Wednesday, January 28, 2009

Bonds extend declines after Fed

Government debt prices extended declines Wednesday after the Federal Reserve said it is prepared to buy long term Treasurys but did not offer the specific details that many investors were looking for.

The U.S. central bank kept its benchmark target rate in a range between 0% and 0.25%, citing credit conditions that are expected to "remain extremely tight." The Fed also said it is "prepared to purchase longer-term Treasury securities" if necessary.

But the market was expecting the Fed to make a stronger statement on its plans to buy long-term Treasurys, said Kevin Giddis, managing director of fixed income Morgan Keegan.

Wednesday's selling "is mostly about the Fed not saying when they would start buying, if they were to start buying," Giddis said. The market was "counting on language that wasn't exactly there," he added.

Prices for longer-term bonds fell sharply as investors who had flocked to the 30-year note in anticipation of a more clear signal from the Fed rushed to unwind those positions, Giddis said.

Treasury prices came off their lows immediately after the announcement. But prices resumed their decline as investors focused on a major influx of supply expected to keep hitting the market.

Record-breaking auctions: The Treasury is scheduled to auction $135 billion worth of debt this week, on top of the $120 billion worth of debt brought to market last week.

Investors have been paying particular attention to the debt auctions recently as a way to measure demand.

On Thursday, the Treasury is scheduled to sell a record $30 billion worth of 5-year notes.

"Everybody is watching those new auctions to see whether past investor interest in buying those securities remains strong," said Michael Herbst, mutual fund analyst at Morningstar.

On Tuesday, the government auctioned a record $40 billion worth of 2-year notes. But prices rose because the bid-to-cover ratio for the auction was 2.69, meaning there was over $100 billion worth of bidders for $40 billion of debt. Even with the tremendous supply of debt, there is still healthy demand.

The government also auctioned $32 billion worth of 28-day bills Tuesday. On Monday, the government auctioned $29 billion worth of 13-week bills, $28 billion worth of 26-week bills, and $8 billion worth of 20-year TIPS (Treasury Inflation-Protected Securities).

Stimulus and supply: President Obama and House Democrats have come up with a stimulus package for the economy focused on job creation through rebuilding the nation's infrastructure. The $825 billion package, which includes $550 billion in spending and $275 billion in tax cuts, will be voted on by the House of Representatives later on Wednesday.

"There has been so much issuance of Treasurys lately to finance the bailout activity and indications seem to point to that there is more issuance to come," said Herbst. "How that impacts the purchasing of Treasurys is something that the market is looking for more clarity on."

The threat of such massive torrents of supply has already lifted yields significantly since December. At the end of 2008, the 30-year traded above 140 and its yield reached down toward 2.50%. The yield on the 30-year longbond was near 3.25% Wednesday.

"The supply dynamic is a massive issue that will have to be dealt with in 2009," said Brian Edmonds, head of interest rate trading at Cantor Fitzgerald.

Debt prices: The 10-year benchmark Treasury edged 2/32 lower to 109-24/32 and its yield rose to 2.6% from 2.53% late Tuesday. Bond prices and yields move in opposite directions.

The 2-year note, meanwhile, was 6/32 lower at 99-28/32 and its yield rose to 0.91% from 0.81%.

The yield on the 3-month note jumped to 0.19% from 0.14% late Tuesday. The 3-month bill has been used as a gauge of confidence in the marketplace because investors tend to shuffle funds in and out of the bill as they assess risk in other places - the lower the yield, the more risk they see.

Meanwhile, the 30-year bond fell 2-4/32 to 121-15/32 and its yield rose to 3.34% from 3.23%.

Conventional home mortgage rates move in close connection to the yields on the long-term Treasury maturities. When Treasury prices hit record highs and yields sunk to record lows at the end of 2008, mortgage rates sunk. Lower mortgage rates help stimulate the housing sector. As government debt yields rally, so have mortgage rates.

"More drastic efforts will be necessary to stabilize the housing market and one key part of that is to bring mortgage rates down to encourage buyers to buy a house and enter into new mortgages," said Herbst.

Lending rates: The 3-month Libor rate edged slightly lower to 1.17% from 1.18% Tuesday, according to data on The overnight Libor rate, meanwhile, held steady at 0.22%, even with Tuesday.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London, and it is used to calculate adjustable-rate mortgages. More than $350 billion in assets are tied to Libor.

Two credit market gauges were mixed. The so-called "TED" spread narrowed to 0.98 percentage point from 1.04 percentage points Tuesday. The bigger the TED spread, the less willing investors are to take risks.

The rate surged as the credit crisis gripped the economy, but has since fallen off as central banks around the world have lowered interest rates and pumped the economy with liquidity.

Another market indicator, the Libor-OIS spread, was unchanged from Tuesday at 0.95 percentage point. The Libor-OIS spread measures how much cash is available for lending between banks, and is used for determining lending rates. The bigger the spread, the less cash is available for lending.

Wall Street cash bonuses fall 44%

Wall Street firms slashed cash bonuses for New York City employees by 44% in 2008, as they reeled from record losses in the securities industry, New York State's comptroller said in a report issued on Wednesday.

Bonuses fell to $18.4 billion from $32.9 billion in 2007, the largest dollar decline ever and the biggest percentage drop in more than 30 years, Comptroller Thomas DiNapoli said. The size of the bonus pool is the sixth-largest on record, he said.

Losses from traditional broker-dealer operations of New York Stock Exchange member firms topped $35 billion in 2008, more than triple the record set a year earlier, DiNapoli said.

Meanwhile, Wall Street shed 19,200 jobs, or 10.2%, in New York City over the last 14 months, ending the year with 168,600 workers.

The declines reflect the souring of the global economy and credit markets, as well as the disappearance of the traditional Wall Street investment banking model.

What were the five largest Wall Street banks no longer exist in the form they began 2008. Goldman Sachs Group Inc. (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) became commercial banks, Bear Stearns Cos. was bought by JPMorgan Chase & Co. (JPM, Fortune 500), Lehman Brothers Holdings Inc. went bankrupt and Merrill Lynch & Co. was acquired by Bank of America Corp (BAC, Fortune 500).

JPMorgan and the ailing Citigroup Inc. (C, Fortune 500) are also based in New York.

Lower bonuses also cut into tax revenue, at a time when New York Gov. David Paterson and legislators are trying to slash a potential $15.4 billion budget deficit over 14 months. DiNapoli said tax revenue could fall by nearly $1 billion in New York state and $275 million in New York City from lower bonuses.

The comptroller said the industry's problems could worsen, despite an influx of hundreds of billions of dollars of taxpayer money from the federal Troubled Asset Relief Program.

"The industry is still continuing to write off toxic assets," DiNapoli said in a statement. "It's painfully obvious that 2009 will probably be another difficult year."

DiNapoli said the average Wall Street bonus fell 36.7% to $112,000 in 2008. The average decline was smaller than the drop in the overall bonus pool, he said, because the pool was shared among fewer workers as jobs were cut.

Tuesday, January 27, 2009

Oil falls $4 amid economic jitters

Oil prices fell more than $4 a barrel Tuesday as worries about a recovery in demand took center stage amid heightened concern that the global recession will continue to drag on.

That feeling was exacerbated by two dismal economic reports out of the United States, the world's largest oil consumer.

By the end of trading, U.S. crude for March delivery had fallen $4.15 to $41.58 a barrel. Falling demand due to the slowing economy has caused oil prices to plummet more than $100 a barrel from a record high of $147.27 a barrel last July.

A turnaround in demand won't occur "until we start seeing an economic expansion in the United States," said Rachel Ziemba, energy analyst with RGE Monitor in New York.

The Labor Department reported a large spike in unemployment in December, and another closely watched report from a private research firm showed consumer confidence sank to an all-time low in January.

Furthermore, stockpiles continue to build in the U.S. so even when demand returns, it may be some time before those get worked off.

Analysts expect the government to show a 3.4 million barrel increase in U.S. crude stocks when it releases its weekly statistics on Wednesday, according to a poll from research firm Platts.

Investors will be keeping a close eye on the $825 billion economic stimulus plan being debated by Congress. However, even if the stimulus plan boosts the economy, oil prices may not start to pick up until at least 2010, Ziemba said.

OPEC cuts: In order to cope with an oversupply of crude oil, the Organization of Petroleum Exporting Countries, an international trade group whose members produce about 40% of the world's oil, pledged last year to cut production in January by 2.2 million barrels a day.

However, as a group, OPEC is notorious for falling short on pledged production cuts.

"They're never really going to lower production to quota levels," said Jim Ritterbusch, president of oil advisory firm Ritterbusch and Associates in Galena, Ill. But he added that "they've done a better job of cutting than I thought they would."

Gas prices: By Tuesday, gasoline retailed at a national average of $1.84 a gallon, down 0.2 cents from the day before, according to a daily survey from motorist group AAA.

Wall Street on the upswing

Stocks gained Tuesday, rising for the third-straight session, as investors breathed a sigh of relief that some of the quarterly earnings were less terrible than had been expected.

The Dow Jones industrial average (INDU) gained 58 points, or 0.7%, closing higher for the second session in a row.

The Standard & Poor's 500 (SPX) index added 9 points, or 1.1% and the Nasdaq composite (COMP) added 15 points or 1%. Both the S&P 500 and the Nasdaq ended higher for the third session in a row.

After the close, Yahoo (YHOO, Fortune 500) reported quarterly sales and earnings that topped estimates. Including charges, the company reported a loss. Shares gained 4% in extended-hours trading.

Earnings are due Wednesday morning from Dow component AT&T (T, Fortune 500) and financial company Wells Fargo (WFC, Fortune 500). AT&T is expected to have earned 65 cents per share versus 71 cents a year ago. Wells Fargo (WFC, Fortune 500) is expected to report earnings of 33 cents per share, versus 41 cents a year ago.

Tuesday's stock gains occurred despite gloomy economic readings on home prices, employment and consumer confidence - and a slew of disappointing earnings.

"We've had some terrible numbers today, but I think the market is trying to look past the bad news and look toward the stimulus package being put forth by the Obama administration," said Robert Siewert, portfolio manager at investment firm Glenmede.

Also, investors seemed to welcome results that were not as weak as expected from American Express, Texas Instruments and others.

And Timothy Geithner's approval as Treasury secretary seemed to boost confidence that the Obama administration's $825 billion stimulus package could get passed, despite some Republican opposition.

"There's a little bit of cautious optimism in the market today, but people aren't going to make any big bets until they see what happens with the stimulus package and how Obama used the second half of the TARP money," said Paul Brigandi, vice president of trading at Direxion Funds.

"People are also looking to the FOMC meeting, not in terms of interest rates, since the Fed isn't going to do anything, but in terms of the statement and whether they announce any new initiatives," Brigandi said.

The Federal Reserve holds its two-day policy-setting meeting Tuesday and Wednesday, with an announcement expected Wednesday afternoon. The central bank is expected to keep short-term interest rates near zero, where it set them at its last meeting. However, as always, the statement that accompanies the decision will be closely scrutinized.

The negative news on the employment front continued on Tuesday as companies across the economic spectrum announced more than 10,000 job cuts.

On Monday all three major gauges managed to close higher, despite corporations announcing more than 71,000 job cuts. The S&P 500 and the Nasdaq also closed higher Friday, while the Dow closed off its lows.

The recent stock gains have followed a short, sharp retreat that saw the S&P 500 plunge 14% in just over two weeks.

That decline was partly due to a "policy vacuum" ahead of President Obama's inauguration, when it was too late for Bush to do anything and too soon for the new administration to make changes, said Richard Campagna, chief investment officer at 300 North Capital.

"What's driving the market now is that at least the administration has the ability to do something, to try to get the stimulus through," Campagna said.

Quarterly results: Dow component American Express (AXP, Fortune 500) reported lower sales and earnings late Monday that narrowly missed expectations. However, the so-called "whisper" number was much worse and investors seemed relieved that AmEx's results were not weaker. Shares gained 9.7%.

Texas Instruments (TXN, Fortune 500) reported a smaller-than-expected drop in quarterly profit after the close Monday and also said it was cutting 3,400 jobs. Shares gained 3.7% Tuesday.

A number of steel companies reported results as well. U.S. Steel (X, Fortune 500) reported higher fourth-quarter earnings and warned that first-quarter revenue would miss forecasts. But investors focused on the earnings and shares rose almost 7%.

Steel Dynamics (STLD) reported better-than-expected fourth-quarter results and said most of its divisions should see profits in 2009, thanks partly to the proposed economic stimulus plan. Shares jumped 15%.

AK Steel (AKS, Fortune 500) reported a fourth-quarter loss and warned that first-quarter revenue would miss forecasts, sending shares 8% lower.

Netflix (NFLX) also reported higher fourth-quarter revenue and said it should surpass revenue expectations in the current quarter. Shares jumped 15.5%.

Dow component DuPont (DD, Fortune 500) reported a wider quarterly loss that was worse than expected and also cut its 2009 earnings forecast. Shares ended little changed.

Dow component Verizon Communications (VZ, Fortune 500) reported higher quarterly sales and earnings, but said that growth in its mobile phone business slowed and traditional land line customers continued to drop out. Verizon also warned that pension and other retirement costs would hurt earnings in 2009. Shares fell 3.3%.

Delta Air Lines (DAL, Fortune 500) reported a steeper quarterly loss due to costs associated with its merger with Northwest and bad fuel hedges. But the world's largest air carrier said that lower fuel costs and downsizing would enable it to earn profits in 2009. Shares tumbled 20%.

Other air carriers dropped with Delta, with the Amex Airline index falling almost 7%.

Among other movers, a number of big financial stocks rallied, including Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500), Goldman Sachs (GS, Fortune 500) and Wells Fargo (WFC, Fortune 500).

Market breadth was positive. On the New York Stock Exchange, winners topped losers two to one on volume of 1.17 billion shares. On the Nasdaq, advancers topped decliners eight to five on volume of 1.83 billion shares.

Economy: Home prices in 20 major cities plunged at a record annual pace in November, falling to levels not seen since 2004, according to a report released Tuesday.

A separate report showed that consumer confidence fell to an all-time low in January. The Conference Board, a research group, said its consumer index fell to 37.7 from a revised 38.6 in December, missing economists' forecasts. It was the lowest level on record since the group began tracking confidence in 1967.

A government report showed that unemployment spiked in all 50 states and the District of Columbia in December, as companies cut thousands of positions in the wake of the recession.

Bonds: Treasury prices rallied, lowering the yield on the benchmark 10-year note to 2.54% from 2.63% Monday as investors pulled money out of the safe-haven investment. Treasury prices and yields move in opposite directions. Yields on the 2-year, 10-year and 30-year Treasurys all hit record lows last month.

Lending rates were mixed. The 3-month Libor rate held steady at 1.18%, according to Overnight Libor fell to 0.22% from 0.23% Monday. Libor is a bank-to-bank lending rate.

Other markets: In global trading, Asian markets were mixed and most European markets ended lower.

The dollar fell versus the euro and yen.

U.S. light crude oil for March delivery fell $4.15 to settle at $41.58 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery fell $9.30 to settle at $901.40 an ounce.

Gasoline prices fell two-tenths of a cent to a national average of $1.84 a gallon, according to a survey of credit-card swipes released Tuesday by motorist group AAA.

Oil reaches for $48

Oil prices rose as much as a dollar, reaching towards $48 a barrel on Tuesday, boosted partly by cold weather in top energy consumer the United States, plus signs OPEC oil supply cuts may have begun to underpin prices.

U.S. light, sweet crude for March delivery rose 72 cents to $46.45 barrel by 6:03 am ET, but had climbed as high as $47.49 a barrel.

U.S. crude has rebounded from below $33 a barrel in the past week.

"People are expecting OPEC to really be serious, and the weather's been cold in the northeast U.S., and here, so we're getting a bit of short-term demand," said Tony Nunan, risk management executive at Tokyo-based Mitsubishi Corp.

"We may have found a short-term bottom but nobody is confident that we're heading further up," he said.

Evidence suggests most of OPEC's members are implementing the group's biggest ever 2.2 million barrel per day (bpd) production cut agreed last month.

Oil has fallen more than $100 from a record peak above $147 a barrel in July last year, depressed by falls in demand as the credit crisis has pushed the global economy towards recession.

U.S. fuel inventories, for example, are building as demand shrinks.

U.S. crude oil stocks are expected to have risen a further 2.7 million barrels last week, the fifth straight week of gains. The figures are due out on Wednesday.

Colder weather is expected to help draw down distillate stocks by 800,000 barrels, according to a Reuters poll. Gasoline stocks are likely to have risen by 1.3 million barrels.

Temperatures in the densely populated U.S. northeast are forecast to be below normal this week.

Oil traders will get an early indication of Wednesday's U.S. government data with the release at 4:30 pm ET on Tuesday of inventory figures from the industry group the American Petroleum Institute, as the API shifts to a new, earlier release schedule.

Cyclone Dominic in Australia shut in more than 200,000 barrels per day (bpd) of oil production provided a small measure of support to prices. But output was expected to resume as soon as Wednesday as the storm passes.

Later on Tuesday, U.S. President Barack Obama goes to Capitol Hill to campaign for an $825 billion economic stimulus package to be put to a House vote within days.

Mostly upbeat start seen for stocks

U.S. stocks appeared set for a mostly higher open Tuesday, as investors looked past economic and earnings gloom, and eyed buying opportunities following the Senate's confirmation of the new Treasury secretary.

At 7:46 a.m. ET, Dow Jones industrial average and Standard & Poor's 500 futures were higher, though Nasdaq 100 futures slipped from their earlier gains. But if the markets on Tuesday follow the lead of the futures, then it could result in a second straight day of gains.

News on the economic front has been dismal, but stocks still managed to gain on Monday. Stocks rose even as about 71,400 job cuts were announced.

Robert Brusca, chief economist at Fact and Opinion Economics, said the approval of Tim Geithner as Treasury secretary on Monday helped to alleviate investor anxiety, despite the "really bad GDP report" that looms on Friday.

"These are the kind of tentative signs that you see," said Brusca. "The market has to stop falling and has to stabilize before it rises. I think this is a good place for people to start making bets."

The gross domestic product is expected to have declined by an annual rate of 5.4% in the fourth quarter, according to a consensus of economist expectations from

Earnings: DuPont (DD, Fortune 500), a Delaware-based chemical company, reported a loss of $629 million, or 70 cents a share, for the fourth quarter. Without charges related to restructuring, the company reported a loss of 28 cents per share.

Corning (GLW, Fortune 500), a maker of fiber-optic and TV screen glass, said its fourth-quarter sales plunged 30% to $1.1 billion, and earnings plummeted 70% to 13 cents per share, excluding special items. The company said it will cut 13% of its work force, or 3,500 jobs.

Telecom operator Verizon Communications (VZ, Fortune 500) said fourth-quarter revenue rose more than 3% to $24.6 billion, and diluted earnings rose to 43 cents per share, up from 37 cents a year earlier.

Other stocks to watch include Texas Instruments (TXN, Fortune 500), which posted a smaller-than-expected drop in quarterly profit after U.S. markets closed Monday. Shares of the chip maker rose 5% in after-hours trading.

Also late Monday, Dow component American Express (AXP, Fortune 500) reported lower quarterly earnings that missed expectations. Still, shares gained 3% in after-hours trading.

The economy: The Conference Board is due to release its January consumer confidence index.

The S&P/CaseShiller home index for November is also on tap and is expected to show steep declines.

The Federal Reserve begins its two-day policy setting meeting, with an announcement expected Wednesday afternoon.

Retail: The outlook for retail sales doesn't appear to be improving. Retail industry sales are expected to decline 0.5% this year, the National Retail Federation said in its 2009 economic forecast released Tuesday.

World markets: Stocks in Japan soared, with the Nikkei climbing nearly 5%. But the positive sentiment didn't carry over to Europe, where major indexes were lower in morning trading.

Oil and money: Oil prices fell 73 cents a barrel to $45 in electronic trading. The dollar rose versus the euro and the yen, but fell versus the British pound.


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Monday, January 26, 2009

Geithner vote looms on Capitol Hill

The Senate is set to meet Monday evening to vote on Tim Geithner's nomination as the next Treasury Secretary. Senate Majority Leader Harry Reid of Nevada has said he expects to hold a vote at 6 p.m. ET.

Geithner is expected to easily win confirmation from the Democratic-controlled Senate. Democrats on Capitol Hill have spoken of the need to quickly confirm Geithner, who will spearhead President Obama's response to the financial crisis that threatens to unravel economic growth around the globe.

Reid warned Friday that Republicans "would not be very wise politically" to try to hold up the nomination, which last week won the support of all the Democrats and half the Republicans on the Senate Finance Committee. He added that Democrats could block any attempt to filibuster.

On Thursday, the committee recommended in an 18-5 vote that the full Senate confirm the appointment of Geithner, who is currently president of the Federal Reserve Bank of New York, to succeed Henry Paulson. Supporters spoke highly of Geithner's substantial experience in managing financial emergencies.

Five Republicans, including Sen. Orrin Hatch, R-Utah, supported his nomination, citing among other things the enormous stress the economy and the financial system are under right now.

If confirmed, Geithner will take over for Stuart A. Levey, the Under Secretary for terrorism and financial intelligence, who has been serving as acting Treasury Secretary since the Obama administration took office last week.
Bank bailout, part 2

The finance panel's recommendation came after two hearings last week that were dominated by questions about how President Obama and his top advisers plan to address the troubles in the financial sector.

Shares of big U.S. banks have plunged anew this month as investors struggle to come to grips with the risk that financial institutions will be overwhelmed by rising loan losses as the economy slows -- and the possibility that shareholders may be wiped out by a new round of government aid.

Congress has given Obama access to $350 billion of federal bailout funds. But congressional leaders, angered by the Bush administration's handling of the first slug of money under the Troubled Asset Relief Program, or TARP, have demanded that tough new terms be applied to bailout recipients -- and that the government give taxpayers a more complete account of how money is spent.

For his part, Geithner said in testimony last week that the administration is working on what he called a comprehensive response to the crisis. He said Obama would address the nation in coming weeks. Geithner also stressed the need for the government to act urgently and with great force.

"The tragic history of financial crises is a history of failures by governments to act with the speed and force commensurate with the severity of the crisis," Geithner said. "In a crisis of this magnitude, the most prudent course is the most forceful course."

Geithner also said he didn't yet see the need for more federal bailout funds, but stressed that the Treasury may have to "act flexibly" if conditions deteriorate further. The comments suggest the president may ask Congress for additional money beyond the $350 billion currently available under TARP.

Lawrence Summers, head of the National Economic Council, on Sunday wouldn't rule out the possibility that more money would be needed. "We can make important progress and get started with the support that has been provided," Summers said on NBC's "Meet the Press" when asked whether taxpayers should expect another request for funding to shore up the financial system. "What ultimately will be necessary is something that will play out over time."

Similarly, House Speaker Nancy Pelosi on Sunday said that "some increased investment" may be needed.

The five Republican committee members who opposed Geithner's nomination did so in part because of questions about Geithner's tax problems and whether he had candidly answered their inquiries about them.

Sen. Jon Kyl, R-Ariz., questioned Geithner extensively about the errors on his 2003 and 2004 tax returns and why Geithner didn't immediately pay back taxes due on his 2001 and 2002 returns.

Geithner acknowledged having made mistakes but insisted the errors were unintentional.

Pfizer to buy Wyeth for $68 billion

Pfizer announced Monday that it has signed a deal to acquire the smaller drugmaker Wyeth for $68 billion, and thousands of job cuts will follow.

New York-based Pfizer, already the world's leading drugmaker, becomes even larger following the cash-and-stock deal with Wyeth, based in Madison, N.J.

The deal values Wyeth shares at $50.19 each, a nearly 15% premium to Friday's closing price. Pfizer agreed to pay $33 in cash and 0.985 share in Pfizer stock for each Wyeth share.

Pfizer said it would cut 10% of its staff and close five of its manufacturing plants. The company totaled about 48,000 employees at the end of 2007, though job cuts have occurred since then. Pfizer recently announced that it was cutting up to 8% of its research staff, or up to 800 jobs.

Pfizer said the deal would be financed through a combination of cash, debt and stock. The company said it is borrowing $22.5 billion from a consortium of banks.

The board of directors also decided to cut Pfizer's quarterly dividend in half to 16 cents a share.

Pfizer announced that it would ramp up its focus in treatments for Alzheimer's disease, inflammation, cancer, pain and psychosis, and continue to focus on vaccines and biotechnology.

"The new company will be an industry leader in human, animal and consumer health," said Pfizer chief executive Jeffrey Kindler, in a press release. "Its geographic presence in most of the world's developed and developing countries will be unrivaled."

Pfizer also reported a 90% plunge in quarterly net profit. The company said its diluted earnings per share plummeted to 4 cents in the fourth quarter, from 40 cents the prior year.

The company blamed a $2.3 billion charge to resolve allegations from federal prosecutors that it had promoted Bextra for uses not approved by the FDA. Bextra, an anti-arthritis drug, was pulled off the market after Merck's (MRK, Fortune 500) Vioxx was withdrawn in 2005.

Pfizer also reported a slight decline in fourth-quarter revenue to $12.9 billion, from $12.3 billion the year before.

This is the first big merger since 2006, when the telecom giant AT&T (ATT) merged with BellSouth for $67 billion. After that deal, AT&T cut 10,000 jobs.

Miller Tabak analyst Les Funtleyder, author of "Healthcare Investing," said that Wyeth has a "decent pipeline" but with "nothing that immediately jumps out at me as blockbuster." Most promising, he said, is Wyeth's plan to roll out a new form of Prevnar, which combats meningitis and blood infections, with sales totaling $2.1 billion in 2008.

Pfizer's (PFE, Fortune 500) stock price slipped in pre-market trading, while Wyeth's (WYE, Fortune 500) edged up.

One of Pfizer's chief challenges is finding a replacement for the cholesterol-cutting Lipitor, the top-selling drug of all time. The drug's annual sales peaked at nearly $13 billion in 2006, but revenue will plummet when Lipitor's patent expires in 2011.

Sunday, January 25, 2009

Ford CEO: 'No more money' needed

Ford Motor Co has enough liquidity to fund its restructuring plan and despite the deep downturn in auto sales still sees no need to ask for government loans, chief executive Alan Mulally said Saturday.

"We don't want to borrow any more money. We have sufficient liquidity to fund our transformation plan, which means our business is in a relatively good shape," Mulally told reporters on the sidelines of the National Automobile Dealers Association convention.

Ford's U.S. rivals, General Motors Corp (GM, Fortune 500) and Chrysler LLC, won approval in December for $17.4 billion of government loans to avert collapse. Ford has asked for access to a $9 billion credit line from the U.S. government but has not sought loans. Washington has not yet responded to Ford's request.

Mulally said Ford was in a better situation than its rivals because it borrowed more than $23 billion in 2006, using most of the company's assets as security, including its well-known blue oval logo.

Mulally said U.S. industry-wide sales in January had been similar to those in December, when they fell about 36% from a year earlier to 10.3 million units on an annualized basis.

Ford expects an economic stimulus package being pushed by new President Barack Obama to drive a recovery in auto sales starting in the second half of the year and maintains its forecast of U.S. auto sales at 12 million to 12.5 million units, he added.

The forecast represents the high end of prevailing expectations. Analysts have forecast U.S. sales in a range between 10.1 million and 12.5 million units for 2009.

"Right now, I think with everything planned in the fiscal and monetary policy, I am very comfortable that we are going to start to turn things around through the second half of the year," Mulally said.

Bigger bank bailouts coming?

President Barack Obama's top economic adviser would not rule out Sunday that more money may be needed to stabilize the U.S. financial system as a deep recession increases banks' losses.

Lawrence Summers, head of the National Economic Council, also said there was no question that tax cuts passed under former President George W. Bush needed to be repealed, though he would not be pinned down on exactly when.

"We can make important progress and get started with the support that has been provided," Summers said on NBC's "Meet the Press" when asked whether taxpayers should expect another request for funding to shore up the financial system. "What ultimately will be necessary is something that will play out over time."

House Speaker Nancy Pelosi said earlier that "some increased investment" may be needed beyond the $700 billion approved last fall.

The bailout fund was first pitched as a way to get bad assets off the banks' books in the hope that doing so would help restore normal lending and get the economy going.

Instead, most of the money has gone to buy stakes in banks, and both Democrats and Republicans have complained that the cash was doled out with too few strings attached and insufficient oversight.

But as the economy weakens and unemployment rises, the pile of bad debts on bank balance sheets is likely to grow, which may force Obama's administration to take bolder action.

One idea that has been much discussed on Wall Street is setting up a "bad bank" that would serve as a repository for those assets that are difficult to value or sell. Summers did not comment directly on that concept, although other members of Obama's economic team have mentioned it as an option.
Repeal tax cuts

Summers said Obama and his choice for Treasury secretary, Timothy Geithner, would provide more detail on economic policy in the coming weeks, but they said an $825 billion stimulus package working its way through Congress is the proper size and shape to help revive the economy.

Responding to criticism that the package contained too little immediate help, Summers said Obama was committed to spending three-quarters of that sum in the first 18 months.

"We're not going to rush things to the point of being wasteful," Summers said. Items like tax cuts and aid for state and local government would provide quick assistance, he added.

While Obama has pledged tax reductions for 95% of households, Summers said Bush's tax cuts must be repealed because the country is facing a severe budget gap and a massive longer-term entitlement spending burden.

"I don't think there's any question they have to be repealed," Summers said. "The country can't afford them for the long run. They have to be allowed to expire. What the timing will be, that's something that's got to get worked out through the legislative process."

Summers would not say when he thought the tax cuts should be eliminated, and the leader of the House Republicans said he did not think that would happen this year.

"I've got my doubts whether they'll be bold enough to do that," Rep. John Boehner of Ohio said on "Meet The Press". To top of page
Mr. President...we've got a plan: Crack down on credit-card companies. Help small businesses. Everyday Americans tell Barack Obama how they'd save the economy.

Saturday, January 24, 2009

New Fannie, Freddie rules on the way

The federal regulator of Fannie Mae and Freddie Mac will set new rules early next week governing the mortgage finance companies' portfolios, which play a crucial role in the nation's housing market.

The Federal Housing Finance Agency is required by Congress to issue regulations ensuring the companies' portfolios are backed by sufficient capital, while keeping in mind their ability to provide funding for the mortgage market by turning home loans into securities. Their portfolios contain mortgages and securities backed by home loans.

The agency will also establish new capital rules for the 12 regional Federal Home Loan Banks, which provide much-needed low-cost funding for more than 8,000 banks nationwide. The home-loan banks have suffered in the economic crisis and may have to reduce their lending to shore up their finances.

"The regulations will address items critical to the safety and soundness of the 14 government-sponsored enterprises, which play a vital role in the nation's mortgage market," said James Lockhart, the agency's director.

Analysts, however, say it's more important to determine the future of Fannie and Freddie, which were taken over by the federal government in September, than to issue portfolio regulations.

"What Congress decides to do with these two companies is the real question," said Jonathan Koppell, associate professor at the Yale School of Management.
Portfolio problems

Fannie and Freddie are the largest sources of funding for the U.S. housing market. They buy mortgages from lenders and either hold them on their books or bundle them into securities. The companies also buy mortgage-backed securities.

Their $1.7 trillion portfolios have long been a source of controversy. Regulators had capped the growth of the companies' portfolios after the pair emerged from accounting scandals earlier this decade in an effort to minimize their riskiness.

But as the mortgage crisis unfolded over the past two years, the federal government has leaned more heavily on Fannie and Freddie to keep the housing market afloat. With investors shying away from buying mortgage-backed securities, the two companies are essentially the only players in the arena nowadays. Regulators lifted the portfolio caps last March.

Fannie and Freddie, however, continue to suffer as delinquencies rise. On Friday, Freddie announced it would ask the U.S. Treasury for up to $35 billion more in assistance as it anticipates losses in its fourth-quarter results. The company has already drawn down $13.8 billion of the $100 billion in federal funds made available to it when it was placed into conservatorship in September.
Trouble at FHLB

Meanwhile, the agency must also set capital requirements at the Federal Home Loan Banks, which are owned by the 8,000 member banks but have an implicit government guarantee. Established during the Great Depression, the home-loan banks are the nation's largest source of residential mortgage and community development credit. They provide low-cost loans, called advances, to member institutions, taking collateral such as high-quality mortgage-backed securities in exchange. Banks nationwide have increasingly relied on the home-loan banks for crucial funding as other sources dry up.

But as the value of the mortgage-backed securities drops, the home-loan banks are facing a credit crunch of their own. Some have cut back their dividends. Others have announced they may fall below their current capital requirements.

If the Federal Housing Finance Agency ups the home-loan banks' capital rules, they may not be able to lend as much. But that may not be a bad thing, experts said.

"The problem of the last five years is that people were doing too much lending," said Thomas Stanton, a lecturer at Johns Hopkins University. "They cannot be as big as everyone would like."

How gold got its luster back

How can you tell that this is yet another panic phase of the market? You can look at plunging stock prices. But the recent surge in the price of gold really tells the story.

Gold gained more than 4% Friday to finish at about $896 an ounce. Gold prices have shot up more than 10% in just the past week. If this trend continues, gold should soon climb back above $900 for the first time since October.

This wouldn't be a huge surprise. Most of the financial news this week has been terrible.

Bank stocks are plunging on fears that some of the most troubled, such as Citigroup (C, Fortune 500) or Bank of America (BAC, Fortune 500), might have to be nationalized. Microsoft (MSFT, Fortune 500) announced its first layoffs in its history. And GE (GE, Fortune 500) reported a 44% drop in fourth-quarter net income Friday morning.

Simply put, gold does well when investors think the world is coming to an end. It's a hard asset, which makes it a more stable bet than stocks, corporate bonds and currencies.

"Where do you hide if you want to be defensive? There are fewer and fewer places," said Axel Merk, president of Merk Mutual Funds a Palo Alto, Calif.-based money manager specializing in currency investments.
Talkback: Will gold hit a new high in the next few months?

Just take a look at the gold price chart to the right and you'll see an obvious pattern. A surge in gold prices always corresponded with an increase in investor fear.

Gold hit a record high last March, rising above $1,000 during the height of the Bear Stearns meltdown. But gold retreated to around $900 over the next few months as investor worries subsided...temporarily.

Gold flirted with $1,000 again in July as investors started to worry about the future of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), and oil prices were hitting record highs.

Gold began to slide again until September, when the collapse of Lehman Brothers and a string of catastrophes drove the metal past $900. And it fell back again, to $712.50, when the bank bailout briefly restored confidence.
Why gold could hit $1000 again

And now gold is on fire again. So what's next? Does it break $900 and head back toward $1,000? Or will investor fears diminish once this dreadful fourth-quarter earnings period is over and hopes turn to the possibility of another economic stimulus package?

Last June, I took a lot of flack from readers for suggesting that gold would not pass $1,000 again in the near future. That turned out to be right. But now, some experts are starting to think that a return $1,000 gold is not out of the question.

"Over the next two to three months, gold is very likely to break above the peak," said Carlos Sanchez, associate director with CPM Group, commodities research firm based in New York.

"With financial volatility, economic sluggishness and what's going on politically around the world, most notably in the Middle East, this all creates a formula for prices to head higher," Sanchez added.

Still, what's remarkable about the most recent rise in gold is that is has been accompanied by relative strength in the dollar. Gold often rallies when the dollar is was the case last summer.

But just because the greenback has rallied from last year's lows, it may not continue to do so, notes Ashraf Laidi, chief market strategist with CMC Markets, a currency and commodities brokerage firm based in London.

"Even though we are seeing some gains in the dollar lately against the euro, traders are all too aware that fundamentals in the U.S. remain weak," Laidi said. "So the dollar remains dysfucntionally high."

In addition, Laidi said that if gold surpasses $900 anytime soon, that could attract more average investors to the currency.

"There is a lot of cash on the sidelines. If gold breaks above $900, it will be in all the headlines and people will chase that and push it higher," he said.

All that said, it's likely that gold will remain as volatile as other investments over the next few months. It won't shoot up in a straight line.

In fact, both Sanchez and Laidi said that -- somewhat paradoxically -- if the economy gets substantially worse over the next few months, investors may take profits in gold and flock to Treasurys as a way to preserve cash.

But Merk points out that longer-term, he's bullish on gold since he thinks that inflation, and not deflation as many fear, will once again become an economic concern.

That's because he expects all the money the government has pumped into the system through rate cuts, bailouts and lending programs will eventually lead to inflation.

"If not for stimulus, we probably would have deflation. But the cure to the disease will make gold go up," Merk said. "At some point, all this money will stick in the economy and it will be impossible to mop up all that liquidity."

Friday, January 23, 2009

Tax cut: When will workers get it?

Congress is racing to pass a giant bill to stimulate the economy. But a key piece of it may be a little slower in coming than many people expect.

The biggest single tax break in the Democrats' proposed economic recovery package is the $145 billion "Make Work Pay Credit."

The credit, which President Obama championed, would reach close to 95% of workers and be paid primarily through paychecks. It would be worth $500 per worker or $1,000 for working couples who file jointly. The full credit will be available to those making $75,000 or less, or $150,000 or less for couples. Even workers in those income groups with no tax liability would get it.

The bill is still being debated. But as things currently stand, workers may not see that money until June. And some of the lowest wage workers -- those who economists say are most likely to spend the money rather than save it -- may not see their credit until they file their 2009 federal tax return sometime next year.

But for the credit to be paid out in workers' paychecks, employers will need to change how much tax they withhold. And they would need new withholding tables from the Treasury Department to do that.

Thomas Barthold, a deputy chief of staff at the Joint Committee on Taxation, told lawmakers on the House Ways and Means Committee on Thursday that he understood Treasury may not be able to get those tables to all employers before June 1.

That means it could take 15 weeks if the bill is enacted by President's Day, as Democrats have promised.

The American Payroll Association paints a slightly more optimistic picture. The trade group, which represents payroll specialists, was told by Senate staffers that Treasury might need only 10 weeks to revise and distribute the withholding tables, said Michael O'Toole, APA's senior director of government relations and publications.

Meanwhile, a Ways and Means staffer told Thursday, "We've heard they will do them as quickly as possible."

A Treasury spokesman was not immediately available for comment.
Timing is everything

Economists have been urging lawmakers for months to act swiftly to get money distributed to states, businesses and consumers to help stem the economic downturn. And many, like Lakshman Achuthan, managing director of Economic Cycle Research Institute, have stressed that the timing of stimulus is paramount to its success.

"This would have been great a year ago, but now consumers are so defensively oriented that the boost to the economy will be more limited," Achuthan said. "Any substantial delay from today increases the risk that the economy will tumble into a much deeper recession, which will be all the more difficult to climb out of later."

Mark Zandi, founder of Moody's whose research has been relied upon by the Democrats to make their case for stimulus, was a little more optimistic. He said June 1 is not too late but that an earlier start would help boost the economy more.

"Every day matters," Zandi said. "The economy will be under severe pressure early this year, and the benefit of the stimulus could be overwhelmed if it doesn't get into the economy quickly."
Low-income workers may wait longer

Even if Treasury is able to turn out new withholding tables on a dime, the way the provision is currently structured, the lowest income workers may not see their 2009 credit until the first quarter of 2010.

"The biggest sticking point is for people who have very little or no income tax withheld because they earn too little or take a lot of exemptions. They'd have to wait for some or all of their credit until they file [their tax return]," O'Toole said.

Of course, the lowest paid are also those most likely to be living paycheck to paycheck and more likely to spend the money quickly.

Even middle-income folks will have to wait to get some of their 2009 credit since the full $500 per worker likely wouldn't all be paid out this year since it would go into effect after a considerable number of pay periods have passed. Workers could claim the unpaid portion of the 2009 credit on their federal tax return due April 15, 2010, according to the Ways and Means Committee.

GE earnings dim by 47%

General Electric Co. on Friday reported a 47% decline in fourth-quarter earnings per share that was at the low end of its expectations, and lower revenue that was below analysts' forecasts.

GE (GE, Fortune 500) reported earnings from continuing operations of $3.9 billion in the final quarter of 2008, or 36 cents per share attributable to common shareholders, including a one-time restructuring charge of $1.5 billion. The conglomerate earned 37 cents per share in the fourth quarter before preferred dividends.

A year earlier, the company posted earnings from continuing operations of $6.8 billion, or 68 cents per share.

Including the restructuring charges, analysts were expecting earnings per share of 37 cents. The company announced in December that it expected to earn between 36 and 42 cents per share including the charge.

"In a very tough environment, we delivered fourth-quarter business results in line with expectations we provided in December," Chairman and CEO Jeff Immelt said in a written statement.

GE posted sales of $46.2 billion for the quarter, down 5% from the fourth quarter of 2007. That was less than the $50.1 billion that analysts were expecting.

The company's strongest sector in the quarter was energy infrastructure, or power generation, which posted an 11% growth in profit on the back of a 21% growth in sales.

But the capital finance division's revenue declined 17% in the quarter and profit fell by 67%. The consumer and industrial sector had a 17% revenue decline and an 86% drop in profit.

The company also said it remains committed to providing the annual dividend of $1.24 per share.

"The first quarter dividend is done, and we are committed to our plan for $1.24 per share for the year," said Immelt in the statement. "We believe the GE dividend provides our investors with a solid return in this uncertain time."

Analysts have questioned whether the company will be able to continue to pay out an annual dividend and still maintain its perfect credit rating, but the company said it was committed to doing both.

"We run the company to have a Triple-A credit rating, and we have significantly strengthened our liquidity position," Immelt said. He said GE has been able to fund $29 billion of its $45 billion long-term debt needs for 2009.

Immelt also said, however, that the coming year was going to be rough. "We expect 2009 to be extremely difficult," he said in a statement.

GE's finance arm, GE Capital, earned $1 billion in the fourth quarter and a total of $8.6 billion for the full year.

The unit has taken a hit since the U.S. economy went into recession in December 2007 as pipelines of credit dried up. The finance arm of the conglomerate offers insurance coverage, credit cards, and commercial and personal loans.

In the company's December outlook, GE said it expects the financial services arm to earn $5 billion in 2009. Immelt maintained this outlook in the fourth quarter earnings announcement.

For all of 2008, earnings from continuing operations were $18.1 billion, or $1.78 a share, down 19% from $22.5 billion, or $2.20 a share in 2007. sales rose 6% to $183 billion.


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Thursday, January 22, 2009

Stock selloff accelerates

Stocks tumbled Thursday morning as Microsoft's earnings disappointment and job cuts and more bad news on the housing sector overshadowed any enthusiasm about Apple's upbeat earnings.

The Dow Jones industrial average (INDU) fell 180 points or 2.3%, over an hour into the session after earlier shedding more than 200 points. The Standard & Poor's 500 (SPX) index tumbled 19 points or 2.3% and the Nasdaq composite (COMP) lost 45 points or 3.1%.

Stocks surged Wednesday on IBM's earnings and a bounce in some of the bank shares hit in the recent retreat. Investors also welcomed signs that Treasury Secretary nominee Tim Geithner is likely to be confirmed.

But the gains proved unsustainable Thursday as investors sorted through a mix of earnings and a pair of dour housing market reports.

Microsoft: The tech leader said it will cut up to 5,000 jobs over the next 18 months due to the impact of the recession. Microsoft (MSFT, Fortune 500) also reported lower fiscal second-quarter earnings that missed estimates on slightly higher revenue that also missed estimates.

Apple: The company reported higher fiscal first-quarter sales and earnings late Wednesday that topped estimates. Apple (AAPL, Fortune 500) also issued a fiscal second -quarter sales and earnings forecast that was short of analysts' estimates. But investors focused on the earnings and sent shares 7% higher Thursday morning.

Other company news: After the market close Wednesday, eBay (EBAY, Fortune 500) reported a lower fourth-quarter profit that nonetheless topped estimates. The online auctioneer also issued a current-quarter profit forecast that is short of expectations. Shares fell 11% Thursday.

Also late Wednesday, Intel (INTC, Fortune 500) said it was shutting sites in Asia and scaling back U.S. operations in a restructuring move that will affect up to 6,000 people. Shares fell 3.7%.

In other news, the chief executives of Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500) bought some of their companies' stock last week, according to separate SEC filings. However, the news failed to lift either stock Thursday, with BofA falling 12% and Citigroup falling 14%.

Economy: Housing starts and building permits both tumbled to record lows in December, the government reported. Permits fell 10.7% from November to an annual rate of 549,000 in December. Starts fell 15.5% from November to an annual rate of 550,000. The declines were worse than expected, according to a survey of economists.

A separate report showed that weekly claims for unemployment rose to a 26-year high last week, rising 62,000 from the previous week to 589,000. Economists from the

Bonds: Treasury prices slipped, raising the yield on the benchmark 10-year note to 2.57% from 2.52% Wednesday. Treasury prices and yields move in opposite directions. Yields on the 2-year, 10-year and 30-year Treasurys all hit record lows last month.

Lending rates tightened. The 3-month Libor rate increased to 1.16% from 1.12% Wednesday, according to Overnight Libor rose to 0.21% from 0.19% Wednesday. Libor is a bank-to-bank lending rate.

Other markets: The dollar fell against the euro and the yen.

U.S. light crude oil for March delivery fell $1.01 to $42.54 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery rose $4.80 to $856.50 an ounce.

Gasoline prices rose two-tenths of a cent to a national average of $1.85 a gallon, according to a survey of credit-card swipes released Wednesday by motorist group AAA.

Oil falls 6% after inventory report

Oil prices fell Thursday after the nation's supplies of crude and gasoline expanded much more than expected last week.

Light, sweet crude for March delivery was down $2.80 to $40.74 a barrel on the New York Mercantile Exchange. Oil was down $1.30 a barrel just before the figures were released.

In its weekly inventory report, the Energy Information Administration said the nation's supplies of crude oil rose 6.1 million barrels in the week ended Jan. 16.

Analysts were expecting crude stocks to have grown 1.9 million barrels, according to a survey by energy research firm Platts.

Supplies of gasoline rose 6.5 million barrels, and supplies of distillates - used to make heating oil and jet fuel - rose 800,000 barrels last week, according to the EIA report.

Gasoline stocks were forecast to rise 1.9 million barrels and distillates supplies were expected to be down 2.25 million barrels.

This week's report, which is normally released on Wednesday, was postponed until Thursday due to the observance of Martin Luther King Jr. Day on Monday.

Wednesday, January 21, 2009

IBM propels stocks

Stocks rallied early Wednesday, bouncing after the previous session's steep decline, as a positive earnings report and forecast from IBM helped temper ongoing worries about the auto and banking sectors.

The Dow Jones industrial average (INDU), the Standard & Poor's 500 (SPX) index and the Nasdaq composite (COMP) all gained in the early going.

Stocks tumbled to two-month lows Tuesday as investors weighed President Obama's historic inauguration with the ongoing recession.

Robert Brusca, chief economist at Fact and Opinion Economics, said the markets were see-sawing from Tuesday's surprise sell-off.

"You would have thought that a new president, one that is greatly heralded and was very active even before he took office, would have heralded something more than that," said Brusca. "Maybe the markets were saying good-bye to (former President George W.) Bush."

"Today's market is best viewed as an unwind of yesterday's inexplicable sell-off," he said.

Earnings: Automaker General Motors (GM, Fortune 500) said that global sales fell 10.8% in 2008 - causing GM to fall behind Toyota as the world's leading seller for the first time. Nonetheless, shares gained almost 2%.

But tech bellwether IBM (IBM, Fortune 500) offered some good news. The company reported better-than-expected quarterly earnings after U.S. markets closed Tuesday and issued a 2009 profit outlook that topped Wall Street's expectations. Shares gained 7%.

On Wednesday, Abbott Labs (ABT, Fortune 500) matched earnings expectations for the fourth quarter, with profit of $1.06 per share, and slightly beat sales projections, with revenue of nearly $8 billion. The drugmaker's stock gained 2%.

Job cuts: The world's largest mining company, BHP Hilton (BHP), said that 6,000 workers would be laid off as a result of production cuts. Around 550 cuts will come from the United States. Shares inched higher.

The Swedish telecom giant Ericsson (ERIC) said it would cut 5,000 jobs in the attempt to save $1.2 billion in costs in 2009. About 1,000 of the job cuts will be in Sweden, where the company is headquartered. This was in spite of a strong fourth quarter for the company, with a 23% surge in sales. Ericsson shares jumped 14%.

Geithner hearing: Tim Geithner, President Obama's choice as Treasury secretary, will appear before the Senate Finance Committee for his confirmation hearing.

Geithner has spent six years as president of the Federal Reserve Bank of New York, but tax problems have clouded his nomination. (Full story)

World markets: Economic fears pressured stocks in Asia and Europe. Japan's Nikkei lost 2%. European indexes were mixed in afternoon trading.

Oil and the dollar: Light crude oil for March delivery rose 36 cents a barrel to $41.20. The dollar was lower versus the euro but rose against the yen and the British pound.

Geithner calls for tougher bailout terms

Treasury Secretary-designate Tim Geithner called for bold action to blunt the economic downturn and promised to tighten the terms for companies getting federal financial help.

In prepared remarks to be delivered Wednesday morning before the Senate Finance Committee, Geithner called on senators to support the Obama administration's $825 billion stimulus plan. The comments come as the Senate panel prepares to consider whether to confirm Geithner as the nation's top financial officer.

"Senators, the ultimate costs of this crisis will be greater, if we do not act with sufficient strength now," Geithner's testimony read. "In a crisis of this magnitude, the most prudent course is the most forceful course."

In his testimony, Geithner -- who is currently the president of the Federal Reserve Bank of New York -- also advocated "aggressive action to address the housing crisis and to get credit flowing again," though he offered no specifics.

The comments come a day after President Obama took office, only to confront the worst-ever Inauguration Day selloff in the stock market.

The Dow Jones industrial average dropped 4% Tuesday, led by another free fall in bank stocks. The KBW Bank index plunged 20% to its lowest level since 1994, amid worries that big financial institutions such as Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) will require additional federal aid that could wipe out shareholders.

Geithner said that if confirmed as Treasury secretary, he would work to reform the government's most visible response to the financial sector crisis -- the $700 billion financial bailout plan enacted by Congress last fall after September brought the collapse or takeover of six major financial institutions.

The Bush administration's approach to the Troubled Asset Relief Program, or TARP, has become deeply unpopular with legislators and the public.

Many skeptics complain that there was no plan in place to make sure the first $350 billion in government funds were used to boost lending to consumers and businesses.

Geithner said a revised TARP plan will contain "tough conditions to protect the taxpayer and the necessary transparency to allow the American people to see how and where their money is being spent and the results those investments are delivering."

The comments echo those made recently by another top Obama economic aide, National Economic Council chief-designate Larry Summers.

Addressing another prominent concern, Geithner promised to develop a plan to unwind the government support for financial markets and institutions as soon as possible, and to develop a plan to put the nation on sounder footing fiscally.

The budget deficit is expected to exceed $1 trillion in coming years as tax receipts plunge and federal spending expands to fill the shrinking private sector.

"We need to demonstrate with clear and compelling commitments now, that when we have effectively resolved the crisis and recovery is firmly established, that as a nation, we will return to living within our means," Geithner said.

The hearing -- starting with testimony by Geithner and statements by the leaders of the Senate Finance Committee, Max Baucus, D-Mont., and Chuck Grassley, R-Iowa -- is expected to focus on these points as well as a discussion of Geithner's tax status.

The hearing was originally set for last week, but it was pushed back after it came to light that Geithner -- who as Treasury secretary would oversee the IRS -- had failed to pay in timely fashion some $34,023 in self-employment taxes between 2001 and 2004.

Obama's team dismissed the tax problems as a "common mistake," and Geithner has since paid the required taxes and interest. Obama's chief of staff said Sunday the president "absolutely" supports the nominee.

Though as head of the Treasury Geithner would oversee the IRS, many observers have dismissed the tax questions as paling in comparison to the need to address the crisis in the economy and financial markets.

"I'm interested in hearing his explanation for the tax stuff, but that's minor next to the other issues," said New York University finance professor Roy Smith. "What I want to know is what he's learned from the first half of the TARP."

Monday, January 19, 2009

Madoff does Minneapolis

Tucked into the rolling hills of Hopkins, a suburb west of Minneapolis, the recently refurbished Oak Ridge Country Club looks much like a middle school: beige paneling, a limestone base, and energy-efficient windows. Along the main road to the club is a modest apartment complex with four signs advertising units for rent. Beyond Oak Ridge's modest doors, however, is a well-appointed interior that provides a gathering place for some of the wealthier families in the Twin Cities.

In Minnesota's warm summers the club's golf course, tennis courts, and playground bustle with prosperity, but this winter, with the grounds buried in snow, the conversation at Oak Ridge has turned as grim as the weather. Typically at such clubs, members swap tips and ideas. People you golf with, after all, are usually people you trust. And for more than 20 years some of the members have enthusiastically shared one notable financial strategy: investing with Bernard L. Madoff.

The predominantly Jewish country club, which dates back to 1921, is the hub of the scandal in the Cities. While fraud victims in Manhattan, Palm Beach, Hollywood, and European cities have grabbed the headlines, Madoff's alleged $50 billion Ponzi scheme reached other towns as well. He had a particularly painful impact on the Cities, where his method of preying on Jewish families and foundations was highly effective in this close-knit and long-established community.

While some regional reports put the losses at $300 million, a local attorney working with victims believes $600 million is a more accurate number. He knows of two families who lost a total of more than $130 million. Dozens of other families lost smaller amounts, representing everything from children's college savings to retirement accounts, while local Jewish-funded philanthropies find themselves scrambling to pay for basic core missions for the poor.

As a native of St. Paul, I returned to find my hometown stunned to be a victim of this kind of crime. I know it as a place of quiet money and conservative investors, where the banks rarely need bailouts and the great fortunes created by the likes of Pillsbury, General Mills, and Cargill keep a low profile. But financial scandal has rocked the Twin Cities twice in one season. By a strange coincidence, just two months before the Madoff case broke open, the celebrated local tycoon Tom Petters was arrested and charged with 20 felony counts for his own alleged Ponzi scheme in which he took $3.5 billion from investors. His tactics, in part, were similar to Madoff's, prosecutors allege: He preyed on a religious community, in this case members of his own evangelical Christian faith.

Madoff, operating remotely from Manhattan, developed a network of local feeders to steer business his way, and in the Twin Cities he had a good one: Mike Engler, an unassuming stockbroker. Engler, as part of Engler & Budd securities, backed small, local stocks that traded on the more obscure edges of the financial markets, making him as different from the posh and powerful Madoff as Minneapolis is from Manhattan. Engler began his work in the 1980s, steering families into the machine with promises of sterling but not spectacular investment performance - usually returns of around 12% per year.

The Oak Ridge Country Club, whose online history says it was founded for everyone in town "who knew the difference between a golf ball and a matzo ball," was fertile ground for Engler. Madoff investors became like a club within a club. "The illusion was created that Bernard had to pick you to be in there," Minneapolis asset manager John Pohlad told the St. Paul Pioneer Press. "Madoff was one of the most difficult to compete against because he had so much momentum and mystique about him."

Even after Engler's death in 1994, the money kept flowing to Madoff as estate lawyers and financial advisors kept up the tradition and families extended their participation, adding new generations to the mill. Besides soaking members of the Oak Ridge Country Club, Madoff worked the other side of the Mississippi river too, attracting a smaller following at Hillcrest Country Club, a predominantly Jewish golf course in St. Paul.
'A safe and conservative investment'

Bruce Graybow, president of Graybow Communications in the Minneapolis suburb of Golden Valley, became familiar with Madoff through Graybow's late father, Marvin, who had regarded Engler as an "honorable" and "trusted" family friend, Graybow told Fortune. After his father sold the family's plumbing and heating business, the family poured that money into Madoff's firm. Bruce built his own business, which provides corporate audio-visual systems, and eventually sold a chunk of it in 2007. As his father and friends had done, he placed most of the proceeds with Madoff.

"I saw this as a safe and conservative investment, a good place to put my discretionary savings," says Graybow. "When I found out what happened, I was shocked and in absolute disbelief." He also felt physically ill and went into a cold sweat. "I put on my coat, and I walked to my friend's house down the street to gather my thoughts and sort things out."

The losses have affected people of much smaller means. One woman had kept her ties to Madoff secret for more than a decade. She was a mistress of a rich and powerful man in the Twin Cities. After a chance meeting in a park, they began a relationship that lasted nearly 20 years and included a promise that he would always take care of her. Once every quarter, a check from a Swiss bank account that included the name of Madoff's securities firm arrived in her mailbox.

She moved into a new apartment, got a nice car, and like many associated with Madoff, gave away some of the money to charities and favored causes. She had a habit of reading the New York Times to keep track of the world she had intersected with in secret. Even after the man's death a few years ago, the checks continued to arrive on schedule. "Then one morning I pick up the Times, and there's Bernie," she recalls. "What's he doing in the paper? I read the article and realized that my life was over." Now she is struggling to find a way to survive, relying heavily on the generosity of friends. The check scheduled for the first week of January didn't arrive, as she expected, and her car has been repossessed.

Just as the Madoff scandal devastated charities on the coasts, including foundations associated with Elie Wiesel and Stephen Spielberg, it hit hard in the Twin Cities, which are notably proud of their philanthropy. The impact of Madoff's machinations can be seen down to the street level. "As difficult as this tragedy is for some families, it's the loss to the poor and to the charitable programs in the Cities that is even worse," said Andy Parker, an attorney who represents some Madoff victims.

Human-rights activism, a Minnesota passion that ranges from voting-rights efforts to campaigns aimed at shutting down the military prison at Guantánamo Bay, has been set back by the scandal. "A lot of money has just disappeared. It's beyond shocking, the widespread damage that has resulted from this behavior," said Barbara Frey, director of the human rights program at the University of Minnesota. "Local charities played a strong role in funding this work, and a lot of them are all of a sudden out of cash."

Many of their supporters find themselves in the position of Violet Werner, a member of the Oak Ridge Country Club whose late husband owned a trucking company and set up a small foundation to support local arts and cultural groups. The foundation had $1.6 million in assets, much of it invested with Madoff. "The whole thing is just the most horrible scam I've ever heard of," she told the Minneapolis Star Tribune. "This money went to help people in need, and to people who do wonderful work. I'm so sad I can hardly speak."

Among the Minnesotans absorbing the news were workaday people who most likely had never heard of Madoff. One company, Upsher-Smith Laboratories in suburban Maple Grove, a generic-drug company with 650 employees, placed some of its profit-sharing programs for its employees with Madoff. These Upsher-Smith accounts, which reportedly had built up to more than $100,000 for some workers, were frozen when the Madoff scandal came to light. A representative of Upsher-Smith declined to comment.

Even the state government is concerned about Madoff's impact. Because of the allegedly fraudulent nature of returns associated with Madoff, many investors will have the right to reclaim taxes paid on phantom gains at the state and federal level. Given the parlous state of the economy, governments are already scrambling for tax revenue. For a state like Minnesota, the highly localized impact of the losses and the potential for refunds on taxes paid by investors in both the Madoff and Petters cases could have significant consequences.

How is it that the Twin Cities found themselves sharing headline space with Palm Beach and Hollywood? While one seldom sees a Rolls-Royce or other public displays of wealth, the Cities have no small number of rich families. Older money associated with James J. Hill's Great Northern Railroad and the Weyerhaeuser timber fortune clustered around St. Paul. In Minneapolis descendants of the early grain millers and grain traders held sway. This money moved quietly in the shadows, seldom drawing much attention to itself. The wealthy who came later, including the Jewish community, also embraced the understated approach to money.

Since the Twin Cities aren't particularly large, some families preferred to invest with money managers in New York or Chicago. "That made it less likely that you'd run into someone at a dinner party or other social function who knew exactly how rich you might be," said an attorney representing local victims.
Under the radar

For Jewish Minnesotans, conforming to the quiet-money standards of the Twin Cities had another benefit: It kept latent anti-Semitism at bay. The Jewish population, despite its relatively small size of about 50,000, or 1% of the total, has had a large impact on philanthropy and politics in Minnesota. Al Franken and Norm Coleman, the two candidates in November's senate race, are both Jewish. Despite this public-sector success, fear of a backlash has always lingered, especially since the Twin Cities were not a welcoming place for Jews as recently as the postwar era. In 1946 progressive author Carey McWilliams called Minneapolis the "capital of anti-Semitism in the United states." Indeed, many Jewish families have expressed alarm that the Madoff scandal will evoke darker thoughts.

"There's always some anti-Semitism, and [the scandal] becomes fodder for those gristmills," says Harlan Jacobs, who runs a small-company investment incubator in the Twin Cities and is past president of the local Jewish Community Relations Council. "People who hate will hate, and this unfortunately will give them more excuses to do so."

Members of Oak Ridge, meanwhile, have worried that the scandal might threaten the future of their 88-year-old club. Speculation reached such a pitch that club president Rom Zamansky, a Minneapolis attorney, sent a note to members saying that the club would pull through fine. In that letter he extolled the charitable work of Oak Ridge members and admonished members not to talk to the media about Madoff.

Most Jewish houses of worship are already struggling financially amid the economic downturn, and the Madoff situation could make things tougher in the near term. But some rabbis have sought to turn the Madoff scandal into a teaching moment. Not far from Oak Ridge, at the Beth El Synagogue in the Minneapolis suburb of St. Louis Park, Rabbi Alexander Davis maintains an optimistic mien. He acknowledges that people are shocked and that some feel the scandal has brought shame to the Jewish community. At the same time, he feels this is a chance to get a spiritual message across. "It's definitely an opportunity, whether we wanted it or not, to rethink our values," says Davis. "We need to examine the cultural norms that allowed us to get into this situation. There's an opportunity to reorganize our thinking so that it better reflects our priorities."

In a letter to his members during Hanukkah in December, he decried Madoff as one who would steal from his own people. "This year the lights of may seem dimmer, the gifts may be fewer," he wrote. "But the message of Hanukkah continues to shine forth brightly. We will not allow Madoff - the Grinch who stole Hanukkah - to dampen the message of Hanukkah. For the light of Hanukkah is not the sparkle of gelt but the spirit of god."

What about the laws of men - can they provide for any recourse to the alleged Madoff sins? Alas, attorneys representing victims are finding it hard to unlock the Madoff puzzle. Some prominent class-action attorneys see no real path to recover lost investments. "He cut a fairly large swath through here, and it's a terrible, awful tragedy," said Karl Cambronne, an attorney in Minneapolis at Chestnut & Brooks. "But as we look at the details, we just can't see anything we can do to help."

One reason that locals are so reticent is that not a small number, like the mistress who spoke to Fortune, received funds throughout the alleged scam. Foundations regularly drew down from their endowments invested with Madoff. The potential for "clawbacks," or litigation to wrest money from those who got cash out of Madoff before the scandal surfaced, remains high. Local attorneys are still scrambling to find some angle to recoup losses. The hunt includes a search for potential fiduciaries, those who might have offered enough advice to bear some responsibility for the failed investments. But many lawyers are skeptical about finding a successful legal strategy beyond the standard bankruptcy path and possible recovery of some assets via the Securities Investor Protection Corp.

Graybow, the communications entrepreneur and victim, is particularly incensed that the government failed to spot Madoff's mischief despite repeated warnings and several investigations into the firm. "It is shameful that after numerous inquiries from the investment community," Graybow says, "the regulators didn't thoroughly research and investigate the truth and uncover the underlying mechanics of the Madoff operations."

He believes a government fund for victims is an appropriate solution, citing the failure of regulators to catch Madoff. At a time when everyone from auto companies to investment banks to state governments is holding a hand out to the government, Graybow's notion might have a chance, at least in theory. But in reality, the line at the government till is already very long and is likely to grow longer. For some members of the Oak Ridge club, the only solace may be springtime, which will come not a moment too soon.

Sunday, January 18, 2009

Stocks: Here come the earnings

Investors not fixated on the inauguration will be bemoaning corporate health as the first big wave of quarterly results are unleashed upon the markets. And it could get ugly.

"Analysts still haven't ratcheted down their earnings expectations enough, so we'll probably see a lot more negative surprises than positive ones," said Timothy Ghriskey, chief investment officer at Solaris Asset Management. "But offsetting this will be optimism about the new administration."

Some 180 companies are slated to report results this week. Currently, 55 S&P 500 firms, including five Dow components are on tap. Standouts include Johnson & Johnson (JNJ, Fortune 500), IBM (IBM, Fortune 500), United Technologies (UTX, Fortune 500), Apple (AAPL, Fortune 500), eBay (EBAY, Fortune 500), Google (GOOG, Fortune 500), Microsoft (MSFT, Fortune 500), and General Electric (GE, Fortune 500).

A few housing reports are also scheduled, but the week is otherwise light on economic news. Financial markets are closed on Monday for Martin Luther King Jr. Day.

Tuesday's big event is of course Inauguration Day, when Barack Obama will be sworn in as the 44th president. It appears likely that Obama will waste little time making his mark on the economy: Expectations are growing that he will soon announce plans for the second $350 billion set aside to bail out the financial system.

Stocks should get a boost from enthusiasm about the inauguration, but any big earnings disappointments could dampen that, said Ghriskey.

Stocks have had a rough go in the new year. A two-session advance at the end of last week took the edge off a decline that saw the Dow falling back to within range of the bear market lows it hit last November.

The financial sector has been especially battered, with the KBW Bank (BKX) sector index losing 28% year-to-date versus the S&P 500's loss of nearly 6%.

Bracing for weak earnings: Fourth-quarter earnings are expected to have slumped 20.2% from a year ago, according to earnings tracker Thomson Reuters. That would make it the sixth consecutive quarter of shrinking growth for the S&P 500 index.

"What's different this time is that the weakness is spreading," said John Butters, Thomson Reuters' senior research analyst.

He said that in previous quarters, most of the weakness was coming from the financial sector and the consumer discretionary sector, which includes automakers and homebuilders. During those quarters, select sectors were actually posting small gains, while others were close to unchanged.

The financial sector is still expected to be the worst performer in the fourth quarter, with analysts forecasting a decline of 98% from a year ago. But this time, the financials are far from an anomaly, Butters said.

Seven of the 10 economic sectors are expected to post declines, Butters said, as companies across a broad range of industries suffer amid the more than one-year old recession. Healthcare, utilities and consumer staples are the only ones expected to see any growth, and all in the low single digits.

Tuesday: Dow component Johnson & Johnson is expected to report earnings of 92 cents per share Tuesday morning, versus a profit of 88 cents per share a year ago, according to analysts surveyed by Thomson Reuters.

After the market close, Dow component IBM is expected to report earnings of $3.03 per share, versus $2.80 per share a year ago.

Wednesday: United Technologies, another Dow component, is expected to have earned $1.22 per share, up from $1.08 a share a year ago.

Apple reports quarterly earnings after the market close. The tech leader is expected to have earned $1.38 a share versus a profit of $1.76 per share a year ago.

Also reporting after the close is eBay. The online auctioneer is expected to have earned 40 cents a share versus 45 cents a share a year ago.

Thursday: Google is expected to report a profit of $4.96 per share Thursday evening, up from $4.43 a share a year ago.

Microsoft also reports results after the bell. The software giant is expected to have earned 50 cents per share, unchanged from the same period last year.

Friday: General Electric, a Dow component, reports quarterly results Friday morning. GE is expected to have earned 37 cents per share versus 68 cents a share a year ago.

Wednesday: Treasury Secretary nominee Timothy Geithner's confirmation hearing in the Senate is due to begin around 10 a.m. ET.

Geithner was considered a shoo-in but has faced questions lately about his initial failure to pay certain taxes earlier this decade, as well as the immigration status of a housekeeper.

Thursday: December housing starts are expected to have fallen to a 610,000 unit annual rate from a 625,000 unit rate in November, according to forecasts. Building permits, a measure of builder confidence, are expected to have fallen to a 615,000 unit annual rate from a 616,000 unit rate in November.

Friday, January 16, 2009

Benefits on the chopping block

As the recession deepens, companies are looking for ways to cut costs without cutting staff -- and that could mean scaling back on benefits.

Many businesses have already reduced retirement contributions, or eliminated them altogether. Saks Fifth Avenue (SKS), Motorola, FedEx and Ford (F, Fortune 500) are just a few of the companies that announced they would no longer be offering employer matches to 401(k) plans.

But the buck doesn't stop there. Now more companies are considering cutting back costly health coverage and other benefits during tough economic times.

"It's definitely a trend that we're seeing," said Laurie Bienstock, national director of strategic rewards for benefits consulting firm Watson Wyatt. "As there are continued challenges, the numbers are growing."

Benefits for employees cost employers, on average, $8.74 per hour worked, according to a report by the Bureau of Labor Statistics, a bulk of which is credited to health insurance coverage. That's $2.27 per employee, per hour, according to BLS.

To bring that expense down, 20% of businesses have already raised the employee contribution to health care premiums and another 17% plan to in the next 12 months, according to a recent survey by Watson Wyatt.

Bob Eubank, executive director of the Northeast Human Resources Association, said that companies are not looking to eliminate benefits altogether but make them more cost effective -- and that means more expensive for employees.

The average employee contribution to company-provided health insurance has already increased 117 percent since 1999, according the Kaiser Family Foundation.

When companies cut back on healthcare plans, workers will likely see less coverage, in addition to higher deductibles and heftier co-pays.

Twelve percent of the businesses surveyed said they have also reduced or eliminated other employee programs, such as tuition assistance and company subsidized dining, as a way of cutting costs and another 12% plan to do that in the coming year.

Paving the way, Procter & Gamble (PG, Fortune 500) already scaled back its charitable match, Weyerhaeuser (WY, Fortune 500) trimmed retiree healthcare benefits, Google (GOOG, Fortune 500) reduced the number of free meals for its employees and General Motors (GM, Fortune 500) suspended tuition reimbursement.

While there may not be much you can do about losing out on perks like matching charitable contributions or tuition assistance, employees may find that there are cost effective alternatives to expensive health plans that could save the employer, and themselves, some dough, experts say.

"Most companies offer multiple plans and often times people will pick a plan without much thought," said Frank Boucher, of Boucher Financial Planning Services in Reston, Va. "Now is the time to pay attention."

For example, Tim Maurer, director of financial planning at the Financial Consulate, recommends looking into a less expensive High Deductible Health Plan (HDHP) coupled with a Health Savings Account, or HSA.

High Deductible Health Plans have lower premiums than traditional health plans and higher deductibles (the minimum deductible for HDHPs is $1,150 for individuals and $2,300 for family coverage).

Meanwhile, workers can put the excess dollars that would have been going into a more expensive plan into an HSA, Maurer says, which has its own advantages.

Health Savings Accounts let you stash cash for qualified medical and health expenses, like filling prescriptions or even getting massages, on a tax-free basis.

Individual employees can contribute up to $3,000 a year (or $5,950 for families) and take a tax deduction on their contribution.

"It's better off for the company and the employee," Maurer said, it's kind of cool."

Bank Rates

Are you one of those who in the midst of the financial turmoil, was able to save money but don't know what to do with it? If your answer is yes, then I recommend you a site where you can gain a lot of interesting information to help you decide.

Monitor Bank Rates shares the latest financial news, especially on the best certificates of deposit rates also known as CD rates. For newbies, a CD is actually commonly called "time deposit". A CD is somewhat similar to saving accounts but with a twist. Unlike online saving accounts where you are free to withdraw anytime, CD's have fixed terms. The common term is 3 months but some offer up to 5 years. During this times, you can't withdraw your money, but your are guaranteed to earn fixed interest rates. This service is offered by banks, thrift institutions, and credit cards. Your deposit is safe as it is insured by the gov't through FDIC's, at a certain amount. With the stock market going for a wild ride, CD's are a safe bet.

Monitor Bank Rates provides a lot of information on the banks that offer the best cd rates. On one of the post it says "Virtual Bank is offering one of the best CD rates for a 1 month CD, currently the annual percentage rate is 2.40% and the annual percentage yield is 2.43% for their 1 month eCD". How's that for a teaser? Aside from cd rates, you can learn about topics ranging from 0% credit card offers, mortgages and personal finance tips. So what are you waiting for? Visit the site and start putting that savings to good use.

Thursday, January 8, 2009

Windy City's retail downdraft

Chicago faces the worst slump in retailing growth in at least a decade - and residents of the Windy City and its suburbs are paying the price in the form of lost tax revenue for improvements and services.

And because Chicago, the nation's third-largest metropolitan area, is a bellwether of the retail industry, the downturn is a harbinger for other major metropolitan areas.

"This is a very challenging environment," said Mike Jaffe, a Chicago-area retail developer and president of Jaffe Companies. He added that when new retail growth stalls in a metro area the size of Chicago, "that's really saying something."

One example of the situation can be found 36 miles southwest of The Loop, in the village of New Lenox, where there was plenty of excitement among the 25,000 residents about two new malls on the way.

One of the malls - the 1 million-square-foot Cedar Crossings shopping center - is slated to open later this year.

But the second, a 1.2 million-square-foot center developed by Forest City Enterprises that was expected to open in 2010, has "run into issues," according to New Lenox mayor Tim Balderman.

"The landowner wanted more money. Now we're not moving forward. We're very disappointed," he said. "There's no doubt that this economy has hurt us."

The two centers collectively were projected to generate as much as $10 million in property and sales tax revenue annually.

That money would have gone to building and maintaining surrounding infrastructure.

"Illinois hasn't passed a capital improvement bill in years," Balderman said. "So the burden falls on us to find the money for maintaining our roads."

But not all of the $10 million would go to roads.

"I am most disappointed about the jobs these [retail] projects would have created," he said, adding that he's been proud of the fact that he hasn't - as yet- been forced to lay off any employees.

"These are temporary construction work and permanent store jobs that people really need right now," he said.

According to Balderman and others, the situation in New Lenox is being played out in numerous cities and suburbs across Chicago.

Jaffe said the suburbs of Chicago, especially those with greater exposure to the subprime crisis, have seen a bigger downturn in retailing than the more conservative, upper income neighborhoods.

Still, Jaffe, who co-developed The Arboretum of South Barrington, a 600,000 square foot mixed use retail space in an affluent northwest Chicago suburb, said the "pain" is being felt in every area.

He said the Arboretum is 80% occupied. "Normally retailers will be knocking down the door for the last 20% of available space in this kind of location," he said.

Not this time.
Why Chicago matters

"There's no [retail] growth happening anywhere," said Andy Bulson, vice president with Mid-American Real Estate, a retail brokerage firm based in Oakbrook Terrace, Illinois. "Everyone has hit the brakes."

This is significant because Chicago is the third-largest retailing market in the United States, based on population, after New York and Los Angeles.

Marshal Cohen, chief retail analyst with the NPD Group, explained that Chicago historically has evolved as a major hub of the Midwest.

"In the Midwest you don't have many epicenters for shopping. So Chicago's draw is that it pulls people from surrounding areas," said Cohen.

He explained that Chicago has become a shopping Mecca for conservative Midwesterners and folks who live in the South for whom New York is too expensive and Los Angeles a little too "freespirtited."

Chicago's other allure for merchants and mall developers is its proximity to Canada, Cohen said.

"Chicago attracts a tremendous amount of immigration dollars when the dollar is weak," he said. "Many people travel from Toronto to do their shopping in Chicago."

So if no new shopping centers are being built, that's vital future revenue that's lost for Chicago's economy.

"The slowing of the U.S. economy has finally cooled Chicago's robust shopping center development [growth]," Bulson's firm said in its annual survey.

The report showed that new gross leaseable area (GLA), which refers to the total floor space dedicated for retail usage such as a shopping center, power center or lifestyle mall, fell 50% in 2008 over 2007.

The projection for 2009 for the Chicago area is for another 22% drop in shopping center growth.

What's more, the longer the recession lasts, the greater the likelihood that a similar erosion of new retailing activity will quickly spread to other major cities across the country, warned Bulson.

And citing New Lenox's example, Bulson said it is the smaller suburban residential towns outlying these larger cities that are less able to withstand the loss of vital retail revenue and new jobs growth.

Bulson said he's familiar with a number of Chicago-area suburbs where developers have "backed out" of deals to construct large malls.

These developers are either not getting interest from retailers - many of whom are shrinking their store base instead of expanding it - or struggling to get financing for these projects in light of the credit market lockdown, he said.
Shopping center slump

In Chicago, Bulson said "a lot" of new projects need to be finalized in the first quarter, or the estimates for decline in new store growth could be even lower.

Macro-level issues facing retailers such as shrinking margins, lower same-store sales and debt and financing problems will lower new store development for every retailer, he said.

He provided a snapshot of chain stores that have already curtailed their expansion plans in the Windy City.

Target (TGT, Fortune 500), the No. 2 discounter after Wal-Mart (WMT, Fortune 500), has "pulled back on multiple deals around metro Chicago," he said.

At the same time, he estimates that Wal-Mart (WMT, Fortune 500), whose sales have been energized in recent months as more consumers trade down in their everyday purchases, could open as many as seven new supercenters around Chicago.

Home improvement chain Home Depot (HD, Fortune 500) closed its regional office in Chicago last year and will "very likely not open a single new store in coming years," he said.

Among department stores, he said Kohl's could open four new Chicago-area stores this year but J.C. Penney's "future plans appear to be unclear at this time."

Regarding shopping centers, he expects to see a "continued decline" this year.

Even with this gloomy scenario surrounding Chicago, NPD's Cohen sees a bright spot.

"I look at all this as a good sign," Cohen said. "The last place where the recession surfaces is in retailing and retail development."

He pointed out that retail sales didn't see a sizeable slump until the fall of 2008, almost a year after the recession was "officially" said to have started in December 2007.

"Finally, retailing has caught up to the rest of the economy and things will start to pick up again in this industry by the second half of 2009," Cohen said.

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