The number of Americans filing for first-time unemployment benefits dropped sharply from last week to a three-month low, according to a government report released Thursday.
The Labor Department said that initial filings for state jobless benefits fell 24,000 to 467,000 for the week ended Jan. 3.
That figure was the lowest since the week ending Oct. 11, when initial claims were at 463,000.
Jobless claims have eased for the past two weeks since surging to a 26-year high of 589,000 claims reported for the week ended Dec. 20.
Both of the big declines came in weeks that included major holidays - New Year's Day last week and Christmas Day the week before.
The week's reading came in below the 550,000 claims expected by survey of economists compiled by Briefing.com.
The weekly jobless claims report can give economists one of the most up-to-the moment reads on the state of the U.S. economy.
Over the past four weeks, new unemployment claims have fallen by 27,000 to an average of 525,750 a week, from the 552,750 the week prior.
The four-week moving average is designed to smooth out some of the week-by-week fluctuations, and give a broader view of the U.S. job market.
The number of people continuing to collect unemployment insurance for one week or more increased by 101,000 to 4.61 million in the week ended Dec. 27, the most recent data available.
Over the previous four weeks, the number of people on unemployment for one week or more increased by 45,000 to an average of 4.47 million a week, the government said.
The greatest number of layoffs were reported in Wisconsin, with layoffs in construction, Missouri, which reported shutdowns related to the holidays and Kansas, with layoffs in manufacturing.
Many economists believe that in order to create demand for goods and services, the government needs to revamp the economy with stimulus and deficit spending.
In a speech Thursday morning, President-elect Barack Obama will make the case for his stimulus program, which he has said will save or create 3 million jobs over the next two years.
Part of his plan, which is estimated to cost between $675 and $775 billion, would establish a new credit for businesses that either create jobs in the U.S. or avoid layoffs.
Thursday's initial claims report came a day before the government's December jobs report, which is expected to show a decline of 475,000 jobs, with the unemployment rate surging to 7% from 6.7% in November.
In the first 11 months of 2008, 1.9 million jobs have disappeared, including 533,000 in November.
Thursday, January 8, 2009
Wednesday, January 7, 2009
Auto sales outlook: Running on empty
Detroit automakers are no longer in the driver's seat when it comes to their own recovery. The U.S. economy is.
No matter what further concessions the United Auto Workers union makes, what debt relief the automakers win in talks with creditors and what kind of additional federal help is made available, U.S. consumers have to start buying cars again.
And a rebound in sales will be difficult, if not impossible, to come by for General Motors (GM, Fortune 500), Ford Motor (F, Fortune 500) and Chrysler LLC as long as the unemployment rate keeps rising.
This Friday's jobs report is likely to show how difficult it will be for the Big Three to complete their promised turnarounds, even with billions of dollars in loans from the government.
Economists are forecasting a loss of 475,000 jobs in December. The outlook for employment for the rest of this year is similarly grim. The minutes of the most recent Federal Reserve meeting show that staff at the central bank expect the unemployment rate "to rise significantly into 2010."
Faced with this backdrop, independent auto analyst Erich Merkle said that even if auto sales bottomed out in early December, a month when all the major car manufacturers posted sales declines of at least 30%, it's not certain when there will be a sustainable rebound in demand.
"It's when we'll have a meaningful upturn, that is the big question. We could conceivably crawl along the bottom for some time," he said.
To that end, J.D. Power & Associates is now forecasting 2009 industrywide sales of 11.4 million vehicles for the year.
While that's up from the tremendously weak sales pace in the fourth quarter, it would be down 14% from the full year 2008 sales, and below the sales targets set by Ford and GM in their turnaround plans submitted to Congress.
It is clear that no automaker can make money with auto sales at currently depressed levels. Even industry sales and profit leader Toyota Motor (TM) has warned it is about to report its first operating loss as a public company.
Ford director of sales and industry analysis George Pipas said that Ford factored in lousy job reports when it presented its plans to Congress. But he added that it is possible industrywide sales could be better than expected, given that the Fed, Congress and the incoming Obama administration are all focused on stimulating the economy.
"When things are bad, the presumption is it will get worse or always be bad," he said. "That's no more correct than the assumption in good times that things will always stay good."
In fact, some economists are forecasting a much sharper rebound in auto sales than now being assumed even by the automakers. Joseph Carson, chief economist at AllianceBernstein, said industrywide sales should reach 13 million this year, and that second-half sales could climb to above a 14 million annualized sales rate.
He said the massive economic stimulus plan likely to be passed by Congress, coupled with low interest rates, should lead to a much stronger rebound than many are expecting.
"If you go back and look at the severe recessions of the mid '70s and early '80s, from the trough to one year later, car and truck sales were up 30%," he said.
Carson added that the sharp cuts in production by the automakers in the past year will also set the stage for an eventual recovery.
But others think auto sales won't be able to bounce back as fast this time given the depth of this recession.
Wilbur Ross, the private equity investor who is chairman of auto parts maker International Automotive Components Group, says that U.S. automakers should have been cutting production sooner.
Instead, he said they offered easy financing terms and cash back offers for too long in order to move cars at below cost. Those sales stole from future demand for their vehicles, he said.
"When you borrow from the future, eventually you run out of future," he said.
Because of that, Ross said the only way for the automakers to survive is to win further concessions from unions and creditors and shed excess dealerships. He is not predicting a major upturn in sales anytime soon.
"We don't know for how long we're likely to stay at these reduced levels," he said.
No matter what further concessions the United Auto Workers union makes, what debt relief the automakers win in talks with creditors and what kind of additional federal help is made available, U.S. consumers have to start buying cars again.
And a rebound in sales will be difficult, if not impossible, to come by for General Motors (GM, Fortune 500), Ford Motor (F, Fortune 500) and Chrysler LLC as long as the unemployment rate keeps rising.
This Friday's jobs report is likely to show how difficult it will be for the Big Three to complete their promised turnarounds, even with billions of dollars in loans from the government.
Economists are forecasting a loss of 475,000 jobs in December. The outlook for employment for the rest of this year is similarly grim. The minutes of the most recent Federal Reserve meeting show that staff at the central bank expect the unemployment rate "to rise significantly into 2010."
Faced with this backdrop, independent auto analyst Erich Merkle said that even if auto sales bottomed out in early December, a month when all the major car manufacturers posted sales declines of at least 30%, it's not certain when there will be a sustainable rebound in demand.
"It's when we'll have a meaningful upturn, that is the big question. We could conceivably crawl along the bottom for some time," he said.
To that end, J.D. Power & Associates is now forecasting 2009 industrywide sales of 11.4 million vehicles for the year.
While that's up from the tremendously weak sales pace in the fourth quarter, it would be down 14% from the full year 2008 sales, and below the sales targets set by Ford and GM in their turnaround plans submitted to Congress.
It is clear that no automaker can make money with auto sales at currently depressed levels. Even industry sales and profit leader Toyota Motor (TM) has warned it is about to report its first operating loss as a public company.
Ford director of sales and industry analysis George Pipas said that Ford factored in lousy job reports when it presented its plans to Congress. But he added that it is possible industrywide sales could be better than expected, given that the Fed, Congress and the incoming Obama administration are all focused on stimulating the economy.
"When things are bad, the presumption is it will get worse or always be bad," he said. "That's no more correct than the assumption in good times that things will always stay good."
In fact, some economists are forecasting a much sharper rebound in auto sales than now being assumed even by the automakers. Joseph Carson, chief economist at AllianceBernstein, said industrywide sales should reach 13 million this year, and that second-half sales could climb to above a 14 million annualized sales rate.
He said the massive economic stimulus plan likely to be passed by Congress, coupled with low interest rates, should lead to a much stronger rebound than many are expecting.
"If you go back and look at the severe recessions of the mid '70s and early '80s, from the trough to one year later, car and truck sales were up 30%," he said.
Carson added that the sharp cuts in production by the automakers in the past year will also set the stage for an eventual recovery.
But others think auto sales won't be able to bounce back as fast this time given the depth of this recession.
Wilbur Ross, the private equity investor who is chairman of auto parts maker International Automotive Components Group, says that U.S. automakers should have been cutting production sooner.
Instead, he said they offered easy financing terms and cash back offers for too long in order to move cars at below cost. Those sales stole from future demand for their vehicles, he said.
"When you borrow from the future, eventually you run out of future," he said.
Because of that, Ross said the only way for the automakers to survive is to win further concessions from unions and creditors and shed excess dealerships. He is not predicting a major upturn in sales anytime soon.
"We don't know for how long we're likely to stay at these reduced levels," he said.
Oil tumbles 12% on still-growing supply
Oil prices fell Wednesday in one of the biggest single-day declines in history, after a woeful supply report gave previously bullish investors little reason to believe oil would sustain a rally anytime soon.
U.S. crude for February delivery fell $5.95, or 12.3%, to settle at $42.63 a barrel, a day after soaring past $50 in intraday trading.
Wednesday's decline was the biggest percentage drop since Sept. 24, 2001, in a week of massive oil price drops following the Sept. 11 terrorist attacks.
Crude's decline nearly undid more than a week of gains that sent oil up from below $40.
Prices fell early in the day on dour economic news. The selloff accelerated dramatically after a government supply report showed still weakening demand for oil, dashing the bullish hopes of traders that had been betting on the beginning of another substantial rise in crude prices.
"For oil to make a real recovery, we will need to see a real economic rebound, not just talk about it," said Stephen Schork, editor of the industry publication The Schork Report. "Oil is still volatile and will likely fall below $30 a barrel again before it makes a material rise."
The Department of Energy report Wednesday showed crude stockpiles rose by a whopping 6.7 million barrels for the week ended Jan. 2. That far surpassed experts' forecast of a 1.5 million barrel rise, according to a poll by research firm Platts.
Rising supply suggests demand for fuel continues to plummet - a trend that has continued since the late summer, when gas prices began a steep and rapid decline from a mid-July record $4.114 a gallon.
The report also showed supplies of gasoline rose by 3.3 million barrels, while supplies of distillates, which are used to make diesel fuel and home heating oil, rose by 1.8 million barrels.
The Platts survey expected a gasoline supply increase of 1.6 million barrels, while stocks of distillates had been expected to rise by 700,000 barrels.
Crude prices had risen more than 38% since Christmas in very, very thin trading. Ultra-light trading volume meant bullish trades on tension in the Middle East and Russia, and further OPEC production cuts exacerbated the rise to $50.
"Many misread the rise over the past week on some kind of bogus assumption that the bottom arrived," said Schork. "The recent highs have been pushed around by low volume in the marketplace - virtually no one has been trading in the past two weeks."
Economy: Job losses rose more than 45% in December over the prior month, to 693,000, according to payroll firm ADP.
In addition, the number of announced job cuts last month was more than four times greater than in 2007, although down slightly from November, according to outplacement firm Challenger, Gray & Christmas.
Unemployment will continue to rise "significantly" into 2010, according to minutes from the Federal Reserve's December meeting, released late Tuesday. The Fed also said that the U.S. gross domestic product, a broad measurement of economic activity, will fall in 2009.
"It was a reminder of how bad the economy is," said Phil Flynn, senior market analyst with Alaron Trading in Chicago. "There's nothing about this financial crisis that bodes well for energy prices and energy demand."
The job reports and Fed's comments put investor attention squarely back on falling demand, a worry that has driven oil prices down from a record high of $147.27 a barrel last summer, according to Flynn.
Measuring supply: Oil production has started to show signs of slowing as low prices make both production and exploration less profitable.
"Traders are seeing producers put down rigs and scuttle projects, and that is a change that is real," Tom Orr, head of research for Weeden & Co., wrote in an e-mail. While the impact on the overall amount of oil entering the market is small, "it sends a signal to people that producers will put down projects very quickly," said Orr.
Last week, the number of oil and natural gas rigs in the United States searching for or pumping energy supplies fell by 5.7%, the largest decline in 15 years, according to oilfield service company Baker Hughes.
Furthermore, fighting in the Middle East between Israel and the Hamas-controlled Gaza Strip had sparked concerns that shipments to the West could be disrupted should an oil producing nation such as Iran get involved.
And an ongoing energy contract dispute in Eastern Europe led to a complete shutoff of natural gas shipments between Russia and Ukraine Wednesday, highlighting the region's reliance on the energy producer. The move could force more homes to switch from natural gas to heating oil for warmth during the winter months, according to Orr.
The United States and China also said last week that they would be adding to their respective strategic oil reserves and taking advantage of the sub-$50 price of oil.
Reports also emerged that Kuwait and Iran were taking concrete steps to comply with the Organization of Petroleum Exporting Countries' pledge to remove 2.2 million barrels a day from the market.
U.S. crude for February delivery fell $5.95, or 12.3%, to settle at $42.63 a barrel, a day after soaring past $50 in intraday trading.
Wednesday's decline was the biggest percentage drop since Sept. 24, 2001, in a week of massive oil price drops following the Sept. 11 terrorist attacks.
Crude's decline nearly undid more than a week of gains that sent oil up from below $40.
Prices fell early in the day on dour economic news. The selloff accelerated dramatically after a government supply report showed still weakening demand for oil, dashing the bullish hopes of traders that had been betting on the beginning of another substantial rise in crude prices.
"For oil to make a real recovery, we will need to see a real economic rebound, not just talk about it," said Stephen Schork, editor of the industry publication The Schork Report. "Oil is still volatile and will likely fall below $30 a barrel again before it makes a material rise."
The Department of Energy report Wednesday showed crude stockpiles rose by a whopping 6.7 million barrels for the week ended Jan. 2. That far surpassed experts' forecast of a 1.5 million barrel rise, according to a poll by research firm Platts.
Rising supply suggests demand for fuel continues to plummet - a trend that has continued since the late summer, when gas prices began a steep and rapid decline from a mid-July record $4.114 a gallon.
The report also showed supplies of gasoline rose by 3.3 million barrels, while supplies of distillates, which are used to make diesel fuel and home heating oil, rose by 1.8 million barrels.
The Platts survey expected a gasoline supply increase of 1.6 million barrels, while stocks of distillates had been expected to rise by 700,000 barrels.
Crude prices had risen more than 38% since Christmas in very, very thin trading. Ultra-light trading volume meant bullish trades on tension in the Middle East and Russia, and further OPEC production cuts exacerbated the rise to $50.
"Many misread the rise over the past week on some kind of bogus assumption that the bottom arrived," said Schork. "The recent highs have been pushed around by low volume in the marketplace - virtually no one has been trading in the past two weeks."
Economy: Job losses rose more than 45% in December over the prior month, to 693,000, according to payroll firm ADP.
In addition, the number of announced job cuts last month was more than four times greater than in 2007, although down slightly from November, according to outplacement firm Challenger, Gray & Christmas.
Unemployment will continue to rise "significantly" into 2010, according to minutes from the Federal Reserve's December meeting, released late Tuesday. The Fed also said that the U.S. gross domestic product, a broad measurement of economic activity, will fall in 2009.
"It was a reminder of how bad the economy is," said Phil Flynn, senior market analyst with Alaron Trading in Chicago. "There's nothing about this financial crisis that bodes well for energy prices and energy demand."
The job reports and Fed's comments put investor attention squarely back on falling demand, a worry that has driven oil prices down from a record high of $147.27 a barrel last summer, according to Flynn.
Measuring supply: Oil production has started to show signs of slowing as low prices make both production and exploration less profitable.
"Traders are seeing producers put down rigs and scuttle projects, and that is a change that is real," Tom Orr, head of research for Weeden & Co., wrote in an e-mail. While the impact on the overall amount of oil entering the market is small, "it sends a signal to people that producers will put down projects very quickly," said Orr.
Last week, the number of oil and natural gas rigs in the United States searching for or pumping energy supplies fell by 5.7%, the largest decline in 15 years, according to oilfield service company Baker Hughes.
Furthermore, fighting in the Middle East between Israel and the Hamas-controlled Gaza Strip had sparked concerns that shipments to the West could be disrupted should an oil producing nation such as Iran get involved.
And an ongoing energy contract dispute in Eastern Europe led to a complete shutoff of natural gas shipments between Russia and Ukraine Wednesday, highlighting the region's reliance on the energy producer. The move could force more homes to switch from natural gas to heating oil for warmth during the winter months, according to Orr.
The United States and China also said last week that they would be adding to their respective strategic oil reserves and taking advantage of the sub-$50 price of oil.
Reports also emerged that Kuwait and Iran were taking concrete steps to comply with the Organization of Petroleum Exporting Countries' pledge to remove 2.2 million barrels a day from the market.
Saturday, January 3, 2009
Wall Street starts new year with a bang
Stocks rallied Friday, with investors starting off a new year on the right foot, after an abysmal 2008, and the Dow closing above 9,000 for the first time since November.
The Dow Jones industrial average (INDU) rose 258 points, or 2.9%. It was the second-best start of the year on a point basis, according to Dow Jones. On a percentage basis, it was the sixth best start of the year.
The Standard & Poor's 500 (SPX) index gained 3.2% and the Nasdaq composite (COMP) rose 3.5%.
"It's the classic Santa Claus rally and people don't want to miss the boat, although the volume is pretty light," said Joseph Saluzzi, co-head of equity trading at Themis Trading.
According to the Stock Trader's Almanac, a combination of the last five trading days of the previous year and the first two of the next have yielded an average return of 1.5% for the S&P 500 since 1950. The S&P is up 7.3% as of Friday's close.
"It's a nice start to the year, but we're not going to get too excited about it until we see a sustained advance on higher volume," said Matt King, chief investment officer at Bell Investment Advisors.
Saluzzi, King and other analysts are cautiously optimistic that Wall Street will recover some in 2009. However, the extent of any market recovery will depend on a variety of factors, including what kind of economic stimulus package the new Congress approves - and the depth of the recession.
Saluzzi said that investors need to be careful to not assume that the trend is now going to be up for most of 2009, as there is no reason why stocks couldn't rally for a bit and then retreat, making new bear market lows.
Wednesday brought a positive end to one of the worst years on record. The Dow lost 33.8% in the year, the third worst in its history, following a drop of 52.7% in 1931.
The S&P declined nearly 38.5% - its worst yearly performance since an earlier version of the broad stock index lost 47% in 1931. The earlier incarnation had 90 U.S. stocks in it.
For the Nasdaq, 2008's loss of 40.5% is the tech-fueled index's worst ever, going back to its inception in 1971.
All financial markets were closed Thursday for New Year's Day.
In the week ended Wed. Dec. 31, investors pulled roughly $1.2 billion out of equity mutual funds, according to tracking firm Trim Tabs. In the previous week, investors pulled $15.5 billion out of funds.
Economy: The manufacturing sector continues to weaken, according to the latest reports. The Institute for Supply Management's manufacturing index fell to a 28-year low in December, declining more than what economists had been expecting.
Next week brings a slew of economic reports, covering retail sales, auto sales, factory orders and construction spending ahead of the big December employment report due Friday.
Company news: Time Warner Cable and Viacom (VIA.B) have reached a new programming deal that will keep 19 Viacom cable channels on TWC's network. TWC is a unit of Time Warner, which also owns CNNMoney.com.
In other news, Bank of America (BAC, Fortune 500) has completed its acquisition of Merrill Lynch. Wells Fargo (WFC, Fortune 500) has completed its purchase of Wachovia.
A variety of oil services stocks rose in tune with the price of oil, including Halliburton (HAL, Fortune 500), ConocoPhilips (COP, Fortune 500) and Schlumberger (SLB).
General Motors (GM, Fortune 500) rallied on news that the government on Wednesday paid the first $4 billion in emergency loans to the troubled automaker. Additionally, on Friday it was reported that lender GMAC LLC had changed its pact with the company to give it more freedom in offering loans.
Market breadth was positive. On the New York Stock Exchange, winners topped losers five to one on volume of 1.04 billion shares. On the Nasdaq, advancers beat decliners nearly three to one on volume of almost 1.47 billion shares.
Bonds: Treasury prices tumbled, raising the corresponding yield on the benchmark 10-year note to 2.37% from 2.24% Wednesday. Treasury prices and yields move in opposite direction. 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 slipped to a 4-1/2-year low of 1.41% Friday from 1.42% Wednesday, according to Dow Jones. Overnight Libor slipped to 0.12% from 0.14%. Libor is a key bank lending rate.
Other markets: In global trading, Asian and European markets ended higher.
The dollar gained versus the euro and yen.
U.S. light crude oil for February delivery rose $1.47, or 3.9%, to $46.15 a barrel on the New York Mercantile Exchange.
COMEX gold for February delivery fell $4.80 to settle at $880 an ounce.
Gasoline prices rose 0.8 cents to a national average of $1.626 a gallon, according to a survey of credit-card swipes released Friday by motorist group AAA.
The Dow Jones industrial average (INDU) rose 258 points, or 2.9%. It was the second-best start of the year on a point basis, according to Dow Jones. On a percentage basis, it was the sixth best start of the year.
The Standard & Poor's 500 (SPX) index gained 3.2% and the Nasdaq composite (COMP) rose 3.5%.
"It's the classic Santa Claus rally and people don't want to miss the boat, although the volume is pretty light," said Joseph Saluzzi, co-head of equity trading at Themis Trading.
According to the Stock Trader's Almanac, a combination of the last five trading days of the previous year and the first two of the next have yielded an average return of 1.5% for the S&P 500 since 1950. The S&P is up 7.3% as of Friday's close.
"It's a nice start to the year, but we're not going to get too excited about it until we see a sustained advance on higher volume," said Matt King, chief investment officer at Bell Investment Advisors.
Saluzzi, King and other analysts are cautiously optimistic that Wall Street will recover some in 2009. However, the extent of any market recovery will depend on a variety of factors, including what kind of economic stimulus package the new Congress approves - and the depth of the recession.
Saluzzi said that investors need to be careful to not assume that the trend is now going to be up for most of 2009, as there is no reason why stocks couldn't rally for a bit and then retreat, making new bear market lows.
Wednesday brought a positive end to one of the worst years on record. The Dow lost 33.8% in the year, the third worst in its history, following a drop of 52.7% in 1931.
The S&P declined nearly 38.5% - its worst yearly performance since an earlier version of the broad stock index lost 47% in 1931. The earlier incarnation had 90 U.S. stocks in it.
For the Nasdaq, 2008's loss of 40.5% is the tech-fueled index's worst ever, going back to its inception in 1971.
All financial markets were closed Thursday for New Year's Day.
In the week ended Wed. Dec. 31, investors pulled roughly $1.2 billion out of equity mutual funds, according to tracking firm Trim Tabs. In the previous week, investors pulled $15.5 billion out of funds.
Economy: The manufacturing sector continues to weaken, according to the latest reports. The Institute for Supply Management's manufacturing index fell to a 28-year low in December, declining more than what economists had been expecting.
Next week brings a slew of economic reports, covering retail sales, auto sales, factory orders and construction spending ahead of the big December employment report due Friday.
Company news: Time Warner Cable and Viacom (VIA.B) have reached a new programming deal that will keep 19 Viacom cable channels on TWC's network. TWC is a unit of Time Warner, which also owns CNNMoney.com.
In other news, Bank of America (BAC, Fortune 500) has completed its acquisition of Merrill Lynch. Wells Fargo (WFC, Fortune 500) has completed its purchase of Wachovia.
A variety of oil services stocks rose in tune with the price of oil, including Halliburton (HAL, Fortune 500), ConocoPhilips (COP, Fortune 500) and Schlumberger (SLB).
General Motors (GM, Fortune 500) rallied on news that the government on Wednesday paid the first $4 billion in emergency loans to the troubled automaker. Additionally, on Friday it was reported that lender GMAC LLC had changed its pact with the company to give it more freedom in offering loans.
Market breadth was positive. On the New York Stock Exchange, winners topped losers five to one on volume of 1.04 billion shares. On the Nasdaq, advancers beat decliners nearly three to one on volume of almost 1.47 billion shares.
Bonds: Treasury prices tumbled, raising the corresponding yield on the benchmark 10-year note to 2.37% from 2.24% Wednesday. Treasury prices and yields move in opposite direction. 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 slipped to a 4-1/2-year low of 1.41% Friday from 1.42% Wednesday, according to Dow Jones. Overnight Libor slipped to 0.12% from 0.14%. Libor is a key bank lending rate.
Other markets: In global trading, Asian and European markets ended higher.
The dollar gained versus the euro and yen.
U.S. light crude oil for February delivery rose $1.47, or 3.9%, to $46.15 a barrel on the New York Mercantile Exchange.
COMEX gold for February delivery fell $4.80 to settle at $880 an ounce.
Gasoline prices rose 0.8 cents to a national average of $1.626 a gallon, according to a survey of credit-card swipes released Friday by motorist group AAA.
Investors to buy IndyMac - $13.9B
The Federal Deposit Insurance Corp. announced Friday that it had struck a deal to sell failed mortgage lender IndyMac to a group of private investment firms for $13.9 billion.
The buyers include buyout specialist J.C. Flowers & Co. and hedge fund Paulson & Co., which focuses on distressed assets, as well as the private investment firm managing computer mogul Michael Dell's fortune and a fund managed by financier George Soros.
The Pasadena, Calif.-based bank will be controlled by IMB Management Holdings, led by Steven Mnuchin, who is chair and co-chief executive of Dune Capital Management. Terry Laughlin, who headed Merrill Lynch Bank & Trust, will serve as chief executive of IndyMac.
The investors could not be reached for comment.
IndyMac's failure, one of the largest in U.S. history, will cost the FDIC between $8.5 billion and $9.4 billion, in line with the agency's previous estimates. The transaction is expected to close sometime in the next three months.
The bank, which specialized in Alt-A loans made to borrowers who did not need to verify their income or assets, collapsed in July after defaults skyrocketed and depositors made a run on the bank.
The buyers will inject $1.3 billion in capital into the bank. The FDIC has also agreed to share the losses on a portfolio of loans, mainly mortgages, with IMB Management. The buyers will take responsibility for the first 20% of losses, and the FDIC will cover the majority of additional losses.
"We have assembled a group of experienced private investors in financial services to acquire the former IndyMac and operate it under new management with extensive banking experience," said Mnuchin. "At closing, we will inject significant private capital into IndyMac so that it can once again effectively serve its customers and communities."
Loan modifications to continue
In order to receive the FDIC's loan loss protection, IMB Management has agreed to continue the streamlined loan modification program FDIC Chairman Sheila Bair put into place.
IndyMac, in an effort to help troubled homeowners who qualify, is adjusting mortgage payments to no more than 38% of a borrower's monthly income by reducing the interest rate or stretching out the length of the loan.
Bair, a vocal advocate of streamlined modifications, has long urged the Bush administration to do more to prevent foreclosures. The Obama administration and Congress are expected to put in place an aggressive loan modification program after the new president takes office on Jan. 20.
So far, more than 8,500 mortgages have been modified and another 9,480 workouts are underway, according to the FDIC. A total of 46,500 mortgages are eligible for modification.
Broad group of investors
This is believed to be the first time private investors have led the buyout of a failed bank, according to an FDIC spokesman. However, private equity firms have participated in such purchases. For instance, private equity Kohlberg, Kravis Roberts & Co. worked with Fleet/Norstar Financial Group to buy New Bank of New England from the FDIC in 1991.
Experts expect to see more private investors scoop up failing banks in 2009. And they will likely have a lot of opportunity. There were 171 banks on the FDIC's list of troubled banks at the end of September.
Investors purchasing IndyMac also include: Stone Point Capital, a global private equity firm specializing in financial services; SSP Offshore, a private investment fund managed by Soros Fund Management, and Silar MCF-I, an affiliate of Silar Advisors.
The new bank will have 33 branches in the Los Angeles area with approximately $6.5 billion in deposits and $16 billion in loans. It will also continue servicing nearly $158 billion in mortgage loans and will maintain IndyMac's reverse mortgage business.
At the time of its collapse, IndyMac has roughly $19 billion in deposits and $32 billion in assets. It was co-founded by Angelo Mozilo, who also started Countrywide, the nation's largest mortgage lender which stumbled badly before being scooped up by Bank of America earlier this year.
The FDIC had hoped to announce the sale by year's end. In recent days, mortgage finance giant Fannie Mae said it was negotiating with the FDIC to settle a claim it has about home loans IndyMac sold to Fannie. According to reports, Fannie wants IndyMac to buy back about $1 billion of mortgages that failed to meet Fannie's standards. An FDIC spokesman said the negotiations did not impede the sale.
Of the 25 banks that have failed so far this year, IndyMac is the only one the FDIC could not immediately sell. Last month, the agency expanded the pool of bidders for failed banks by allowing those without bank charters to bid for the institutions. Bidders would need to obtain charters before the deal closes.
IndyMac was also one of the biggest banks to go under and among the costliest to the agency. Washington Mutual was larger, with $307 billion in assets, but its September failure did not cost the FDIC a dime. WaMu was immediately acquired by JPMorgan Chase (JPM, Fortune 500) for $1.9 billion.
The buyers include buyout specialist J.C. Flowers & Co. and hedge fund Paulson & Co., which focuses on distressed assets, as well as the private investment firm managing computer mogul Michael Dell's fortune and a fund managed by financier George Soros.
The Pasadena, Calif.-based bank will be controlled by IMB Management Holdings, led by Steven Mnuchin, who is chair and co-chief executive of Dune Capital Management. Terry Laughlin, who headed Merrill Lynch Bank & Trust, will serve as chief executive of IndyMac.
The investors could not be reached for comment.
IndyMac's failure, one of the largest in U.S. history, will cost the FDIC between $8.5 billion and $9.4 billion, in line with the agency's previous estimates. The transaction is expected to close sometime in the next three months.
The bank, which specialized in Alt-A loans made to borrowers who did not need to verify their income or assets, collapsed in July after defaults skyrocketed and depositors made a run on the bank.
The buyers will inject $1.3 billion in capital into the bank. The FDIC has also agreed to share the losses on a portfolio of loans, mainly mortgages, with IMB Management. The buyers will take responsibility for the first 20% of losses, and the FDIC will cover the majority of additional losses.
"We have assembled a group of experienced private investors in financial services to acquire the former IndyMac and operate it under new management with extensive banking experience," said Mnuchin. "At closing, we will inject significant private capital into IndyMac so that it can once again effectively serve its customers and communities."
Loan modifications to continue
In order to receive the FDIC's loan loss protection, IMB Management has agreed to continue the streamlined loan modification program FDIC Chairman Sheila Bair put into place.
IndyMac, in an effort to help troubled homeowners who qualify, is adjusting mortgage payments to no more than 38% of a borrower's monthly income by reducing the interest rate or stretching out the length of the loan.
Bair, a vocal advocate of streamlined modifications, has long urged the Bush administration to do more to prevent foreclosures. The Obama administration and Congress are expected to put in place an aggressive loan modification program after the new president takes office on Jan. 20.
So far, more than 8,500 mortgages have been modified and another 9,480 workouts are underway, according to the FDIC. A total of 46,500 mortgages are eligible for modification.
Broad group of investors
This is believed to be the first time private investors have led the buyout of a failed bank, according to an FDIC spokesman. However, private equity firms have participated in such purchases. For instance, private equity Kohlberg, Kravis Roberts & Co. worked with Fleet/Norstar Financial Group to buy New Bank of New England from the FDIC in 1991.
Experts expect to see more private investors scoop up failing banks in 2009. And they will likely have a lot of opportunity. There were 171 banks on the FDIC's list of troubled banks at the end of September.
Investors purchasing IndyMac also include: Stone Point Capital, a global private equity firm specializing in financial services; SSP Offshore, a private investment fund managed by Soros Fund Management, and Silar MCF-I, an affiliate of Silar Advisors.
The new bank will have 33 branches in the Los Angeles area with approximately $6.5 billion in deposits and $16 billion in loans. It will also continue servicing nearly $158 billion in mortgage loans and will maintain IndyMac's reverse mortgage business.
At the time of its collapse, IndyMac has roughly $19 billion in deposits and $32 billion in assets. It was co-founded by Angelo Mozilo, who also started Countrywide, the nation's largest mortgage lender which stumbled badly before being scooped up by Bank of America earlier this year.
The FDIC had hoped to announce the sale by year's end. In recent days, mortgage finance giant Fannie Mae said it was negotiating with the FDIC to settle a claim it has about home loans IndyMac sold to Fannie. According to reports, Fannie wants IndyMac to buy back about $1 billion of mortgages that failed to meet Fannie's standards. An FDIC spokesman said the negotiations did not impede the sale.
Of the 25 banks that have failed so far this year, IndyMac is the only one the FDIC could not immediately sell. Last month, the agency expanded the pool of bidders for failed banks by allowing those without bank charters to bid for the institutions. Bidders would need to obtain charters before the deal closes.
IndyMac was also one of the biggest banks to go under and among the costliest to the agency. Washington Mutual was larger, with $307 billion in assets, but its September failure did not cost the FDIC a dime. WaMu was immediately acquired by JPMorgan Chase (JPM, Fortune 500) for $1.9 billion.
Friday, January 2, 2009
Oil in slight retreat start the new year
The oil market kicked off 2009 feebly on Friday, falling partly in reaction to a sharp rally late on Wednesday.
U.S. light, sweet crude fell 30 cents to $44.30 a barrel by 9:30 a.m. ET, reversing part of Wednesday's $5.57 a barrel gains. Oil fell as much as 7% earlier in the day, touching a low of $41.05.
In 2008 oil initially rose by more than $50 to touch a record peak of $147 before falling by more than $110.
On the last trading day of 2008 it surged 14% after weekly U.S. data showed a decrease in refinery activity and an unexpected 500,000-barrel rise in crude stocks in the world's biggest oil consumer.
Refined product inventories also rose, though less than analysts expected. Gasoline stockpiles were up 800,000 barrels, versus a forecast of 1.5 million barrels, while distillates rose by 700,000 barrels, versus an expected 1.1 million barrels.
"The recent crop of demand side indications for oil has been rather ambiguous. In itself, that is something of a change, given a fairly long period during which the demand side numbers have been weakening fairly consistently," Barclay's Capital wrote in a note to investors.
Analysts said economic factors were pushing markets down while geopolitical events were serving as support.
Israel sealed off the occupied West Bank on Friday, bracing for protests and retaliatory violence a day after it killed a senior Hamas leader in an air strike on his Gaza home.
Oil markets have also watched cautiously the dispute between the world's biggest non-OPEC oil exporter, Russia, and its neighbors over natural gas supplies.
Russia shut off gas to its neighbor Ukraine on Thursday, after a contract dispute, but said it had increased supplies to other European states to try to reassure its premium-paying customers.
The row could stir new doubts about Moscow's reliability as an energy supplier and fuel suspicions in the West - already running high since Russia's war with Georgia last August - that the Kremlin bullies its pro-Western neighbors. However, similar past disputes rarely had an impact on oil flows.
U.S. light, sweet crude fell 30 cents to $44.30 a barrel by 9:30 a.m. ET, reversing part of Wednesday's $5.57 a barrel gains. Oil fell as much as 7% earlier in the day, touching a low of $41.05.
In 2008 oil initially rose by more than $50 to touch a record peak of $147 before falling by more than $110.
On the last trading day of 2008 it surged 14% after weekly U.S. data showed a decrease in refinery activity and an unexpected 500,000-barrel rise in crude stocks in the world's biggest oil consumer.
Refined product inventories also rose, though less than analysts expected. Gasoline stockpiles were up 800,000 barrels, versus a forecast of 1.5 million barrels, while distillates rose by 700,000 barrels, versus an expected 1.1 million barrels.
"The recent crop of demand side indications for oil has been rather ambiguous. In itself, that is something of a change, given a fairly long period during which the demand side numbers have been weakening fairly consistently," Barclay's Capital wrote in a note to investors.
Analysts said economic factors were pushing markets down while geopolitical events were serving as support.
Israel sealed off the occupied West Bank on Friday, bracing for protests and retaliatory violence a day after it killed a senior Hamas leader in an air strike on his Gaza home.
Oil markets have also watched cautiously the dispute between the world's biggest non-OPEC oil exporter, Russia, and its neighbors over natural gas supplies.
Russia shut off gas to its neighbor Ukraine on Thursday, after a contract dispute, but said it had increased supplies to other European states to try to reassure its premium-paying customers.
The row could stir new doubts about Moscow's reliability as an energy supplier and fuel suspicions in the West - already running high since Russia's war with Georgia last August - that the Kremlin bullies its pro-Western neighbors. However, similar past disputes rarely had an impact on oil flows.
Bonds in 2009: Waiting by the exits
Treasurys are coming off their best year since 1995, returning more than 13.7% to investors in 2008, but analysts say support for bonds could come to a crashing end in 2009.
Despite record bond auctions totaling hundreds of billions of dollars aimed at financing the government's bailouts, Treasurys were led higher by investor anxiety about the health of the overall economy and stock market.
But analysts expect the economy to begin its recovery sometime in 2009. They say stocks will rebound this year, restoring appetite for risk. That could mean a quick rush to the exits from what some analysts consider artificially high demand for Treasurys.
"Treasurys are overbought and perhaps in a bubble," said Kim Rupert, fixed income analyst with Action Economics. "When the mood changes, it will be a case of everybody out the door at the same time."
Rupert said a mass exodus from the bond market would be troubling for investors. As the value of their assets decline, they will have difficulty selling them off.
"The market will just explode, and you can just hope that you get out in time," she added.
Other analysts agree, saying growing government debt levels amid increasing appetite for risk could spell trouble for the bond market.
"Investor appetite for government debt has kept funding rates impressively low, but continued appetite is a potential concern in 2009," said Thomas Lee, a strategist for JPMorgan. "We believe investors are beginning to appreciate that risk aversion has hit maximum levels."
Lee expects the federal government's debt to balloon past the current $10 trillion level on further bailout actions. Investors' desire to buy up even more Treasurys will be tested as supply continues to expand, with more record bond auctions set to finance the financial rescue programs, he said.
But some analysts believe demand for bonds will remain, even if risk appetite increases.
Goldman Sachs analyst David Kostin said in a recent note that he expects the 10-year Treasury yield to increase to 3.6% from 2.67% to close 2008. That's a decent increase, though barely back to the 3.91% yield at the beginning of 2008. He forecasts a yield of 1% for the 2-year bond, up from 0.76% at the end of last year.
Bond prices: Treasurys started 2009 a bit higher in the first trading day of the new year Friday, after a furious decline to end 2008 helped raise yields off their record lows. The bond market was closed Thursday for New Year's Day.
The benchmark 10-year note gained 4/32 to 113-21/32 and its yield dropped to 2.2% from 2.22% from Wednesday. Prices and yields move in opposite directions.
The 30-year bond rose 16/32 to 137-13/32 and its yield fell 2.66% from 2.67%.
The 2-year bond was up 1/32 to 100-8/32 and its yield held even at 0.76%.
Meanwhile, the 3-month yield - widely considered a gauge of investor confidence - edged lower to 0.11% from 0.12%.
Lending rates: The 3-month Libor fell to 1.41% from 1.42% Wednesday, and the overnight Libor rate sank to 0.12% from 0.14%, according to Dow Jones. The British Bankers' Association did not disclose Libor rates in observance of Thursday's bank holiday in the U.K.
Libor - the London Interbank Offered Rate - is a daily average of rates 16 different banks charge each other to lend money in London. It is used to calculate adjustable-rate mortgages. More than $350 billion in assets are tied to Libor.
Two market gauges were mixed to start the new year.
The "TED spread," a measure of banks' willingness to lend, slipped to 1.29 percentage points from 1.34 points - the lowest level for the measure since Sep. 11.
The lower the TED spread, the more willing investors are to take risks. The rate skyrocketed as the credit crisis took hold in mid-September, but it has fallen since the government put trillions of dollars into credit-easing programs in the past several months.
Another indicator, the Libor-OIS spread, rose to 1.29 percentage points from 1.24 points. 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.
Despite record bond auctions totaling hundreds of billions of dollars aimed at financing the government's bailouts, Treasurys were led higher by investor anxiety about the health of the overall economy and stock market.
But analysts expect the economy to begin its recovery sometime in 2009. They say stocks will rebound this year, restoring appetite for risk. That could mean a quick rush to the exits from what some analysts consider artificially high demand for Treasurys.
"Treasurys are overbought and perhaps in a bubble," said Kim Rupert, fixed income analyst with Action Economics. "When the mood changes, it will be a case of everybody out the door at the same time."
Rupert said a mass exodus from the bond market would be troubling for investors. As the value of their assets decline, they will have difficulty selling them off.
"The market will just explode, and you can just hope that you get out in time," she added.
Other analysts agree, saying growing government debt levels amid increasing appetite for risk could spell trouble for the bond market.
"Investor appetite for government debt has kept funding rates impressively low, but continued appetite is a potential concern in 2009," said Thomas Lee, a strategist for JPMorgan. "We believe investors are beginning to appreciate that risk aversion has hit maximum levels."
Lee expects the federal government's debt to balloon past the current $10 trillion level on further bailout actions. Investors' desire to buy up even more Treasurys will be tested as supply continues to expand, with more record bond auctions set to finance the financial rescue programs, he said.
But some analysts believe demand for bonds will remain, even if risk appetite increases.
Goldman Sachs analyst David Kostin said in a recent note that he expects the 10-year Treasury yield to increase to 3.6% from 2.67% to close 2008. That's a decent increase, though barely back to the 3.91% yield at the beginning of 2008. He forecasts a yield of 1% for the 2-year bond, up from 0.76% at the end of last year.
Bond prices: Treasurys started 2009 a bit higher in the first trading day of the new year Friday, after a furious decline to end 2008 helped raise yields off their record lows. The bond market was closed Thursday for New Year's Day.
The benchmark 10-year note gained 4/32 to 113-21/32 and its yield dropped to 2.2% from 2.22% from Wednesday. Prices and yields move in opposite directions.
The 30-year bond rose 16/32 to 137-13/32 and its yield fell 2.66% from 2.67%.
The 2-year bond was up 1/32 to 100-8/32 and its yield held even at 0.76%.
Meanwhile, the 3-month yield - widely considered a gauge of investor confidence - edged lower to 0.11% from 0.12%.
Lending rates: The 3-month Libor fell to 1.41% from 1.42% Wednesday, and the overnight Libor rate sank to 0.12% from 0.14%, according to Dow Jones. The British Bankers' Association did not disclose Libor rates in observance of Thursday's bank holiday in the U.K.
Libor - the London Interbank Offered Rate - is a daily average of rates 16 different banks charge each other to lend money in London. It is used to calculate adjustable-rate mortgages. More than $350 billion in assets are tied to Libor.
Two market gauges were mixed to start the new year.
The "TED spread," a measure of banks' willingness to lend, slipped to 1.29 percentage points from 1.34 points - the lowest level for the measure since Sep. 11.
The lower the TED spread, the more willing investors are to take risks. The rate skyrocketed as the credit crisis took hold in mid-September, but it has fallen since the government put trillions of dollars into credit-easing programs in the past several months.
Another indicator, the Libor-OIS spread, rose to 1.29 percentage points from 1.24 points. 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.
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