Leterme said.

"We have taken up our responsibility, we did not abandon" account holders, Leterme told reporters.

Under the bailout, Belgium will invest 4.7 billion euros ($6.88 billion) and the Netherlands 4 billion euros ($5.86 billion) in Fortis' banking operations in the two countries. In return, they each receive 49 percent ownership in those national arms of the bank.

Luxembourg will invest 2.7 billion euros ($3.95 billion) in the bank's Luxembourg operations, also for a 49 percent stake.

The deal, orchestrated by the three neighboring countries and EU Central Bank chief Jean-Claude Trichet, is meant to restore confidence in the bank before the reopening of markets on Monday after a tumultuous week in which Fortis' shares imploded.

Belgian officials also announced Sunday that they planned to offer better guarantees for all retail deposits at Fortis, the country's largest bank and largest private employer.

Fortis named its third chief executive officer in as many months Friday after insolvency fears caused the company's shares to tumble to 5.18 euros ($7.56), their lowest level in more than a decade. The shares have lost more than three-fourths of their value in the past year.

Fortis denies any imminent solvency problems, but it has been in trouble since it took part in a three-bank consortium last year that acquired ABN Amro in a 70 billion euros ($102.5 billion) deal that was the largest takeover in the history of the banking industry.

Oil slips amid growing global woes

Oil prices fell to near $103 a barrel Monday on concern that economic growth will slow across the globe despite a tentative agreement in Washington on a $700 billion bailout package to stabilize the U.S. financial system.

By midday in Europe, light, sweet crude for November delivery was down $3.50 to $103.39 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.13 Friday to settle at $106.89.

In London, November Brent crude fell $3.39 to $100.15 a barrel on the ICE Futures exchange.

Bailout plan goes to House
Congressional leaders and the White House agreed Sunday to a rescue of the ailing financial industry after lawmakers insisted on sharing spending controls with the Bush administration. The biggest U.S. bailout in history won the tentative support of both presidential candidates and goes to the House of Representatives for a vote Monday.

"The bailout package reduces the chance of a complete meltdown," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "But worries on the demand side will continue to weigh on oil prices."

The plan would give the administration broad power to use hundreds of billions of taxpayer dollars to purchase devalued mortgage-related assets held by cash-starved financial firms.

Congress insisted on a stronger hand in controlling the money than the White House had wanted. The government would take over huge amounts of devalued assets from beleaguered financial companies in hopes of unlocking frozen credit.

"It's still a crisis situation," Shum said. "The market is concerned about the depth and breadth of this global downturn."

JBC Energy in Vienna, Austria, also was cautious about the effects the rescue package could have on U.S. economic growth.

"The latest government reports show sales of new homes at a 17-year low in August and orders for durable goods falling stronger than expected," JBC said in a research note. "It is far from certain that (the bailout) will prevent an economic downturn."

Dollar stronger
Prices were also pushed down by a stronger dollar. Investors often buy crude futures as a hedge against a weakening dollar and inflation, and sell when the dollar strengthens.

While the dollar gained as details of the bailout package become known, analysts said the euro was weaker also because of growing economic problems in Europe.

"It is also a question of the euro losing ground due to a continued deterioration in the euro zone," said Olivier Jakob of Petromatrix in Switzerland. "With the rate of bank failures increasing in Europe and the economy slowing more rapidly than expected, pressure will continue to mount on the (European Central Bank) to lower (interest) rates."

The 15-nation euro fell Monday to $1.4361 from $1.4614 on Friday while the dollar rose to 106.23 yen from 106.01.

"The bailout should inject confidence in the markets in the short-term," Shum said. "Longer term, it increases money supply, inflation and likely weakens the dollar - all of which supports oil prices."

Sunday, September 28, 2008

Banks: Only the strong survive

Banks have been thrust into the center of a financial tempest during the past few months that has left industry experts and consumers wondering: what's next?

Well, if Thursday's collapse of Washington Mutual and subsequent sale to JPMorgan Chase (JPM, Fortune 500) revealed anything, it's that no bank is too big to fail and the strongest banks are likely to get stronger by acquiring weaker banks.

So far this year, 13 institutions have failed, including Washington Mutual (WM, Fortune 500), which ranks as the biggest ever in U.S. history. But both analysts and industry regulators have warned that number will grow with the economy weakening and the housing market continuing to spiral lower.

While bank failures are considered a natural part of doing business even in good times, a general state of panic about the industry has complicated matters as investors are actively betting on which might be the next bank to fail.

Shares of regional bank giants Wachovia (WB, Fortune 500) and the Cleveland-based National City (NCC, Fortune 500) each lost more than a quarter of their value Friday on speculation that either firm could be in serious trouble.

Both companies have lost money in the first two quarters of this year and are expected to report losses for all of 2008 due to exposure to bad mortgages.

A representative from National City condemned the comparison to WaMu while Wachovia stressed "its strong retail franchise and large and stable deposit base" in a statement.

But later Friday, The New York Times reported that Wachovia and Citigroup (C, Fortune 500) were in early talks about a merger. Spokespeople for Citigroup and Wachovia had no comment about the report.

In addition, The Wall Street Journal reported that Wachovia is talking to Wells Fargo and Spanish bank Banco Santander as well as Citigroup.

Fears sparked "run" on WaMu
The big concern for struggling banks is that market jitters, in addition to driving down the stock price, can also fan fears among bank customers.

As a result, some banks will have to worry about a so-called "run" on the institution, where customers pull out their money. For example, WaMu had 10% of its deposits pulled out this past Monday, according to bank regulators.

"One must now worry about old-fashioned bank runs, which is something that was supposed to have disappeared after the Great Depression," said Jaret Seiberg, a financial services analyst at the Stanford Group in Washington.

Kevin St. Pierre, who covers National City for Sanford Bernstein, argued in a research note Friday that National City is not "the next WaMu" and that there has been no evidence of customers pulling money out of that bank.

"[National City] is much better capitalized, better reserved, less exposed to residential real estate," he wrote. "[National City] has shown no signs whatsoever of a flight in deposits."

Whether other banks the size of WaMu fail remains to be seen. Analysts said many institutions of all sizes could be saved if Congress manages to cobble together a bailout plan that would remove the troubled assets from the books of banks across the country.

As of Friday afternoon, lawmakers were trying to work past political divisions in the hopes of crafting legislation that would address the crisis.

Any takers?
Until then, there are few lifelines for the battered banking sector other than the possibility of more mergers.

The Federal Reserve took steps earlier this week to encourage bigger private investments in banks by loosening long-standing rules that limited how much of a stake buyout firms or other outside investors could take in a bank.

But other than Warren Buffett's $5 billion investment in Goldman Sachs (GS, Fortune 500) earlier this week, few distressed investors have stepped into the fray out of fear of seeing their investment wiped out altogether.

Certainly consolidation could be the answer at a time when many bank stocks are dirt cheap. But with few exceptions, banks are shying away from mergers since they are fearful of acquiring another company's troubled assets.

What's more, there are few "white knights" or banks stable enough and with enough cash on hand to start gobbling up their peers.

"Who is really left that is of any consequence in this environment?" asked John Jay, a senior analyst at the Aite Group, a research and advisory firm focused on the financial services industry.

Potential buyers waiting for banks to get even cheaper
JPMorgan Chase has emerged as arguably the strongest big bank in the wake of the crisis but it also bought Bear Stearns earlier this year and may not be able or willing to try and deal with three big merger integrations at once.

Bank of America will also have plenty to digest following its most recent acquisitions, including the purchase of Merrill Lynch (MER, Fortune 500) just two weeks ago and mortgage lender Countrywide Financial earlier this year.

Wells Fargo (WFC, Fortune 500), which has a dominating presence along the West Coast and the Minneapolis-based US Bancorp (USB, Fortune 500) also seem healthy enough to scoop up a rival. But analysts are divided about whether either company really is willing or able to make a big acquisition.

Foreign banks, such as the British giant HSBC (HBC) and Banco Santander (STD), were both mentioned as possible suitors for WaMu before it went belly up. But it is not clear just how committed either firm is to further expansion in the U.S.

HSBC already owns more than 400 bank branches in the U.S., mostly in New York. Santander owns a minority stake in the Philadelphia-based savings and loan Sovereign Bancorp.

And the collapse of WaMu, combined with the piecemeal sale of parts of Lehman Brothers after it filed for bankruptcy, show that healthier banks are waiting for their rivals to go under first.

That way, they can buy up their assets for just pennies on the dollar. JPMorgan Chase paid just $1.9 billion to federal regulators for the banking assets of WaMu.

"That seems to be the new game plan here," said Gregory Church, chief executive of Church Capital Management in Philadelphia, which owns shares of Bank of America. "These guys are seeing the light in a different way."

Saturday, September 27, 2008

Gas prices fall for 10th straight day

Gas prices fell for their 10th straight day, dropping almost 19 cents during the period, according to a nationwide survey of credit card swipes at gas stations.

The average price of unleaded regular fell by 1.6 cents to $3.667 a gallon on Saturday, from $3.683 a gallon, according to survey results from the motorist group AAA.

Gone are the high prices that followed Hurricanes Ike and Gustav weeks ago. But prices are slightly higher than a month ago, when the national average for a gallon of unleaded was $3.660. They are 30% higher than a year ago, when the average was $2.805.

The record high was on July 17, when the nationwide average for gas prices was $4.114 a gallon.

For now, Hawaii and Alaska are the only two states where gas costs more than $4 a gallon. In Alaska on Friday, the statewide average for unleaded was $4.284 a gallon, according to AAA, and the average was $4.262 in Hawaii.

The cheapest gas was in New Jersey, where the average was $3.394 for a gallon, and in Oklahoma, at $3.370 a gallon.

Friday, September 26, 2008

Gas prices: 10% down from July high

Gas prices dropped for the ninth day in a row, bringing the total decline to nearly 17 cents over that time period, according to a nationwide survey of credit card swipes at gasoline stations.

The average price of unleaded regular dropped a further 1.7 cents to $3.683 a gallon, from $3.70 a gallon, according to the survey released Friday by motorist group AAA.

Prices are sharply lower from the high levels seen mid-summer and are just 3 cents shy of pre-Ike levels of $3.652 a gallon. Furthermore, gas is now selling for about 43 cents less than the record high price of $4.114 a gallon set on July 17. That remains to be roughly a 10% decline.

Gas prices headed higher following the devastation left behind by hurricanes Ike and Gustav. With the summer season quickly becoming a distant memory, the downward trend may continue. However, hurricane season is only halfway done, so a big storm could quickly change the landscape.

Prices have stayed below the key $4 level for some time now, but they still remain higher from a year ago, when gas was selling for less than $3 a gallon.

Current prices are about 87 cents, or 31%, higher from a year earlier at this time, when gas was selling for $2.81 a gallon.

Prices for gasoline also tend to follow oil prices, which had been moving lower since mid-July amid weakening demand. In fact, crude prices have dropped some 38% from their record settlement of $145.29 a barrel nearly two months ago.

Prices temporarily reversed course on Monday, posting the biggest one-day dollar gain ever. By Tuesday and Wednesday, the euphoria gave way to more somber trading.

Prices edged higher on Thursday as worries that the government's massive $700 billion bailout plan could be in jeopardy and subsequently cut into demand - which had already been a top worry. Crude prices were down $2.50 a barrel to $105.52 early Friday.

Meanwhile, only two states continue to report gas prices above $4 a gallon: Alaska and Hawaii.

Alaska continues to be the state with the most expensive gas prices, at $4.277 a gallon. Oklahoma unseated New Jersey for the second day as the state with the cheapest gas prices, at $3.389 a gallon, according to AAA's Web site.

Dollar mixed on bailout strife

The dollar was mixed Friday against major currencies as the fate of the government's proposed $700 billion intervention remained unclear.

The Japanese yen rallied as other foreign currencies pulled back from earlier gains.

The greenback bought ¥106.02 in early New York trading, down from from ¥106.69 late Thursday.

The 15-nation euro slipped to $1.4610 from $1.4614. And the British pound traded at $1.8414, up from $1.8348.

Meanwhile, lawmakers resumed negotiations over the government's bailout proposal. Talks broke down late Thursday following at high-level meeting at the White House as Republican members of Congress voiced opposition to the plan. President Bush said early Friday that he believes the plan will pass muster with lawmakers soon. (full story)

"It seems unthinkable that a deal won't be reached," wrote Scotia Capital currency strategist Steve Malyon in a note to clients. "The stakes are simply too high."

Failure to reach an agreement on a bailout could cause the financial system to collapse and push the country into a deep recession, Malyon said.

Track 17 currencies
Still, if the impasse is resolved, "the stage will be set for a rebound in carry in the short term." But until then, "things are bound to be volatile," he said.

Other news keeping investors on edge was the latest bank bailout. Late Thursday, the Federal Reserve seized Washington Mutual - the nation's largest thrif - in the biggest bank failure in history. WaMu was then sold to JP Morgan. The news served to underscore how deep the financial crisis extends. To-date 13 banks have faced failure.

HSBC cutting 1,100 jobs

HSBC Holdings PLC, Europe's largest bank by market value, is cutting 1,100 jobs worldwide in the wake of the financial turmoil, a spokesman said Friday.

The London-based lender is laying off 4% of its global banking and market division, with half of them taking place in the bank's operation in Britain, said spokesman Gareth Hewett in Hong Kong.

"We've taken the action because of the current market conditions, the economic environment and our cautious outlook of 2009," Hewett said by phone.

All of the staff being cut has already been told. In Hong Kong, HSBC, which operates in Europe, Asia and the Americas, is laying off 100 staff. HSBC has a 335,000-strong work force globally, and so the job cuts will only hit 0.3% of its total employees.

Peter Wong, the banking group's executive director for Hong Kong and China, did not rule out the possibility of further layoffs.

"The financial environment is difficult now. It's nothing extraordinary that some staff have to leave our operations," Wong told broadcaster Cable TV. "I think this kind of action will continue to come in the financial sector."

HSBC has been hit hard by the credit crisis, largely because of its ownership since 2003 of Illinois-based lender Household International Inc. -- the biggest U.S. subprime mortgage lender.

Last month, HSBC reported its steepest fall in profit since 2001 as costs for bad U.S. mortgage loans mounted. Net profit for the first half of the year plunged 29 percent to $7.7 billion from $10.9 billion in profit in the January to June period of 2007.

The biggest losses came from the North American market, which HSBC depends on for a quarter of its revenue. Operations there posted a first-half loss of $2.9 billion, compared with profit of $2.4 billion a year ago.

Friday's job cuts are the second major money-conserving move the bank has announced in as many weeks.

On Sept. 19, HSBC canceled a $6 billion agreement to purchase a controlling stake in South Korea's Korea Exchange Bank from U.S. private equity group Lone Star Funds

Oil prices slip on fresh demand worries

Oil prices retreated Friday as the largest bank failure in the nation's history and uncertainty about the fate of the $700 billion bailout raised fresh concerns about the economy.

As Wall Street buckles, without clarity as to when relief should arrive from Washington, and the economy continues to sag, demand for oil will remain weak, sending oil prices lower.

Oil eased $2.46 to $105.56 a barrel. On Thursday, crude futures for November delivery settled up $2.29 to $108.02 a barrel on the New York Mercantile Exchange as the oil market focused on the way that the bailout plan would work to devalue the dollar.

Crude oil is traded in U.S. currency around the world, and so a devalued dollar means that crude oil becomes more expensive in dollar terms.

But as oil prices resumed their slide Friday, inflationary concerns took a back seat to the continued collapse of the economy, which was initially weakened by the meltdown of the housing industry.

Federal regulators seized Washington Mutual (WM, Fortune 500) and announced Thursday night that JP Morgan Chase (JPM, Fortune 500) had acquired the bank's $307 billion in assets and $188 billion in deposits. The acquisition marks another sting in a biting chain of failures on Wall Street in the past couple weeks, pulling into focus just how weak the U.S. economy has become.

There were hopes that the $700 billion bailout plan that President Bush announced Saturday in an attempt to loosen credit on Wall Street would be passed quickly. However, a proposed settlement fell through Thursday when Congressional Republicans raised objections.

The heated disagreements across party lines and the inability of key lawmakers to reach an agreement was one more sign that the already beleaguered economy may have to weather through a prolonged period of distress. On Friday, President Bush made a brief televised statement promising a rescue plan will pass..

The longer the economy remains under high stress and credit markets stay frozen, the weaker demand for oil becomes.

Oil hit a record high of $147.27 a barrel on July 11, but has fallen more than $40 since as weak demand has overpowered otherwise significant supply concerns.

Hurricanes Gustav and Ike both smashed through the Gulf of Mexico, shutting down the production and refinery rich region for a period. Recovery in the region has been slow.

And violence in Nigeria has continued, threatening pipelines and limiting oil production from the region.

Thursday, September 25, 2008

New home sales fall to 17-year low

The pace of new home sales fell to its lowest level in 17 years in August, according to a key government report released Thursday that signaled more dismal news for the housing sector in coming months.

August sales came in at a seasonally adjusted annual rate of 460,000, the Census Bureau report showed, down 11.5% from a revised 520,000 in July. The reading was well below the consensus forecast of 513,000, according to economists surveyed by Briefing.com.

The rate of sales was down 34.5% from a year earlier. Sales were at their lowest pace since January 1991, when the first Gulf War started, and the economy was near the bottom of a recession and undergoing an oil price shock. Excluding that month, you'd have to go all the way back to August 1982 to find a rate of sales so low.

"It's a stunning decline, but we're still going to be dealing with a tough market well into 2009 and maybe even 2010," said Mike Larson, an analyst with Weiss Research. "All indicators say we're heading into a recession, if we're not already in one."

On a non-seasonally adjusted basis, the report showed only 39,000 new homes were sold in July, which marks the lowest level for that measure since December 1991.

"It looks like we're in an absolute cliff dive, but we're coming down sharply from a very high level," Larson said.

Prices: Sales fell as prices continued to drop. The median price of a new home sold in August was $221,900, down 5.5% from $234,900 in July and down 6.2% from $236,500 a year earlier. Prices for new homes on the market were at their lowest level since September 2004.

This decline probably doesn't accurately capture the weakness in prices for new homes, as about three out of four builders have reported having to pay buyers' closing costs or offer other incentives such as expensive features for free in order to maintain sales.

Inventory: Prices have been driven down by the glut of new homes on the market.

The report showed 166,000 completed new homes available at the end of the month, bringing total inventory - including new homes under construction and not yet started - to 405,000, the lowest inventory since August 2004.

Still, the Census Bureau said that the number of homes for sale on the market is equal to a seasonally adjusted 10.9-month supply, up from a 10.3-month supply in July. By contrast, it took the 404,000 homes on the market just 3.7 months to be sold four years ago.

"The good news is supply is falling, it's just not fast enough," Larson said. "The government is doing everything it can to reduce supply by stopping foreclosures, but sales are still falling faster than inventories."

The report is just the latest sign of trouble in the overall housing market.

On Wednesday, the National Realtors Association reported existing home sales fell more than expected in August, as prices continued to fall and inventory hovered near a record high.

Stocks jump on bailout hopes

Stocks rallied Thursday morning as optimism that a deal on the $700 billion bank bailout plan is near tempered the latest signs of economic distress - including GE's profit warning and a jump in jobless claims to a seven-year high.

The Dow Jones industrial average (INDU), the Standard & Poor's 500 (SPX) index and the Nasdaq composite (COMP) all jumped an hour into the session, with the Dow up over 200 points.

Stocks struggled Wednesday as the bank rescue plan seemed to hit an impasse as officials warned that delaying passage could be disastrous for the economy and lawmakers urged caution amid the size and scope of the deal.

But Thursday brought optimism that a modified form of the deal could see passage, following President Bush's speech Wednesday night and comments from congressional lawmakers.

That optimism countered the session's negatives, including GE (GE, Fortune 500)'s warning, a seven-year high for jobless claims, weak durable goods orders, a report that showed new home sales fell to a 17-year low, and a falling dollar.

A deal nears: After two days of heated congressional debate, a deal on the proposed $700 billion bailout plan appears to be near. (Where things stand).

President Bush made the case for the deal in a televised address Wednesday night, warning that the country could slip into a "financial panic" if swift action is not taken.

While earlier, congressional lawmakers seemed to be working through key sticking points on the deal - which would get soured mortgage assets

Over the last two days, Secretary Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke have argued that failure to enact a deal could be disastrous for the economy, for businesses and for individuals.

But lawmakers had been concerned about the size and scope of the package. Concerns have been raised about whether the plan offers taxpayers enough protection, allows for enough government oversight and limits pay packages for executives whose companies participate.

The plan would allow the Treasury to buy battered assets from troubled banks to be held and sold later for a profit, helping the firms clear up their balance sheets and hopefully start lending to each other again. This would in theory loosen up the jammed credit markets.

Businesses depend on the credit markets to function on a daily basis, and the absence of ready capital has threatened to stall the broader financial system.

Oil and gold: Oil prices were volatile Thursday morning. U.S. light crude oil for November delivery fell 31 cents to settle at $105.42 a barrel on the New York Mercantile Exchange after tumbling more in the early going.

Oil prices had plummeted over $55 after peaking at $147.27 a barrel on July 11, as investors bet that sluggish global growth will diminish oil demand. But prices have soared in the last few weeks as the financial crisis has intensified and investors sought hard assets to put their money into.

COMEX gold for December delivery fell 4.80 to $890.20 an ounce. Like oil, gold prices had also rallied during the biggest periods of unrest over the last few weeks.

Bonds: Treasury prices slipped, raising the yield on the benchmark 10-year note to 3.82% from 3.80% late Wednesday. Treasury prices and yields move in opposite directions.

The 3-month Treasury bill, seen as the safest place to park money in the short term, rose to 0.58% from 0.45% Wednesday, suggesting investors were a little less risk-averse than in recent sessions.

Treasury prices have been rallying recently and yields tumbling as nervous stock market investors have looked for safer areas to park their cash. The three-month Treasury bill fell to a 68-year low around 0% last week, demonstrating the utter lack of interest in risk-taking amid the financial market crisis.

Other markets: In currency trading, the dollar fell against the euro and the yen.

Gas prices fell for the eighth day in a row, according to a nationwide survey of credit card activity. (Full story).

In global trade, European markets were mostly higher at midday and Asian markets ended lower

Oil prices slip on economic uncertainty

Oil prices slipped Thursday as investors weighed supply delays in the Gulf of Mexico against concerns that the U.S. credit crisis will slow global economic growth and hurt crude demand.

Light, sweet crude for November delivery was down 24 cents at $105.49 a barrel in electronic trading on the New York Mercantile Exchange by afternoon in Europe. The contract fell 88 cents to settle at $105.73 on Wednesday.

About 66% of oil production and 61% of natural gas output in the Gulf of Mexico remains shut-in after the passage of Hurricanes Gustav and Ike, according to the U.S. Minerals Management Service. The Gulf area is home to a quarter of U.S. oil production and 40% of refining capacity.

Mexico's state oil company said Tuesday it temporarily reduced oil production because U.S. refineries damaged by Ike have canceled shipment orders.

Petroleos Mexicanos, or Pemex, lowered its daily output by 250,000 barrels a day. The company said it expects production to be back to normal by the end of the week. Pemex produced an average of 2.75 million barrels a day in August, the latest available output figure.

OPEC's decision earlier this month to cut production by 520,000 barrels a day and militant threats to Nigerian oil operations have added to the supply shortage.

In addition, Royal Dutch Shell PLC was forced to close one of its gasoline-making units at Pernis, Europe's largest oil refinery, on Wednesday night after a mechanical fault. The closed unit has a daily processing capacity representing 10 % of the total 400,000 barrel daily capacity of the refinery, which is located in the Netherlands.

"We don't know when it will reopen," said spokesman Wim van de Wiel.

Crisis may impact crude demand
Traders are also concerned about the turmoil in the U.S. financial system will impact economic growth and crude demand from the world's biggest economy.

President Bush strongly urged Congress to act quickly to pass a $700 billion financial industry bailout, warning Americans in Wednesday speech that failing to act fast risked dire economic consequences such as disappearing retirement savings, rising foreclosures, lost jobs and closed businesses.

"Markets hate uncertainty, and this thing is hanging over everybody's head," said Gavin Wendt, head of mining and resources research at consultancy Fat Prophets in Sydney. "I don't think anyone is too keen to take a position in oil either way right now."

With the administration's original proposal facing significant changes in Congress, top House leaders issued an upbeat statement late Wednesday saying there was progress toward revised legislation that could pass. Bush summoned presidential candidates Barack Obama, John McCain and legislative leaders to an extraordinary White House summit in hopes of hashing out a deal.

Oil investors are also eyeing the impact the bailout plan may have on the value of the dollar. Investors often buy crude futures as a hedge against a weakening dollar and inflation.

The price of oil "depends on the dollar, it has nothing to do with oil demand and supply," Chakib Khelil, the president of the Organization of the Petroleum Exporting Countries, told journalists at a press conference in Algiers on Wednesday.

He said that oil prices would rise if the dollar weakens, as investors would use oil to hedge against the depreciating currency.

The dollar fell slightly in morning trading on Thursday against both the 15-nation euro and the Japanese yen. The euro bought $1.4708, up from $1.4658 late Wednesday in New York. The dollar slipped to 105.89 Japanese yen from 105.93.

In other Nymex trading, heating oil futures for October delivery fell 3.33 cents to $2.9800 a gallon, while gasoline prices rose 0.5 cents to $2.5997 a gallon. Natural gas declined 8.5 cents to $7.594 per 1,000 cubic feet.

In London, November Brent crude fell $1.71 to $100.74 a barrel on the ICE Futures exchange.

Wednesday, September 24, 2008

Democrats allow drilling ban to lapse

Democrats have decided to allow a quarter-century ban on drilling for oil off the Atlantic and Pacific coasts to expire next week, conceding defeat in a month-long battle with the White House and Republicans set off by $4 a gallon gasoline prices this summer.

Appropriations Committee Chairman David Obey, D-Wis., told reporters Tuesday that a provision continuing the moratorium will be dropped this year from a stopgap spending bill to keep the government running after Congress recesses for the election.

Republicans have made lifting the ban a key campaign after gasoline prices spiked this summer and public opinion turned in favor of more drilling. President Bush lifted an executive ban on offshore drilling in July.

"If true, this capitulation by Democrats following months of Republican pressure is a big victory for Americans struggling with record gasoline prices," said House GOP leader John Boehner of Ohio.

Democrats had clung to the hope of only a partial repeal of the drilling moratorium, but the White House had promised a veto, Obey said.

Just last week, the House passed legislation to open waters off the Atlantic and Pacific coasts to oil and gas drilling but only 50 or more miles out to sea and only if a state agrees to energy development off its shore.

Republicans called that effort a sham that would have left almost 90% of offshore reserves effectively off-limits.

The Interior Department estimates there are 18 billion barrels of recoverable oil beneath coastal waters now off-limits.

Lifting the drilling ban gives considerable momentum to the underlying bill, which includes the Pentagon budget, $24 million in aid for flood and hurricane victims and $25 billion in loans for Detroit automakers in addition to keeping the government open past the Oct. 1 start of the 2009 budget year.

Bank of New York's $22.5 billion headache

Inside a rundown government building on Novaya Basmannaya Street in Moscow, a bizarre lawsuit is playing out involving $7.5 billion in illicit money transfers and America's ninth-largest bank.

The Russian government is suing the Bank of New York Mellon (BK, Fortune 500) under the U.S. civil RICO statute - the Racketeer Influenced and Corrupt Organizations Act - seeking $22.5 billion.

And what a cast of characters. Russia is represented by a Miami plaintiffs lawyer who specializes in airplane crash cases, whose experts include Harvard law professor Alan Dershowitz. The bank's defense is being led by Jonathan Schiller, a founding partner of super-lawyer David Boies's law firm, Boies Schiller & Flexner, and he has assembled his own phalanx of experts, led by former U.S. Attorney General Richard Thornburgh.

In the suit the Russian Federal Customs Service seeks to recover taxes it says it should have collected on the $7.5 billion that one of the Bank of New York's employees helped smuggle out of the country about a decade ago. The bank maintains that the case has no merit.

What makes the dispute unique is that Russia has filed the suit not in "any appropriate United States district court," as the RICO statute contemplates, but in a Russian court. Moscow's commercial court is widely regarded as not only a place susceptible to corruption but one in which judges simply lack the judicial independence required to rule against important state interests.

While a judgment in Moscow might well not be enforceable in the U.S., the Bank of New York does business in more than 100 countries, and the judgment would almost certainly be enforceable in some of them. Moreover, as a multinational operation, the Bank of New York does not relish the prospect of defying any country's judiciary. After an 80-year presence in Russia, it also dreads the prospect of having to pull out now, when Russia is the world's sixth-largest economy, its second-largest producer of oil, and a global superpower once again.

The case raises a larger issue: Can any Western company get a fair shake in the Russian court system when the adversary is the Russian government?

In recent years Russia has often used the selective enforcement of its laws to advance policy objectives - most notably the nationalization of natural resources. From 2003 to 2006 it cited tax claims as the basis for seizing the assets of Yukos, then its largest oil company; in 2006 it alleged environmental violations in forcing Shell (RDSA), Mitsui (MITSY), and Mitsubishi (MSBHY) to cough up half their stake in their Sakhalin Island oil franchise; and in recent months it has invoked transgressions of labor, migration, and tax laws to wring concessions from the Western half of the TNK-BP (BP) oil joint venture, including the ouster of its American CEO, Richard Dudley.

Yet the Bank of New York suit might also reflect a quirkier, narrower agenda. Russia's President, Dmitry Medvedev, has acknowledged that his nation's courts sometimes become the tool of powerful individuals. As the Financial Times reported in June - citing Moscow sources - "the Bank of New York case could not have got this far without support from a high-level 'sponsor' in government, the security services, or business - or one well connected in all three areas."

How high up in the Russian government hierarchy does one need to go to get approval to sue an American bank for $22.5 billion? Louise Shelley, an expert on the Russian legal system at the George Mason School of Public Policy in Arlington, Va., says, "The head of the customs service wouldn't have approval to do something like this on his own." Approval probably came, she says, from "somewhere in the Kremlin."

Oil rises as market wait

Oil prices rallied Wednesday as the market waits to hear from Congress about the proposed $700 bailout plan and for weekly supply data from the government.

Oil climbed $1.24 at $107.85 a barrel. On Tuesday, oil slipped $2.76 to settle at $106.61 a barrel as the market refocused on how the dour economic situation has crimped demand.

Bailout plan: The oil market has been waiting to hear from Congress about a $700 billion proposed bailout plan for beleaguered financial services companies. The debate over the rescue was very heated Tuesday.

The plan could pull oil prices higher, depending on the specific terms of the plan and depending on the economy's reaction to whatever plan is adopted.

If the bailout were passed and served to jumpstart the lethargic economy, the oil market hopes that demand for energy would recover to healthy levels. If the economy recovers and demand for oil recovers, then oil prices jump.

Dollar: At the same time, the plan involves a unprecedented shot of liquidity to the market and the sheer quantity of dollars being pumped into the market would devalue the greenback. Crude oil is traded in U.S. currency across the globe, and so when the dollar loses value, crude prices increase.

In the past couple sessions, oil prices have zig-zagged, and the dollar's volatility has contributed to the movement in the price of oil.

On Wednesday, "the dollar is down just a bit again and that is always positive" for oil prices, said Neal Dingmann, senior energy analyst for Dahlman Rose.

Demand: However, the fact that the economy is in desperate need of a lifeline highlights just how weak the economy is, and raises fresh concerns about demand. A limping economy does not have a healthy, growing appetite for oil.

The market continues to swing off the perceived level of demand for energy and the level of demand for energy swings off the strength of the economy. Therefore, the oil market watches the broader economy for clues on a daily basis.

Goldman Sachs Group (GS, Fortune 500) announced Tuesday that it will receive a $5 billion investment from Berkshire Hathaway. Goldman will sell $5 billion of preferred stock to Warren Buffett's company, which was a much-needed vote of confidence for the investment bank in a time of unprecedented uncertainty on Wall Street.

"When you have support either from Buffett or the Treasury Secretary," said Dingmann, "any support for the underlying financial markets boosts the overall market, or thus overall demand, which is positive for oil prices."

Supply report: The government's weekly supply oil data was due out later Wednesday from the Energy Information Administration. The market watches the report very closely in order to gauge demand for energy. The report should also give some indication of the stage of recovery of the Gulf region after Hurricanes Gustav and Ike.

"This will definitely give us another glimpse on the aftereffects of how the storm has played out," said Dingmann.

Crude oil stockpiles were expected to increase by 1.6 million barrels, according to a consensus estimate of industry analysts surveyed by Platts, a global energy information provider.

Gasoline stocks were expected to drop 5.1 million barrels and the Platts survey forecast that distillate stocks - used for heating oil and diesel fuel - would be 1.8 million barrels lower than the previous week. The Platts survey forecast that refinery utilization or run rate would fall 3.5 percentage points to 73.9%.

Gustav, Ike: Hurricane Gustav slammed the Gulf of Mexico on Labor Day and Hurricane Ike hit the Coast of Texas nearly a week later. The storms shook the production and refinery-rich region.

The Minerals Management Service reports that 23 manned oil platforms have been destroyed by Hurricane Ike. Of the 694 remaining platforms, 203 production platforms, equivalent to 29.3%, were still evacuated.

According to the most recent situation report from the Department of Energy, 76.6% of production in the region remained shut in and 65.5% of natural gas production was still shuttered. With 6 refineries in Texas still shut down, nearly 1.7 million barrels per day less oil have been processed in the region, according to the DOE.

Tuesday, September 23, 2008

Oil pulls back as Congress mulls bailout

Oil prices fell Tuesday as investors wait for more developments concerning the government's proposed $700 billion bailout plan and the day after a record one-day surge. Oil slipped $2.15 to $107.22 a barrel, after having traded as low as $106.07. The November contract, which as of Tuesday became the front-month contract, settled up $6.62 to $109.37 on Monday. $700 billion bailout: On Saturday, President Bush asked Congress for the authority to spend as much as $700 billion to purchase toxic mortgage debt from already struggling financial institutions in an effort to prevent the credit crisis from crippling an already beleaguered Wall Street. Investors had hoped that the bailout plan would put the nation's economy on the fast track to recovery, helping demand for energy tick higher as well. However, the unprecedented scope of the plan in combination with a lack of details as to how the plan will actually work left the stock market anxious on Monday, and the Dow ended the day 373 points lower. The oil market was hesitant on Tuesday as well, waiting for further information. "There is still some fear about the bailout package because it is still in the hands of Congress," said Tom Orr, director of research at Weeden & Co., financial services firm. "People are worried that there will have to be compromising to be made and there will be delays." "Time is a problem. Time is not on your side. It needs to be expeditious," added Orr. "Every day there is a delay, there is the risk that some other landmine goes off. People need the comfort to know that this package is in place." Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke both said Tuesday that the measures outlined for the bailout were urgently necessary. One analyst said that if the Congress does actually pass the bailout, it would likely push oil prices higher very quickly. The bailout "may get the motor running but because of the influx of so much money. They are adding liquidity to the system to the tune of $700 billion," said Mark Waggoner , president of Excel Futures. But, "adding that much liquidity to the market essentially dilutes the dollar - makes the value lower," said Waggoner. And because crude oil is traded in U.S. currency globally, a weaker dollar pushed crude prices sharply higher. The oil market was waiting to hear from Congress about the fate of the $700 bailout plan. After the spike: The November contract's substantial $6 gain on Monday was overshadowed by the historic $16 surge in the October contract. Monday was the last day that the October contract was the front-month contract, and oil posted the largest one-day gain in dollar terms ever, settling up $16.37 at $120.92 a barrel. Oil had risen as much as $25 to touch $130 a barrel. The late-session spike was due to investors having to make good on their orders before the October contract expired. The $6.62 increase in the November contract Monday would be considered a substantial move, except for its comparison with the unprecedented move in the October contract. "The market is resetting itself," said Orr, of the moderate trading on Tuesday. The spike in price on Monday "was completely aberrational. It was not indicative of what was going on in the market - it was only indicative of what was going on with the front month contract," said Orr. "People waited until the last half hour of the day and there were absolutely no sellers," said Orr. "You don't have any market makers since Wall Street is in such disarray." In response to the unprecedented run-up in oil futures, the Commodity Futures Trading Commission (CFTC) said in a statement that it was investigating the situation to be sure that there was no mishandling of the oil trade. "No one should be trying to game our nation's commodity futures markets," said CFTC Acting Chairman Walter Lukken in a written statement. Supply concerns: Lower oil prices defied several ongoing supply disruptions, which would normally cause oil prices to rally. Violence in oil-rich Nigeria has been limiting crude supplies out of the country. The Movement for the Emancipation of the Niger Delta (MEND) has been attacking oil pipelines in retaliation against government forces, limiting the amount of crude oil that can leave the country. In addition, the Gulf of Mexico was still struggling to regain footing after Hurricanes Gustav and Ike shook the oil production and refinery-rich region. According to the most recent situation report from the Department of Energy, 89.2% of oil production in the region remained shut in and 75.4% of natural gas production was still shuttered. With refineries in Texas still shut down, nearly 2.3 million barrels per day less oil have been processed in the region, according to the DOE. Russian warships have sailed for Venezuela, and that would also typically support oil prices, according to Waggoner. After the Russia-Georgia conflict last month, two Russian bombers were deployed to Venezuela as tensions with the United States mounted. Both Venezuela and Russia have large supplies of oil. According to Waggoner, the oil market will also be keeping an eye on the area in the Atlantic Ocean which the National Hurricane Center reports "has the potential to become a tropical depression at any time."

Home prices slide 5.3% in July

Home prices in July fell 5.3% compared with a year ago, a government agency said Tuesday, and have now receded to October 2005 levels.
The home price index was down 0.6% from June on a seasonally adjusted basis, according to the Federal Housing Finance Agency.
The nationwide decline in home values coupled with reckless lending standards are the driving forces behind rising mortgage defaults and foreclosures, and the credit crisis that has shaken Wall Street to its core.
Lending standardsJames Lockhart, the head of that agency, suggested Tuesday that mortgage finance companies Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) could loosen lending standards to help more homebuyers qualify for a loan and stabilize the market. The government took control of Fannie and Freddie earlier this month.
"I expect any changes to reflect both safe and sound business strategy and attentiveness to the [companies'] mission," Lockhart said Tuesday in prepared testimony before a Senate Banking Committee hearing. He also said that modifying loans for troubled borrowers should be a "high priority."
Lockhart also said he has directed the companies' new chief executives "to examine the underwriting standards and pricing" of Fannie Mae and Freddie Mac-backed loans.
Over the past year, the companies have tightened requirements and raised fees substantially, making it hard for borrowers with any blemish on their credit reports to qualify for a loan.
Government interventionLockhart explained the government had little option but to seize control of Fannie and Freddie. Both companies, he said, were unable to raise money to gird against losses without aid from the government.

Without new money, the only other option was to do stop doing new business and shed assets in a weak market. "That would have been disastrous for the mortgage markets and mortgage rates would have continued to move higher," Lockhart said.
But rates are creeping back up.

The national average rate on a 30-year, fixed rate mortgage rose to 6.26% on Monday up from 6.11% on Friday as details of the government's rescue plan remained in flux, according to financial publisher HSH Associates. The rate had fallen as low as 5.87% last Tuesday.

Chrysler electric car for sale in 2010

Chrysler LLC says it will put an electric car on sale in North America in 2010.
The company showed reporters three electric prototypes Tuesday: an electric Dodge sports car, a Jeep and a Chrysler minivan.
But the automaker's product development chief, Frank Klegon, says the company hasn't decided which vehicle will come out in 2010.
The Dodge sports car is completely electric, but the Jeep Wrangler and Chrysler minivan models will be similar to the Chevrolet Volt that General Motors Corp. is planning.
The Volt will have a small engine to recharge the batteries while driving, and GM says it will go on sale in late 2010.
Klegon says Chrysler is still working with several partners on the battery technology for its vehicles.

Friday, September 19, 2008

Bush: 'We must act now'

President Bush and Treasury Secretary Henry Paulson on Friday outlined a series of far-reaching steps - likely to cost hundreds of billions of dollars - aimed at stemming a widening financial crisis that is roiling the financial markets and undermining confidence in the banking system.

"We must act now to protect our nation's economic health from serious risk," Bush said at a White House press conference. "There will be ample opportunity to discuss the origins of this problems. Now is the time to solve it."
"This is no time for partisanship," Bush added. "We need to move urgently needed legislation as quickly as possible without adding controversial provisions that could delay action."
Earlier, Paulson said that federal action would target the mortgage-related "illiquid assets" that are burdening the finance industry.

"The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy," said Paulson. "This troubled asset relief program must be properly designed and sufficiently large to have maximum impact."
The new program would cost hundreds of billions of dollars, according to Paulson.
"This has got to be big enough to make a real difference," he said.
The plan will be fleshed out in the coming days in meetings between Paulson, other Bush administration officials and lawmakers.
"I will spend the weekend working with members of Congress of both parties to examine approaches to alleviate the pressure of these bad loans on our system, so credit can flow once again to American consumers and companies," Paulson said.
The mortgage plan is part of an extraordinary effort by the federal government to contain a financial crisis that has rocked Wall Street and has started rippling out to Main Street.
In the past week, two of the nation's most venerable investment banks - Lehman Brothers and Merrill Lynch (MER, Fortune 500) - have fallen and the Federal Reserve was forced to lend $85 billion to prevent the sudden collapse of insurance giant American International Group (AIG, Fortune 500).
Meanwhile, mainstay financial institutions are scrambling to raise cash or find merger partners as lending has frozen up and investor confidence has sunk.
In addition to the plan aimed at housing, the government on Friday announced a number of steps aimed more directly at investors and the stock markets.
The Treasury Department said it would insure money market mutual funds for finance firms that pay a fee to participate in a temporary program.
Bush said that "recent stresses cause some to question whether" money market deposits are safe. He said the plan will include government insurance for money markets.
"For every dollar invested in an insured fund, you'll be able to take a dollar out," Bush said.
Separately, the Securities and Exchange Commission took what it called "emergency action" and temporarily banned investors from short-selling 799 financial companies.
"What we had, in effect, was a dam that was sprouting lots of cracks and lots of leaks," said Bernard Baumohl, chief global economist for The Economic Outlook Group. "For the last several days, the Federal Reserve and the Treasury were trying to plug each of these holes as they were appearing. What they decided to do today was to put up a whole new dam."
This is the federal government's most far-reaching intervention in the financial markets since the Great Depression of the 1930s.

"They did what they had to do," said Baumohl. "They were facing a Category 5 financial hurricane that really threatened the entire global financial architecture."
The downside to the plan is its enormous cost, said Baumohl, estimating that the federal bail-out of the financial markets could swell the national deficit to $1 trillion annually.
So far, investors welcomed the news on Friday. The Dow soared 400 points at the start of Friday trading, after having surged 410 points on Thursday when speculation of the bailout started to grow. This included meteoric rises for battered finance firms like Morgan Stanley (MS, Fortune 500), Goldman Sachs (GS, Fortune 500) and Washington Mutual (WM, Fortune 500).

Thursday, September 18, 2008

Jobless claims on the rise

The number of out-of-work Americans who signed up for jobless benefits rose last week, the government reported Thursday, surprising economists who expected fewer claims.
The Labor Department said applications for jobless benefits rose to a seasonally adjusted 455,000, up by 10,000 from the prior week. That was above analysts' expectations of 440,000, according to a consensus compiled by Briefing.com. A year ago, initial claims stood at 319,000.
The four-week seasonally adjusted moving average of new jobless claims rose 5,000 to 445,000 in the past week. The average is used to smooth out weekly fluctuations and it stood at 323,250 a year ago.
A reading above 400,000 indicates weakness in employment.
The number of people continuing to receive unemployment benefits fell by 55,000, to 3.48 million in the week ended Sept. 6., compared with 2.56 million people a year ago.
The four-week moving claims average for those continuing to receive unemployment benefits rose by 29,750 to 3.46 million, compared with 2.58 million a year ago.
Earlier this month, the government reported that there were 84,000 jobs lost in August, bringing to 605,000 the number of jobs cut from payrolls by U.S. employers in the first eight months of the year.
The unemployment rate surged to 6.1% last month, a nearly five-year high and up from 5.7% in July.
On Monday, Hewlett-Packard (HPQ, Fortune 500) announced plans to cut about 24,000 employees and on Wednesday auto supplier Federal-Mogul (FDMU) said it is cutting its work force by 4,000 jobs.
North Carolina reported significant increases in initial filings, with layoffs in construction, furniture and transportation. Wisconsin also noted a surge in filings due to layoffs in manufacturing and construction. Texas and California both reported fewer layoffs in the service industry.

Oil retreats as stocks rally

Oil prices backed off of earlier session highs as the stock market rallied on the promise of a major cash infusion from central banks around the world.
Earlier in the session, oil had raced past the $100-a-barrel mark to touch $102, as the chaos on Wall Street motivated investors to move out of stocks an into safer investments, such as oil, gold and Treasurys.
Oil was 83 cents higher at $97.99 a barrel, after having run up as high as $102.24. On Wednesday, oil prices jumped $6.01 a barrel, the second largest one-day surge on record, to settle at $97.16 a barrel on the New York Mercantile Exchange.
Wall Street caves: Early Thursday, a consortium of central banks coordinated their forces to inject nearly $180 billion dollars into the global economy. The Federal Reserve worked with the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Bank of Japan, and the Swiss National Bank to pull off the effort to juice the global economy.
The move came on the heels of three days of turmoil in the financial sector that began early Monday when Lehman Brothers (LEH, Fortune 500) filed for bankruptcy.
In the days that followed, Bank of America (BAC, Fortune 500) purchased the struggling Merrill Lynch (MER, Fortune 500) and the beleaguered American International Group (AIG, Fortune 500) received an $85 billion government loan to stave off bankruptcy. By Thursday, there was speculation about Washington Mutual (WM, Fortune 500) putting itself up for sale.
The unprecedented news of the week jolted the stock markets. On Wednesday, the Dow Jones industrial average fell 449 points in its second worst session of the year. The worst session - in fact, the worst on Wall Street in 7 years - came Monday when the Dow lost 504 points.
Oil and gold: The price of gold rose $70 on Wednesday, and when investors run to gold, that pulls the other commodities up, according to Phil Flynn, senior market analyst at Alaron Trading.
The move to gold was "because of a crisis of confidence in the U.S. economic system," said Flynn, and investors look to oil "as a safe haven" as well, said Flynn.
That's because "when you buy a barrel of oil, you know (exactly) what you are getting," said Tom Orr, director of research at Weeden & Co., a financial services firm. However, he explained that when you purchase a share of a financial company right now, it's not a tangible asset. "Your liabilities are unknown."
The oil market has been under serious pressure as demand for energy has fallen off, however. The concern about demand "is one of the reasons is why we are not at $150" in this recent flight to commodities, said Flynn.
"Even though in the short term, people are running to oil as a safe haven, the minute we get some stability, the focus will be on softening demand and oil will collapse once again," he added.
Dollar: The falling dollar was also supporting higher oil prices. "The dollar is getting creamed," said Orr. "The Fed is just flooding the system with liquidity."
When the supply of currency increases, the value of each greenback falls. Because crude oil is traded in U.S. currency around the globe, when the dollar loses value, it pushes up the prices of crude.
Big jumps: The oil market has been making big moves every day this week, reeling from the devastating news on Wall Street, as investors and traders digest an unprecedented set of moves in the financial sector.
On Monday and Tuesday, oil prices tumbled $10 as the oil market saw the implosion of Wall Street as another factor that will cripple demand. Crude prices have fallen sharply off their record of $147.27 a barrel hit July 11.
On Wednesday, however, oil prices staged a late day rally as investors decided that while oil was a volatile market, it was a safer place to have assets than the stock market.
Storms: Wall Street and the economic slowdown have been the focus of the oil market in recent sessions. But the Gulf of Mexico oil region was still struggling to get back on its feet after two Hurricanes - Gustav and then Ike - pummeled the production and refinery rich area.
In its weekly inventory report, the Energy Information Administration said Wednesday that gasoline supplies fell by 3.3 million barrels last week to 184.6 million barrels, the lowest level since 1990. Crude stocks fell by 6.3 million barrels, according to the same report.
The decline in crude and gas stockpiles was a result of the shuttered production facilities, both in anticipation of the storm and as a result of damage and flooding.
As of Wednesday afternoon, 12 refineries in Texas and Louisiana were shuttered, according to the Department of Energy, which resulted in a 3 million barrel decline in refinery capacity. Meanwhile, 95.9% of crude production and 82.3% of natural gas production in the Gulf of Mexico remained shuttered.
According to a report from the Minerals Management Service, 28 of 3,800 offshore platforms were destroyed by Hurricane Ike. Personnel from 425 out of 717 - or 59.3% - of the production platforms remained evacuated, according to MMS as of Wednesday

Tuesday, September 16, 2008

Fed leaves rates unchanged

The Federal Reserve left its fed funds rate at 2% Tuesday despite increased hopes for a rate cut.
Wall Street wanted a cut in order to help ease the pain in the financial sector and restore investor confidence.
The Fed's policymakers acknowledged the deepening problems facing the nation's financial markets as well as weaker economic fundamentals in its statement.
"Strains in financial markets have increased significantly and labor markets have weakened further," said the statement, making reference to the jump in unemployment to a five-year high of 6.1% in August. It also warned that softer spending by consumers is expected to slow economic growth.
But the Fed added that it believes rates are already low enough to spur future economic growth and that despite recent declines in commodity prices, such as oil, the outlook for inflation remains uncertain.
The fed funds rate is the central bank's key tool to affect the economy. Lowering the rate pumps money into the economy by reducing the cost on a broad range of loans, including credit cards, home equity lines and many business loans.
Stocks initially fell on the announcement but bounced back and were higher in late afternoon trading even though expectations had grown in recent days that the Fed would respond to market turmoil by lowering rates.
According to futures contracts listed on the Chicago Board Trade, investors were betting Tuesday morning that a rate cut of at least a quarter-of-a-percentage point was almost certain.
The Fed and AIGAlso lifting stocks were wire service reports that the Fed was considering loaning tens of billions to American International Group (AIG, Fortune 500), the nation's largest insurer and a key player in the financial markets. The Fed was said earlier to have reservations about lending to AIG but that may be changing.
AIG's scramble for cash this week is just the latest of the problems roiling the nation's financial markets.
In the past nine days, the Treasury Department took control of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), investment bank Lehman Brothers (LEH, Fortune 500) filed for bankruptcy and Merrill Lynch (MER, Fortune 500) agreed to a buyout by Bank of America (BAC, Fortune 500).
In addition, shares of Washington Mutual (WM, Fortune 500), the nation's largest savings and loan, have plunged due to growing concerns that it too would have trouble raising necessary capital.
Keith Hembre, chief economist for First American Funds, said he thought a bailout of AIG made sense and that a potential rescue plan for the firm may have been one of the factors that stopped the Fed from cutting rates.
"If they were about to do an about face on AIG, that was probably a consideration on the rates," he said.
A Fed spokesman would not comment on the AIG report. But one possible indication of the Fed's involvement in any AIG discussions is that New York Federal Reserve President Timothy Geithner did not attend the meeting. Christine Cumming, first vice president of the New York Fed, voted in his place.
Geithner has been widely acknowledged as the Fed's main person involved in Wall Street efforts to save struggling financial firms.
In March, the Fed agreed to guarantee $29 billion in loans so that JPMorgan Chase would buy Bear Stearns. And Geithner led this weekend's last-minute efforts to save Lehman. Those talks between regulators and top banking officials were held at the offices of the New York Fed.
The New York Fed also pumped $50 billion into the nation's financial system Tuesday in an effort to help ease credit stresses.
Bernard Baumohl of The Economic Outlook Group in Princeton Junction, N.J., said that injection is a sign that the Fed recognizes it must deal with the problems facing Wall Street, even if it kept rates unchanged.
"The Fed is in effect saying, 'I'm not going to lower rates and subsidize the loan, but we're going to give you as much money as you need to conduct your operations," said Baumohl.
K. Daniel Libby, senior portfolio manager for Sands Brothers Asset Management, said he also believes the Fed made the right decision not to cut rates even though he remains worried about the outlook for AIG and Washington Mutual and other troubled financials.
"I am concerned about a number of banks and institutions being on the precipice of another downward spiral," he said. "But I don't know if [a quarter- point rate cut] would have helped us enough."
Libby said it's important for the Fed to not become too accommodative to the whims and demands of Wall Street.
Future rate cuts not out of the pictureWhat's more, the Fed may still wind up lowering rates later this year or early next year due to the weakness in the financial system, Hembre said. If the job market weakens further and oil prices continue to fall, that would reduce inflation fears and make it easier to justify a rate cut.
"We're likely to see inflation fall significantly and unemployment go higher, so that's a prescription for more Fed [cuts]," said Hembre.
Baumohl also noted that the Fed's decision Tuesday was unanimous -- the first time that's happened since early January.
Dallas Fed President Richard Fisher voted to raise rates at the last two meetings when they were left unchanged and voted against some of this year's rate cuts. Philadelphia Fed President Charles Plosser joined Fisher in some of his dissents during that period.
Baumohl thought the lack of a dissenting vote was key given the many fires that the Fed is trying to put out.
"This unanimity is important at this critical moment," he said.

House vote expected on oil drilling

The House has restarted a summerlong debate on expanding oil drilling in Atlantic and Pacific waters that would end a longtime moratorium.
The legislation is expected to be voted on later Tuesday. It would allow drilling 50 miles beyond shore if a state agrees to offshore oil or gas development.
Republicans in Congress slammed the measure, saying that it would keep off limits nearly 90% of offshore oil because it lies within 50 miles of land.
The bill also calls for $18 billion in taxes on the largest oil companies, with the money to be used for tax breaks for alternative energy such as solar, wind and biomass.
Democrats in Washington called it a balanced bill aimed at shifting priorities from fossil fuels to other energy sources.

Gas prices rise another penny

Gas prices ticked up another penny, bringing the total increase in gas prices to 18 cents since Hurricane Ike rocked the Gulf, according to a survey released Tuesday.
The average price of unleaded regular rose 1.2 cents to $3.854 a gallon, according to the survey released by motorist group AAA.
That followed increases of 4.7 cents on Monday, 5.8 cents Saturday and 6.2 cents Sunday. The jump on Sunday was the biggest one-day spike since after Hurricane Katrina hit the Gulf Coast in 2005.
Hurricane Ike slammed the Gulf Coast of Texas early Saturday, shutting down the heart of the nation's refinery operations. Preliminary reports indicate, however, that damage to refineries was not as bad as expected. Refineries process crude oil into usable products, such as gasoline and home heating oil, and are vulnerable to floods.
Before the storm, drivers had been breathing a sigh of relief as gas prices eased off the high price of $4.114 a gallon set July 17. Now, gas prices have increased for seven consecutive days and, while they're lower than a couple months ago, gas is 38% higher than the same time last year.
Twelve states reported gas prices above $4 a gallon in the AAA survey: Alaska, Alabama, Georgia, Hawaii, Illinois, Indiana, Kentucky, Michigan, North Carolina, South Carolina, Tennessee, and West Virginia.
Alaska had the most expensive gas prices, at $4.398 a gallon .The least expensive gas was in New Jersey, where gas cost $3.536 a gallon, according to AAA's Web site.
Even as gas prices continue to tick higher, crude futures were trading near $93 a barrel, or $54 off the record high price of $147.27 a barrel, set July 11

Oil at 7-month low on Wall Street woes

Oil prices settled at a seven-month low Tuesday as the meltdown on Wall Street pulled the oil market's focus to the economic slowdown that has already been cutting away at demand for energy.
Lehman Brothers (LEH, Fortune 500) filed for bankruptcy Monday, Merrill Lynch (MER, Fortune 500) agreed to be purchased by Bank of America (BAV) over the weekend, and American International Group (AIG, Fortune 500) continued to be hit by downgrades even as it struggles to come up with capital.
Oil closed $4.56 lower to $91.15 a barrel, after reaching as low as $90.51. Tuesday's settle was the lowest since Feb. 7, when oil closed at $88.11 a barrel.
On Monday, oil traded down $5.47, bringing the 2-day loss to $10.03.
"The sheer rise of oil as a financial instrument through July of this year is what pushed it higher, and it's now showing the other side of the same sword, with prices pushing lower," said Peter Beutel of energy risk management firm Cameron Hanover.
Beutel said oil prices would probably dip below $90 a barrel this week.
Slowdown cuts demand: Oil prices have fallen more than $56 from the record high price of $147.27 a barrel, set July 11. Prices have slid in recent months as the global slowdown has chipped away at demand, and the unprecedented implosion in the financial markets has cast more gloom over the oil market.
As the economy continues to deteriorate, so does demand for oil. And Wall Street's woes don't make it likely that demand will return to healthy levels any time soon.
The price of oil "is definitely not supply- and-demand related right now," said Neal Dingmann, senior energy analyst at Dahlman Rose. "It is clearly all demand related right now."
As Wall Street reeled Monday, stocks were battered. The Dow Jones industrial average shed 504 points, or 4.4%, which was the biggest one-day decline on a point basis since Sept. 17, 2001, when the market reopened for trading after having been closed in the aftermath of the 9/11 terrorist attacks. On Tuesday, Wall Street was much more subdued.
"When the stock market goes down like we have seen in the last day, commodity prices go down," said Mark Waggoner, president of Excel Futures.
Despite the fact that a major Hurricane barreled through the Gulf of Mexico, - leaving production limited, more than a dozen refineries shuttered, and gas stations without gas to pump - oil prices were still at 7-month lows, which shows "the severity of what is going on in the economy," said Dingmann.
Fed: Despite the recent tumult on Wall Street, Federal Reserve policy makers held their key interest rate steady at 2% at Tuesday's meeting. Oil prices were mostly unchanged after the announcement.
The Fed's decision to hold the key funds rate steady at 2%, while much of the market was looking for a rate cut, did not push oil prices outside of their range.
"If you look at where we were before the report and after the report, the price really did not change that much," said Waggoner. Oil prices "held pretty steady."
One analyst said the decision was a vote of confidence for the markets.
The Fed's "decision surely reflects confidence in the overall financial infrastructure but may reflect an even more strongly held confidence in the need for a strong dollar," said Dr. Larry G. Chorn, the chief economist at Platts, an energy research firm.
Ike: Hurricane Ike slammed the Gulf Coast of Texas on Saturday. The oil rigs and platforms in the Gulf were evacuated in advance of the storm and refineries were shuttered.
Hurricane Ike resulted in a decrease of 3.6 million barrels per day of refinery capacity, with 14 refineries in Texas and Louisiana shuttered, according to the Department of Energy.
Meanwhile, 99.9% of crude production and 93.8% of natural gas production in the Gulf of Mexico was shuttered, as of Tuesday.
Some of the refineries were hit strongly, and a few of them could be down for awhile, said Dingmann.
Another analyst said that Ike might have caused more damage than the first couple days of reports indicate. Ike was "not as horrible as Katrina or Rita, but I am in between - there are going to be some problems that we have to deal with," cautioned Waggoner.
The market needed to wait for more information to come in, according to Waggoner. "Although it was only a Category 2, it was a big, big storm," he said. "Some of these platforms are going to be virtually fine and some of them are going to have some major problems - but nobody knows yet."
MMS estimated that 498 of the 717 manned production platforms - about 69.5% - remained evacuated in the wake of Hurricane Gustav earlier this month and after Hurricane Ike, as of Tuesday. v

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