Tuesday, January 29, 2008

Societe Generale Shares Rise on Takeover Report

(Bloomberg) -- Societe Generale SA, France's second-biggest bank, rose the most in five years in Paris trading on speculation that BNP Paribas SA is considering a takeover.

BNP, the country's largest bank, is holding preliminary internal discussions about a possible bid after Societe Generale's announcement last week of 4.9 billion euros ($7.2 billion) of losses from unauthorized bets, the Wall Street Journal reported. BNP said it does not comment on market rumors.

Traders speculated that President Nicolas Sarkozy's government is seeking a French partner for the bank to ward off any potential foreign bids. Prime Minister Francois Fillon told Parliament today that the government will ensure that Societe Generale remains in French hands.

``There's rumor of a bid by BNP on Societe Generale for 92 euros,'' said Constantin Salagaras, a trader at Aurel Leven Securities in Paris. ``The market is speculating on the will of Sarkozy to create a national champion.''

Societe Generale rose 10 percent to 78.45 euros in Paris, marking its biggest gain since Dec. 16, 2002 and valuing the bank at 36.3 billion euros. Societe Generale shares, down 21 percent since the start of the year, yesterday had a lower market value than Credit Agricole SA before rebounding today.

``Societe Generale is a great French bank and Societe Generale will remain a great French bank,'' Fillon told lawmakers in Paris today.

Trading Losses

Societe Generale's employee Jerome Kerviel, 31, was charged yesterday with falsifying documents, computer hacking and breach of trust by French judges.

Kerviel's unauthorized bets led to the biggest trading losses in banking history. Societe Generale said Kerviel amassed 50 billion euros in positions in European stock index futures, an amount that exceeded the company's market value.

``A takeover of Societe Generale is not impossible,'' Guillaume Tiberghien, an analyst at Credit Suisse, said in a report to clients. ``Any potential bidder would have to assess Societe Generale's risk control, assess the risk that the equity derivatives business might be damaged for the long term, assess the political and regulatory consequences of recent events for the entire banking sector.''
 

U.S. Stocks Rise After Earnings, Durable Goods Top Forecasts

(Bloomberg) -- U.S. stocks rose for a second day, led by telephone companies and utilities, on better-than- forecast durable goods orders and earnings that topped estimates at two dozen members of the Standard & Poor's 500 Index.

Dow Chemical Co., American Electric Power Co. and Valero Energy Corp. led gains among the 30 companies in the S&P 500 that reported results since markets closed yesterday. Boeing Co. and Caterpillar Inc. climbed after the Commerce Department said orders for U.S. durable goods rose the most since July.

The S&P 500 added 1, or 0.1 percent, to 1,354.97 at 1:06 p.m. in New York. The benchmark for U.S. equities is still down 7.6 percent in 2008 on concern the collapse of the subprime mortgage market will drag the economy into recession. The Dow Jones Industrial Average rose 25.04, or 0.2 percent, to 12,408.93. The Nasdaq Composite Index decreased 6.52, or 0.3 percent, to 2,343.39, dragged down by a 2.1 percent drop in Google Inc.

``When you see a durable goods number like this and then earnings outside of the financial sector doing quite well, people are beginning to realize that perhaps the contagion effect may be somewhat limited,'' said Damon Barglow, who helps oversee $1.9 billion at Eastern Investment Advisors in Boston, in an interview with Bloomberg Radio.

Durable Goods

Index futures doubled their advances after the 5.2 percent gain in durable goods orders last month highlighted how growing overseas demand may spur manufacturing as the U.S. economy slows. The Federal Reserve is to expected to cut interest rates tomorrow in an effort to spur growth.

The S&P 500 has gained 3.5 percent from its 16-month low on January 22 after falling as much as 15 percent from its Oct. 31 record.

Fourth quarter earnings advanced 20 percent on average for the 155 non-financial companies in the S&P 500 that have reported results so far, according to data compiled by Bloomberg. Analysts expect the entire index to post an 18 percent average decline in profit.

Dow Chemical rose 43 cents to $38.02. The maker of 3,200 products ranging from synthetic latex to pesticides posted profit excluding some restructuring costs and other items of 84 cents, topping the 80-cent average estimate of 14 analysts surveyed by Bloomberg.

Valero, American Electric

Valero Energy Corp. climbed $5.22 to $60.12. The largest U.S. refiner posted fourth-quarter profit of $1.02 a share, topping the 59-cent average analysts' estimates compiled by Bloomberg. Earnings were buttressed by a cut in Valero's tax rate and increased use of low-grade crude oil.

Sunoco Inc., the largest oil refiner in the U.S. East, added $2.20 to $63.35. Tesoro Corp., the largest refiner in the U.S. West, gained $2.90 to $41.29. ConocoPhillips, the nation's second-biggest refiner, increased $1.18 to $77.59.

American Electric Power Co. gained 59 cents to $42.82. The biggest U.S. producer of electricity from coal said fourth- quarter profit rose 28 percent on higher power sales and a gain from the sale of a stake in a power plant. Sales rose 10 percent to $3.3 billion on higher utility rates and colder weather that increased use of electricity for heating.

Boeing, the world's second-biggest commercial airplane maker, climbed $2.34, or 3 percent, to $79.94. Caterpillar, the largest maker of bulldozers and excavators, added 72 cents to $68.93.

The dollar strengthened and yields on Treasury notes rose after the durable-goods report. Economists had forecast orders would increase 1.6 percent in December, according to the median of 64 estimates in a Bloomberg News survey.

Eli Lilly & Co. rallied 94 cents to $52.34. Excluding certain items, Lilly earned 90 cents a share, a penny higher than the average estimate of 17 analysts surveyed by Bloomberg.
 

Durable goods orders jump, house prices slump

(Reuters) - Stronger-than-expected orders for U.S.-made durable goods in December suggested the economy retained some life and might not need a heavy dose of interest-rate cuts, even though house prices fell a record amount in November.

New orders for long-lasting goods rose 5.2 percent last month, a Commerce Department report showed on Tuesday, well above the 1.5 percent increase forecast by economists in a Reuters poll.

The surprise surge in durable goods orders helped offset a report that showed home prices in 10 major metropolitan areas fell a record 8.4 percent in the year through November.

U.S. Treasuries fell after the durables report, which contradicted weakness in other areas of the economy and undermined the argument for more aggressive interest rate cuts by the Federal Reserve. Stocks rose.

A consumer sentiment survey, meanwhile, showed confidence fell in January but by slightly less than economists had expected. The Conference Board's index of consumer sentiment fell to 87.9 from an upwardly revised 90.6 in December.

"Consumers are on the edge but haven't packed it in yet. They are worried about the up-and-down stock market, falling house value and high gasoline prices. But they still have jobs," said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania.
 

NY Gov working on fix for bond insurers

(Reuters) - New York Gov. Eliot Spitzer said on Tuesday he was working "extraordinarily hard" to aid troubled bond insurers, adding that he would do what is appropriate for the bond market, and the municipal market in particular.

U.S. states, counties and cities buy insurance from bond guarantors because it makes it easier for the tax-free issuers to sell their debt. The insurance companies guarantee that if there is a default, investors will be paid all the principal and interest they are owed.

But bond insurers' expansion into the now-melting subprime mortgage sector threatens the companies' top "AAA" ratings their business requires.

As a result, tax-free issuers around the nation are increasingly skipping insurance or having to pay unusually high interest rates on some types of short-term notes whose liquidity partly depended on insurance.

New York Insurance Superintendent Eric Dinallo has been trying to help the bond insurers raise capital to strengthen their balance sheets, but has warned this will take time.

The Democratic governor told reporters: "We are deeply immersed in this to do what we think is appropriate for the marketplace and for the bond market and ... for the municipal market in particular."
 

Wal-Mart cuts prices to lure Super Bowl shoppers

(Reuters) - Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research) said on Tuesday it is cutting prices on thousands of items by 10 percent to 30 percent this week to win sales from cash-strapped shoppers ahead of the Super Bowl.

A Wal-Mart spokeswoman did not have an exact figure on the number of items included in the price cuts but said the world's largest retailer was reducing prices on groceries, popular electronics and other items that shoppers might buy before the Super Bowl football championship game on Sunday.

Wal-Mart typically announces such widespread price cuts during the ultra-competitive holiday shopping season.

But with 2008 U.S. retail sales forecast to rise at the slowest pace in six years, retailers are turning to promotions to lure shoppers into their stores to spend their limited budgets.

Ahead of the Super Bowl weekend, Best Buy Co Inc's (BBY.N: Quote, Profile, Research) Web site is advertising no interest for three years on all Samsung flat panel TVs $999 and up, while in a similar move, Circuit City Stores Inc (CC.N: Quote, Profile, Research) is offering no interest for 36 months on TVs $999 and higher.

Wal-Mart said it is charging no interest for 18 months on purchases of $250 or more with a Wal-Mart credit card.
 

Monday, January 28, 2008

Verizon Profit Rises on Wireless; Sales Miss Estimate

(Bloomberg) -- Verizon Communications Inc., the second-largest U.S. phone company, said fourth-quarter profit rose 3.9 percent, driven by new wireless subscribers. Sales missed estimates after home-phone users defected to cable rivals.

Net income climbed to $1.07 billion, or 37 cents a share, from $1.03 billion, or 35 cents, a year ago, the New York-based company said today in a statement. Sales rose 5.5 percent to $23.8 billion, below the $24 billion average estimate of analysts in a Bloomberg survey.

Chief Executive Officer Ivan Seidenberg is spending $23 billion over seven years to offer TV service and higher Internet speeds, to compete with cable companies that sell phone plans. Verizon lost 875,000 phone lines in the quarter, an 8.1 percent drop from a year ago, compared with an 8 percent decline in the previous quarter.

``Line losses accelerated again,'' said Todd Rosenbluth, an equity analyst at Standard & Poor's in New York. ``That's a trend we expected, given cable competition.'' He recommends holding the shares.

Profit excluding items such as severance pay for fired workers was 62 cents a share, meeting the average estimate of 21 analysts in the Bloomberg survey. The wireless unit's operating margin, the percentage of sales remaining after deducting the costs of providing the service, expanded to 26.2 percent from 25 percent a year ago.

Verizon fell $1.02, or 2.7 percent, to $36.74 at 9:37 a.m. in New York Stock Exchange composite trading. The stock was little changed in the 12 months before today.

Job Cuts

The company said it began cutting jobs in the fourth quarter and plans to continue firing workers this year. Spokesman Bob Varettoni declined to say how many positions the company will eliminate.

Verizon's larger rival, AT&T Inc., also reported fourth- quarter revenue that fell short of analysts' estimates. While AT&T blamed the results on shutting off service to nonpaying customers, Verizon pointed to competition from cable companies such as Comcast Corp.

Seidenberg, 61, has been shedding businesses to focus on Verizon's fiber-optic network and wireless unit. Verizon is awaiting regulatory approval for a $2.72 billion deal to hand over about 1.6 million phone lines in the northeastern U.S. to FairPoint Communications Inc.

Spinoff, Sale

Fourth-quarter results last year included expenses of 22 cents a share for taxes on the sale of assets in the Dominican Republic and the cost of spinning off a directories unit.

Verizon added 226,000 TV subscribers to its fiber-optic network, less than the 234,000 projected by UBS AG analyst John Hodulik in New York. The company also recruited 245,000 fiber Internet customers, missing Hodulik's 284,000 estimate.

The fiber-optic network, called FiOS, is available in parts of 16 states. Verizon plans to make it available to 18 million homes by the end of 2010, up from about 9 million last year.

Verizon Wireless, jointly owned by Verizon and Vodafone Group Plc, added 2 million wireless customers, including 1.6 million on long-term contracts. Verizon Wireless took subscribers from smaller rival Sprint Nextel Corp., which lost 683,000 contract customers last quarter. AT&T, owner of the biggest U.S. mobile-phone service, added 2.7 million users in the quarter, including 1.2 million on contracts.
 

Tuesday, January 22, 2008

Oil in N.Y. Falls on Skepticism Rate Cut Will Bolster Economy

(Bloomberg) -- Crude oil dropped to a six-week low in New York on skepticism that an emergency interest rate reduction by the U.S. Federal Reserve will prevent the world's biggest energy consuming country from falling into recession.

The overnight lending rate was lowered to 3.5 percent from 4.25 percent, the Federal Open Market Committee said in a statement in Washington. Oil in New York has declined 11 percent since touching a record $100.09 a barrel on Jan. 3 on speculation demand will drop as global economies slow.

``Recessionary fears have spread from the U.S. to overseas markets in a pronounced fashion,'' said Eric Wittenauer, an analyst at A.G. Edwards & Sons Inc. in St. Louis. ``The Fed move has given us some support but it's not enough to reverse the downward course of the energy market.''

Crude oil for February delivery fell $1.26, or 1.4 percent, to $89.31 a barrel at 11:45 a.m. on the New York Mercantile Exchange. Prices touched $86.11 before the Fed announcement, the lowest since Dec. 6. Prices are up 75 percent from a year ago.

There was no floor trading in New York yesterday because of the Martin Luther King Day holiday. Yesterday's electronic trades will apply toward today's close.

Brent crude for March settlement rose 26 cents, or 0.3 percent, to $87.77 a barrel on London's ICE Futures Europe exchange. Brent touched $85 today, the lowest since Oct. 25. Futures dropped $1.72, or 1.9 percent, yesterday.

Oil would slide to ``the low $80s'' if all outstanding speculative contracts were sold, analysts at Goldman Sachs Group Inc. including London-based Jeffrey Currie, said in a report today. Investment funds have sold oil contracts amounting to as much as 100 million barrels in the past two weeks, Goldman said.
 

Ambac, MBIA's Lust for CDO Returns Undermined AAA Profitability

(Bloomberg) -- Municipal bond insurers such as MBIA Inc. and Ambac Financial Group Inc. had a good thing going.

For years, they earned some of the highest profit margins in any industry -- by writing coverage for securities sold by states and cities to build roads, schools and firehouses. During the past five years, MBIA's average profit margin was 39 percent, more than four times the average of the Standard & Poor's 500 Index, according to data compiled by Bloomberg. Ambac's average profit margin was 48 percent.

The good times are over, and the culprit isn't municipal bonds; it's subprime debt, a market the insurers waded into in pursuit of even greater profits. Some of the biggest bond insurers are facing potential claims that may deplete their capital. Their share prices have plunged, and credit rating companies are scrutinizing their AAA status. Ambac became the first insurer to lose its triple-A rating, when Fitch Ratings downgraded the company to AA on Jan. 18.

With the main players distracted by subprime woes, billionaire investor Warren Buffett's Berkshire Hathaway Inc. is expanding into their core business of insuring bonds in the $2.6 trillion municipal market.

``The good, solid, old-fashioned but profitable business may gravitate over to Berkshire Hathaway,'' says Mark Adelson of Adelson & Jacob Consulting LLC, a New York firm that advises on the structured finance market. ``That was the bond insurers' anchor; that's what saw them through.''

The crisis has been brewing for about six years, ever since the insurers discovered collateralized debt obligations. These securities, part of an area known as structured finance, were created by Wall Street by repackaging assets such as mortgage bonds and buyout loans into new obligations for sale to institutional investors.

Subprime Home Loans

Attracted by top ratings from Standard & Poor's, Moody's Investors Service and Fitch and by lucrative premiums, the insurers agreed to pay CDO holders -- many of them banks that created the securities -- in the event of a default. Insurers backed $127 billion of CDOs that relied at least partly on repayments on subprime home loans, according to a Dec. 19 report by S&P, the No. 1 credit rating company.

``It looked so profitable and so easy that they let the portfolio shift too far toward structured finance,'' says Robert Fuller, who runs Capital Markets Management LLC, a Hopewell, New Jersey-based firm that advises municipalities and nonprofits. ``It morphed into this monster that is devouring them.''

CDO Rating Cuts

The tipping point came last year when the three major rating companies downgraded thousands of CDOs. Ratings on more than 2,000 CDOs were cut in November alone, with Fitch lowering CDOs backed by subprime mortgages 9.6 levels on average, according to a Dec. 13 UBS AG research report.

Rating cuts on CDOs and other securities backed by subprime mortgages and home equity loans led S&P to conclude bond insurers faced potential losses of $19 billion, the rating company said in its December report. That sent insurers scrambling for additional capital to protect their own credit ratings from being cut -- by the same companies whose judgments they had relied on in backing the CDOs.

Fitch Ratings said at the end of December that MBIA, Ambac and FGIC Corp., the fourth largest, had four to six weeks to raise $1 billion each to keep their AAA ratings.

MBIA Raises Capital

Seeking to avert a crippling reduction of its triple-A rating, MBIA, the largest of the companies, said in December that it would raise as much as $1 billion by selling a stake to private equity firm Warburg Pincus LLC. It said Jan. 9 that it will slash its dividend to 13 cents a share from 34 cents, and two days later it paid a yield of 14 percent to sell $1 billion of surplus notes, bonds issued by insurance companies that state regulators consider equity.

Shares of the Armonk, New York-based company fell 86 percent on the New York Stock Exchange to $8.55 on Jan. 18 from $60 on Aug. 31.

Ambac, the second largest, replaced Chief Executive Officer Robert Genader, 60, on Jan. 16, cut its dividend 67 percent and said it would raise more than $1 billion in capital. Two days later, it scrapped the plan to raise capital. The New York-based insurer's shares dropped 90 percent to $6.20 on Jan. 18 from $62.82 on Aug. 31.

Blackstone Group LP, the New York buyout firm run by Stephen Schwarzman, said Jan. 10 that it may write down its stake in FGIC, which it bought from Fairfield, Connecticut-based General Electric Co. in 2003 along with PMI Group Inc. and Cypress Group LLC.

First to Fall

The first to fall was ACA Capital Holdings Inc., whose ACA Financial Guaranty Corp. unit guaranteed $26.6 billion of CDOs backed by subprime mortgages, according to S&P. The New York- based firm was founded in 1997 by H. Russell Fraser, a one-time chairman of Fitch, to insure municipal bonds that triple-A rated insurers wouldn't cover.

S&P slashed ACA Financial's rating to CCC, a low junk level, from A in December and earlier this month suspended ratings on almost 2,150 bonds it insured. ACA Capital shares plunged 93 percent to 48 cents on Jan. 18 in OTC Bulletin Board trading from $6.70 on Aug. 31; the stock was suspended from trading on the New York Stock Exchange before the opening on Dec. 18.

``I knew that if they played with fire long enough, they were going to get burned,'' says Fraser, 66.

He left the company in 2001 over a dispute with the board about insuring CDOs, he says. Back then, it was debt of Enron Corp. and WorldCom Inc. -- companies that later filed the two largest bankruptcies in U.S. history -- that was being shoveled into CDOs.

Old West Museum

``Companies that were having problems or were growing very fast began to turn up in all the deals ACA was offered,'' says Fraser, who moved to Wyoming to run a 12,000-acre (4,856-hectare) ranch and turn a ghost town into a museum of the Old West.

Fraser, who first rated MBIA and Ambac in the 1970s as an analyst at S&P and later helped turn Fitch into one of the three major rating companies, says that while ACA's original mission had been to help finance projects such as nursing homes and rural hospitals, the board didn't want to allocate the capital needed to insure riskier municipal bonds.

Backing CDOs with credit-default-swap contracts was more alluring, Fraser says. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a borrower's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should the borrower fail to adhere to its debt agreements.

Scooping Up Premiums

By using swaps, ACA wasn't limited to guaranteeing only securities with a lower credit rating than its own. It could compete with AAA-rated insurers to back top-rated CDOs while having to maintain less capital than the triple-A companies. The top-rated insurers collected annual premiums for insuring CDOs with swaps that were 50 percent of the capital the rating companies required them to maintain, S&P said in a July 2007 overview of the bond insurance industry. ACA was scooping up premiums that were 130 percent of its required capital.

``ACA has had good success assuming exposure to very low risk supersenior CDO tranches, where the goal of the counterparty is risk transfer and the associated mark-to-market relief,'' S&P said.

By December, after S&P completed a ``stress test,'' it projected more than $3 billion of losses on those low-risk securities. Alan Roseman, ACA's CEO, didn't return a voice mail message seeking comment.

Ridgeway Court Funding

The deals could be complex, sometimes involving layers of potential risk related to the same troubled assets while appearing to offer diversification. As recently as June, Ambac insured $1.9 billion of a CDO called Ridgeway Court Funding II Ltd. whose holdings include other CDOs, some of which contain still more CDOs, according to documents prepared for investment managers that were reviewed by Bloomberg News.

In one case, Ridgeway Court has a direct interest in Carina CDO Ltd., whose assets are being liquidated, according to a statement issued Jan. 7 by its trustee, Bank of New York Mellon Corp. Ridgeway also has an indirect interest through another CDO holding called 888 Tactical Fund Ltd. that has a stake in Carina. And it has still more indirect interest in Carina through two CDOs, Pinnacle Peak CDO Ltd. and Octonion CDO Ltd., that hold interests in 888 Tactical Fund, according to the documents.

Ridgeway Court Funding II experienced a so-called event of default after declines in the creditworthiness of its holdings indicated some senior investors may not be fully repaid, S&P said in a statement on Jan. 18.

Credit-Default Swaps

While the bond insurers made big bets on CDOs using credit- default swaps, others in the market used similar contracts to bet against MBIA and Ambac. Credit-default swaps tied to MBIA's bonds rose to 26 percent upfront and 5 percent a year on Jan. 18, according to CMA Datavision in New York. That meant it would cost $2.6 million initially and $500,000 a year to protect $10 million in MBIA bonds from default for five years. The price implied traders were putting the chance MBIA would default in the next five years at 71 percent, according to a JPMorgan Chase & Co. valuation model. Credit-default swaps on Ambac rose to 26.5 percent upfront and 5 percent a year, implying a 72 percent risk of default within five years.

Two of the seven top-rated municipal bond insurers have so far escaped the deepest pitfalls in the structured finance market: New York-based Financial Security Assurance Holdings Ltd., the third largest, and Bermuda-based Assured Guaranty Ltd. FSA is a unit of Brussels-based Dexia SA, the world's largest lender to local governments. FSA and Assured Guaranty are the only two bond insurers that deserve top credit ratings, says Janet Tavakoli, president of Chicago-based Tavakoli Structured Finance, who has written two books on CDOs.

`Faux Ratings'

``All the AAA ratings are faux ratings at this point, with the exception of FSA and Assured Guaranty,'' she says.

The three major credit rating companies have affirmed FSA's AAA rating with a stable outlook. Assured Guaranty, which earned a Moody's top Aaa rating in July, opened a new office in Sydney and plans to expand into Asia. Dexia shares declined 25 percent to 15.14 euros ($22.14) on Jan. 18 from 20.21 euros on Aug. 31, while Assured Guaranty shares fell 33 percent to $17.46 from $26.07.

The siren call of CDOs was too strong for most insurers to resist. Virtually all of the securities were rated triple A and backing them required very little capital.

``This type of risk is thought to be one of the most profitable for the bond insurers,'' S&P said in a 2007 industry report.

Risk-Adjusted Ratio

Annual premiums on CDOs averaged 50 percent of the capital that the rating companies required the insurers to set aside, according to S&P. That compared with an average risk-adjusted profit ratio of 8 percent for insuring other types of structured- finance securities.

What the insurers hadn't bargained on was that the rating companies themselves, including S&P, had grossly underestimated the risk of CDOs.

``Insurers got into trouble because they charged too little for the risk they took on,'' says Joshua Rosner, managing director of New York-based research firm Graham Fisher & Co. While they shielded banks from taking writedowns on their CDOs, they undermined their own credibility, Rosner says. ``They lost their way out of greed.''

The lack of data on the securities that backed CDOs should have been a red flag. CDO prospectuses warned that reliable default rates for some types of securities backing the CDOs didn't exist, Tavakoli says.

`They Got It Wrong'

Structured-finance adviser Adelson says analysts failed to see that the mortgage market was becoming riskier. They relied instead on models to predict the performance of CDOs based on historical defaults, recovery rates and correlation risks for various credit ratings. They didn't consider how piggyback loans, which are loans used to borrow a down payment, would perform when extended to people with a history of not paying their bills, Adelson says.

``They treated it like a math problem, and they got it wrong.''

That became obvious in October, when New York-based Merrill Lynch & Co., the biggest U.S. brokerage firm, announced $8.4 billion of writedowns on subprime mortgages, asset-backed bonds and bad loans. Analysts used the numbers to shine a light on CDO prices. They began to estimate losses in the billions when the guarantees on securities were marked to reflect the market's view of the CDOs.
 

Corporate Default Risk Soars as Fed Rate Cut Signals Recession

(Bloomberg) -- The risk of companies defaulting soared on concern that an emergency interest rate cut by the Federal Reserve will fail to halt a worsening global economic slowdown, credit-default swaps show.

Contracts on Ambac Financial Group Inc. rose to a record after the second-largest bond insurer reported its biggest-ever loss. Merrill Lynch & Co. increased on concern that ratings downgrades at bond insurers including Ambac will cause losses at financial firms to surge. Benchmark gauges of corporate default risk in the U.S. and Europe climbed to the highest since they were created in 2004.

``The Fed's behind the curve; they had to cut,'' said Mark Kiesel, who oversees $158 billion in corporate bonds as executive vice president at Pacific Investment Management Co. in Newport Beach, California. ``The big question is, `Can the Fed change the willingness to take risk?' I'm not so sure.''

Contracts on the Markit CDX North America Investment-Grade Index, tied to the bonds of 125 companies in the U.S. and Canada, climbed as much as 16 basis points to 126, before falling back to 117 at 10:45 a.m. in New York, according to Deutsche Bank AG. Contracts on the Markit iTraxx Europe index of 125 investment- grade companies rose as much as 10.25 basis points to a record 92.5 today before falling back to 81.75, according to JPMorgan Chase & Co.

``The issues that plague the markets and the economy aren't necessarily fixed by simple rate cuts, but it helps,'' said Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``The overarching issue is the Fed seems extremely responsive to just the markets, which doesn't engender confidence necessarily.''

Stock Markets Tumble

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

The Fed lowered its benchmark interest rate in an emergency move for the first time since 2001 after stock markets tumbled from Hong Kong to London and amid increasing signs the U.S. economy is headed into a recession. The central bank lowered its target overnight lending rate to 3.5 percent from 4.25 percent.

U.S. stocks declined for a fifth day, the longest stretch of declines in 11 months.

Contracts on Ambac climbed 4 percentage points to 32 percent upfront and 5 percent a year, according to CMA Datavision in London. The New York-based company posted a $3.6 billion loss after writing down the value of guarantees on subprime debt by $5.21 billion. Armonk, New York-based MBIA Inc., the largest bond insurer, climbed 3 percentage points to 29 percent upfront and 5 percent a year, CMA prices show.

Risk of Default

Sellers of credit-default swaps demand upfront payments when they see a high risk of default.

Fitch Ratings cut Ambac's top grade last week and Moody's Investors Service and Standard & Poor's are reviewing the company, along with MBIA, for possible downgrade.

Credit-default swaps on New York-based Merrill Lynch, the biggest U.S. brokerage firm, rose 23 basis points to 190 basis points, prices from broker Phoenix Partners Group and CMA show.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Contracts With Insurers

``No one wants to wait to find out how it's all going to end,'' said Nigel Myer, a credit analyst at Dresdner Kleinwort in London. ``They just want to sell, preferably at last week's prices. The general reckoning is that the banks will be taking more charges.''

Banks led by Citigroup Inc. and Merrill Lynch have a net $1 trillion at risk because of contracts with insurers, according to the International Swaps and Derivatives Association.

Contracts on Charlotte, North Carolina-based Bank of America Corp. rose 6 basis points to 100 basis points, CMA prices show. The second-largest U.S. bank said today earnings dropped 95 percent after at least $5.28 billion of mortgage-related writedowns.

Financial firms have already lost more than $100 billion because of the worst U.S. housing slump for 27 years.

New York-based ACA Capital Holdings Inc., an insurer which guaranteed $26.6 billion of collateralized debt obligations backed by subprime mortgages, had its ratings cut to CCC from A by S&P in December. That prompted Merrill Lynch to announce $2.6 billion of writedowns on securities insured by the company.
 

Ambac Reports Loss, Talks With `Potential Parties'

(Bloomberg) -- Ambac Financial Group Inc., the first bond insurer to be stripped of its AAA credit rating, reported its biggest-ever loss and said it is talking to ``a number of potential parties'' to help overcome a slump in the value of guarantees on subprime-mortgage securities.

New York-based Ambac, the second-largest bond insurer, jumped as much as 37 percent in New York Stock Exchange trading on optimism the company may be sold. Ambac posted a $3.26 billion loss after writing down the value of guarantees on subprime debt by $5.21 billion, according to a statement by the company today.

Ambac said ratings companies are ``underestimating'' its ability to weather the rout in credit markets. Ambac, an underwriter of $556 billion of municipal and structured finance debt, last week scrapped a $1 billion equity sale after a 71 percent drop in the stock and the departure of its chief executive officer, prompting Fitch Ratings to reduce its insurance rating to AA from AAA.

``They can't issue equity and they can't issue debt,'' said Robert Haines, an analyst at bond research firm CreditSights Inc. in New York. ``The new CEO might be prepping the company for a potential sale.''

Michael Callen, who became interim CEO after Robert Genader left last week, said in a statement today that Ambac is ``exploring the attractiveness'' of various alternatives. He wasn't more specific.

The fourth-quarter net loss, which equated to $31.85 a share, took the 2007 deficit to $3.23 billion, the company's first ever annual loss. Ambac on Jan. 16 forecast a fourth- quarter net loss of about $32.83 a share. The company reported an operating loss, excluding writedowns on contracts to guarantee subprime securities, of $6.21 per share.

Hobbled by Expansion

The AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg. The industry guaranteed $127 billion of collateralized debt obligations linked to subprime mortgages that have plunged in value as defaults by borrowers with poor credit soar to records.

Ambac, which pioneered municipal bond insurance in 1971, has been hobbled by its expansion into CDOs, which package pools of debt and slice them into pieces with varying ratings. The CDO declines forced Ambac and others to reduce the value of contracts designed to protect CDO holders from default. Ambac said most of the writedowns aren't necessarily permanent losses and it hasn't paid any claims on its CDO portfolio.

Dividend Cut

Ambac shares rose 99 cents, or 16 percent, to $7.19 at 9:41 a.m. in New York Stock Exchange composite trading. The stock has tumbled 93 percent in the past year, shaving $8.8 billion from the company's market capitalization.

Ambac on Jan. 16 slashed its dividend 67 percent and said it would sell stock or equity-linked notes to bolster its capital, in part to meet Fitch's demand to raise $1 billion by the end of January. Two days later it scrapped the share sale.

The plan provoked a boardroom dispute that led to the departure of Genader, who disagreed with the capital raising, according to the company's regulatory filings.

Ambac's loss reported today followed the company's first- ever loss in the third quarter. Before 2007, Ambac had reported profit increases every year for the past decade.

``In retrospect, insurers wish they'd never heard the term structured finance, much less written the business,'' said Donald Light, an insurance analyst at Celent, a consulting firm in Boston.

Credit-Default Swaps

Prices for credit-default swaps that pay investors if Ambac can't meet its debt obligations imply a 72 percent chance it will default in the next five years, according to a JPMorgan Chase & Co.

Contracts on Ambac climbed 2.5 percentage points to 30.5 percent upfront and 5 percent a year today, prices from CMA Datavision in London show.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
 

SA losing faith in govt

(Fin24) - If the power deadlock within the ANC is perpetuated, a feeding frenzy of opportunistic corruption, near corruption or inertia could follow, according to a researcher from the Institute for Justice and Reconciliation (IJR), Susan Brown, who calls this "the worst case".


Brown was speaking during a breakfast briefing to launch the IJR's transformation audit, which she edited, and which showed there has been an alarming slump in public confidence in SA leaders and its representative institutions, including parliament.


The report was conducted between April 2006 and April 2007 among 3 500 respondents.


The Presidency has already received a copy of the report, and according to the IJR it was "receptive", questioned whether a trend was being seen and engaged more openly in dialogue than they would have perhaps a year ago.


IJR researcher Jan Hofmeyr explains that all 23 government performance areas showed significant declines, with seven showing declines of 20% or more.


"This is quite significant," he noted, adding that there was a decline in the trust being placed in national leaders. Added to this were concerns around softer issues, like the integrity of leadership.


Incoming executive director of the IJR (replacing Charles Villa-Vicencio, who remains on the board) Fanie du Toit said: "There are some serious findings here. It speaks of a more systematic failure to take the public into confidence."


He added that there was a "startling gap" between economic growth and the public perception as displayed in the audit.
SA has been enjoying the highest growth in its business cycle since the Second World War, but yet the public was clearly not happy. Some blame must lie somewhere, and as the audit showed, there appeared to be something of a leadership crisis within government institutions and lack of delivery to a wider base.


Brown highlighted inefficiencies in the education system, which she explained fed into unemployment. She said the linkages with tertiary institutions had hardly expanded since 1994.


Du Toit pointed out that SA compared badly with its peers on the education front, and said that the pool of people from which tertiary students were derived was still the same size as it was in 1995.


"It affects the nature of the macroeconomic system we have, and it affects public confidence and the ability to develop a unified society," said Brown.
 

Rand climbs after US rate cut

(Fin24) - The rand has climbed against the dollar on Tuesday, after the US Federal Reserve cut its overnight rate, and global stocks pared their losses.
 

Monday, January 21, 2008

Europe Starts to Feel Pinch as U.S. Slowdown Spreads

(Bloomberg) -- The European economy may be starting to suffer collateral damage from the U.S. subprime mortgage slump.

Banks are making borrowing harder, industrial production is shrinking and investor confidence is waning just as the U.S. skirts recession. With the euro's appreciation to a record hurting exports, more economists are betting the European Central Bank will be forced to lower interest rates.

``There is a clear downtrend in the economy now,'' said Michael Schubert, an economist at Commerzbank AG in Frankfurt. He revised his ECB forecast last week and predicts two cuts by October after previously projecting one in the final quarter.

The ECB has so far refused to follow the Federal Reserve and the Bank of England in lowering borrowing costs as contagion from the U.S. housing recession spreads, arguing that inflation pressures are too strong. Government and industry surveys this week may nevertheless show growth risks are mounting and finance ministers meet in Brussels today to discuss the outlook.

Europe's manufacturing and services industries probably expanded at the slowest pace since June 2005 and German business confidence fell to the lowest in two years, according to surveys of economists by Bloomberg News.

Europe's Stoxx 600 index today extended its decline to 20 percent since its 6 1/2-year high on June 1, satisfying the definition of a bear market. The euro fell to a five-month low against the yen after ECB council member Nout Wellink said yesterday that growth may slow more than officials had expected.

Credit Costs

The slowdown is undermining policy makers' hopes that the region will avoid the fallout from the subprime mortgage collapse, which drove up global credit costs.

Luxembourg Finance Minister Jean-Claude Juncker, who will chair today's talks, said Jan. 14 the European Commission may lower its growth projection for this year to 1.8 percent from 2.2 percent previously. That would be the slowest pace since 2005.

Industrial output fell enough in November for economists at Royal Bank of Scotland Group Plc to declare that manufacturing has slipped into its first recession since 2001, while investor confidence in Germany crumbled to the lowest since 1992.

European banks will make it harder for companies and consumers to get loans in the next three months, an ECB survey showed on Jan. 18.

``The days of easy credit appear to be over,'' said Martin van Vliet, an economist at ING Bank in Amsterdam. Royal Bank of Scotland publishes the manufacturing and services reports on Jan. 23 and the Munich-based Ifo institute releases business confidence figures a day later.
 

U.K. to Back Northern Rock Debt in Plan to Spur Sale

(Bloomberg) -- The U.K. government, struggling to find a buyer for Northern Rock Plc, said it will guarantee a sale of bonds backed by the bank's home loans and gave bidders two weeks to come forward with proposals.

The mortgages, consumer loans and some investment-grade securities of the Newcastle, England-based bank would be packaged as debt and sold to investors, the Treasury said today. Bids based on the new funding plan must be submitted by Feb. 4.

Northern Rock rose as much as 55 percent in London trading on speculation the proposal will revive interest among potential buyers such as Richard Branson's Virgin Group Ltd. Northern Rock sparked the first run on a U.K. bank in a century when it sought aid from the Bank of England in September. Borrowings have since swollen to about 24 billion pounds ($47 billion), hampering a sale and forcing the government to consider nationalization.

``It seems a very reasonable solution for Northern Rock,'' said Simon Maughan, an analyst at MF Global Securities Ltd. in London who has a ``neutral'' rating on the stock. ``The problem comes when the competition cries foul.''

Northern Rock rose 21.75 pence, or 34 percent, to 86.25 pence by 12:35 p.m., valuing the bank at 363 million pounds.

Brown, Darling

U.K. Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling have been accused of ``dithering'' by opposition lawmakers for failing to prevent the run on Northern Rock. The U.K. regulatory framework, designed while Brown was running the Treasury, hampered the central bank's ability to head off the bank run, lawmakers, economists and the Bank of England's governor, Mervyn King, have said.

Brown's government has also been criticized for not making a decision earlier on the future of the bank. Darling will make a statement today on the plan and possibilities for a private sale.

``It's precisely because Gordon Brown and Alistair Darling couldn't make a decision that we are looking at public subsidy for five years to come, with no guarantee the government is going to get its money back,'' George Osborne, who speaks on finance for Britain's Conservative Party, said in an interview on BBC Radio 4's Today program.

Northern Rock, a formerly customer-owned building society whose roots date to 1850, is the U.K.'s third-biggest mortgage lender. The company, which sold shares in 1997, has 76 branches and relied mainly on money markets to finance mortgage lending.

The bank sought the government's help after the U.S. subprime mortgage crash rattled credit markets, choking off its financing. The government guaranteed the bank's customer deposits and will also back the bond sale.

Weighing Options

Northern Rock is weighing private solutions, including a bid by Virgin and a reorganization plan of its own. At the same time, concern has grown the bank may have to be nationalized as bidders struggle to secure financing to repay the Bank of England debt.

Northern Rock welcomed the authorities' preference ``to reach agreement on a private sector solution for the company,'' the bank said in a statement today. The lender said it would work with bidders and the government to develop their proposals and its own standalone plan.

A sale will have to be agreed upon in time to enable a restructuring plan to be submitted for approval to the European Union by March 17, the government said. Pending approval by the EU, the Bank of England's loans would be repaid under the plan, which was devised by Goldman Sachs Group Inc.
 

Across Asia, food is the new oil as prices surge

(Reuters) - From India to Indonesia, governments across Asia are scrambling for solutions as it dawns on them that sky-high food prices might not fall any time soon.

With food accounting for a third of China's consumer price basket and even more in some other countries, the high prices are a ticking time bomb for the region, where fuel increases periodically touch off sometimes violent protests.

"If the inflation problem gets out of hand, it could have devastating implications for not only economic but also political stability," said Yiping Huang, an economist with Citigroup in Hong Kong.

In Pakistan, where the government has blamed a shortage of flour on smugglers and hoarders, paramilitary troops have begun escorting wheat trucks to deter thieves.

Malaysia briefly rationed cooking oil this month before the government boosted supplies of subsidized oil.

In China, where inflation is at an 11-year high, the government has taxed grain exports to boost local supplies and resorted to command economy-style price controls.
 

"Help Wanted" highlights skills drain in U.S

(Reuters) - Only half the machines are running at precision parts maker Hamill Manufacturing, nestled in the Allegheny Mountains just east of Pittsburgh, once the booming center of the U.S. steel industry.

But the factory's overcapacity is the result not of a shortage of business -- it has more orders than it can fill, despite a slowing U.S. economy -- but because of a shortage of skilled workers.

"I'd hire 10 machinists right now if I could," said John Dalrymple, president of the company, which makes high-end parts for military helicopters and nuclear submarines. "That's eight to 10 percent of our workforce."

While millions of jobs making everything from textiles to steel have moved to new powerhouses like China in recent years, precision manufacturing remains a crucial niche in the United States, one that is overworked and chronically understaffed.

And, in a bad sign for the United States and its declining economic might, that shortage of skilled workers is likely to get worse as Baby Boomers retire -- with no younger generation of manufacturing workers to take the baton.

"Our workforce is an aging workforce," said Chief Executive Jeff Kelly, whose father founded Hamill nearly 60 years ago. "There isn't a queue of people lining up to come into the industry."

Some 20 percent of small to medium-sized manufacturers -- those with up to 2,000 workers -- cited retaining or training employees as their No. 1 concern, according to a survey by the National Association of Manufacturers. The survey was carried out in 2007 but has not been published yet.
 

Wednesday, January 16, 2008

ECB's Mersch Urges Caution as Growth Risks Increase

(Bloomberg) -- European Central Bank council member Yves Mersch said the bank should exercise caution as risks to economic growth increase.

``We have certainly downside risks to economic activity,'' Mersch, 58, said in an interview at his office in Luxembourg yesterday. While inflation risks have also risen, ``we're not unaware of mitigation to price developments,'' he said, citing a stronger euro, near-record oil prices, the slowing U.S. economy and higher credit costs.

The ECB has threatened to raise interest rates as unions demand wage increases to compensate for the fastest inflation in six years. At the same time, the U.S. Federal Reserve is cutting borrowing costs to stave off recession in the world's largest economy after its housing market slumped.

``I don't like assumptions that what's happening in one part of the world is also true for another part,'' Mersch said. The ECB should nevertheless ``be cautious, look at the figures and take the appropriate decisions. There's still widespread uncertainty, and that's affecting confidence.''

The euro fell more than a cent on the comments, to $1.4652 at 5.06 p.m. in Frankfurt, and bonds rallied.

Mersch is the fifth policy maker this week to note either downside risks to the economic outlook or the temporary nature of the jump in inflation.

`Look Through'

The ECB can afford to ignore an oil-driven surge in inflation if it doesn't inflate wage settlements, Mersch said. ``If there's no pass-through of these temporary factors to the general price level, we're able to look through if need be.''

Inflation, which held at 3.1 percent in December, may return to the ECB's 2 percent limit next year if oil prices ease and wages don't rise excessively, ECB council members Michael Bonello, Lorenzo Bini Smaghi and Axel Weber all said this week.

Mersch said while rising oil and food costs have increased the likelihood of so-called second-round effects materializing, they ``haven't materialized so far.'' Financial-market uncertainty and ``other international developments'' may ``weigh on the inflation development,'' he said.

The ECB shelved a planned rate increase in September and has since kept its benchmark at 4 percent to assess the economic impact of the U.S. subprime mortgage collapse, which made banks reluctant to lend and drove up the cost of credit globally. Oil prices near $100 a barrel and the euro's appreciation may also damp European growth.
 

JPMorgan Fourth-Quarter Earnings Fall, Miss Estimates

(Bloomberg) -- JPMorgan Chase & Co., the third- biggest U.S. bank, said profit dropped 34 percent on subprime- mortgage writedowns and higher provisions for future loan defaults.

Fourth-quarter net income declined to $2.97 billion, or 86 cents a share, from $4.53 billion, or $1.26, a year earlier, the New York-based bank said today in a statement. JPMorgan rose as much as 6.8 percent in New York trading as the $1.3 billion writedown was smaller than analysts estimated.

The profit decline, the first since Jamie Dimon became chief executive officer in 2005, came as trading revenue fell and JPMorgan prepared for what it said may be a substantial weakening in the U.S. economy. The company added $2.3 billion to credit reserves, bringing the total to $10 billion. Citigroup Inc., the biggest U.S. bank, said yesterday it added $5.2 billion to cover U.S. loan losses and took an $18.1 billion writedown.

``We remain extremely cautious as we enter 2008,'' Dimon, 51, said in the statement. ``If the economy weakens substantially from here -- for which, as a company, we need to be prepared --it will negatively affect business volumes and drive credit costs higher.''

JPMorgan gained $1.68, or 4.3 percent, to $40.85 in composite trading on the New York Stock Exchange at 10:28 a.m.

``Their diversified business model really continues to separate JPMorgan from a lot of their peers,'' said William Fitzpatrick, an analyst at Racine, Wisconsin-based Optique Capital Management, which oversees $1.7 billion including JPMorgan shares.

Revenue Increase

Revenue climbed 7 percent to $17.4 billion, compared with the average estimate of $17.2 billion in the Bloomberg survey. Profit fell short of the 92-cent average estimate of 17 analysts surveyed by Bloomberg. Last year's fourth-quarter earnings included a one-time gain of $622 million.

Net income at the investment-banking division tumbled 88 percent to $124 million in the fourth quarter, as credit-market turmoil reduced revenue from debt underwriting 39 percent, to $467 million. Fixed-income revenue tumbled 70 percent because of the writedown, to $615 million, and ``weaker trading results'' contributed to a 40 percent drop in equity market revenue, which fell to $578 million.

The retail bank's profit climbed 5 percent to $752 million, driven by increases in mortgage banking. Those gains were tempered by declines in the home-equity and auto-loan businesses. Charge-offs on home-equity loans totaled $248 million. Profit from auto loans was $49 million, a 25 percent drop from a year earlier.

Credit Costs

Dimon said on a conference call with analysts that he isn't predicting a U.S. recession, though credit costs will increase as the economy weakens.

JPMorgan earned 15 percent less from its card services business, as its provision for future losses rose 40 percent to $1.79 billion.

Return on equity from continuing operations, a gauge of how effectively the company reinvests earnings, was 10 percent, compared with 14 percent a year earlier.

JPMorgan lost 18 percent of its market value in the past 12 months, compared with 50 percent at New York-based Citigroup and 29 percent at Charlotte, North Carolina-based Bank of America Corp.

JPMorgan's Tier 1 capital ratio, which regulators monitor to assess banks' ability to withstand loan losses, remained unchanged from the third quarter at 8.4 percent.
 

Load shedding inquiry looms

(Fin24) - The public protector is considering whether or not to mount an investigation into the load shedding currently being experienced by South Africans, which, he says "is having a devastating effect ... on service delivery by government, is causing serious prejudice to the private sector and negatively affects the lives of many of the people."


In a letter to the chief executive of Eskom, Jacob Maroga, the public protector, Lawrence Mushwana, on Wednesday said that he is mandated to investigate on his own initiative or on receipt of a complaint, conduct by public entities that causes unlawful or improper prejudice to any person.


He poses a series of questions to the Eskom chief to help him decide whether to proceed.

He asks Maroga to explain the reasons for the load shedding, the measures that were put in place by Eskom to prevent what is causing the load shedding and the expected duration of the load shedding practice.

He also asks for detailed information "as a matter of urgency" on steps that have been taken by Eskom to address the reasons for the load shedding and the time frames within which the problems will be resolved.
 

Metorex guns for CRC control

(Fin24) - Metorex, the JSE-listed diversified mining group, said it was confident it would vacuum up the remaining 5% it needed to complete the takeover of Copper Resources Corporation (CRC), an AIM-traded company with mining prospects in the Congo.


"We already own 45% of the company," said Charles Needham, CEO of Metorex at the group's annual general meeting held in Johannesburg suburb, Rosebank. "We have approached between 7% to 8% of CRC shareholders who are outside the offer to sell us the shares on the same terms and conditions."


"What if something goes wrong?" a shareholder asked Needham.


Said Needham: "We are pretty certain about getting at least 5% of those."


Metorex bought 38.7% of CRC in July last year plus a 5% stake in its 75% held subsidiary MMK from the Forrest group for R600m. The Metorex share price stood around R24 at the time and it subsequently rose to an all-time high of 2 950c.


But by mid-January, Metorex's share price was 38% off its 12-month high and was last trading at 1 902c, another 5% decline on the day.

 Read more at Fin24

Monday, January 14, 2008

Malawi tobacco output higher

(Fin24) - Tobacco production in Malawi is expected to rise to 150 million kilograms this season, encouraged by higher prices and good rains, says the Tobacco Association of Malawi (Tama).


Tama president Charles Mwamsambo told Reuters more farmers had signed up to grow tobacco this season because of a number of factors, key among them an anticipated spike in prices that is likely to encourage tobacco growers to lift production.


The expected increase in prices follows a slump in production last year, when growers only managed production of only 140 million kilograms, down from 158 million the previous season.


"There are several factors like the motivation that farmers have from last year's good prices: more buyers on the market and good rains that will result in high production of about 150 million kilograms this growing season," he said.


More farmers


Mwamsambo said Tama had registered 27 000 new farmers this season compared to only 10 000 new growers signed up last year.


Tobacco accounts for over 70% of Malawi's exports and 15% of its gross domestic product, but for the last two years low prices have led to cuts in production.


About 2 million of the country's 13 million people depend on tobacco and related industries for their livelihood.


The biggest auction floors last year saw farmers sell their crop between $1.70 and $1.60 per kg for the first time in several years, after President Bingu wa Mutharika ordered buyers to offer better prices or leave the country.


 

India sweetens Ethopian sugar

(Fin24) - India has agreed to give Ethiopia a $640m credit out of a total $1.3bn needed to boost Ethiopia's sugar production, say officials from the two countries.


Late last year Ethiopia announced plans to increase its annual sugar production to 1.3 million tons by 2011 from a current 300 000 tons.


India's Exim Bank will finance the $640m.


"It is the largest ever line of credit that India has provided to any country so far," Gurjit Singh, the country's ambassador to Ethiopia, said while signing an agreement between India and Ethiopia.


New factory


The remaining $660m will be covered by the Ethiopian government.


The money will mainly go towards erecting a new factory at Tendaho in the country's Afar region, and expansion of Finchaa, one of four existing sugar factories in Ethiopia within the next two years.


"With the completion of Tendaho... and the enhanced production of the existing four sugar factories... annual sugar production is expected reach up to 1.3 million tons within the next two years," Trade and Industry Minister Girma Birru said.


Tendaho will have an annual production capacity of 600 000 tons and will be Ethiopia's largest sugar factory. It will be located in the lower Awash Valley, in the Afar region, along the Addis Ababa-Djibouti highway and railway line.
 

Big yes for diamond merger

(Fin24) - Diamond Core Resources (Diamond Core) shareholders today overwhelmingly approved the proposed merger with Toronto-listed BRC Diamonds to create BRC Diamond Core.


There was no sign of opposition from estranged black economic empowerment (BEE) partner Sefalana and the fact that the meeting went so smoothly indicates settlement negotiations between Sefalana and Diamond Core management seem to be progressing well.


The proposed merger had to be passed by at least 75% of the votes cast at the meeting.


In all 206.8 million shares - equivalent to 69.8% of Diamond Core's total issued share capital - were cast. Some 205.8 million of those - equivalent to 99.5% - were voted in favour of the merger.


'SA, DRC projects to be prioritised'


The merger must now be formally sanctioned by the High Court before coming into effect. Diamond Core shares are due to be suspended from trading on the JSE from February 4 at which point BRC shares will begin trading on the bourse. The effective implementation date of the scheme is February 11.


Diamond Core CEO Theo Botoulas said: "What management must do now ahead of February 11 is prioritise the projects in South Africa and the Democratic Republic of Congo (DRC) and come up with a revised strategy and plan to be presented to the new board."


Diamond Core already has two bulk sampling operations running in South Africa. One of these is on an alluvial deposit at Silverstreams on the Middle Orange River and the second is on the Paardeberg kimberlite pipe near Kimberley.


Main justification for the merger is the potential rapid growth for the company should it make a major diamond discovery in the DRC on the prospecting rights held by BRC Diamonds.


Interviewed after the meeting, Botoulas told Fin24 that bulk sampling had been completed at Paardeberg and the results were being analysed by consultants with a view to drawing up a mine plan.
 
 

Reuters, Thomson expect deal to close in Q2

(Reuters) - News and information groups Reuters Group Plc (RTR.L: Quote, Profile, Research) and Thomson Corp (TOC.TO: Quote, Profile, Research) said they expect Thomson's proposed acquisition of the British group to close early in the second quarter of 2008.

The pair said the U.S. Department of Justice, which had been expected to give its decision on the 8.2 billion pound ($16.1 billion) deal by Tuesday, would now give its ruling around the same time as the European Commission's.

The Commission is set to give its ruling by March 10, and it could then take four to six weeks to secure shareholder approval.

"Thomson and Reuters have had productive discussions with the (United States) Department of Justice and the European Commission," the companies said, adding that they "have a high degree of confidence that the acquisition will receive clearance on an expedited timetable".
 

M&T Bank Q4 profit sinks

(Reuters) - M&T Bank Corp (MTB.N: Quote, Profile, Research), the first large U.S. bank to report fourth-quarter results, said on Monday that profit tumbled 70 percent, hurt by debt write-downs and turmoil in residential real estate markets.

The bank, which counts Warren Buffett's Berkshire Hathaway Inc (BRKa.N: Quote, Profile , Research) (BRKb.N: Quote, Profile, Research) among its largest investors, said net income fell to $64.9 million, or 60 cents per share, from $213.3 million, or $1.88, a year earlier. Operating profit totaled 77 cents per share, the bank said.

Analysts on average expected profit of $1.85 per share, according to Reuters Estimates. Buffalo, New York-based M&T was one of the few large U.S. banks that had not in the last two months specifically cautioned investors how credit and mortgage market turmoil would hurt fourth-quarter results.

M&T shares fell $3.24, or 4.4 percent, to $70.51 in pre-market electronic trading.

The company reduced profit by $78 million, or 71 cents per share, to write down collateralized debt obligations, and by $29 million, or 27 cents per share, for credit losses.

Earnings were also reduced 13 cents per share for M&T's share of antitrust litigation involving credit card network Visa Inc, and 8 cents per share for acquisitions.

M&T Bank said it has $64.9 billion in assets and more than 650 branches in seven mid-Atlantic states and Washington, D.C.

Its results may foreshadow those at other large U.S. banks, most of which are to report by the middle of next week. Nearly all are expected to report lower profits, or losses.
 

Ford sees challenges in first half of 2008

(Reuters) - Ford Motor Co (F.N: Quote, Profile, Research) expects a challenging first half of 2008 for all automakers in the United States with a drop in industrywide retail sales, Ford's North American president said on Monday.

Mark Fields also said he hopes prior Federal Reserve rate cuts would begin to support the economy in the second half of the year, and that the U.S. government would take a look at tax rates as part of an economic stimulus package.
 
 
 

Romney, McCain, Huckabee Shift to Economy in Michigan

(Bloomberg) -- Michigan's hard-hit economy occupies center stage as two favorite sons, Mitt Romney and John McCain, square off in a potentially decisive contest for the Republican presidential nomination, with an outsider, Mike Huckabee, gaining ground.

``It's a strong three-man race,'' said Scott Reed, a Republican strategist who isn't affiliated with any candidate. Michigan's primary tomorrow ``is a must-win for Romney, a need- to-win for McCain, and Huckabee just has to do well enough to go on to South Carolina,'' which votes Jan. 19.

Romney, who was born and raised in Michigan, is staking his candidacy on a victory in the state after his second-place showings in Iowa and New Hampshire this month. Even though Romney, 60, hasn't lived in the state for more than three decades, he benefits from high name recognition: His late father, George, was chairman of American Motors Corp., a three- term governor in the 1960s and a presidential candidate.

Michigan's highest-in-the-nation unemployment rate and ballooning home-mortgage foreclosures have forced the candidates to tout their economic remedies.

``When the nation begins to feel a hiccup, we all talk about a stimulus package, the need to put money in the hands of consumers and so forth,'' Romney said in an interview today. ``But when Michigan has been suffering for 10 years, people have sat by and been somewhat idle.''

This weekend, Romney and McCain sparred over who would best be able to address the state's economic woes. Romney, who promises to lower tax rates ``across the board'' to stimulate the economy, criticized McCain for saying some lost jobs would never come back.

`Going Away'

``Some say these are jobs that are just going away and you better get used to it,'' the former Massachusetts governor said at a campaign stop Jan. 12 outside a General Motors Corp. plant in Ypsilanti where the automaker has announced plans to fire 200 workers. ``Are we going to allow the entire domestic automotive manufacturing industry to disappear?''

After losing to Huckabee in Iowa and to McCain in New Hampshire, Romney is relying on a win in Michigan to stay competitive. Last week, his campaign canceled ad purchases in South Carolina and Florida and shifted the money to the Wolverine State.

``Romney's running as someone who really understands Michigan's problems,'' said Tom Rath, one of the candidate's top strategists.

2000 Race

McCain, 71, also is well-known in Michigan, having won the state's Republican primary in 2000, defeating then-Texas Governor George W. Bush.

The Arizona senator is counting on a repeat performance to give him momentum for subsequent primaries. Like Romney, McCain rushed from New Hampshire to Michigan, where he began touting an economic agenda that includes reining in federal spending, shoring up Social Security and Medicare, middle-class tax cuts and job training.

Michigan had a 7.4 percent unemployment rate in November, compared with a national rate of 4.7 percent, according to the U.S. Labor Department. It is also feeling the effects of the credit crisis: In 2007, Michigan accounted for 35,404 of the 588,882 U.S. home-mortgage foreclosures, according to foreclosure.com.

In Livonia on Jan. 12, McCain said training and technological improvements would lead to new, better-paying jobs.

`Bright Future'

``Michigan has a bright future; but it will not be reached attempting to recreate the past,'' McCain said.

Huckabee, 52, has also jumped into the economic debate. In an address at the Detroit Economic Club on Jan. 11, the former Arkansas governor laid out his proposals for a ``fair tax'' based on consumption that would replace federal income and payroll levies.

The state ``helped save America'' during World War II ``and now it may be time for America to help save Michigan,'' he said.

His low-budget campaign is also is running a TV ad that obliquely takes a shot at Romney's background as co-founder of Bain Capital LLC, a Boston buyout firm, suggesting he reminds Americans of ``the guy who laid them off.''

The ordained Baptist minister's appeal goes beyond his economic message. Lower and Western Michigan have blocs of evangelical voters who may turn out for him in large numbers. These voters account for up to 30 percent of the state's Republican electorate, and their support for Huckabee would hurt Romney more than McCain, said Reed, who managed Bob Dole's 1996 presidential campaign.
 

IBM Beats Estimates on Emerging Markets; Shares Climb

(Bloomberg) -- International Business Machines Corp., the world's biggest computer-services company, posted earnings and sales that topped analysts' projections as orders from Asia and Europe bolstered results.

IBM advanced 8 percent in early trading, which would be the most in more than five years if it holds when U.S. markets open. Fourth-quarter profit climbed to $2.80 a share and sales rose to $28.9 billion, exceeding predictions by more than $1 billion.

Business in Asia, Europe and developing countries drove results, Chief Executive Officer Samuel Palmisano said today in a statement. The remarks eased concern that slowing economic growth in the U.S. will drag down technology company profits and marked a reversal from the previous quarter, when IBM disappointed investors with slack hardware sales.

IBM rose $7.85 to $105.52 in early trading after closing at $97.67 on Jan. 11 on the New York Stock Exchange. The Armonk, New York-based company's shares climbed 11 percent last year.

Analysts anticipated profit from continuing operations of $2.60 a share and revenue of $27.7 billion, according to the average of estimates compiled by Bloomberg.

The company plans to report full results on Jan. 17.
 

Friday, January 11, 2008

No fresh Vodacom bid for GT

(FIN24) - Vodacom, SA's biggest mobile network, operator has not tabled a fresh offer for a controlling stake in Ghana Telecoms (GT) but couldn't rule out adding a sweetener to its initial $500m (R3.5bn) bid.


"I've read reports from Ghana to that effect [of a higher offer]," said Dot Field, head of group communications at Vodacom. "But the fact is that we have not tabled a fresh offer for GT."


She added, however, that Ghana remained a market in which the group was "firmly" interested... as indicated in our annual report".


Initial bids for a 51% stake in GT were rejected by transactional advisors who argued that they were way below the government's asking price. Bidders included Portugal Telecom and France Telecoms.
 
 

Gold Futures Rise to Record $900.10 on Interest-Rate Outlook

(Bloomberg) -- Gold futures rose to a record $900.10 an ounce on speculation the Federal Reserve will further cut U.S. interest rates, weakening the dollar and boosting the investment appeal of the precious metal. Silver also climbed.

Interest-rate futures show a 68 percent chance the Fed will lower borrowing costs 0.5 percentage point to 3.75 percent by Jan. 30 after Fed Chairman Ben S. Bernanke suggested cuts may be necessary to guard against an economic slowdown. Gold rose 31 percent last year when the Fed slashed rates 1 percentage point, sending the dollar 9.5 percent lower against the euro.

``If the Fed drops rates, a lower dollar will propel gold higher,'' said Leonard Kaplan, president of Prospector Asset Management in Chicago. ``Everything we buy is going to be more expensive. Any raw material will go through the roof. The smart people see inflation.''

Gold futures for February delivery rose $4.70, or 0.5 percent, to $898.30 an ounce at 11:55 a.m. on the Comex division of the New York Mercantile Exchange. The price reached the record at 10:40 a.m. The record level was confirmed by Nymex.

Silver futures for March delivery rose 2 cents, or 0.1 percent, to $16.295 an ounce. The price earlier reached $16.415, the highest since January 1981. The metal gained 15 percent last year.

HSBC Securities USA Inc. and Morgan Stanley predicted the Fed will reduce its benchmark rate by half a percentage point this month after Bernanke's comments, up from their previous forecast of a quarter point.
 

Thursday, January 10, 2008

Tony Blair to join JPMorgan: source

(Reuters) - Former British prime minister Tony Blair is expected on Thursday to join U.S. bank JPMorgan Chase & Co Inc as a senior adviser, according to a person familiar with the situation.

JPMorgan declined to comment. The Financial Times in London first reported the move on its Web site, saying it would be the first of a series positions Blair expects to take in the private sector.

Blair, a key ally of U.S. President George W. Bush, was replaced last year by Gordon Brown as prime minister amid growing discontent over Great Britain's policy in Iraq.

Details of Blair's duties with JPMorgan, the third largest U.S. bank, were not immediately available.
 

Citigroup and Merrill in talks for foreign capital: report

(Reuters) - Citigroup Inc. (C.N: Quote, Profile, Research) and Merrill Lynch & Co Inc. (MER.N: Quote, Profile, Research) are in discussions to receive more capital from investors, primarily foreign governments, The Wall Street Journal reported on Thursday.

Citigroup could get as much as $10 billion, likely all from foreign governments, while Merrill is expected to get $3 billion to $4 billion, much of it from a Middle Eastern government investment fund, the report said.

The report also said Citigroup's board is expected to discuss cutting the firm's dividend in half, a move that could save it more than $5 billion a year.

Representatives were not immediately available for comment at either bank.

U.S. banks have been wrestling with huge subprime mortgage losses, prompting some to seek cash from sovereign wealth funds
 

Recession fears are growing

(Reuters) - Expectations for the weakest consumer spending performance in 17 years during 2008 kept the odds of a recession at nearly 40 percent, a survey of top forecasters showed on Thursday.

Panelists surveyed by the Blue Chip Economic Indicators newsletter have the odds of a recession in the next year at 38 percent, a little weaker than the 39 percent odds forecast a month ago.

But the most recent survey was taken ahead of December's grim unemployment report and the newsletter stated that growth forecasts would have been weaker if taken after release of that data.

"The January 4th news of the first decline in private sector nonfarm payrolls since July 2003 and whopping 0.3 of a percentage point jump in the unemployment rate during December no doubt caused some of our panelists to further trim their forecasts of economic growth this year and heightened speculation about the possibility of a recession," the newsletter stated.

"Whether or not the economy is already in a recession, about to enter one, or manages to muddle through without one, will only be known in the fullness of time," the newsletter wrote.

Based on the Jan 2-3 survey of economists -- taken a day ahead of the government's weak employment report that showed a huge uptick in the December unemployment rate and the weakest job growth in more than four years -- consumer spending this year is expected to grow at the weakest annual pace since 1991.
 

Wednesday, January 9, 2008

S.Africa business confidence falls to 4-year low

(Reuters) - South African business confidence fell to a four-year low in December as companies were nervous about economic growth in 2008, the South African Chamber of Commerce and Industry (SACCI) said on Wednesday.

The Business Confidence Index fell to 94.8 points, its lowest level since November 2003, after declining to 95.8 in the previous month.

SACCI said in a statement a stable rand currency assisted exports and manufacturing output,

"The other sub-indices all turned negative...trade, residential construction and import volumes declined substantially while inflation moved higher while the stock market lacked direction."

Inflation climbed to a four-and-half year high of 7.9 percent year-on-year in November, raising expectations that the central bank would hike interest rates again on Jan 31, after raising them by 400 basis points since June 2006.

 

U.S. Will Escape Recession, Economists Say in Survey

(Bloomberg) -- The U.S. will skirt recession as consumer spending slows without collapsing, a survey of economists showed.

Economic growth will average 1.5 percent in the first six months of 2008, matching the fourth quarter's pace, according to the median estimate of 62 economists surveyed by Bloomberg News from Jan. 3 to Jan. 8. The rate of expansion would be the weakest since the last nine months of 2001.

 

Tuesday, January 8, 2008

Bear Stearns's Cayne to give up CEO post: report

(Reuters) - Bear Stearns Cos Inc (BSC.N: Quote, Profile, Research) leader James Cayne will relinquish his title as chief executive, but remain chairman, the Wall Street Journal reported on Monday, citing people familiar with the matter.

Reached by phone at his residence in Manhattan, Cayne declined to comment.

"I can't talk. I'm on the other line," Cayne told Reuters.

The 74-year-old Cayne has been under fire since two Bear-run hedge funds collapsed last summer. The fifth-largest U.S. investment bank also lost money in the fourth quarter -- its first loss ever -- on bad bets on risky subprime mortgages.

Cayne has been the subject of unflattering articles about his time playing golf and bridge while the company's key fixed-income business stumbled amid a meltdown in the subprime mortgage industry. The company took a $1.9 billion write-down in the quarter that ended November 30, reflecting the reduced value of subprime mortgage-related securities. Its quarterly net loss was $854 million.
 

Schultz back as Starbucks CEO

(Reuters) - Starbucks Corp (SBUX.O: Quote, Profile, Research) replaced CEO Jim Donald with founder and Chairman Howard Schultz and said it would slow an aggressive U.S. expansion in a shake-up that sent its battered shares up nearly 9 percent.

The move marks a return to daily management for Schultz, who is seen as the conscience of the company and warned executives a year ago that Starbucks was losing its way. Schultz, who was chief executive from 1987 to 2000, said Starbucks would close underperforming U.S. outlets and speed up international growth.

Investors have nearly halved the value of the world's biggest coffee chain to $13 billion in the last year in the midst of weakened U.S. sales growth.

"The most serious challenge we face is of our own doing," Schultz said on a conference call. "I am not going to use the economy, with you or our people, as an excuse."
 

Monday, January 7, 2008

Rand poses 'real risk'

(Fin24) - The deterioration in SA's growth/inflation trade-off should stay limited unless the rand weakens sharply, says chief economist for Citigroup in SA, Jean Mercier.

He adds that he does view the threat to the rand as "a real risk".

"Despite being sheltered from the subprime crisis, growth in SA is suffering from an inflation-induced tightening of monetary policy," says Mercier.

Reuters reports that the rand weakened one percent against the dollar on Monday, tracking weaker global markets as investors fled risky assets.

Electronics makers keep eye on U.S. economy

(Reuters) - Electronics makers considering the strain on the U.S. economy are hoping consumers will cut other expenses first, but many see some worrying signs ahead.

Gathered in Las Vegas this week for the Consumer Electronics Show, gadget, cell phone and television makers are placing their bets on whether U.S. economic troubles from rising unemployment to mortgage market problems will stop consumer spending.

"We need to watch just how cold sentiment is getting," Toshihiko Fujimoto, chief executive of Sharp Corp's (6753.T: Quote, Profile, Research) Sharp Electronics, said on Sunday. "We can't say business is especially good."

Sony Corp's (6758.T: Quote, Profile, Research) Sony Electronics President Stan Glasgow, who oversees the U.S. electronics business, told Reuters the company had strong sales in recent months, boosted by demand for its Bravia line of televisions.
 

Sunday, January 6, 2008

Wal-Mart May Appeal $33.5 Million North Carolina Court Decision

(Bloomberg) -- Wal-Mart Stores Inc., the world's largest retailer, may appeal a judge's dismissal of its attempt to get a $33.5 million refund from North Carolina's tax authorities.

The retailer contends it's entitled to the return of taxes and penalties it paid after the state said it couldn't deduct store rents to Wal-Mart real estate units.

The decision threatens tax deductions Bentonville, Arkansas-based Wal-Mart and other companies can get by paying rent to real-estate investment trust units that transfer tax- free income to their owners. The Wall Street Journal reported that Wal-Mart may have saved $230 million in state taxes across the U.S. over four years through similar arrangements.
 

Trade Deficit Probably Widened on Oil: U.S. Economy Preview

(Bloomberg) -- The U.S. trade deficit probably widened in November as Americans spent a record amount on imported oil, economists said a report this week may show.

The gap between imports and exports expanded to $59.5 billion, a five-month high, according to the median estimate of economists surveyed by Bloomberg News ahead of the Commerce Department's Jan. 11 report. Earlier in the week, a private report may show a decline in contracts to buy existing homes.

The trade report is also likely to show exports continued to increase, preventing a steeper decline in manufacturing. Sales to customers overseas are even more important now that rising fuel prices, a deepening housing slump and rising unemployment threaten to stall economic growth.
 

US STOCKS-Market sinks as jobs data stirs recession fears

(Reuters) - U.S. stocks tumbled on Friday, dragging the Dow to its worst three-day start to a year since the Great Depression, as a sharp rise in the unemployment rate heightened fears the economy is heading into a recession.

Technology shares were the worst performer in a broad-based decline after chip maker Intel Corp skidded 8.1 percent on concerns that businesses are unlikely to upgrade computer equipment in the face of a slowdown.

The Nasdaq fell 3.77 percent, bringing the index to its worst three-day kick-off to a new year since it was created in 1971.

The U.S. Labor Department reported job creation nearly ground to a halt in December and unemployment rose to a two-year high of 5 percent.

"The payroll numbers are showing that we don't have the jobs, and if you don't have job income you don't have consumers doing any spending," said Gary Shilling, president of A. Gary Shilling & Co. of Springfield, New Jersey. "I don't think there's much question we're in a recession now."
 

Friday, January 4, 2008

U.S. Stocks Fall After Job Growth Misses Forecast; Apple Drops

(Bloomberg) -- The U.S. stock market got off to its worst start since 2000 after government reports on jobs and manufacturing added to concern the economy will sink into recession.
Apple Inc., maker of the iPod music player, fell the most since April 2005 and was the biggest drag on the Standard & Poor's 500 Index. Apple declined after Intel Corp., the largest chipmaker, was downgraded by JPMorgan Chase & Co. Alcoa Inc., Home Depot Inc. and Hewlett-Packard Co. led the Dow Jones Industrial Average to its third retreat in four days.
 

Thursday, January 3, 2008

Consumers late payers on most loans since recession

(Reuters) - Americans are falling further behind on consumer loans, with late payments rising to the highest level since the nation's last recession in 2001, data released Thursday show.

In its quarterly study of consumer borrowing, the American Bankers Association said the percentage of loans at least 30 days past due rose to 2.44 percent in the July-to-September period from 2.27 percent in the previous quarter.

The delinquency rate, which covers eight loan categories, was the highest since a 2.51 percent rate in the second quarter of 2001. Late payments on some types of loans rose to levels not seen since the 1990s.

The ABA attributed some of the summer increase to rising oil prices and the inability of thousands of homeowners to keep up with mortgage payments.
 

Oil majors' winnings from $100/barrel seen limited

(Reuters) - Crude prices at a $100/barrel should boost major international oil companies' profits, but increasing competition from governments and suppliers for a bigger share of the bonanza will cap their gains.

Shares in European oil companies opened higher on Thursday after U.S. crude hit a record $100/barrel on Wednesday.

The DJ Stoxx European oil and gas sector index was up 1.9 percent at 8:40 a.m. EST on Thursday, echoing a smaller rise across the U.S. oil industry on Wednesday.