America's economy
Boxed-in Ben
For Ben Bernanke, the Federal Reserve chief, even good news turns out to be bad
JITTERY investors and anxious politicians have often relied on Federal Reserve chairmen to conjure up something to steady their nerves. But when Ben Bernanke gave his twice-yearly monetary testimony to Congress this week he had little to offer but unvarnished and uncomfortable truths. There were “significant downside risks” to the economy’s outlook, he said, and the chances that high inflation would persist had “intensified”. Mr Bernanke did not specify which was the bigger threat: recession or inflation. This lack of a clear policy bias invited the conclusion that, for the time being at least, the Fed thinks it cannot safely move interest rates in either direction.
With financial markets buffeted by renewed fears about the credit drought and a deepening housing slump, Mr Bernanke could hardly boast of the economy’s soundness. To make matters worse, figures released on Wednesday July 16th showed that year-on-year inflation rose in June to 5.0% (see chart), the highest rate since 1991. Paltry pay rises, as well as job losses, mean employment income is probably growing by less than 3%, well below the inflation rate. Falling real income, slumping share and house prices and tighter credit all cast a cloud over consumer spending. Firms worried about future demand will be more cautious too about shelling out for costly capital projects, even if they could raise the finance.
Despite these unsettling prospects, the Fed’s rate-setters bumped up their forecasts for GDP growth in 2008, to 1.0-1.6%, prompted by stronger data on consumer and business spending between April and June. Private-sector analysts are revising up their forecasts too. The first estimate of second-quarter GDP, to be released on July 31st, is likely to show that the economy grew at an annualised rate of around 2%, twice as fast as in the first quarter.
The Fed’s trouble is that, although the economy has avoided recession so far, it may not do so for much longer. Indeed Mr Bernanke acknowledged that some of the demand that the Fed had hoped for later this year may have already come and gone. So the economy’s first-half resilience may be of more concern than comfort.
The performance of companies and consumers shows why. Businesses received some extra tax relief as part of February’s fiscal-stimulus package, which may have helped a little to stave off recession. There was also a spurt in the construction of offices, hotels and other business structures in the spring. However, this burst of activity may have been just the fag-end of the commercial-property boom. Now conditions have deteriorated.
Consumer spending seems likely to flag too. A jump in retail sales in April and May owed something to the tax rebates first sent out at the end of April. But a slim rise in retail sales in June is a hint that the effects of this one-off stimulus may already be fading. Another crutch for consumers has been the home-equity loan. Borrowing from this source rose by 3.8% between March and June, despite a big fall in overall bank credit. This increase came about partly because access is blocked to other forms of borrowing, such as mortgage refinancing. It may also be a sign of distress borrowing, as consumers battle with rising living costs. That battle will become harder if, as anecdotal evidence suggests, banks are cutting pre-arranged credit lines.
The brightest hope for America’s economy is its foreign sales. Net trade added more than one percentage point to GDP growth in the year to the first quarter. The weak dollar is still helping American firms to take advantage of the strong demand in other parts of the world. But even here, the future is looking bleaker. Rising global inflation, spurred in part by countries with dollar pegs mimicking the Fed’s rate cuts, is now prompting central banks in many emerging economies to tighten monetary policy. That will curb demand for imports. America’s richer trading partners are struggling too.
There is little that central banks can do to support the economy when inflation is rising dangerously high. The Fed’s hands are tied by its concern that today’s inflation may lead to higher wages. The Fed chief has to sound hawkish to show that he has not lost sight of inflation. But equally he cannot set out a plan for interest-rate increases when the financial system is so wobbly.
The good news in the first half may even make the Fed’s job harder. If consumers have already used up much of their tax rebates and credit lines, spending is likely to flag soon. A first-half recession followed by a sluggish recovery—the standard forecast until recently—could well have enabled the Fed to raise rates in the autumn. But with the worst news on the economy yet to come, Mr Bernanke can only keep his fingers crossed that inflation does not become ingrained.
Commentary by Michael Lewis
July 17 (Bloomberg) -- Memo To: The Non-Rich From: A Concerned Hedge-Fund Manager Re: Your Air Travel
Being a private person, I can't imagine flying any way but privately.
It's true that I airdrop into Bloomberg every now and again to offer the public a rare glimpse of the mind of a seriously rich (over $100 million net worth) and consistently successful hedge-fund manager (more than $1 billion under management). But mainly I try to keep to myself, and to that end have long avoided boarding an airplane owned by someone else.
So you can think of me as an outside consultant. With no direct experience of your predicament -- the growing misery of life inside a commercial airplane -- I am unusually positioned to understand it.
I can give you the view from 30,000 feet; I can tell you how your traveling future looks to me from the window of my Gulfstream G5. And from where I sit I can see three big trends. They are:
Trend One: The service on your airplanes, bad as it may be, is going to get much worse.
AMR Corp.'s American Airlines is now charging $15 a bag, U.S. Airways Group Inc. is taking away the in-flight movies and demanding two bucks for a can of Coke, and various airline chief executive officers are contemplating weighing the passengers and charging them by the pound. And you just know that once one of these airlines starts weighing people, all of them will, or risk being crushed by fat people looking for a deal.
``They have already begun to think exotically,'' a spokesman for the airline industry told Bloomberg News, apropos of these airline CEOs. ``Nothing is not under the microscope.''
There's a reason for this, and it's not just the price of oil. It's the price of you.
You still expect to be treated like a rich person when you have demonstrated, by flying commercial, that you are a poor person. (Poor being defined as an inability to afford at least a share of a NetJet.) And nothing demoralizes a service-industry professional so quickly as the sight of a high concentration of poor people.
Take flight attendants, for example. Once upon a time these straight ladies and gay men sought to please fliers; now they treat fliers like criminals. Ask a stew and she'll probably blame it all on terrorism. She'll go on about how after 9/11 she stopped being a camp counselor and became a cop. But that's just an excuse.
Little in Return
What's really happened is that she's come to realize that however happy she makes her passengers they can give her back only so much in return -- so why bother?
If even one of the passengers was a seriously rich person -- Jack Welch, for instance, or even little Dickie Grasso -- these same stews might think twice before abandoning service for law enforcement. They might actually want to be charming. Instead, they gaze upon a first class filled with people who paid with frequent-flyer miles and a coach class of seriously desperate people and instinctively reach for their whips and chains. And really, can you blame them?
Trend Two: Your time will be treated as ever-less valuable. You think it's an outrage that planes are now flying more slowly to save fuel? Wait until you find yourself en route from New York to Los Angeles, and stop unexpectedly in Denver until the headwind slows.
You will wonder: How long can it take to fly across America? And you will discover: As long as they want it to take! They know you are poor; they know from their experience that, given the choice, you will always save money rather than time. And so they don't fear that if they slow down you will get off.
If your time was that valuable, they will think to themselves, you wouldn't be flying on their planes in the first place.
And they are right!
Trend Three: Your planes will be ever-more likely to have an accident.
After all, these people who run the airlines have every expense under their microscope; how long can it be before they're examining the value of your coach-class head?
Of course, no major airline would ever consciously set out to kill you. But their planes will age, their spending on safety will decline, and they will increase, at your peril, the likelihood of catastrophe. The only question is when they try to sell you your own parachute will there be some free smoked almonds inside?
Giving Hope
Studying these trends a pessimist would probably conclude that poor people must one day simply cease to travel. Come vacation time the rich will still pop over to Paris and eat at the finest restaurants; the poor will find something else to entertain themselves. Perhaps a camp site near their quaint little home, where they can forage in the wild for free snacks.
But I am not a pessimist. Like Barack Obama, I believe in giving people hope. And the hope, for you, is to lure actual rich people back onto commercial airlines.
For example, in exchange for paying, say, two-thirds of what it would cost to fly private, and thus covering the bulk of the cost of any flight, rich people might be given special cabins in the front of each commercial plane, decked out very much like their G5s once were.
Obviously, no rich person would agree to fly commercial -- essentially paying for a great deal more than his share of the cost -- unless he was granted the other comforts of flying private. And, of course, he and he alone would need to decide when the plane took off and where it landed -- but as rich people usually go to really desirable places, this shouldn't be a problem.
Getting to Topeka
Each night poor people in say, Detroit, who were hoping to travel to, say, London, could go online and see where the local rich people planned to go. They'd surf around and find...Bill Ford is planning to fly to London tomorrow morning! And as many of the local poor who might fit could click on a link and acquire a cheap seat in the back of Bill Ford's flight.
There are some tiny problems with this plan, of course. There won't be many direct flights to Topeka, Kansas, or a lot of other places that the rich seldom go. Indeed, poor people trying to get anywhere near Topeka will probably experience frustration, as their airplanes fly back and forth over it, without so much as a pause.
But these problems are small compared with the benefits. Once again poor people will be free to fly, at speed and even in comfort, just like us regular folk.
July 17 (Bloomberg) -- Builders started work in June on the fewest single-family U.S. homes since 1991 and manufacturing in the Philadelphia region contracted for an eighth straight month, signaling the economic slowdown is worsening.
Construction starts fell to an annual pace of 647,000, the Commerce Department said today in Washington. A change in New York City building codes spurred total starts, which include condominiums and apartment buildings, to a four-month high.
The figures underscore the housing recession was already deepening before the financial turmoil this month at Fannie Mae and Freddie Mac threatened to further curb mortgage financing. Today's drop in the Philadelphia Federal Reserve's factory gauge showed manufacturers cut orders and employment in July as confidence in the economic outlook deteriorated.
``Hopes for a bottom'' this year in home construction ``are rapidly fading,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. The housing recession ``has been spilling over to manufacturing for months,'' contributing to ``recessionary conditions,'' he said.
Housing starts in the Northeast, which includes New York, soared 242 percent in June. The city's new construction codes tightened safety and environmental standards and stem from the Sept. 11, 2001, terrorist attacks. Examples include requiring interconnected smoke alarms and so-called ``white roofs'' to reflect heat.
``Anyone planning to build had a strong incentive to get started before the deadline,'' Lindsey Piegza, a market analyst at FTN Financial in New York, wrote in a note to clients.
Stocks, Treasuries
Stocks advanced and Treasuries dropped after JPMorgan Chase & Co. joined Wells Fargo & Co. in reporting higher-than-forecast earnings. The Standard & Poor's 500 Stock Index rose 0.4 percent to 1,250.3 at 11:54 a.m. in New York. Ten-year notes yielded 3.97 percent from 3.94 percent late yesterday.
The Philadelphia Fed's general economic index was minus 16.3 in July, lower than forecast, compared with minus 17.1 in June. Negative readings signal a decline, and the measure averaged 5.1 last year. The index of prices paid climbed to 75.6, the highest level since 1980, from 69.3.
``As manufacturers see the final demand for their products go down and inventories go up, they have to slow production and that means less employment,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York in an interview with Bloomberg Television. ``The pricing numbers are important too because it indicates that we're in a period of stagflation.''
Total Starts
Total housing starts rose 9.1 percent to a 1.066 million pace from a revised 977,000 rate in May. Economists forecast a 960,000 reading in June, from a previously reported 975,000 for May, according to the median on 76 projections in a Bloomberg News survey.
A separate government report showed initial claims for unemployment benefits rose less than forecast last week. Claims increased to 366,000 from 348,000 the prior week, the Labor Department said.
Building permits rose 11.6 percent to a 1.091 million rate in June. Excluding multi-family applications in the Northeast, permits would have risen 0.7 percent.
Work on single-family homes decreased 5.3 percent, bringing it to the lowest level since January 1991, Commerce said. Construction of multifamily homes, such as townhouses and apartment buildings, jumped 43 percent to an annual rate of 419,000 in June, led by a 242 percent surge in the Northeast.
Starts fell in two of four regions, led by an 11 percent drop in the Midwest.
Influence on Growth
Declines in construction probably will limit economic growth, even as tax rebates boost consumer spending. Residential building dropped at a 24.6 percent pace in the first quarter and subtracted 1.1 percentage points from growth.
Fed Chairman Ben S. Bernanke this week abandoned his June assessment that the threat of an economic downturn had diminished. During testimony before U.S. lawmakers in Washington, he also said that ``upside risks to the inflation outlook have intensified.''
After stabilizing over the last nine months, builders' confidence slumped again in July. The National Association of Home Builders/Wells Fargo sentiment index dropped to 16, the lowest level since records began in 1985, from 18 in June, the group said yesterday.
As property values have fallen, some homeowners are stuck with mortgages they can't afford, and that is leading to an increase in foreclosures. Bank seizures increased a record 171 percent from a year ago and foreclosure filings rose 53 percent in June, RealtyTrac Inc., a seller of default data, said last week in a statement.
One in 500
The Irvine, California-based company began collecting statistics on default notices, warnings of scheduled auction and repossessions in January 2005. One in every 500 U.S. households entered a stage of the foreclosure process, RealtyTrac said.
Concern over the ability of Fannie Mae and Freddie Mac, the largest U.S. purchasers of mortgages, to withstand the subprime lending meltdown has also heightened the credit crisis and may further limit access to loans.
M/I Homes inc., a homebuilder concentrating in the Midwest, Florida and the Mid-Atlantic states, said July 10 it delivered 478 homes in the second quarter, down from 755 in the same period in 2007. The Columbus, Ohio-based company said the number of new contracts fell to 530, from 688.
The slump in housing has caused job losses in construction as well as in manufacturing. Payrolls at builders declined by 43,000 in June after a drop of 37,000 the prior month, the Labor Department said this month. The total loss of construction jobs since September 2006 has swelled to 528,000.
July 17 (Bloomberg) -- Treasury Secretary Henry Paulson tried to rally support yesterday for his plan to rescue Fannie Mae and Freddie Mac and said he is confident Congress will pass it by next week.
A growing number of lawmakers from both parties agree with his assessment, even if they don't back the legislation. House Minority Leader John Boehner, an Ohio Republican, said there's no question ``that this will become law and become law very soon.'' Senator Christopher Dodd, a Connecticut Democrat who is chairman of the Senate Banking Committee, expects a vote on the measure next week.
``I am optimistic that this is going to be done quickly,'' Paulson said yesterday.
Paulson asked Congress on July 13 to approve a three-part plan that would allow the Treasury to increase the credit lines of the two mortgage companies, buy shares in the firms if necessary and give the Federal Reserve what he called a ``consultative role'' in overseeing their capital requirements. The proposals are meant to restore confidence in the government- chartered companies which together own or guarantee more than half of the $12 trillion of U.S. home loans outstanding.
Boehner was among Republicans who on July 15 urged Democrats to hold hearings on the measure so they could get a better idea of how it would work. He said after meeting with Paulson yesterday that he hasn't decided whether to support the bill.
Market Stability
Anthony Ryan, Treasury's acting under secretary for domestic finance, said the proposals are ``wholly consistent'' with a focus on capital-market stability.
``We don't see the need for them to have to access additional liquidity or capital, but if they did, it certainly would send a strong signal to the marketplace that they have the resources to do so,'' Ryan said in an interview today on CNBC.
Fannie Mae shares jumped $1.87, or 20 percent, to $11.12 at 10:43 a.m. today in New York. Freddie Mac rose $1.28, or 19 percent, to $8.11 a share.
Paulson also met yesterday with Dodd and Alabama Senator Richard Shelby, the top Republican on the banking panel, to try to address concerns that Treasury would have too much power under the plan. Paulson declined to comment upon leaving that meeting.
``We had a very positive meeting, and think it's going in the right direction,'' Shelby said after the session. ``We're trying to do it right.''
Systemic Risk
Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac have lost more than 80 percent of their stock market values this year on concern they don't have enough capital to survive the biggest housing slump since the Great Depression.
Lawmakers from both parties raised questions about how much authority Treasury should have.
``I want to make darn sure that, if we do this, that the American taxpayer is going to be protected,'' Dodd said earlier yesterday.
Paulson said he emphasized with lawmakers that Treasury's authority would be temporary.
This issue is ``tough,'' Paulson said. ``There's never unanimity, but I'm feeling very good as a result'' of meetings today, he said.
Representative Jeff Flake, an Arizona Republican, said Paulson received a ``mixed'' reception from lawmakers.
``Everybody knows something has to be done. It's just a question of what are we willing to accept,'' Flake said.
Globally Held Debt
Congress created Fannie Mae and Freddie Mac to expand homeownership by increasing mortgage financing and to provide market stability. The shareholder-owned companies make money by holding mortgage assets and on guarantees of mortgage-backed securities they create out of loans bought from lenders.
Debt from the government-sponsored enterprises ``is globally held in extensive amounts so we want to reassure that market that we understand the importance of this,'' Dodd said. ``And simultaneously, we need to reassure the American taxpayer that they're not going to be exposed to a massive bill at the end of the day. So striking that balance is what I'm trying to achieve.''
House Financial Services Committee Chairman Barney Frank has suggested prohibiting the companies from paying dividends if they tap a proposed increased line of credit with the Treasury. He also said regulators should be required to approve the compensation for top executives of Fannie Mae and Freddie Mac.
Housing Bill
House Democrats postponed a vote on the rescue plan until early next week. Paulson had initially pushed for a vote this week.
``I think we're going to have it all done by the end of next week,'' Frank told reporters yesterday. Senate Minority Leader Mitch McConnell, a Kentucky Republican, said he doesn't expect the bill to get ``bogged down'' in the Senate.
Lawmakers plan to graft the rescue plan onto a pending housing bill that would allow thousands of Americans struggling with subprime loans to refinance into fixed-rate mortgages backed by the government. The measure would also install tougher regulators for Fannie Mae and Freddie Mac.
Frank said July 15 that Democrats may retain provisions opposed by the Bush administration to send $4 billion to communities to buy up foreclosed properties. The White House has threatened to veto the bill over those plans because administration officials say they would benefit lenders who own the vacated properties, not homeowners.
Representative Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, who also met with Paulson yesterday, said he preferred a stand-alone Fannie-Freddie bill.
``We don't need to deal with 40 different issues,'' he said. ``We need a clean bill.''
Fannie Mae dropped 27 percent July 15, its biggest slump since at least July 1980, while Freddie Mac declined 26 percent.
Fannie Mae rebounded yesterday, rising 31 percent to $9.25 in New York, while Freddie Mac climbed 30 percent to $6.83.
July 17 (Bloomberg) -- JPMorgan Chase & Co., the largest U.S. bank by market value, reported second-quarter earnings that exceeded analysts' estimates, helped by higher investment banking fees and revenue from the consumer business.
JPMorgan rose as much as 14 percent, sparking a rally in financial stocks, as the company followed Wells Fargo & Co. in posting a smaller drop in profits than investors were expecting. Second-quarter net income fell 53 percent to $2 billion, or 54 cents a share. Analysts were predicting 44 cents.
Chief Executive Officer Jamie Dimon said in a statement that while a weakening economy means financial markets will remain ``under stress,'' the New York-based company's capital position is strong. JPMorgan has posted more than $12 billion of writedowns, losses and credit provisions on mortgage-tainted assets through the second quarter, a fraction of the $43 billion at Citigroup Inc., which reports earnings tomorrow.
``JPMorgan is like a raging bull prize fighter punching their way through the credit crisis,'' David Hendler, an analyst at CreditSights Inc. in New York, said in a Bloomberg Television interview. The bank ``has a fortress-like balance sheet and that really helps them absorb these punches,'' he said.
Shares of the company rose $3.77 to $39.71 in composite trading on the New York Stock Exchange at 11:33 a.m.
Bear Stearns
Second-quarter earnings were cut by $540 million of costs from the takeover of Bears Stearns Cos., which JPMorgan agreed to buy in March as the fifth-largest U.S. securities firm faced bankruptcy. The bank won't record any gain on the purchase, which it previously thought would add $1 billion. JPMorgan said it will keep 7,000 of Bear Stearns's 14,000 employees.
JPMorgan increased credit reserves by $1.3 billion to cover bad loans in the quarter, and wrote down the value of leveraged loans and mortgage-related assets by $1.1 billion.
Revenue fell 3 percent to $18.4 billion in the quarter, beating the average estimate of $16.6 billion among analysts surveyed by Bloomberg. Return on equity, a gauge of how effectively the company reinvests earnings, was 6 percent, down from 14 percent a year earlier.
The investment banking unit had a second-quarter profit of $394 million, versus earnings of $1.2 billion a year earlier. The division reported its second-highest quarter for fees, pulling in $1.7 billion. Revenue for the business fell 6 percent partly on weaker equity trading.
Return on equity for the investment bank was 7 percent in the second quarter. That compares with 12.3 percent for New York- based Morgan Stanley and 20.4 percent for Goldman Sachs Group Inc., also based in New York.
Consumer Banking
Consumer banking earned $606 million, a 23 percent drop from a year earlier as JPMorgan set aside more money to cover bad loans. Revenue in the retail bank was $5 billion, up 15 percent.
Chief Financial Officer Michael Cavanagh said on a conference call with reporters that mortgages had ``deteriorated'' with higher late payments and losses.
The problems extended to the bank's so-called prime mortgages, given to customers with the best credit quality, Dimon said on a call with analysts. Prime mortgage losses could climb to $300 million a quarter by 2009.
JPMorgan's decision in 2007 to expand in mortgages was ``wrong,'' Dimon said. ``Prime looks terrible. We're sorry.''
Home-equity losses could reach $700 million by the fourth quarter, less than the previous forecast of $900 million, Cavanagh said.
``It's too early to declare victory on that,'' he said. ``The trend of deterioration may be slowing a bit here.''
Card Business
The credit-card division's profit fell to $250 million, or 67 percent below last year's results. Net charge-offs rose to 5 percent in the quarter.
JPMorgan fell 28 percent during the past 12 months, compared with the 69 percent drop of Citigroup and the 54 percent decline of Bank of America Corp.
``It was clearly a very good report,'' Peter Sorrentino, who helps oversee $16.7 billion at Cincinnati-based Huntington Asset Management, including 3.6 million JPMorgan shares, said in a Bloomberg Radio interview. ``The telling thing for me was the number of business categories where they had very positive revenue comparisons with the same quarter last year.''
Swap Prices
Credit-default swaps on JPMorgan fell 9 basis points to 116 in New York, according to CMA Datavision.
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
``We remain somewhat cautious about calms before storms, as consumer and commercial losses will likely increase into early 2009, if not longer,'' David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, wrote in a research note today. He rates the stock ``in-line.''
Dimon also repeated that he would consider buying another bank. He said he has no plans to increase the dividend while credit quality continues to decline.
July 17 (Bloomberg) -- U.S. stocks advanced for a second day, led by banking shares, after JPMorgan Chase & Co. reported earnings that topped analysts' estimates.
JPMorgan, the largest U.S. bank by market value, rose to the highest level in five weeks after its profit beat estimates by 22 percent. Huntington Bancshares Inc., BlackRock Inc. and Comerica Inc. also climbed after earnings exceeded projections, extending yesterday's record rally in financial companies sparked by higher-than-forecasts results at Wells Fargo & Co. Consumer shares fell after Coca-Cola Co. reported a drop in earnings.
The Standard & Poor's 500 Index added 4.94 points, or 0.4 percent, to 1,250.3 at 11:53 a.m. in New York. The Dow Jones Industrial Average gained 69.54, or 0.6 percent, to 11,308.82. The Nasdaq Composite Index rose 4.97 to 2,289.82. About five stocks climbed for every four that fell on the New York Stock Exchange.
``I wouldn't get too ahead of ourselves, and there are more financial companies to report, but it's good that we've got a couple of surprisingly good reports'' from JPMorgan and Wells Fargo, Joseph Keating, who helps manage $3 billion as chief investment officer of RBC Bank in Birmingham, Alabama, told Bloomberg Television. ``For the economy to grow, we need a viable banking system.''
Stocks also gained today following reports showing an unexpected gain in housing starts and a smaller-than-forecast increase in jobless claims. The S&P 500 rallied the most since April yesterday, rebounding from the lowest level since 2005, after Wells Fargo sparked a 12 percent gain in the S&P 500 Financials Index and oil extended a two-day tumble to more than $10 a barrel.
Shares in Europe and Asia rose today, sending the MSCI World Index to its biggest two-day gain since April.
Earnings Watch
Earnings have surpassed analysts' estimates by an average of 6.7 percent for the 51 companies in the S&P 500 that have released second-quarter results so far, data compiled by Bloomberg show. The entire index trailed estimates by an average of 3.6 percent in the first quarter, a period in which the benchmark gauge of American equities slumped 9.9 percent.
Analysts as of July 11 had forecast an average 14 percent decline in profits for S&P 500 companies, led by a 69 percent tumble in earnings at financial companies. So far, the group's earnings have slipped 4.9 percent, with financial profits declining 32 percent, Bloomberg data show.
Wednesday, July 16, 2008
July 16 (Bloomberg) -- Prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food, intensifying the pressure on households struggling with falling home prices and the credit crunch.
The cost of living soared 1.1 percent, more than forecast, after a 0.6 percent gain the prior month, the Labor Department said today in Washington. Excluding food and energy, so-called core prices climbed 0.3 percent, also more than anticipated.
The figures underscore why Federal Reserve Chairman Ben S. Bernanke yesterday said inflation risks had ``intensified.'' The surge in energy costs has also trimmed consumer and business spending, hurting growth and making it less likely policy makers will boost interest rates to stem even bigger price increases.
``This is a problem for the economy; it's even worse for the Fed,'' said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania. ``Inflation numbers are high enough that under different circumstances the Fed would be hiking rates. But given the state of the economy,'' it can't, he said.
Treasuries dropped after the report, with yields on benchmark 10-year notes rising to 3.87 percent at 9:41 a.m. in New York, from 3.82 percent late yesterday.
A separate report showed industrial production rose 0.5 percent in June from the previous month, more than forecast, after falling 0.2 percent in May. The increase was led by utilities, as manufacturing advanced just 0.2 percent.
Economists' Forecasts
Consumer prices were forecast to rise 0.7 percent, according to the median forecast of 79 economists in a Bloomberg News survey. Estimates ranged from gains of 0.2 percent to 1.1 percent. Costs excluding food and energy were forecast to rise 0.2 percent, the survey showed.
Prices increased 5 percent in the 12 months to June, the most since May 1991. They were forecast to climb 4.5 percent from a year earlier, according to the survey median.
The core rate increased 2.4 percent from June 2007, also more than forecast.
Energy expenses jumped 6.6 percent. Gasoline prices soared 10.1 and fuel oil jumped 10.4 percent.
The cost of fuel will continue stoking price pressures. Crude oil futures reached a record $147.27 a barrel on July 11 and have risen almost 90 percent in the past year. Regular gasoline, which topped $4 a gallon for the first time in June, kept rising this month, AAA figures show.
The consumer price index is Labor's broadest gauge of costs. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets.
Wholesale Costs
Wholesale prices rose 1.8 percent in June, the most in seven months, the Labor Department reported yesterday. From a year ago, prices climbed 9.2 percent, the biggest surge since 1981.
Food prices, which account for about a fifth of the CPI, increased 0.8 percent, driven by a gain in the cost of vegetables.
The report showed that food and fuel weren't the only items on the rise. Costs for airline fares jumped 4.5 percent. Prices for all commodities increased 1.9 percent.
Rents which, make up almost 40 percent of the core CPI, also accelerated. A category designed to track rental prices rose 0.3 percent after a 0.1 percent gain in May.
Today's figures also showed wages decreased 0.9 percent in June after adjusting for inflation, and were down 2.4 percent over the last 12 months. The drop in buying power is one reason economists forecast consumer spending will slow.
Impact on Spending
Americans trimmed purchases of automobiles, furniture and restaurant meals last month as the cost of gasoline soared, a Commerce Department report showed yesterday. Retail sales rose 0.1 percent, less than forecast, a sign the boost from the tax rebate checks is already fading.
Bernanke, testifying before Congress yesterday as part of his semi-annual report on the economy, cited ``significant downside risks to the outlook for growth'' in addition to the heightened threat of inflation.
Consumer spending is ``likely to be restrained over coming quarters,'' and businesses are ``likely to be cautious with their spending in the second half of the year,'' Bernanke said.
Companies, unable to fully recover ballooning raw-material costs by raising prices, have cut staff and reduced equipment purchases as profits shrink.
Kimberly-Clark Corp., the maker of Huggies diapers and Scott paper towels, said earnings for this year will trail its previous forecast as expenses rise more than twice as fast as predicted, In May, the company said it would raise prices for a second time this year to counter higher costs for materials such as oil, natural gas and pulp.
Pressure on Costs
``Inflation has outpaced our ability to offset higher costs in the near term through price increases, cost reductions and other measures,'' Thomas Falk, the Dallas-based company's chief executive officer, said this week in a statement.
Procter & Gamble Co., the maker of Tide detergent and Head & Shoulders shampoo, last week said it'll raise prices as much as 16 percent due to higher costs for plastic, energy and paper. The increases start in September and are the Cincinnati-based company's steepest in at least 18 months.
The consumer-price and wholesale-price reports reflect differences in timing. In calculating wholesale prices, the government asks survey participants to report costs as of the Tuesday of the week that includes the 13th. Consumer prices are based on average costs over the entire month.
July 16 (Bloomberg) -- U.S. stocks rose, helping the Standard & Poor's 500 Index rebound from the lowest level since 2005, after profit at Wells Fargo & Co. topped analysts' estimates and oil dropped for a second day.
Wells Fargo, the U.S. West Coast bank that lost almost a third of its value this year, rallied the most since at least 1980 after boosting its dividend 10 percent. United Parcel Service Inc. and Target Corp. climbed as the two-day retreat in crude prices overshadowed a government report showing the biggest gain in consumer prices since 2005.
The S&P 500 added 10.39 points, or 0.9 percent, to 1,225.3 at 10:42 a.m. in New York. The Dow Jones Industrial Average climbed 106.58, or 1 percent, to 11,069.12, while the Nasdaq Composite Index increased 27.89, or 1.3 percent, to 2,243.6. About two stocks rose for each that fell on the New York Stock Exchange.
``This quarter was fairly good'' for earnings, said Eric Green, Cherry Hill, New Jersey-based director of research and senior money manager at Penn Capital Management, which oversees about $4.5 billion. ``This is a buying opportunity if you have a 12-month time horizon.''
Profits have slipped only 0.8 percent on average for the 26 companies in the S&P 500 that have reported second-quarter results so far, according to data compiled by Bloomberg. Earnings for all companies in the index are forecast to drop 14 percent on average, according to an analyst survey published July 11. The quarter is expected to cap a full year of declining earnings, the longest profit slump in six years.
Wells Fargo, UPS
Wells Fargo rallied $3.32, or 16 percent, to $23.83 for the steepest gain in the S&P 500. Gains in credit card fees and insurance revenue softened the blow from bad home loans. Net income slumped 23 percent to $1.75 billion, or 53 cents a share. That beat the 50-cent average estimate of 21 analysts surveyed by Bloomberg. Revenue rose 16 percent to a record $11.5 billion.
UPS, the largest package delivery company, climbed 1 percent to $57.03, helping the S&P 500 Transportation Index rise 1.9 percent as all 10 companies in the group advanced.
Target, the second-biggest U.S. discount chain, added 17 cents to $43.85. Retailers in the S&P 500 climbed 0.6 percent as a group.
Crude oil for August delivery declined $6.24, or 4.5 percent, to $132.50 a barrel in New York after retreating $6.44 yesterday.
Wells Fargo led financial shares to their first advance in six days. The S&P 500 Financials Index climbed 4.8 percent as 82 of its 89 companies increased.
Schwab Rallies
Charles Schwab Corp. had the biggest gain in three months, climbing 6.9 percent to $20.54. The largest U.S. online brokerage reported quarterly profit from continuing operations above the average analyst estimate as an influx of customer assets helped buoy revenue amid a decline in equity markets.
Fannie Mae and Freddie Mac rebounded more than 13 percent each. Fannie Mae tumbled 27 percent yesterday for its steepest slump since at least July 1980 and Freddie Mac tumbled 26 percent as investors lost confidence in the government's plan to rescue the largest U.S. mortgage-finance company.
About $14 trillion has been wiped off the value of global equities since October, with the S&P 500 falling into a bear market last week, as $417 billion in credit-related losses prolong the global economy's slump and rising commodity prices stoke inflation.
Among the 23 industrialized nations in the MSCI World Index, only Canada averted a bear-market decline of 20 percent. Financial institutions and consumer companies dependent on discretionary spending led the world's retreat in 2008, losing 31 percent and 22 percent.
Bearish Sentiment
The global bear market in equities will deepen from New York to London to Tokyo in the next six months as credit losses prolong the economy's slump and inflation erodes profits, a survey of Bloomberg users showed.
The S&P 500, the U.K.'s FTSE 100 Index, Japan's Nikkei 225 Stock Average, Spain's IBEX 35 Index, the Swiss Market Index, France's CAC 40 Index, Italy's S&P/MIB Index and Germany's DAX Index will decline, according to the Bloomberg Professional Global Confidence Survey of 4,232 users taken July 7 to 11. In Brazil, the only market where investors predict gains, optimism dropped to a five-month low, the survey showed.
The S&P 500 has slumped 22 percent since its Oct. 9 record. Financial shares in the measure capped the steepest-ever five-day decline yesterday, with Citigroup Inc., the biggest U.S. bank, plunging to the lowest level since it was created through a merger in October 1998.
The S&P 500 now trades for 20.1 times the reported earnings of companies in the index, while the MSCI World Index, excluding the U.S., is valued at 11.8 times profit. When the gap between their price-to-earnings ratios widened to 9.89 in May, the rest of the world hadn't been that much cheaper than the U.S. since 2002.
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