Venezuela's oil policy
A sticky proposition
Take a tiny bit of it, or leave it
IN A world in which oil is scarcer, the 272 billion barrels of heavy crude that Venezuela reckons are contained in the oil sands of its Orinoco basin ought to seem like a more attractive proposition to multinationals and state oil firms alike. Yet three times this year Petróleos de Venezuela (PDVSA), the state oil company, has postponed bidding for seven blocks in the Orinoco which officials think would yield 1m barrels per day of synthetic oil. The reason: the terms on offer are even stiffer than those being contemplated by Brazil’s government (see article), and the uncertainty is even greater.
The risk is not geological. Everyone knows where the oil is. The upgrading and refining facilities required to turn tar to oil cost billions of dollars, but the technology is tried and tested. Environmentalists, so vocal about Canada’s tar sands (see article), have so far been silent over Venezuela’s bitumen.
It does not help that PDVSA wants a 60% share and operational control in each block while not putting up any money. On top of that the government will take a 33% royalty and a windfall tax. Even so, state-owned oil firms from China, Russia and India have expressed interest in the blocks, along with Brazil’s Petrobras and multinationals such as BP, Chevron, Royal Dutch Shell and Total. Two things have prompted them to hesitate, says Michelle Billig of Pira Energy, a consultancy. The first is the world recession and the fall in the oil price—factors that lay behind disappointing bidding rounds in Algeria and Iraq earlier this year. The second is political risk.
Over the past two years Venezuela’s president, Hugo Chávez, has nationalised large parts of the economy, including dozens of oil-service companies (which are still awaiting promised compensation). Two oil giants—Exxon Mobil and ConocoPhillips—are mired in arbitration over government changes to their contracts for their operations in the Orinoco belt. The proposed new contracts contain no provision for arbitrating disputes.
Such is the thirst for oil that some companies, especially state-owned ones from countries, such as Russia and China whose governments are friendly to Mr Chávez, may eventually hold their noses and dive into the Orinoco’s sticky sands.
Brazil's oil policy
Preparing to spend a “millionaire ticket” from offshore
The government has unveiled plans to give the state the lion’s share of the money from vast new oil discoveries. Will this wealth be invested or squandered?
BY TRADITION Brazil invests little and saves less. Brazilians like to borrow and spend, and ao inferno with the future. This may be a legacy of stubbornly high inflation for most of the second half of the 20th century. It may also be an inheritance from further back. Eduardo Giannetti, an economist and philosopher, thinks that the Brazilian ethnic mixture of indigenous nomads, Portuguese settlers seeking a quick fortune and Africans brought to the country in chains bequeathed an entrenched habit of spending now and saving some other time. Whatever the cause, the discovery in 2007 of potentially vast new offshore oil deposits deep beneath the Atlantic seabed will be a crucial test of Brazil’s moral fibre: depending on how it is used, this new wealth could help the country overcome poverty and underdevelopment, or exaggerate its spendthrift ways.
After almost two years in which his government has pondered the question, on August 31st President Luiz Inácio Lula da Silva unveiled four new bills setting out how the windfall should be gathered and spent. His rhetoric on what he called “independence day” was triumphalist. The oil deposits were “a gift from God,”“a millionaire ticket” and “a passport to the future.” But he also pointed to the problems that oil has caused some economies, and explained how Brazil plans to avoid them. The bills, which have to be approved by Congress, will not affect existing exploration and development contracts held by Petrobras, the state-controlled oil company, and five foreign oil companies. These contracts govern parts of the Tupi field, which contains between 5 billion and 8 billion barrels of oil. But plenty of oil and gas would fall under the new laws. Officials believe that in all, there may be up to 50 billion barrels of oil and gas offshore—enough to turn Brazil into an oil giant.
One bill declares the oil in the new fields—dubbed pré-sal because they lie beneath a shifting layer of salt—the property of the state, rather than of the companies that buy concessions. In each block, half of any oil produced would go to the state. The remaining half would be subject to a production-sharing agreement between Petrobras and any companies that partnered it, in proportion to their costs. Another bill creates a new state oil company called Petrosal to represent the state’s interests in each block. In theory this will be a small entity, staffed by technicians. In practice it may swell, particularly if it is controlled by politicians, as they may stuff it with supporters. The state will also inject the monetary equivalent of 5 billion barrels of oil into Petrobras, with the aim of ensuring it has the financial muscle to remain the dominant operator. Since 60% of Petrobras’s shares are traded on the market, this capital boost will dilute existing shareholders. The company’s share price fell sharply on the day of the announcement, wiping $7 billion from its market value. In addition, the government plans to set up a social fund to spend Petrosal’s billions.
Officials have argued that the discovery of so much oil in the Tupi field has eliminated geological risk. That, they say, merits guaranteeing the state a fatter slice of the revenues. But this could have been done by tweaking the existing arrangements, for example to impose a higher royalty. The pré-sal fields are technologically complex and expensive to develop. Two recent wells, one drilled by Britain’s BG Group and the other by America’s Exxon Mobil, proved dry. Some industry experts question the decision to scrap the current rules in which concessions are overseen by the National Petroleum Agency (ANP). “You have a system that has worked well for ten years and is transparent, in a country that often has problems with corruption in public works projects,” says Marilda Rosado, a former director of both the ANP and Petrobras and currently a partner in a Rio law firm, “and you decide to scrap it?”
The reason for doing so, according to Mauricio Tolmasquim, head of the state-run Energy Research Company (EPE), is to give the government more control over the oil business. EPE looked at the regulatory regimes in the 20 countries with the biggest oil reserves. Only three—the United States, Canada and Brazil—operate a pure concession system with minimal state involvement, it found. The new set-up, says Mr Tolmasquim, would allow the government to take things such as the exchange rate into account when it takes decisions on exploration.
Even if Congress heeds Lula’s plea to act speedily, it cannot approve the bills until December. In practice, they may become bogged down by wrangling. One of the new measures reduces the share of oil revenues that go to the states and municipalities closest to the fields, aiming to spread the wealth more widely. That is reasonable but will face political resistance. José Serra, the governor of São Paulo and the man opinion polls tip to succeed Lula in a presidential election next year, has urged Congress not to rush. The government spent 22 months coming up with its proposals, so congress and society should also be given time to debate them, he says. It would certainly suit his campaign if they did. Conversely, the electoral chances of Dilma Rousseff, Lula’s chosen candidate, might be boosted by speedy approval.
There are still many details to be sorted out. The proposed social fund was originally conceived as being earmarked for education and infrastructure spending. It was supposed to be inspired by Norway’s oil fund, most of which is saved. Now its mandate has spread to the environment, culture and even the financing of new industries. The worry is that the money will be spent today rather than saved or invested, further bloating a state whose revenue is already equivalent to 36% of GDP, compared to 20% in Mexico.
Of course, these are nice problems to have. And Brazil is better placed to deal with them than many other countries. Still, as Lula pointed out, what looks like a winning lottery ticket can all too easily become a curse. Anyone who has been following the recent corruption scandals in Brazil’s Congress will know that such a disaster is well within the powers of the country’s lawmakers.
Buttonwood
Be thankful they don't take it all
Governments will need to find new ways of raising tax
“IF YOU drive a car, I’ll tax the street/ If you try to sit, I’ll tax your seat.” The Beatles may have been joking when they wrote the lyrics of “Taxman”, but the authorities could soon be tempted to use some of their ideas.
The credit crunch has revealed as many holes in government finances as the Fab Four found in Blackburn, Lancashire in “A Day in the Life”. Some nations, including America and Britain, have lurched into budget deficits of more than 10% of GDP, a scale of shortfall not normally seen in peacetime. That may simply be an indication of the depth of the recession. But it may also be a sign that tax revenues have become more volatile, making it much harder for governments to judge the health of their finances.
Instead of storing up surpluses in the fat years so as to cushion their finances in the lean ones, governments were sorely tempted to spend their inflated revenues, in the hope of buying some electoral popularity. A European Commission report published earlier this year concluded that tax-revenue growth was “exceptionally high” in most European Union countries during the period from 2003 to 2007. But even with the money pouring in, Britain actually managed to increase its spending at an even faster rate.
A bust in tax revenues has swiftly followed the boom. What explains such marked volatility? The property cycle is one possibility. Higher property prices boost tax revenues directly, through levies on capital gains or on transactions (such as stamp duty in Britain). They also have an indirect impact via the wealth effect, as consumers increase their spending in response to improvement in their balance-sheets (see article). Britain and America raise a higher proportion of their revenues from taxes on property than other countries. The commission notes tartly that “revenue windfalls during asset-price boom periods are often misread as durable improvements in the underlying budget position.”
Another explanation is that both Britain and America have been highly dependent on the finance industry. In the good years, bumper bank profits inflated both corporation-tax receipts and the income-tax take from bonuses. The credit crunch has slashed the revenue from both.
The banking boom was also partly responsible for the widening wealth and income inequalities in the Anglo-Saxon world. The result has been a narrowing of the tax base. In 1986 the top 1% of Americans were responsible for 25.4% of all income taxes paid; by 2005 their share had risen to 38.4%. Since the pay of these plutocrats is highly variable, a bad year for them means a bad year for the taxman.
Even though bank bonuses are on the rebound this year, the industry is smaller than it was. Unless the system is changed, tax revenues from the financial system may never reclaim the heights they reached earlier this decade.
As countries try to eliminate the shortfall, it is tempting to hope that they will do so purely by cutting waste in public spending. But they won’t (and probably can’t). So they will find other things to tax.
That task will be made more difficult by the greater mobility of corporations (and high-earning individuals) in the modern world. Competition among EU member nations has forced the top corporate-tax rate down by ten percentage points since the mid-1990s, according to Elga Bartsch of Morgan Stanley. In America, low-tax Nevada is among those trying to lure businesses away from high-tax California (where tax revenues have been extremely volatile).
Competition also explains why governments are unlikely to be tempted by the recent suggestion of “Red Adair” Turner, the head of Britain’s financial services regulator, to impose a levy on capital-market transactions. It would only work if everyone else, including the Swiss and Singaporeans, did the same. Instead their energies will be focused on closing “loopholes”—witness the recent assault on offshore tax havens. That may result in some one-off windfalls, but not enough to plug the revenue gap.
Because governments are limited in their ability to tax the mobile, they will tax the static. As noted above, property is already highly taxed in Britain and America (and may be years away from another boom). So consumption taxes are the more likely answer. They are hard to avoid and fairly stable, since spending patterns do not change sharply from year to year. But they tend to fall more heavily on the poor than the rich. A crisis created by investment bankers will be paid for by shop assistants and office cleaners.
Trade agreements
Doing Doha down
Regional trade deals are no substitute for a Doha agreement. Indeed, they are its enemy
SOMETHING is usually better than nothing. Shorn of all of the economic jargon and legal niceties, that is the logic behind the booming business in bilateral trade deals that is sweeping Asia. As the Doha round of world trade talks languishes, Asia’s trading nations say that they cannot afford to sit on their hands and wait for Doha to revive. Better, they argue, to loosen up trade with simpler deals between a couple of countries or, if you are truly ambitious, a handful.
Some regional trade deals in the right circumstances have indeed added to economic well-being. But the sorts of deals that are now being signed in Asia, just when multilateral trade desperately needs supporting, are likely to do less for their countries’ economies than for the egos of the politicians who sponsor them. Taken as a trend, they amount to a dangerous erosion of the system of multilateral trade on which global prosperity depends.
In 2001 there were just 49 bilateral and regional free-trade agreements (FTAs) in place. A deal signed last month between India and South Korea raised the total to 167 (see article). That recent agreement was trumpeted as a boon for both economies. South Korean firms say they are keen to make more use of India as a manufacturing base from which to export to the rest of the world. In return, Indian programmers will more easily be able to set up shop in South Korea.
More such agreements are likely to follow. And who could object to that? In a world of collapsing exports and rising protectionism, the fashion for bilateral deals looks like a welcome boost to the idea that trade is good. Peer deeper, however, and the message is far less reassuring.
Noodles all round
For a start, bilateral deals impose so much paperwork and bureaucracy on trade that companies rarely make use of their provisions. Only about a fifth of 609 firms in four Asian countries surveyed by the Asian Development Bank in 2008 took advantage of the agreements that applied to them.
When bilateral agreements are attractive to companies, it is often for the wrong reasons. Many bilateral trade deals offer favourable treatment to a few companies from a particular country at the expense of all the rest from elsewhere in the world. The companies that lose out may well be lower-cost producers, since such agreements are dictated more by politics than by economics. If so, the economy will suffer. Even if such a deal is eventually superseded by a broader one, it may already have caused long-term damage by allowing less efficient firms to become entrenched. Economies that are too small to extract concessions from their bigger bilateral negotiating partners fare particularly badly.
Then there is the complexity of the growing number of bilateral and regional deals. Each has its own rules and administrative requirements, leading to a confusing spaghetti (or perhaps noodle soup) of preferential agreements, instead of the predictability that multilateralism promises. As such agreements multiply, there is less chance that they create the wealth that their authors claim.
Some claim that the tricky issues that stand in the way of a multilateral deal can be more easily resolved when only two countries are sitting at the table. That rarely happens: in the rush to conclude an agreement, such issues are often shelved. India’s deal with ASEAN last year, for instance, put aside the poisonous question of farm trade, which was one of the deal-breakers in the Doha talks last July.
Bilateral agreements, thus, do not, on the whole, serve as stepping stones to a comprehensive global deal. On the contrary, they both distract governments from the multilateral process and offer cover for politicians’ failure to advance it. Moreover, the fear of losing favourable treatment in a bilateral agreement can deter governments from talking tough in multilateral negotiations.
Some defenders of bilateralism admit all this, but cling to one argument they regard as clinching—that bilateral agreements are at least possible, whereas the chances of concluding Doha seem ever more remote. The comparison, they say, is not between local deals and a global one, but between regional deals and no deals at all.
This argument ignores the lessons of the past. The history of the multilateral trading system is littered with rows, hiatuses, disillusion, despair—and sudden success. In the 1970s many people wrote off the precursor to the World Trade Organisation. The ministerial meeting of 1982 failed and the later Uruguay round of talks nearly collapsed, before being successfully concluded. Even now, amid deep pessimism about ever finishing Doha, the Indian government is holding a summit of trade ministers in the hope of restarting the talks. If they truly want Doha to succeed, the bilateralists need first to acknowledge that their own deals are poisoning its chances.
Google books
Tome raider
A fuss over Google's effort to build a huge digital library
PAUL COURANT, the dean of libraries at the University of Michigan, jokes that he also runs “an orphanage”. Among the books on his shelves are such seminal texts as “Blunder Out of China” and “The Appalachian Frontier: America’s First Surge Westward”, which are protected by copyrights belonging to people who cannot be found. Known as “orphan” books, such titles are one element of a controversial plan by Google, the world’s biggest internet company, to create a vast online library.
Several years ago Google began working with research libraries in America to create digital copies of their collections, parts of which it made available online. Not long after, a group of authors and publishers sued the company for breach of copyright. Now Google and its former antagonists are seeking judicial approval for a deal they reached last year to settle the class-action suit. Among other things, this would allow the company to scan millions of out-of-print books, including orphan works, without seeking permission from individual copyright holders. Google could then sell individual works or access to its entire library, provided it paid a share of the proceeds to owners of the copyrights, if they can be found. (It has already set aside $125m to that end.) Publishers and authors had until September 4th to withdraw from the agreement; those remaining in it can ask Google to remove their titles from its library at any time. Next month a federal court is due to hold a hearing on the agreement, which will help shape the future of the digital publishing.
Opposition to the deal is brewing all around the world. On August 31st the German government filed a submission to the American court arguing that the agreement, which encompasses books by German authors published in the United States, would violate Germany’s copyright law. French publishers also claim the agreement will contravene laws in their homeland. They note that there are no plans for European representatives on the book-rights registry that would be set up under the deal to collect and distribute payments due to copyright owners. This has heightened suspicions that foreigners will be fleeced.
In Japan two noted writers have filed a complaint with local authorities about Google’s actions. Many American firms oppose the deal, including Microsoft and Yahoo!, two of Google’s big competitors, as well as Amazon, a big retailer of books in both paper and electronic form. Amazon argues that Congress, rather than Google and its allies, should decide how copyrights should be handled in the digital age.
Together with the Internet Archive, a non-profit organisation which runs a rival project to digitise libraries’ contents, these firms have formed a group called the Open Book Alliance to campaign against the agreement. A posting on the Alliance’s website claims that the agreement would create a monopoly in digital books that would inevitably lead to fewer choices and higher prices for consumers. Such complaints have attracted the attention of America’s Department of Justice, which is examining the agreement to see whether it is anti-competitive. It is due to send its findings to the court by September 18th.
In response, Google executives point out that the deal cannot be opened up to other firms because of the way class-action litigation works in America. However, it is a non-exclusive arrangement, so other companies are free, in theory, to seek a similar deal to Google’s. But in practice few are likely to enter this legal maze, and go to the expense of scanning millions of books, without any certainty of making money.
In spite of this, Google claims that rather than suppressing competition in the emerging market for electronic books, the agreement would increase it by offering a web-based alternative to expensive proprietary systems such as Amazon’s Kindle. Having bought a book from Google, customers would be able to read it on any device with internet access. Moreover, by clarifying the copyright status of millions of digital books, the deal would also make it easier for firms other than Google to strike deals to use them.
This may explain why the agreement is garnering support from some unexpected quarters. In a recent letter to the court, lawyers for Japan’s Sony, which also makes readers for electronic books, argued that if the agreement is approved it would have “numerous and significant pro-competitive effects”. Viviane Reding, the European Union’s commissioner for telecoms and media, has publicly hailed new business models such as Google’s, which she thinks will complement the EU’s Europeana initiative to digitise Europe’s cultural heritage. By promising to bring many more books like “The Appalachian Frontier” to an exciting new digital frontier, Google stands a fighting chance of winning its case.
By Keith Naughton, Adam Satariano and Duane D. Stanford
Sept. 4 (Bloomberg) -- At Activision Blizzard Inc., instilling a “culture of thrift” means you wait 13 years before you change the office carpet, according to Chief Executive Officer Bobby Kotick.
“A lot of other companies, when there is some sort of economic downturn, they go into triage mode where they are trying to figure out their costs,” Kotick said. “We do that all the time.”
Kotick acted quickly during the recession, merging his company last year with Blizzard, the game division of France’s Vivendi SA. Activision got “World of Warcraft,” an online role-playing game with more than 11 million subscribers paying $14.99 a month. That helped Kotick boost market share in North America and Europe by 2.8 percentage points to 12.7 percent even as industry sales fell 14 percent.
Activision offers one example of how companies well- positioned for the worst economic slump since the 1930s have gained a competitive advantage.
Wal-Mart Stores Inc. expanded electronics offerings after Circuit City Stores Inc. liquidated, McDonald’s Corp. rolled out low-priced lattes and casino owner Penn National Gaming Inc. is looking to expand into Las Vegas. J.M. Smucker Co. added Folgers, the best-selling ground coffee in the U.S., to its market-leading jelly, jam and preserve brand; Ford Motor Co. boosted output while U.S. rivals filed for bankruptcy; and Verizon Communications Inc. bought Alltel Corp.
Beating the S&P
Six of those seven companies have outperformed the Standard & Poor’s 500 Index since the recession began in December 2007, while Penn National, the only laggard, has outpaced the S&P since the benchmark’s March 9 low.
Analysts expect the gains to continue. Each of the seven companies has more buy ratings than holds or sells. Of 150 recommendations for the group, there are 106 buys, 38 holds and six sells, based on data compiled by Bloomberg.
“To be aggressive in this recession, it took a strong stomach and a good balance sheet,” said Mark Zandi, chief economist of Moody’sEconomy.com in West Chester, Pennsylvania. “The companies that panicked will suffer more in the long run.”
McDonald’s, the world’s largest restaurant chain, and its franchisees invested $1.12 billion to add McCafe gourmet coffee drinks at about 11,200 U.S. locations.
Investing in Coffee
The company’s share of the U.S. fast-food market has increased 1 percentage point since 2006, according to a spokeswoman, Heidi Barker. That growth was driven in part by last year’s introduction of the McCafe products, said Chief Financial Officer Peter Bensen. Coffee sales have grown to 5 percent of the Oak Brook, Illinois-based company’s sales, up from 2 percent in 2006, Bensen said.
“We’re hitting or exceeding our targeted unit movement across the country,” Bensen said, while declining to specify internal goals. “We think the combined beverage strategy, conservatively, can add about $125,000 to sales per store.”
U.S. McDonald’s restaurants average $2.3 million in annual sales, Bensen said.
Lattes at McDonald’s start at $2.29, compared with $3.29 for a small latte at some of Starbucks Corp.’s New York outlets. Seattle-based Starbucks said Aug. 20 it is lowering prices on coffees and lattes by as much as 15 cents while raising prices on frappuccinos and caramel macchiatos by as much as 30 cents.
Sales Growth
“We continue to focus on providing value to our customers, an area where we have made much progress against the misperceptions about Starbucks value proposition,” May Kulthol, a spokeswoman for Starbucks, said in an e-mailed statement.
McDonald’s shares are up 9.3 percent since their March 5 low this year. They rose 20 cents to $55.57 yesterday in New York Stock Exchange composite trading. Of 21 analysts covering the stock, 12 say buy and 9 say hold, based on data compiled by Bloomberg.
“We’ve had an intense focus on improving operations,” Bensen said. “The eating-out market is shrinking in the recession, and we’re grabbing an even bigger part of the market.”
U.S. restaurant-industry traffic fell 2.6 percent for the three months ended May 2009, according to market researcher NPD Group, the steepest drop since 1981. Sales at McDonald’s U.S. stores open at least 13 months gained 3.5 percent in the second quarter, the company said.
Breakfast Boost
While it’s too early to say whether the drinks strategy will meet McDonald’s goals, the coffee is “bringing people into McDonald’s more often and they’re spending more on breakfast and the rest of the menu,” said Richard Jeremiah, a restaurant analyst with marketing researcher IBISWorld Inc. in Los Angeles. “The key thing at the moment is getting that traffic.”
Smucker, the 112-year-old maker of Smucker’s jams and Jif, the top-selling peanut butter in the U.S., has also taken advantage of the decline in dining out.
“The shift to ‘at-home’ consumption is on an upward trend and we are well prepared to continue to play an important role,” Co-CEO Tim Smucker said in an Aug. 21 e-mail.
Net income at Orrville, Ohio-based Smucker more than doubled to $98.1 million for the three months ended July 31. Revenue nearly doubled when it acquired the Folgers coffee business from Procter & Gamble Co. for about $3 billion in November as Wall Street turmoil fueled a global financial collapse.
“Folgers was a sleeper that they have been able to reinvigorate,” said Edward Aaron, a Denver-based analyst with RBC Capital Markets.
On the Prowl
Folgers captured more than a quarter of ground-coffee dollar sales in the 13 weeks ended June 28, according to Information Resources Inc., a Chicago-based market researcher. IRI’s data does not include sales at Walmart.
Aaron, who advises buying Smucker, has a 12-month share- price target of $59, 14 percent more than yesterday’s NYSE close at $51.59. Of 11 analysts covering the company, 9 say buy and 2 say hold. Smucker has surged 51 percent since touching a 2009 low of $34.22 on March 11.
Penn National has $800 million in cash and is on the prowl for new casino licenses in states including New York, Kansas and Ohio, as well as existing properties being sold by debt-laden rivals, Chief Executive Peter Carlino has said since October.
“We are probably busier at the corporate office than we have ever been in terms of looking at new opportunities,” CFO Bill Clifford said in an Aug. 21 interview. “We have a lot more firepower, a lot more options available to us to take advantage of the opportunities being created indirectly by the bad economy.”
‘Distressed Property’
The prize the Wyomissing, Pennsylvania-based casino and race-track company is seeking: a mid-sized resort on the Las Vegas Strip. Troubled owners now reluctant to sell may have little choice next year after MGM Mirage’s CityCenter opens in December, adding almost 6,000 new hotel rooms amid the city’s worst decline.
“There are going to be some distressed property situations out in Las Vegas,” Clifford said. “It will play itself out early next year, and at that point in time I think it will be much easier to get something done.”
Of 16 analysts covering Penn National, 12 recommend buying and 3 say hold, according to data compiled by Bloomberg. The shares have soared 68 percent since a March 6 low. They rose 13 cents to $28.64 in Nasdaq Stock Market composite trading.
As U.S. auto buying fell to the lowest level in three decades, Ford CEO Alan Mulally forced the 106-year-old automaker to deal with its diminished place in a changing market.
“There was a move by the company to accept the reality of today rather than thinking things are going to get better,” CFO Lewis Booth said in an Aug. 21 interview. “This very strong view, led by Alan, is, ‘Accept reality and react to it. Don’t hope it’s going to go away.’”
Avoiding Bankruptcy
That attitude led the Dearborn, Michigan-based automaker to borrow $23 billion in late 2006. The move saved Ford from the bailouts and bankruptcies that beset the predecessors of General Motors Co. and Auburn Hills, Michigan-based Chrysler Group LLC.
Ford has cut its North American workforce by 42 percent, or 50,400 jobs, since December 2006 as it revamped its product line. It dropped the 10-miles-per-gallon Excursion sport-utility vehicle and added the 41-mpg Fusion hybrid.
As Chrysler and Detroit-based GM slipped into Chapter 11 in April and June, Ford boosted output 16 percent to win more buyers. Ford had 15.8 percent of U.S. auto sales through August, up from 15 percent in 2008. It’s faring better than it did after the 2001 recession, when its market share slid to 21.5 percent in 2002 from 24.1 percent two years earlier.
“We didn’t think of just surviving,” Booth said. “We thought that, as we went through this, we would continue to invest in the new products for the future.”
‘Stealing Share’
Ford has combined “cost cutting, product improvement and pricing enhancement,” said Brian Johnson, a Chicago-based Barclays Capital analyst who has a “neutral” rating on the stock. “Ford is not just stealing share from GM and Chrysler, they’re taking it from the Japanese as well.”
Ford rose 45 cents to $7.48 yesterday in composite trading on the New York Stock Exchange. The shares have more than tripled this year for the third-largest gain in the S&P 500.
Analysts still aren’t convinced a turnaround is at hand. Six recommend the shares while five say hold and five say sell.
Walmart, the world’s biggest retailer, loaded up on laptops, mobile phones and Blu-ray disc players as Circuit City liquidated in March. In the U.S., operating profit advanced 5 percent to $4.9 billion in the quarter ended July 31.
Walmart and Target
Customer visits during the period increased by 1.3 percent, reflecting store improvements that will help the Bentonville, Arkansas-based company keep shoppers when the recession ends, Eduardo Castro-Wright, U.S. stores chief, said on an Aug. 13 earnings call.
Sales by Walmart’s U.S. stores open at least a year rose 1 percent in the 26 weeks through July 31 as Target Corp. posted a 5 percent decline. Walmart had a 3.2 percent gain in 2008, when same-store sales for Minneapolis-based Target slid 2.9 percent.
“Based on same-store sales performance over the past year, Walmart has been outperforming the competition, which implies that the company is gaining market share,” Joseph Feldman, an analyst at New York-based Telsey Advisory Group, said Aug. 27.
A Target spokesman, Eric Hausman, said the second-largest U.S. discount chain “has continued to gain market share in many categories.”
“Market share is not a zero-sum game between these two companies,” he said.
Verizon’s Leap
Walmart’s ability to keep increasing sales in a slumping economy echoes the company’s experience in the 2001 recession. For the 52 weeks ended Feb. 1, 2002, Walmart’s same-store sales climbed 6.1 percent.
Walmart rose 82 cents to $51.74 in NYSE trading yesterday. Walmart has gained 11 percent since a 2009 low on Feb. 4, and 21 analysts recommend buying the stock, based on data compiled by Bloomberg. Six say hold.
Verizon used an acquisition to leapfrog AT&T Inc. and become the largest U.S. wireless provider this year. The Jan. 9 purchase of Alltel for $28 billion helped New York-based Verizon increase second-quarter sales by 11 percent amid a slowing market for phone services, and boosted the number of mobile customers by 18 percent.
Mobile Web Access
“Our business relationships have held up very well,” Verizon CFO John Killian said in an Aug. 19 interview from his office in Basking Ridge, New Jersey. “We’ve not lost any contracts.”
Verizon announced contracts this year with the Bank of New York Mellon Corp., Siemens Enterprise Communications and federal agencies such as the Department of Health and Human Services.
Revenue from mobile plans that let customers surf the Web jumped 53 percent last quarter from a year earlier. They will eventually comprise half of customers’ monthly wireless bills, up from 29 percent in the second quarter, Killian said.
Mobile Web access will speed up when Verizon rolls out its “fourth generation,” or long-term evolution, network next year. Verizon said it will be the first to deploy its LTE network in the U.S., ahead of AT&T’s planned 2011 rollout.
While global mobile-phone sales slid 6 percent in the second quarter, smart-phone sales rose 27 percent, according to research firm Gartner Inc.
“People want the cool thing,” said Brian Marshall, a technology analyst at Broadpoint AmTech Inc. in San Francisco. “They view that as a necessity.”
Verizon rose 10 cents to $30.24 yesterday in NYSE trading, pushing its gain to 16 percent since a March 9 low. Of 31 analysts covering the company, 17 say buy, 13 say hold and 1 recommends selling.
‘Even Out Earnings’
Like Verizon, game maker Activision looked to a merger to expand in the recession by combining with Vivendi’s Blizzard.
“Doing that merger and having a subscription base for a game such as ‘Warcraft,’ that really helps even out earnings,” said Geoff Chamberlain, a research analyst with Appleton Partners in Boston, which owned 272,000 Activision shares as of June 30, based on data compiled by Bloomberg.
Adding market share in an economic contraction isn’t new for Santa Monica, California-based Activision. In 2001’s fourth quarter, when the last recession ended, game titles featuring professional skateboarder Tony Hawk helped boost global market share by 1.7 percentage points from a year earlier to 12.4 percent, the company said.
Activision has surged 41 percent since its low for the year on Jan. 6 in Nasdaq trading. The shares fell 9 cents to $11.55 yesterday. All 29 analysts following the stock rate it as a buy.
As for the 13-year-old carpet at company headquarters, CEO Kotick said he recently replaced it at the landlord’s expense.
By Timothy R. Homan
Sept. 4 (Bloomberg) -- The pace of U.S. job losses slowed in August while the unemployment rate reached a 26-year high, signaling the recovery from recession will be slow to develop.
Employers cut payrolls by 216,000, fewer than forecast, after a 276,000 drop in July, Labor Department data showed today in Washington. The jobless rate rose to 9.7 percent; the so- called underemployment rate -- which includes part-time workers who’d prefer a full-time position and people who want work but have given up looking -- reached a record 16.8 percent.
Today’s figures stoke concern that the recovery forecast to take hold in the second half of the year won’t prompt a turnaround in the job market until 2010. With the ranks of long- term unemployed nearing 5 million, workers are at risk of losing skills, making it even tougher for them to eventually find work.
“The economy is no longer detonating, but we are still losing jobs,” David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto, said in an interview with Bloomberg Radio. “It’s going to be a very tough environment for the consumer.”
Stocks fluctuated after the release, and the Standard & Poor’s 500 Index was up 0.3 percent at 1,005.99 as of 11:23 a.m. in New York. Treasuries were lower, with benchmark 10-year notes yielding 3.38 percent from 3.35 percent late yesterday.
Rising joblessness underscores Treasury Secretary Timothy Geithner’s judgment this week that it’s “too early” to start exiting from the unprecedented stimulus measures aimed at stabilizing the economy.
Lowering Costs
AMR Corp. and Whirlpool Corp. are among the companies continuing to cut staff to lower costs and revive profits in the aftermath of the deepest recession since the 1930s.
“The labor market lags behind the rest of the economy, so we are first going to have to see positive GDP growth,” Christina Romer, chairman of the White House Council of Economic Advisers, said in a Bloomberg Radio interview. While 9.7 percent unemployment is “a tragedy,” Romer noted that the pace of job losses has slowed from 741,000 in January.
Romer said the Obama administration’s $787 billion fiscal stimulus is working to boost growth and declined to comment on whether a second effort will be needed.
Revisions subtracted 49,000 from payroll figures previously reported for July and June. The drop for July is now calculated at 276,000, compared with the 247,000 previously reported.
Payrolls were forecast to fall 230,000 in August according to the median of 79 economists surveyed by Bloomberg News. The jobless rate was projected to rise to 9.5 percent. Analysts in a monthly Bloomberg survey projected the jobless rate will reach 10 percent by early 2010 and average 9.8 percent next year.
Recession’s Toll
The latest numbers brought total jobs lost since the recession began in December 2007 to 6.9 million, the biggest decline in any post-World War II economic slump.
Among the 14.9 million unemployed Americans in August, 4.99 million were out of work for more than 26 weeks. The percentage of jobless who weren’t classified as on temporary layoff rose to 53.9 percent, up from 39.1 percent a year ago.
“Layoffs that we’re having are more structural and not cyclical, and that makes it more difficult to have a meaningful rebound in income growth, which is a key ingredient as I said for sustainable self re-enforcing expansion,” said Tony Crescenzi, a market strategist and portfolio manager at Pacific Investment Management Co., manager of the world’s biggest bond fund.
Breadth of Declines
All major job categories recorded losses in August, with construction payrolls tumbling 65,000, factories cutting another 63,000 and retailers firing 10,000 people.
Whirlpool, the world’s largest appliance maker, is among those firms still eliminating positions. The Benton Harbor, Michigan-based company said Aug. 28 it will close its Evansville, Indiana, manufacturing plant, resulting in the elimination of 1,100 jobs.
Fort Worth, Texas-based American Airlines, a unit of AMR, said this week it will furlough 228 flight attendants and put 244 more on involuntary leave.
Federal Reserve officials had “particular” concern about the job market when they met Aug. 11-12, minutes of the gathering showed this week.
“Long-term unemployment and permanent separations continued to rise, suggesting possible problems of skill loss and a need for labor reallocation that could slow recovery in employment begins to expand,” the Fed said in the minutes released Sept. 2.
Fed Rate Changes
Federal Reserve policy makers waited at least a year after unemployment peaked before raising interest rates in the aftermath of the previous two recessions.
Chairman Ben S. Bernanke, credited with preventing a second depression in winning nomination by President Barack Obama for a second term last month, has overseen a $1.2 trillion expansion of the central bank’s balance sheet to combat the credit crisis.
Today’s report also showed the average work week held at 33.1 hours in August. Average weekly hours worked by production workers remained unchanged from the month before, at 39.8 hours, while overtime also held at 2.9 hours. That brought the average weekly earnings up to $617.32 from $615.33.
“We’re still going to see some months of job cuts,” said Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts. “There is a whole range of options, like adding shifts or hours, that companies can put in place until it becomes necessary to hire people back.”
Workers’ average hourly wages rose 6 cents, or 0.3 percent, to $18.65 from the prior month. Hourly earnings were 2.6 percent higher than August 2008. Economists surveyed by Bloomberg had forecast a 0.1 percent increase from the prior month and a 2.2 percent gain for the 12-month period.
The U.S. recession “is bottoming out” and the economy is poised for “a slow return,” Alcoa Inc. Chief Executive Officer Klaus Kleinfeld said in a Sept. 2 interview. The head of the largest U.S. aluminum producer said government stimulus in the U.S. and China will affect the New York-based company’s earnings “positively” this year.
Coruscating on Thin Ice
The Obama administration is young and out of touch.
At a speech in Colorado someone asked if I was concerned about some of the appointees to the Obama administration. The questioner was referring obliquely to conservative dismay at Van Jones, special adviser for green jobs on the White House environmental council. Apart from a flirtation with radicalism (you have to hope it did not become a full, deep and continuing relationship), Jones, in February, thoughtfully attempted to capture the essence of the GOP in a speech in Berkeley, Calif. "Republicans are —," he explained. We don't print the word he used, but it refers to a body part involved in elimination. He was speaking at the inaugural ceremony of the Rahm Emanuel Center for the Study of Political Comportment. Ha, just kidding.
But Mr. Jones is not my concern. All early administrations draw to their middle and lower levels a certain number of activists from the edges—flakes. But because they are extreme, they become controversial, and because they are controversial, they become ineffective. In its way the system works.
A Doctor's Plan for Legal Industry Reform
My modest proposal to rearrange how lawyers do business.
RICHARD B. RAFAL
Since we are moving toward socialism with ObamaCare, the time has come to do the same with other professions—especially lawyers. Physician committees can decide whether lawyers are necessary in any given situation.
At a town-hall meeting in Portsmouth, N.H., last month, our uninformed lawyer in chief suggested that we physicians would rather chop off a foot than manage diabetes since we would make more money doing surgery. Then President Obama compounded his attack by claiming a doctor's reimbursement is between "$30,000" and "$50,000" for such amputations! (Actually, such surgery costs only about $1,500.)
Physicians have never been so insulted. Because of these affronts, I will gladly volunteer for the important duty of controlling and regulating lawyers. Since most of what lawyers do is repetitive boilerplate or pushing paper, physicians would have no problem dictating what is appropriate for attorneys. We physicians know much more about legal practice than lawyers do about medicine.
Following are highlights of a proposed bill authorizing the dismantling of the current framework of law practice and instituting socialized legal care:
• Contingency fees will be discouraged, and eventually outlawed, over a five-year period. This will put legal rewards back into the pockets of the deserving—the public and the aggrieved parties. Slick lawyers taking their "cut" smacks of a bookie operation. Attorneys will be permitted to keep up to 3% in contingency cases, the remainder going into a pool for poor people.
• Legal "DRGs." Each potential legal situation will be assigned a relative value, and charges limited to this amount. Program participation and acceptance of this amount is mandatory, regardless of the number of hours spent on the matter. Government schedules of flat fees for each service, analogous to medicine's Diagnosis Related Groups (DRGs), will be issued. For example, any divorce will have a set fee of, say, $1,000, regardless of its simplicity or complexity. This will eliminate shady hourly billing. Niggling fees such as $2 per page photocopied or faxed would disappear. Who else nickels-and-dimes you while at the same time charging hundreds of dollars per hour? I'm surprised lawyers don't tack shipping and handling onto their bills.
• Legal "death panels." Over 75? You will not be entitled to legal care for any matter. Why waste money on those who are only going to die soon? We can decrease utilization, save money and unclog the courts simultaneously. Grandma, you're on your own.
• Ration legal care. One may need to wait months to consult an attorney. Despite a perceived legal need, physician review panels or government bureaucrats may deem advice unnecessary. Possibly one may not get representation before court dates or deadlines. But that' s tough: What do you want for "free"?
• Physician controlled legal review. This is potentially the most exciting reform, with doctors leading committees for determining the necessity of all legal procedures and the fairness of attorney fees. What a wonderful way for doctors to get even with the sharks attempting to eviscerate the practice of medicine.
• Discourage/eliminate specialization. Legal specialists with extra training and experience charge more money, contributing to increased costs of legal care, making it unaffordable for many. This reform will guarantee a selection of mediocre, unmotivated attorneys but should help slow rising legal costs. Big shot under indictment? Classified National Archives documents down your pants? Sitting president defending against impeachment? Have FBI agents found $90,000 in your freezer? Too bad. Under reform you too may have to go to the government legal shop for advice.
• Electronic legal records. We should enter the digital age and computerize and centralize legal records nationwide. All files must be in a standard, preferably inconvenient, format and must be available to government agencies. A single database of judgments, court records, client files, etc. will decrease legal expenses. Anyone with Internet access will be able to search the database, eliminating unjustifiable fees charged by law firms for supposedly proprietary information, while fostering transparency. It will enable consumers to dump their clunker attorneys and transfer records easily.
• Ban legal advertisements. Catchy phone numbers such as 1-800-LAWYERS would be seized by the government and repurposed for reporting unscrupulous attorneys.
• New government oversight. Government overhead to manage the legal system will include a cabinet secretary, commissioners, ombudsmen, auditors, assistants, czars and departments.
• Collect data about the supply of and demand for attorneys.Create a commission to study the diversity and geographic distribution of attorneys, with power to stipulate and enforce corrective actions to right imbalances. The more bureaucracy the better. One can never have too many eyes watching these sleazy sneaks.
• Lawyer Reduction Act (H.R. -3200). A self-explanatory bill that not only decreases the number of law students, but also arbitrarily removes 3,200 attorneys from practice each year. Textbook addition by subtraction.
Enthusiastically embracing the above legal changes can serve as a "teachable moment" and will go a long way toward giving the lawyers who run Congress a taste of their own medicine.
Dr. Rafal is a radiologist in New York City.
Harry Jekyll and Harry Hyde
Never the two shall meet.
In the Aug. 6 edition of the Las Vegas Sun, readers saw an op-ed by Harry Reid. "I have never taken up the Washington hobby of pointing fingers for political gain," reassured Nevada's eminently reasonable, bipartisan, four-term senator.
A few hours later, Mr. Reid appeared for the national press, armed with a piece of Astroturf, to berate town-hall protestors as captive to "Internet rumor mongers and insurance rackets." The Republican Party "is run by a talk-show host," snapped Washington's eminently angry and partisan majority leader.
Welcome to Mr. Reid's bipolar world, which isn't about to fuse any time soon. As a senator up for re-election next year in a swing state that is on the economic ropes and wary of Democrats' liberal plans, Mr. Reid is under pressure from constituents to work with Republicans toward a reasonable agenda. As the public face of the Democratic Senate, Mr. Reid is under pressure from his liberal wing to tear up the opposition and advance his party's wild ambitions. Never the two Harry Reids shall meet, as Mr. Reid's dismal poll numbers are proving.
Senate Majority Leader Harry Reid
The Coming Reset in State Government
My fellow governors and I are likely facing a permanent reduction in tax revenues.
MITCH DANIELS
State government finances are a wreck. The drop in tax receipts is the worst in a half century. Fewer than 10 states ended the last fiscal year with significant reserves, and three-fourths have deficits exceeding 10% of their budgets. Only an emergency infusion of printed federal funny money is keeping most state boats afloat right now.
Most governors I've talked to are so busy bailing that they haven't checked the long-range forecast. What the radar tells me is that we ain't seen nothin' yet. What we are being hit by isn't a tropical storm that will come and go, with sunshine soon to follow. It's much more likely that we're facing a near permanent reduction in state tax revenues that will require us to reduce the size and scope of our state governments. And the time to prepare for this new reality is already at hand.
The coming state government reset will be particularly wrenching after the happy binge that preceded this recession. During the last decade, states increased their spending by an average of 6% per year, gusting to 8% during 2007-08. Much of the government institutions built up in those years will now have to be dismantled.
For now, my state's situation is far better than most, but it won't stay that way if we fail to act in Indiana. At present, we are meeting our obligations, without raising taxes, and still have over $1 billion in reserve. But the dominant reality is that even assuming the official revenue projections are accurate (and they have been consistently too rosy for the past two years), the state of Indiana will have fewer dollars to work with in 2011 than it did in 2007. Most other states face similar or worse prospects.
Stocks Hold Line After Jobs Data
Stocks climbed modestly after new data sent mixed signals about the pace of deterioration in the U.S. job market.
In the latest Labor Department report, the number of lost jobs in August was smaller than expected, but the unemployment rate was higher than anticipated, reaching its highest level since June 1983.
![[Markets Data]](http://s.wsj.net/public/resources/images/MDGpromo_D01222009151210.jpg)
Major indexes have swung in a narrow range between gains and losses in early action. The Dow Jones Industrial Average was recently up 29 points, or 0.3%, to 9374.46, helped by a 2% gain in component Bank of America.
The Nasdaq Composite Index was up 0.6%. The S&P 500 gained 0.4% to stay just above the key 1000 level. It was helped by slight gains in all its sectors except utilities and basic materials.
The market is still in the red for the week, thanks to a plunge on Tuesday that it never quite recovered from. Traders are wary of what will happen when many investors return from summer vacations after the Labor Day weekend. U.S. financial markets will be closed for the holiday Monday.
Safe-haven investments traded a little lower on Friday but didn't signal an all-out embrace of risk by the market participants who have stuck around. The 10-year Treasury note fell 3/32 to yield 3.353%. Gold futures fell $5.50 to $992.20 per troy ounce in New York. The dollar gained against the yen and euro.
Despite the yellow metal's pullback, it still has a loyal following among those who believe it is due for a renewed rally in the months ahead as an alternative to paper money.
"You've got so much more currency out there and a limited supply of gold," said Andrew Schiff, a broker at the portfolio-management firm Euro Pacific Capital, which has been a long-term buyer of gold and mining stocks. "With all the liquidity out there, here's a lot of reason to believe that the boom in gold and other commodities will get back on track," as investors seek tangible stores of value.
The Labor Department said nonfarm payrolls shed 216,000 jobs in August, slightly smaller than the loss expected. Revised data showed more job losses than previously reported in earlier months. The unemployment rate grew to 9.7%, the highest level since June 1983 when the rate was 10.1%. In July, the unemployment rate had declined for the first time since April 2008.
Among stocks to watch, shares of ratings firm Moody's were down nearly 1% after Berkshire Hathaway further reduced its holdings in the company, selling about 800,000 shares earlier this week. Since May, the Warren Buffett-led company has pared its stake in Moody's to about 40 million shares.
Asian stock markets benefited from the firmer gold and base metal prices, with Hong Kong's Hang Seng Index rising 2.8% and the Shanghai Composite Index up 0.6%. In Europe, shares were higher.
Job Losses Moderate, but Unemployment Rate Hits 9.7%
MAYA JACKSON RANDALL
WASHINGTON -- U.S. job losses softened last month but the unemployment rate soared to its highest level since June 1983, proving that it will take some time for the ailing labor market to recover from the worst financial crisis in decades.
Nonfarm payrolls declined 216,000 last month compared to a revised 276,000 drop in July, the Labor Department said Friday. The August drop is smaller than the 233,000 decline economists in a Dow Jones Newswires survey had expected.
Even though the loss is huge by historical standards, it's an improvement; monthly job cuts earlier in the year totaled as much as 700,000. The economy has lost 7.4 million jobs since the recession started in December 2007.
The unemployment rate, calculated using a survey of households as opposed to companies, grew to 9.7%, the highest level since June 1983 when the rate was 10.1%. In July, the unemployment rate had declined for the first time since April 2008. The unemployment rate was under 6% less than one year ago.
Data on U.S. employment has grown more mixed of late. While there has been improvement, economists expect a labor market recovery will be fairly sluggish. Meanwhile, U.S. Federal Reserve officials have grown more confident that the worst economic downturn in decades is ending. According to minutes of the August meeting held by the Fed's policy panel, Fed officials see growth resuming this year, and they expect the recovery to pick up in 2010. But they point out that the economy remains vulnerable to shocks.
Recently, some economic data has turned brighter. Earlier this week, National Association of Realtors data showed that pending home sales climbed to the highest level in more than two years. Also, factory activity in August expanded the first time since January 2008, according to the Institute for Supply Management report released this week.
At the same time, other data shows that the U.S. service sector contracted. And data the Labor Department released this week on jobless claims indicates significant challenges in the labor market, which in turn poses a threat to consumer spending. Meanwhile, economists such as Christina Romer, who heads President Barack Obama's Council of Economic Advisers, see unemployment reaching 10%.
"There's no doubt that we have a long way to go and I and the other members of this administration will not let up until those Americans who are looking for jobs can find them," President Obama said in a statement from the Rose Garden earlier this week.
The Fed's policy panel is slated to meet later this month. But the minutes from its August meeting suggest the Fed is unlikely to hike rates anytime soon. Many economists don't expect rate hikes until the unemployment rate has peaked. In August, officials held the federal funds rate a range near zero.
According to Friday's employment report, average hourly earnings were up $0.06 last month at $18.65. That was up just 2.6% from one year ago, a sign that inflation isn't a risk for the Fed.
Employment last month in manufacturing fell 63,000.
Construction employment, meanwhile, was down 65,000.
Employment in the service sector -- the main source of U.S. jobs -- fell 80,000. Business and professional services companies shed 22,000 jobs.
Retail trade cut 10,000 jobs and leisure and hospitality employment shed 21,000.
Meanwhile, education and health services rose by 52,000.
The government shed 18,000 jobs.
The average workweek was unchanged at 33.1 hours.
No comments:
Post a Comment