(Reuters) - Getty Images Inc (GYI.N: Quote, Profile, Research) said on Monday it agreed to be bought by Hellman & Friedman affiliates for $34 per share in cash, in a deal it said was worth $2.4 billion, including the assumption of debt.
Monday, 25 February 2008
Cheap Palm Oil May Overtake Soy on Rising Asia Demand
(Bloomberg) -- Palm oil, the world's most-used cooking oil, is also the cheapest, a discrepancy that won't last long as demand rises across Asia's biggest countries.
An ingredient in curries, stir-fries and Skittles candy, Malaysian palm oil costs 15 percent less than soybean oil on the Chicago Board of Trade. Tobin Gorey, a commodity strategist at Commonwealth Bank of Australia Ltd. in Sydney, said the two may soon be even money, raising the prospect of at least a $1.5 million profit from a $10 million investment.
Rising incomes mean billions of people in Asia's developing economies seek palm oil for fried and processed foods, according to the U.S. Department of Agriculture. Crude oil at $100 a barrel is boosting demand for alternative fuels such as diesel from vegetable oil. As consumption rises, supply in China may drop after the worst snowstorms in five decades damaged rapeseed crops in January, the government reported.
``We may have a case of mass shortage of vegetable oil in China,'' said Rudolphe Roche, a manager at Schroders Plc's $6 billion agricultural commodities fund in London. ``This means they will continue to import from the rest of the world.'' Palm oil, produced in Malaysia and Indonesia, will benefit the most because its proximity to China lowers shipping costs, he said.
Rising prices will increase expenses at Nissin Food Products Co., Japan's biggest instant-noodle maker, and increase profits at Kuala Lumpur-based Sime Darby Bhd., the world's largest publicly traded owner of palm plantations. About 36 percent of the world's cooking oil comes from oil palm, more than any other plant, USDA data show.
The Precedent
``Ninety-three percent of all the palm oil in the world is going to food demand,'' William Doyle, chief executive officer of fertilizer maker Potash Corp. of Saskatchewan Inc., said in a Feb. 19 interview. ``It's enormously powerful, and we don't see this backing off.''
The last time palm oil was this cheap, in April 2007, prices rallied for two months because of increasing demand, gaining 38 percent to 2,855 ringgit ($889) a metric ton on the Malaysia Derivatives Exchange to reach parity with Chicago prices. Contracts for May delivery ended at 3,698 ringgit a ton (52 U.S. cents a pound) on Feb. 22 in Malaysia. May soybean oil finished at 63.02 cents a pound on the CBOT.
Palm oil and soybean oil reached records today. Palm oil rose as much as 5.8 percent to 3,914 ringgit a ton and closed 4.5 percent higher at 3,866 ringgit, the biggest gain since Dec. 26, 2006. Soybeans advanced as much as 2.4 percent to 64.52 cents a pound and last traded at 64.29. That narrowed palm oil's discount to 16 percent from 17 percent.
Food Inflation
``There is no reason why the price of soybean oil and palm oil cannot be the same,'' said Edgare Kerwijk, chief financial officer for Biox Group BV in Rotterdam, which has put on hold plans for three biodiesel projects in the Netherlands and the U.K. due to higher prices. ``The discount will narrow'' for palm oil, he said.
U.S. manufacturers will increase consumption of soybean oil for energy by 22 percent to 3.4 million pounds in the year ending November, the USDA forecasts. The total equals 16 percent of U.S. use.
Soaring food prices are fueling inflation. China's consumer- price gains accelerated to 7.1 percent in January, the fastest pace in more than 11 years, the statistics bureau said Feb. 19. U.S. inflation quickened to 4.3 percent in January from 4.1 percent in December, the Labor Department said Feb. 20.
China's January snowstorms and rains, the worst in 50 years, affected as much as 48 million mu (7.9 million acres) of rapeseed crops, almost half the total area planted, the China National Grain and Oils Information Center said Feb. 14.
China, U.S.
China, the biggest annual buyer of cooking oils, raised palm oil imports 18 percent in January to 360,000 metric tons, compared with a year earlier, according to customs figures. India boosted imports 75 percent to 366,353 tons that month, and imports of all cooking oils may gain 15 percent to 5.4 million tons in the year ending Oct. 31, according to a Bloomberg News survey of six traders and analysts.
``With the strong demand coming from the substitution effect this year, the discount should narrow further from here,'' said Ben Santoso, a plantations analyst at the brokerage arm of DBS Group Holdings, Singapore's largest bank. He said palm oil may reach the same level as soy by June.
Even the U.S., the world's largest soybean grower and exporter, is buying more palm oil. Soyoil is hydrogenated in some foods to make them last longer on store shelves, a process resulting in trans-fats that may raise the risk of heart disease, according to the Food and Drug Administration.
``Trans-fats are a big reason for more palm oil imports,'' Anne Frick, a senior oilseed analyst for Prudential Financial Inc. in New York, said in a Feb. 20 e-mail.
Visa May Raise as Much as $17 Billion in Initial Sale
(Bloomberg) -- Visa Inc. may raise as much as $17 billion in what would be the biggest U.S. initial public stock offering.
Visa, the world's largest payment-card network, plans to sell 406 million Class A shares for $37 to $42 each, the San Francisco-based company said in a regulatory filing today. Banks have the option of selling an additional 40.6 million shares, pushing the potential size of the deal to $18.8 billion.
The company is trying to replicate the success of its smaller rival, MasterCard Inc., whose shares have surged more than fivefold since a May 2006 IPO. Demand for initial public offerings has waned this year, with 97 companies raising $12 billion, or 43 percent less than in the same period last year, according to data compiled by Bloomberg.
At the high end of the projected range, Visa's transaction would be the world's second-biggest IPO, after the $22 billion raised by Industrial & Commercial Bank of China Ltd. in 2006.
Thursday, 21 February 2008
Oil seen heading higher after topping $100
(Reuters) - Rampant oil prices are likely to continue to rise for a while yet as supply worries and investor demand for commodities outweigh concerns of economic slowdown.
Crude hit a record high of $101.32 on Wednesday and was trading at $98.64 at 9:45 a.m. EST on Thursday.
The price has climbed from below $50 at the start of 2007 and below $20 in early 2002.
"From here, we think that the next stage may well be a period of consolidation in the high $90s, and that could include increasingly frequent moves above $100," said Paul Horsnell of Barclays Capital.
Prices have risen in part because of expectations that the Organization of the Petroleum Exporting Countries, rather than increase oil output, will maintain or even cut supply at a meeting on March 5.
OPEC argues that factors beyond its control, such as speculation, are boosting prices. One OPEC minister made clear on Thursday that oil's push into triple digits would not bounce the group into changing supplies.
"We will not just react to $100 oil," Qatar's oil minister, Abdullah al-Attiyah, told Reuters by telephone. "OPEC will move when it sees physical demand for its oil."
Microsoft to open up some key software blueprints
(Reuters) - Microsoft Corp said on Thursday that it would make key technology elements of some of its best-selling software products widely available to boost interoperability of its software with that of competitors and customers.
To make connecting Microsoft products with third-party software products easier, Microsoft will publish on its Web site key software blueprints, known as application program interfaces, pertaining to its high-volume products used by other Microsoft products.
Microsoft also pledged not to sue open-source developers for development or noncommercial distribution of those software blueprints.
In January, the European Commission launched new antitrust investigations into Microsoft to see whether the company broke competition rules to help its Web browser and its Office and Outlook products.
Auction Debt Succumbs to Bid-Rig Taint as Citi Flees
(Bloomberg) -- The collapse of the auction-rate bond market, where state and local governments go to raise cash, demonstrates that regulators are no match for Wall Street.
Hundreds of auctions have failed this month, sending borrowing costs as high as 20 percent because dealers from Goldman Sachs Group Inc. to Citigroup Inc., UBS AG and Merrill Lynch & Co. stopped using their own capital to support the sales. Regulators, who allowed the manipulation of bids and lack of information to persist even after two probes in the past 15 years, are now watching a $342 billion market evaporate at the expense of taxpayers.
Inadequate disclosure ``may have masked the impact of broker-dealer bidding on rates and liquidity,'' Martha Haines, head of the Securities and Exchange Commission's municipal office, said in an interview. ``The large numbers of recent auction failures, which are reported to have occurred due to a reduction in bidding by broker-dealers, appears to indicate those concerns were well founded.''
Citizens Property Insurance of Tallahassee, Florida, a state-run insurer that protects homeowners against hurricane losses, is a casualty. The rate Citizens pays on a portion of the $4.75 billion in securities it has sold jumped to 15 percent from 5 percent at an auction run by UBS that failed on Feb. 13.
No `Backstop'
``The banks were the backstop,'' said Sharon Binnun, the chief financial officer of Citizens. ``If you had more sell orders than buy orders, they'd pick up the difference and you wouldn't have a failed auction.''
Officials at Goldman, Citigroup, UBS and Merrill declined to comment. All the firms are based in New York, except UBS, which is located in Zurich. UBS told its brokers this month that it won't buy bonds that fail to attract enough bidders, and Merrill said it was reducing its purchases.
Auction-rate securities are long-term bonds whose interest resets every seven, 28 or 35 days at bidding run by a dealer who collects a fee of about 25 basis points. Unlike Treasuries or stocks, there is no daily source of information about auction- rate bonds. Issuers have relied on banks to be buyers of last resort when bidders couldn't be found at their auctions.
Since the first of the securities were sold in 1984 for American Express Co., the market has expanded as investors sought the bonds as a higher-yielding alternative to money funds.
SEC Fines
Along the way, New York-based Lehman Brothers Holdings Inc. was fined $850,000 in 1995 by the SEC for manipulating auctions conducted for American Express. Almost two years ago, 15 securities firms paid the SEC $13 million to settle claims of bid-rigging in auction-rate bonds. The banks neither admitted nor denied wrongdoing.
While the SEC required dealers to disclose that they may use insider knowledge to place bids, they don't have to say how frequently they bid or how much. Dealers also aren't obligated to disclose rates on auction debt when the securities trade.
The settlement didn't go far enough because it still deprives investors of information they need to make informed bids, said Joseph Fichera, chief executive of Saber Partners LLC, an advisory firm in New York.
``Investors aren't sure they can sell the bonds when they want,'' Fichera said.
Aside from the fines, the market worked smoothly until November, when investors began pulling back from all except the safest of government debt as losses on securities tied to subprime mortgages began infecting other parts of the credit market.
Subprime Contagion
Wall Street firms, reeling from $146 billion in losses on their debt holdings, became unwilling to commit their own capital to support auctions that don't attract enough bidders.
``It's more a liquidity issue, I don't think there's a concern here about these entities being able to repay their debts,'' said Tony Crescenzi, chief bond-market strategist in New York at Miller Tabak & Co., in an interview today with Bloomberg Radio. ``These auction-rate securities are proving to no longer be viable, and we'll see them diminish in scope and size as we go forward.''
A month ago, it was ``unthinkable'' that the banks wouldn't intervene to support auctions, said Steven Brooks, executive director of the North Carolina State Education Assistance Agency. ``I had certainly hoped and believed that that liquidity was there and was an important part of why this marketplace was good for investors and good for issuers.''
From 1984 through 2006, only 13 auctions failed, typically because of changes in the credit of the borrower, according to Moody's Investors Service. There were 31 failures in the second half of 2007, and 32 during a two-week period beginning in January.
`Ugly' Market
``It's ugly,'' said Luis I. Alfaro-Martinez, finance director for the Government Development Bank of Puerto Rico, which saw the rate it pays on $62 million of debt rise to the maximum of 12 percent set out in documents governing the bonds, from 4 percent at a Feb. 12 auction handled by Goldman. ``It's getting uglier.''
The average rate for seven-day municipal auction bonds rose to a record 6.59 percent on Feb. 13 from 4.03 percent the previous week, according to indexes compiled by the Securities Industry and Financial Markets Association.
The higher rates drove California, the biggest borrower in the municipal bond market, to decide to replace $1.25 billion of auction-rate bonds with traditional debt.
Wednesday, 20 February 2008
AT&T, Verizon May Fall Further as Flat Rates Portend Price War
(Bloomberg) -- AT&T Inc. and Verizon Communications Inc. declined for the second straight day in New York trading after adopting flat-rate mobile calling plans that could be the opening salvos in a price war.
AT&T and Verizon Wireless, the two top U.S. wireless carriers, announced plans yesterday to sell unlimited calls for a flat fee of $99.99 a month. Credit Suisse cut its ratings on shares of AT&T and Verizon Communications, co-owner of Verizon Wireless. Robert W. Baird & Co. lowered its AT&T rating to match its neutral stance on Verizon Communications.
The unlimited plans, including another announced by T-Mobile USA Inc., pose a competitive challenge as U.S. mobile carriers already struggle to reach the remaining fifth of Americans that don't yet have a wireless phone. While analysts estimated the new rates may not hurt sales, they worried about future price cuts.
``There's no going back,'' said Credit Suisse's Christopher Larsen, who cut AT&T and Verizon shares to a neutral rating from the equivalent of a buy recommendation. ``It's extremely unlikely prices go up from $99, so now you've created a ceiling for what unlimited pricing will be.''
AT&T, based in San Antonio, fell $2.41, or 6.7 percent, to $33.48 at 10:13 a.m. in New York Stock Exchange composite trading, the biggest drop in five years. The shares lost 5.3 percent yesterday. New York-based Verizon declined $1.60, or 4.5 percent, to $33.74, extending yesterday's 6.6 percent loss.
While the pricing plans may only affect the less than 5 percent of subscribers who pay more than $100 a month, they will convince more customers to replace their home phones with mobile handsets, said Larsen, who is based in New York.
Upper Tier
The plans announced yesterday aim at the upper tier of customers who spend about twice what an average mobile-phone user paid last quarter, as reported by AT&T and Verizon.
The new rate plans reminded Stanford Group Co.'s Michael Nelson of the day the old AT&T Wireless began selling local and long-distance service for one price.
``It turned the wireless industry upside down,'' the New York-based analyst said in an interview yesterday. ``It caused all the carriers to come up with completely new calling plans, to really revisit their entire business models.''
The flat-rate movement ``raises the risk profile for a pricing war across the entire industry,'' said Nelson.
The former AT&T Wireless, which is now part of AT&T's mobile-phone unit, started its Digital One Rate plan in 1998, erasing the distinction between local and long-distance calls on mobile phones, keeping rates flat regardless of the caller's location.
U.S. Stocks Climb, Erasing Earlier Drop; Hewlett-Packard Gains
(Bloomberg) -- U.S. stocks rose, led by technology and bank shares, after Hewlett-Packard Co.'s profit topped estimates and investor William Ackman proposed a restructuring of bond insurers in an effort to minimize credit losses.
Hewlett-Packard, the biggest maker of personal computers, climbed the most in two years and helped the Dow Jones Industrial Average erase a 109-point drop. Wells Fargo & Co. and Citigroup Inc. led financial shares to their steepest gain in a week on Ackman's plan. TJX Cos., owner of the T.J. Maxx and Marshalls discount chains, led a rally in retailers after posting profit that topped analysts' estimates.
The Standard & Poor's 500 Index gained 2.41 points, or 0.2 percent, to 1,351.19 at 12:57 p.m. in New York. The Dow Jones Industrial Average rose 12.45, or 0.1 percent, to 12,349.67. The Nasdaq Composite Index increased 6.9, or 0.3 percent, to 2,313.1. About four stocks rose for every three that fell on the New York Stock Exchange.
Stocks dropped earlier in the day on concern competition will reduce profits among wireless networks and faster inflation will keep the Federal Reserve from cutting interest rates.
Hewlett-Packard rose $3.33 to $47.28 First-quarter net income increased 38 percent to $2.13 billion, or 80 cents a share, from $1.55 billion, or 55 cents, a year ago. Excluding expenses for acquisitions, profit was 86 cents a share, five cents more than the average analyst estimate in a Bloomberg survey. The company also raised its annual sales forecast on increasing demand overseas.
Tech Rally
Technology companies in the S&P 500 added 1.3 percent as a group, the steepest advance among 10 industries.
Wells Fargo, the biggest bank on the West coast, climbed 67 cents to $30.53. Citigroup added 39 cents to $25.71.
Ackman distributed a plan to restructure bond insurers that may prevent dividends from being paid to the parent companies and minimize losses for holders of asset-backed securities.
Port Authority Auction Bonds Reset at 8% After Surge
(Bloomberg) -- Interest rates on $100 million of bonds issued by the Port Authority of New York and New Jersey were set at 8 percent in a weekly auction after surging to 20 percent on Feb. 12.
Rates had soared from 4.3 percent when too few buyers bid for the so-called auction-rate debt and Goldman Sachs Group Inc., which runs the auction, refused to put up its own capital to buy unwanted securities. That caused the yield to be set at a level predetermined in bond documents. Rates fell yesterday as the prospect of high yields enticed investors, according to data compiled by Bloomberg.
Rates in the more than $300 billion market for auction-rate debt are rising after banks including Citigroup Inc. and Goldman stopped bidding for the debt at periodic sales they oversee, prompting hundreds of so-called failures. Some investors, including OppenheimerFunds Inc., see an opportunity in the turmoil and are buying the bonds.
``Twenty percent was such an unusually high number,'' said Judy Wesalo Temel, director of credit research at Samson Capital Advisors LLC, a fixed-income manager in New York. ``I wouldn't say that the whole market has calmed down or has even begun to function normally yet. It hasn't.''
Yesterday, a Citigroup-run auction of $25 million of federally taxable debt issued by Vermont's student loan agency failed, causing the rate to remain at 18 percent for the second week in a row. The debt paid 4.5 percent as recently as Feb. 11.
Port Authority Rates
The 8 percent rate on the federally taxable Port Authority debt is still above the range of 4 percent to 5.70 percent the agency paid until this month. Port Authority Treasurer Anne Marie Mulligan didn't return a call for comment; Goldman spokesman Michael DuVally declined to comment.
Auction-rate bonds are long-term debt with interest rates that reset according to bids submitted through securities firms every seven, 28 or 35 days. When there aren't enough bids, the auction fails and the rate is set at a level spelled out in bond documents. Investors who expected to sell the debt are left holding the securities.
Until the past two weeks, bankers who ran auctions prevented failures by purchasing bonds for their own account, though they weren't required to do so. Investors grew wary of relying on bankers to support auctions as the investment firms reported more than $146 billion of losses and writedowns.
Rising Average
The average rate for seven-day municipal auction bonds rose to a record 6.59 percent on Feb. 13 from 4.03 percent the previous week, according to indexes compiled by the Securities Industry and Financial Markets Association.
Regulators allow dealers to bid when they choose, and to control auction information as long as they disclose that they might submit bids. Bankers don't have to say how often they buy or how much, and aren't required to make public the range of bids or when auctions fail.
Last week, New York Governor Eliot Spitzer cited the high rate on the Port Authority's auction-rate bonds in testimony on bond insurers before a House subcommittee on Capital Markets, Insurance and Government. Insurers such as MBIA Inc. and Ambac Financial Group Inc. that back the debt are struggling to raise capital after taking more than $8 billion in writedowns related to mortgage-linked securities they guaranteed.
``The higher max rate stuff is starting to get some traction,'' said Matt Dalton, chief executive officer of Belle Haven Investments, a money management firm based in Greenwich, Connecticut.
Massachusetts Tolls
Drivers on the Massachusetts Turnpike may face higher tolls after the state was unable to sell auction-rate securities backed by a unit of Ambac, according to state officials. The turnpike is now trying to buy a letter of credit from State Street Bank and Trust Co. and KBC Group NV so it can sell variable-rate demand obligations by mid-March instead of auction-rate securities, an advisor for the Turnpike told the agency's board yesterday.
``That is a very significant financial obligation, probably our biggest short-term problem,'' Alan LeBovidge, the turnpike authority's executive director, said at the state agency's monthly board meeting yesterday.
Auction-Rate Proposal
The Securities and Exchange Commission fined banks in a settlement over bid-rigging two years ago. The U.S. municipal bond market's main regulator, the Municipal Securities Rulemaking Board, plans to propose rules requiring banks to disclose more, including the rate, bidding details and information about failures.
Auction-rate securities were introduced in the corporate market in 1984, when American Express Co. sold $300 million of auction preferred stock. The securities, devised by Ronald Gallatin, a retired managing director at Lehman Brothers Holdings Inc., then Shearson Lehman, were used by banks and other companies before auction difficulties prompted many companies to move away from them.
American Express retired its issue in 1991-1992, and in 1995 Lehman was fined $850,000 by the SEC for manipulating auctions conducted for American Express.
The first failed auction in the municipal market occurred in 1990 for bonds issued by the Pima County, Arizona, Industrial Development Authority for Tucson Electric Power Co., now a unit of UniSource Energy Corp., based in Tucson.
U.S. Economy: Housing Slump Fails to Quell Inflation
(Bloomberg) -- The two-year housing slump pushing the U.S. economy toward a recession hasn't alleviated inflation pressures, reports today showed.
Consumer prices rose 0.4 percent from December, with costs excluding food and energy climbing 0.3 percent, the most since June 2006, the Labor Department said. Builders started work on 1.012 million homes at an annual rate in January, close to a 16- year low, the Commerce Department reported in Washington.
The figures mean Federal Reserve Chairman Ben S. Bernanke will need to consider raising interest rates as soon as the economy stabilizes. Bernanke, who last week said the Fed is prepared to keep lowering interest rates, warned that faster inflation would ``greatly complicate'' the central bank's job.
``What this means is that they don't have as much comfort to play with rates,'' Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said on Bloomberg Television, referring to Fed officials. ``Once the U.S. economy looks like it's started to stabilize, they're going to have to jump right back in to that, raising rates back up to neutral.''
Treasury securities slumped after the consumer price report, while recouping most of the losses later. Ten-year note yields increased to 3.93 percent at 9:54 a.m. in New York from 3.90 percent late yesterday. The Standard & Poor's 500 stock index lost 0.8 percent, to 1,337.97.
Lowest Since 1991
Building permits, an indication of future construction, fell 3 percent to a 1.048 million rate, the lowest level since November 1991, today's Commerce report showed.
Housing starts were projected to rise to a 1.01 million pace from an originally reported 1.006 million rate in December, according to the median forecast in a Bloomberg survey of 72 economists. Permits were forecast to drop to a 1.05 million rate, from 1.068 million in December.
``We don't think housing has hit bottom yet,'' said Douglas Porter, deputy chief economist at BMO Capital Markets in Toronto. ``Until we get some stabilization in sales or even a mild improvement, it's likely that construction will continue to weaken.''
A jump in food and energy costs, rents and clothing prices led the consumer-price index higher last month. Economists had forecast a 0.3 percent increase, with the so-called core rate gaining 0.2 percent, Bloomberg surveys showed.
Today's price report ``certainly showed a broad-based intensification of inflation pressures,'' said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. While the Fed currently ``is looking at growth,'' inflation ``will come back on the radar screen'' when economic data improve, he said.
Food Costs
Food prices, which account for about one-seventh of the CPI, rose 0.7 percent, matching the biggest gain since May 2004, after a 0.1 percent increase in January. Energy prices last month increased 0.7 percent, after rising 1.7 percent the previous month.
``Even if energy prices remain flat, the continued rise in retail food prices will damp consumer spending growth,'' JPMorgan Chase & Co. economists wrote in a note to clients last week.
Fuel costs were up 4.5 percent. Apparel prices rose 0.4 percent after a 0.1 percent increase in December.
The consumer price index is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices that consumers pay for services ranging from medical visits to airline fares and movie tickets.
Tuesday, 19 February 2008
MBIA Former Chief Returns as Credit Rating Cut Looms
(Bloomberg) -- MBIA Inc., the world's largest bond insurer, brought back former Chief Executive Officer Joseph Brown to run the company and expedite talks with regulators to help preserve its AAA credit rating.
Gary Dunton, who succeeded Brown as CEO in 2004 and added the title of chairman last year, will leave the company, Armonk, New York-based MBIA said today in a statement.
Brown, 59, will be tasked with forging a plan to restructure and revive MBIA, which has recorded losses of more than $5 billion on subprime-mortgage securities, threatening its credit rating and sending its shares plunging 83 percent in the past year. New York Insurance Superintendent Eric Dinallo said last week bond insurers may need to be split into two businesses to protect more than $1 trillion of insured municipal debt from subprime losses.
``MBIA faces meaningful challenges,'' Brown said in the statement. Brown said he is seeking to ``frame a new model,'' for MBIA.
Brown said he has already discussed MBIA's plans with Dinallo who provided ``helpful guidance.'' Dinallo, who is taking the lead among the nation's insurance regulators, brought in Warren Buffett to start a new insurer and also asked the billionaire investor to value the guarantors' municipal business.
Insurers Splitting
FGIC Corp., the third-largest bond insurer, sought permission to split up last week. Dinallo said MBIA and Ambac Financial Group Inc., the market leaders, may do the same if they can't raise capital.
The companies and Security Capital Assurance Ltd. insure about $580 billion of asset-backed debt, including collateralized debt obligations that package bonds into new securities.
MBIA, New York-based Ambac and FGIC of New York are struggling after more than $8 billion in losses tied to the slumping value of subprime debt.
MBIA rose 53 cents to $12.77 in early New York Stock Exchange trading. Ambac, down 88 percent this year, fell 24 cents to $9.98. FGIC is owned by New York-based leveraged buyout firm Blackstone Group LP and mortgage insurer PMI Group Inc. of Walnut Creek, California.
Under Dunton, 52, MBIA sold about $2.5 billion in the sale of shares and notes in the past three months.
Medco profit tops estimates
(Reuters) - Medco Health Solutions Inc (MHS.N: Quote, Profile, Research) reported better-than-expected quarterly earnings on Tuesday, helped by sales of generic drugs, and the pharmacy benefit manager boosted its full-year profit forecast, sending its shares higher.
Medco, which derives more than half its profit from home delivery of generic medicines by mail, said its rosier outlook reflected confidence in its fundamentals, new business, and more generics becoming available sooner than anticipated.
Pharmacy benefit managers (PBMs), which administer prescription drug benefits for employers and health plans and operate large mail-order pharmacies, have profited from the availability of low-cost generic versions of popular drugs.
Morgan Stanley analyst David Veal said in a research note, "Another quarter of solid growth, when coupled with higher guidance, affirm our positive view of the PBM industry and should offer relief for the high level of investor nervousness around the quarter."
After a huge gain in 2007, Medco shares were down 3 percent this year through Friday's close, compared with a 13 percent drop for rival Express Scripts Inc (ESRX.O: Quote, Profile, Research). Medco shares rose 4 percent to $51 in pre-market trading on Tuesday.
Fourth-quarter net income fell 9 percent to $207.6 million, or 38 cents per share, from $228.8 million, or 39 cents per share, a year earlier.
The latest results were hurt by higher-than-expected costs tied to new clients and expenses related to two acquisitions. The year-earlier earnings were boosted by the temporary availability of a generic version of a popular blood thinner.
Monday, 18 February 2008
Home movie DVD battle won, hard sell begins
(Reuters) - Consumers will be the winners, through better quality home movies and lower prices, when Toshiba Corp finally calls time on its DVD technology, ending a long-running battle to set the format for next-generation discs.
Viewers seeking sharper movies on high-definition DVDs will no longer have to choose between rival incompatible formats. A single format should help accelerate the shift to the new technology in the $24 billion home DVD market.
But, while they will get better audio quality and higher resolution pictures -- and they will likely wait for DVD player prices to halve -- consumers will probably have to upgrade their television sets to make the most of them.
Sony Corp's Blu-ray technology is close to winning the format war for home movie DVDs after a source at Toshiba said it was planning to exit its HD DVD business after Hollywood studios and big retailers such as Wal-Mart Stores Inc backed Blu-ray.
"This has been a long overdue end to the format war that has frustrated and confused consumers, and will allow vendors to focus resources on the Blu-ray technology," said Claudio Checchia, an analyst with research firm IDC.
"I would expect a more aggressive push towards Blu-ray in the second half, resulting in more movie content, more stand-alone DVD players, and prices for these players falling to attractive levels by Christmas."
Checchia said the cheapest Blu-ray player on the market was Sony's PlayStation 3 video game console, costing about $400.
Westland/Hallmark Recalls Record Amount of U.S. Beef
(Bloomberg) -- Westland/Hallmark Meat Co., the supplier of ground beef to U.S. school lunch programs, recalled a record 143.4 million pounds of meat after the government said it was unfit for humans.
The company, based in Chino, California, withdrew all raw and frozen products made since Feb. 1, 2006, because some of the cattle weren't fully inspected, the Department of Agriculture said in a statement yesterday. A total of 37 million pounds went to nutrition programs, including schools, since October 2006.
The order relates to so-called downer cattle discovered between the normal USDA inspection before slaughter and the killing of the animals, the department said. Downer cattle, those unable to walk, are banned from the food chain as a precaution against Bovine Spongiform Encephalopathy, also known as mad-cow disease, the USDA said.
The risk of consumers contracting BSE from the meat is ``negligible,'' the USDA said in a separate statement. ``The prevalence of the disease in the United States is extremely low,'' with two animals testing positive for the disease out of 759,000 tested nationwide since June 2004, the department said.
A video taken at the plant released by the Humane Society of the U.S. shows workers kicking cows and using electric prods and forklifts to make them move. Two Westland/Hallmark former employees were charged with animal cruelty by the San Bernardino District Attorney's office Feb. 15.
Operations Ceased
The company ceased operations last month after the video was revealed. In a statement posted on the company's Web site Feb. 3, Westland/Hallmark president Steve Mendell said the company was cooperating fully with the USDA. Two messages left yesterday with Westland/Hallmark seeking comment weren't immediately returned. Today is a U.S. public holiday.
The U.S. consumed 28 billion pounds of beef in 2006 and the U.S. beef industry was worth $71 billion that year on a retail basis, according to the USDA. Beef exports totaled 1.15 billion pounds worth $1.63 billion.
The recall shouldn't create a supply problem, Kim Essex, vice president of communications at the National Cattlemen's Beef Association, said in a Bloomberg Television interview from Denver today. ``I am very confident in the safety of the beef supply,'' she said.
The recalled meat is considered a low risk to food supply because almost all the meat has either been consumed or is being held from distribution, Richard Raymond, USDA under secretary for food safety, said in a teleconference call yesterday.
Hamburger Patties
The ground beef bought for schools was processed into products such as hamburger patties, chili meat and taco meat, Bill Sessions from the USDA's Agricultural Marketing Service, said on the call, according to a transcript.
The recall is categorized as a Class II, meaning ``there is a remote probability of adverse health consequences from the use of the product,'' according to Raymond.
The recall is more than four times the size of the previous record, a 35 million-pound removal of Thorn Apple Valley Inc. ready-to-eat meats potentially contaminated with listeria in January 1999, Raymond said.
``All of the larger recalls done in the past were all Class I,'' Raymond said. ``In this one we feel there is a very, very remote possibility of anyone suffering health consequences.''
About 150 U.S. school districts are no longer using beef from Hallmark Meat Packing Co., the Associated Press reported, without saying where it got the information.
Kidney Exports
Schools in Washington state and California said they wouldn't serve students beef for now, Agence France-Presse reported, citing unidentified local officials.
Hamburger patties and meatballs in schools in South Florida are being destroyed as part of the recall, the South Florida Sun- Sentinel newspaper reported, without saying where it got the information.
Westland/Hallmark's exports last year consisted of kidneys and livers to Ivory Coast and livers to Angola, the USDA said. There have been no exports to Japan or South Korea since at least 2003, the department said.
Japan and South Korea banned U.S. beef imports after the first U.S. case of mad-cow disease was found in 2003. Japan, once the largest U.S. beef export market, now only imports meat from animals aged 20 months or younger, which have a lower risk.
The 27-nation European Union only imports hormone-free beef from the U.S., which has to be produced separately from other livestock, Michael Mann, a spokesman for agriculture and rural development at the European Commission, said by telephone today. The EU exported 87 tons of beef to the U.S. in 2006.
Stocks Rise in Europe, Latin America; Credit Suisse, Vale Climb
(Bloomberg) -- European stocks rose, led by banks and metal producers, on optimism this year's 12 percent drop in the region's benchmark index was too steep given the outlook for sales. Shares in Latin America gained, while Asian equities fell.
Credit Suisse Group rose the most in three weeks in Zurich after Qatar said it's buying shares in the second-biggest Swiss bank, while Barclays Plc and Lloyds TSB Group Plc climbed in London as traders speculated on higher dividends. BHP Billiton Ltd. followed metals prices higher in Europe, while Cia. Vale do Rio Doce rallied in Sao Paulo.
The Dow Jones Stoxx 600 Index added 1.7 percent as of 3:18 p.m. in London, and the MSCI World Index increased 0.4 percent, as gains from Europe and Latin America more than offset declines in Australian bank shares and Japanese insurers. Futures on the Standard & Poor's 500 Index rose 0.8 percent. The U.S. market is closed today for the Presidents' Day holiday.
Qatar's purchase ``gives the market a boost,'' said Salah Seddik, who helps oversee $5.9 billion at Richelieu Finance in Paris. ``There's been some good news in the financial industry. The strong declines we've seen have left some buying opportunities.''
Concern the subprime mortgage slump will lead to more losses sent Europe's Stoxx Banks Index down 17 percent this year. The gauge was valued at 7.5 times profit in the week ended Feb. 8, the lowest since at least 1998, data compiled by Bloomberg show.
The MSCI Latin America Index added 2.1 percent. Brazil's Bovespa index jumped the most in a week, advancing 2 percent, while Chile's Ipsa stock index rose 0.9 percent.
The MSCI Asia Pacific Index lost 0.6 percent today, reversing an earlier gain of 0.8 percent.
European Markets
National benchmarks advanced in all 18 western European markets except Greece. France's CAC 40 rose 1.5 percent, while the U.K.'s FTSE 100 climbed 2 percent. Germany's DAX increased 1.7 percent.
The Stoxx 50 jumped 1.6 percent, as did the Euro Stoxx 50, a measure for the euro region. All of the 18 industry groups in the Stoxx 600 gained, with five stocks rising for each one that fell.
Credit Suisse rose 3.1 percent to 56.7 francs. Qatar is accumulating shares in Credit Suisse and plans to spend as much as $15 billion on European and U.S. bank stocks over the next year, the Gulf state's prime minister said in an interview.
``We have a relation with Credit Suisse and we bought some of the stock from the market, actually, but I cannot say what percentage because still we are in the process,'' Sheikh Hamad bin Jasim bin Jaber al-Thani, who is also chief executive officer of the Qatar Investment Authority, said in an interview late yesterday in Doha.
Barclays, Lloyds TSB
Barclays, the U.K.'s third-biggest bank, jumped 6.8 percent to 456.5 pence. Lloyds TSB, the U.K.'s No. 1 provider of unsecured loans, increased 6.4 percent to 421 pence.
Barclays and Lloyds, which are seeking to quell concern about financial institutions, are expected to report ``robust'' results, the newspaper said. Barclays will lift its dividend by 10 percent on Feb. 19, the Times reported, without saying where it got the information.
Barclays spokesman Robin Tozer and a Lloyds TSB spokesman Leigh Calder declined to comment on the report.
HBOS Plc, the U.K.'s biggest mortgage lender, advanced 4.1 percent to 633.5 pence. Royal Bank of Scotland Group Plc, the U.K.'s second-largest bank, added 2.9 percent to 360.75 pence.
UBS AG fell 1.2 percent to 35.58 francs after a Bear Stearns Cos. analyst downgraded the stock, forecasting more writedowns on debt holdings.
New disclosure of holdings affected by the subprime debacle ``revealed the full and frightening extent of UBS's potential problems,'' Christopher Wheeler wrote, cutting his stock recommendation to ``peer perform'' from ``outperform.''
Steel Price Accord
Vale do Rio Doce surged the most in three weeks, climbing 5.7 percent to 49.15 reais.
Asia's three largest steelmakers agreed to pay Rio de Janeiro- based Vale, the world's biggest iron-ore producer, 65 percent more than last year for the material. Vale said the price increase shows the market is going through ``very tight conditions.''
ArcelorMittal, the world's largest steelmaker, gained 1.4 percent to 48.22 euros. Nippon Steel Corp., the second-biggest, rose 3.2 percent to 575 yen, its highest close since Feb. 7.
``It's good that the price increases are being decided early,'' Alan Coats, an analyst at HSBC Holdings Plc in London, said today in a telephone interview. ``It means they can be passed on.''
BHP Billiton
BHP Billiton, the world's largest mining company, gained 3.9 percent to 1,612 pence. Vedanta Resources Plc, India's biggest copper producer, climbed 3.9 percent to 2,153 pence.
Copper advanced to the highest in almost four months in London after China, the world's largest user, said imports grew 6.6 percent in January from the previous month. The metal for delivery in three months rose 2.3 percent to $7,910 a metric ton, the highest intraday price since Oct. 29. Zinc and lead also climbed.
Australia & New Zealand Banking Group Ltd., Australia's third-largest bank, dropped 6.1 percent to A$22.46, the lowest since September 2005, after its chief executive said a ``bloodbath'' in debt markets will wipe out earnings growth.
Commonwealth Bank of Australia, the country's top mortgage lender, lost 5.1 percent to A$44.
Aioi Insurance Co., Japan's fourth-largest nonlife insurer, tumbled 6.8 percent to 439 yen, after a newspaper said it will have $740 million of subprime-related losses.
Friday, 15 February 2008
New York Fed Manufacturing Index Dropped to -11.7 in February
(Bloomberg) -- Manufacturing in New York unexpectedly contracted this month for the first time in almost three years as new orders and shipments declined.
The Federal Reserve Bank of New York's general economic index fell to minus 11.7, the first negative reading since May 2005, from 9.0 in January, the bank said today. Readings below zero signal contraction. The New York Fed's index averaged 17.2 in 2007.
The worst housing slump in a quarter century and cutbacks at U.S. automakers are weakening manufacturing and helping to push the broader economy toward a recession. Fed Chairman Ben S. Bernanke yesterday told lawmakers that the central bank will act in a ``timely'' manner to help growth, after already cutting the benchmark interest rate 2.25 percentage points since September.
``Prospects for manufacturing are shaky,'' Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh, Pennsylvania, said before the report.``We are relying on strong exports but I'm not convinced that will hold up indefinitely. We expect to see capital spending softening.''
Economists forecast the New York manufacturing index would fall to 6.5 in February, according to the median of 49 estimates in a Bloomberg News survey. Projections ranged from minus 1.2 to 11.6.
The New York Fed's measure of new orders fell to minus 11.9 from 0.0 the prior month, and a measure of shipments dropped to minus 4.9 from 15.8 in January.
Inventory Gauge
A gauge of unfilled orders decreased to minus 1.1 from 1.2, while the index of inventories was unchanged in February after a minus 4.9 reading the month before.
The employment index fell to minus 2.1 from a positive 2.4 a month earlier, the New York Fed said. An index of prices paid rose to 47.4 from 40.2, while a gauge of prices received fell to 17.9 from 18.3.
The report provides one of the month's earliest clues to the state of manufacturing nationwide. Similar data for the Philadelphia region will be released Feb. 21. New York's economy is less vulnerable to the auto slump and more exposed to financial services and trade, economists said.
The index measuring the manufacturing outlook for six months from now rose to 22.7 from 19.4, today's report showed.
U.S. Stock-Index Futures Fall; Bear Stearns, Caterpillar Drop
(Bloomberg) -- U.S. stock-index futures fell after analysts said banks face up to $203 billion more in credit writedowns and former Federal Reserve Chairman Alan Greenspan warned the economy is on the verge of a recession.
Futures extended declines after a Fed report showed manufacturing in New York unexpectedly declined for the first time in almost three years and the Labor Department said prices of imported goods climbed more than economists had forecast.
Goldman Sachs Group Inc. and Bear Stearns Cos. dropped after UBS AG said banks are at risk of further losses as bond insurers such as MBIA Inc. and Ambac Financial Group Inc. face credit-ratings cuts. Caterpillar Inc., the world's largest maker of earthmoving machines, led a decline in industrial shares after Greenspan said the economy may shrink for the first time in six years. European stocks fell and Asia's benchmark rose.
``The banks are now looking into the headlights like worried rabbits,'' said David Buik, market analyst at BGC Partners in London, in an interview with Bloomberg Television. ``They don't know how much money they've lost, the size of their balance sheets has collapsed.''
Thursday, 14 February 2008
Kerviel's Fimat Broker Denies Knowledge of Unauthorized Bets
(Bloomberg) -- Fimat broker Moussa Bakir said he had no knowledge of any wrongdoing by Jerome Kerviel, distancing himself from the trader blamed by Societe Generale SA for a loss of 4.9 billion euros ($7.2 billion).
``I gave two or three pieces of advice to Jerome,'' he told police during a 48-hour interrogation between Feb. 7 and Feb. 9, according to Isabelle Montagne, the spokeswoman for the Paris prosecutors' office.
Bakir, 32, named a material witness in the Kerviel probe, was questioned after Societe Generale provided financial police with e-mail exchanges between the two men. Kerviel passed his trades through Fimat, which merged last month with Credit Agricole SA's futures brokerage to form a new entity, Newedge.
Societe Generale, France's second-largest bank, said Kerviel amassed 50 billion euros in authorized bets backed by fake hedges. It liquidated the positions in a three-day sell-off that resulted in the biggest trading loss in banking history. Kerviel, 31, has been charged with hacking into the bank's computers, falsifying documents and breach of trust. He is in police custody.
Bakir and Kerviel exchanged 164 text messages between Nov. 13 and Dec. 13, following queries from Eurex, Europe's biggest futures exchange, about the size of Kerviel's transactions, Montagne said. Kerviel had earlier told prosecutors he had been able to explain away Eurex's concerns.
More Questioning
Bakir's remarks to the financial police were reported today by Le Parisien. Bakir's lawyer, Jean-David Scemama, didn't return calls for comment.
``Between us, there was a kind of complicity you normally find in a professional context,'' Bakir told police, according to the prosecutors' spokeswoman. ``I knew he had a problem with his bosses without knowing why.''
Over the weekend, Le Nouvel Observateur reported on its Web site a series of e-mail exchanges between the two men, confirmed by a lawyer on the case, where Kerviel refers to ``our trades.''
In an Oct. 11 message, Kerviel asks Bakir, ``Did you speak to him about what we're doing?'' After Bakir says that the unidentified person ``returns tonight,'' Kerviel says: ``You didn't tell him about our trades, did you? Or else I'll knock your head off.''
Bakir, who was released on Feb. 9, may be called in for another round of interrogation, although a date has yet to be set, Montagne said.
Second Friend
Bakir's classification as a material witness shows that ``although the judge feels that there might be something there, there might be something against him, he has not made up his mind,'' said Stephane Bonifassi, a Paris-based lawyer and member of FraudNet, the International Chamber of Commerce's commercial crime unit.
The prosecutors' office also confirmed the Parisien report that a second friend of Kerviel's had received 1,218 calls from him in recent months and would be questioned soon.
Societe Generale said on Jan. 24 that it discovered Kerviel's bets on Jan. 18 and liquidated the positions between Jan. 21 and Jan. 23. The trading loss forced the bank to raise 5.5 billion euros by selling stock to replenish its capital.
Separately, a computer expert aiding Kerviel's lawyers said in an interview in Paris Match magazine today that the bank must have known about Kerviel's transactions.
``The bank could not have not known,'' Jean-Raymond Lemaire told the magazine, after spending a day with Kerviel to review his trades. Christophe Reille, a spokesman for Kerviel's legal team, confirmed his comments.
U.S. December Trade Gap Narrows More Than Forecast
(Bloomberg) -- The U.S. trade deficit narrowed more than forecast in December as exports reached record levels and Americans spent less on imported autos and goods from China.
The gap between imports and exports shrank 6.9 percent, the biggest decrease in more than a year, to $58.8 billion from $63.1 billion in November, the Commerce Department said today in Washington. The deficit for all of 2007 decreased for the first time in six years.
A weaker dollar and expansion of emerging economies are feeding overseas sales for U.S.-made goods and may forestall a deeper slump at U.S. manufacturers. The narrowing deficit is one of the few remaining bright spots for the economy and will probably lead the government to increase its estimate of fourth- quarter gross domestic product later this month.
``The trade balance is going to continue to be a support for the economy,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. ``The drop in imports is probably consistent with the view the domestic economy is turning quite soft.''
Economists had forecast the gap would narrow to $61.5 billion, according to the median of 76 projections in a Bloomberg News survey. Estimates of the deficit ranged from $57 billion to $66.5 billion.
The dollar, which had fallen against the euro earlier today, stayed lower after the report. It traded at $1.4609 per euro at 8:37 a.m. in New York, from $1.4573 late yesterday. The U.S. currency was little changed versus the yen, at 108.30 yen per dollar.
2007 Deficit Shrinks
For all of last year, the deficit shrank 6.2 percent to $711.6 billion, the biggest decrease since 1991. Last year was the first time the trade gap narrowed since 2001.
Exports rose 1.5 percent to $144.3 billion in December, setting a record for a 10th straight month and reflecting more demand for U.S. made capital equipment and industrial supplies. For the year, exports rose 12 percent to a record $1.622 trillion.
Imports in December declined 1.1 percent to $203.1 billion, reflecting lower demand for foreign-made autos, consumer goods, food and capital equipment.
Also contributing to the drop in imports was a 14 percent decline in purchases from China, which helped shrink the month's trade gap with the Asian nation 22 percent to $18.8 billion. Petroleum imports rose 4.2 percent to a record $36 billion as the average price rose to $82.76 a barrel, also the highest monthly average ever. Prices increased in late December and early January and may push up the value of imports for the January report. They have since declined.
Fourth-Quarter Growth
Today's report may cause the Commerce Department to revise its estimate of fourth-quarter economic growth higher. The government projected last month that the trade gap narrowed to a $521 billion annual pace in the last three months of 2007. For all of last year, trade contributed 0.55 percentage point to growth, the most since 1991.
The government will release a revised estimate of the expansion for the last three months of 2007 on Feb. 28.
Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson are scheduled to testify to the Senate Banking Committee later today on the state of the U.S. expansion. Central bank policy makers have forecast the economy will avoid a recession.
``The Fed's policy actions should help to promote a pickup in growth over time,'' Fed Bank of San Francisco President Janet Yellen said in a speech on Feb. 12. ``I consider it most probable that the U.S. economy will experience slow growth, and not outright recession, in coming quarters.''
Fed's Rate Cuts
The Fed's Open Market Committee is scheduled to next vote on interest-rate policy on March 18. Policy makers lowered the benchmark rate by three-quarters of a percentage point in an emergency decision announced Jan. 22 and followed that with a half-point cut at the scheduled Jan. 29-30 meeting.
After eliminating the influence of prices, the trade deficit decreased to $49.3 billion from $53.6 billion. This is the figure the government uses in calculating GDP.
For the year, the trade deficit with China, the second- largest U.S. trading partner after Canada, increased 10 percent to a record $256.3 billion.
The gap with China is a political sticking point for the U.S. and other countries.
Group of Seven policy makers, meeting in Tokyo last weekend, said China should do more to defuse global trade tensions by allowing the yuan to climb against the dollar and other currencies. The G-7 also forecast the U.S. economy may slow further, eroding global growth.
MBIA Says It Can Weather Slump, Doesn't Need Bailout
(Bloomberg) -- MBIA Inc., the world's biggest bond insurer, said it is equipped to survive the slump in prices of mortgage securities and dismissed suggestions that the industry needs a rescue or stronger federal oversight.
``A bailout of highly credit-worthy companies who, at most, are at risk of losing the very highest ratings available, is misplaced,'' MBIA Chief Financial Officer Charles Chaplin said in prepared remarks to be delivered today at a hearing of the House Financial Services subcommittee on capital markets in Washington.
Chaplin and Ambac Financial Group Inc. Chief Executive Officer Michael Callen will make their presentations on Capitol Hill as they try to fend off credit rating downgrades and critics who say the companies may be headed for bankruptcy. One of the most vocal skeptics, hedge fund manager William Ackman, will also deliver remarks today alongside the MBIA and Ambac executives.
MBIA, based in Armonk, New York, and Ambac are among five companies struggling to maintain their top bond insurance credit ratings after a slump in the value of mortgage-linked securities the companies guaranteed. Standard & Poor's, Moody's Investors Service and Fitch Ratings are reviewing MBIA's top rating for a possible downgrade. Fitch already cut its AAA ratings on New York-based Ambac's insurance unit to AA. Ambac is also being scrutinized by Moody's and S&P.
``MBIA is more than adequately capitalized to meet obligations to policyholders,'' Chaplin, 51, said in his testimony.
Rescue Plans
Ambac said in a statement last night that Callen will tell the committee the company's main challenge is to achieve ``ratings stability.''
MBIA rose 61 cents to $12.25 at 9:38 a.m. in New York Stock Exchange composite trading. Ambac climbed 19 cents to $9.56.
MBIA and Ambac tumbled more than 80 percent in the past year in New York trading as they posted record losses of more than $5 billion and concern grew the companies may not get enough capital to sustain their ratings, casting doubt on $2.4 trillion of municipal and structured finance debt.
New York Insurance Department Superintendent Eric Dinallo last month organized banks to begin plans for a rescue of the insurers and said he may consider strengthening his oversight. Dinallo will also appear before the committee today, as will New York Governor Eliot Spitzer, U.S. Securities and Exchange Commission director Erik Sirri and Keith M. Buckley, a group managing director at Fitch.
Buffett's Offer
Dinallo will tell lawmakers he will consider splitting the bond insurers into two businesses, according to prepared testimony. ``One would have the municipal bond policies and any other healthy parts of the business,'' Dinallo said. ``The other would have the structured finance and problem parts of the business.''
Billionaire investor Warren Buffett yesterday offered to take over $800 billion of the municipal debt guaranteed by MBIA, Ambac and FGIC Corp., the fourth-largest bond insurer. Ambac yesterday said it rejected the offer. Two other insurers haven't responded, Buffett told CNBC television this week.
Spitzer told CNBC today that while Buffett's proposal would benefit municipalities, it wouldn't help the ``bad bank'' piece of the bond insurers' business. ``We don't want to create that schism yet if it can be avoided,'' Spitzer said.
Wednesday, 13 February 2008
Financial sector loses 52,500 jobs in 6 months
(Reuters) - Financial companies slashed 52,500 jobs from July to December 2007, revealing how badly the subprime debacle has hurt these employers, but such companies based in New York City hired 1,900 people during that period, a new report said on Wednesday.
However, the securities industry, which is concentrated in New York City, is just one sector of the overall financial arena that includes mortgage brokers and real estate credit companies.
Mortgage and real estate lenders tend to be located outside New York City, which helps explain why financial companies in the city were still adding staffers, explained New York City Comptroller William Thompson in a quarterly economic report.
However, many of New York City's securities companies have taken multibillion dollar write-downs from sinking subprime mortgage investments and they sliced 3,700 jobs in just the last three months of last year, the Democrat said.
NY AG probes health insurers over reimbursement
(Reuters) - New York Attorney General Andrew Cuomo said on Wednesday he is conducting an industry- wide probe of health insurers into an alleged scheme to defraud consumers by manipulating reimbursement rates.
At the center of the scheme is Ingenix, the nation's provider of health care billing information, which serves as a conduit for rate data to the largest insurers in the country, Cuomo said in a statement.
Cuomo intends to sue Ingenix, its parent, UnitedHealth Group Inc, and three additional subsidiaries.
Paulson sees slower economy, to rush tax rebates
(Reuters) - Treasury Secretary Henry Paulson on Wednesday stood by his view that the economy will avoid recession this year and grow at a slower pace, and that the Treasury will act quickly to distribute tax rebate payments.
"The U.S. economy is diverse and resilient, and our long-term fundamentals are healthy. I believe our economy will continue to grow, although at a slower pace than we have seen in recent years," Paulson said in prepared testimony to the U.S. House of Representatives Budget Committee.
President George W. Bush on Wednesday is expected to sign into law a $152 billion fiscal stimulus package that will provide tax rebates to some 130 million Americans, with most about $600 for an individual and $1,200 for a couple.
Paulson said the Internal Revenue Service would simultaneously manage the spring tax filing season and preparations for issuing the rebate payments starting in early May.
"Payments will be largely completed this summer, putting cash in the hands of millions of Americans at a time when our economy is experiencing slower growth," he said. "Together, the payments to individuals and the incentives for businesses will help create more than half a million jobs by the end of this year."
Paulson also called on Congress to aid the housing sector by passing legislation that will modernize the Federal Housing Administration and create a new, stronger regulator for Fannie Mae and Freddie Mac, the government-sponsored housing finance enterprises.
Under the stimulus plan, Fannie and Freddie will be temporarily allowed to invest in larger mortgages, providing more resources for refinancing troubled mortgages in costly coastal housing markets.
Auction-Bond Failures Roil Munis, Pushing Rates Up
(Bloomberg) -- Bonds sold by U.S. municipal borrowers with rates set through periodic auctions failed to attract enough buyers as banks including Goldman Sachs Group Inc. and Citigroup Inc. that run the bidding wouldn't commit their own capital to the debt.
Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey, with bidding run by Goldman, soared to 20 percent yesterday from 4.3 percent a week ago, according to data compiled by Bloomberg. Presbyterian Healthcare in Albuquerque and New York state's Metropolitan Transportation Authority also experienced failures, officials said.
What began three weeks ago with too few bidders for auction-rate debt backed by relatively small entities, such as Georgetown University and Nevada Power, has widened in recent days to include large issues of state governments, such as New York state's Dormitory Authority. The auction failures provide new indication of Wall Street's unwillingness to commit capital amid $133 billion in credit losses and asset writedowns.
``It's the beginning of the end for the auction-rate market,'' said Matt Fabian, a senior analyst with Concord, Massachusetts-based Municipal Market Advisors. ``Banks have stopped supporting the market.''
Investor demand for the securities has declined on waning confidence in the credit strength of insurers backing the debt, and on reluctance by banks to submit bids and risk ending up with too many of the bonds. Local governments that have borrowed in the $300 billion auction-rate market confront the prospect of higher borrowing costs as economic slowing trims tax revenue.
Auction-Rate Bidding
Auction bonds have interest rates that are determined by bidding that typically occurs every seven, 28 or 35 days. When there aren't enough buyers, the auction fails and bondholders who wanted to sell are left holding the securities. Rates at failed auctions are set at a level spelled out in official statements issued at the initial bond sale.
Other borrowers paid higher rates, even if their auctions didn't fail. Wisconsin's 28-day auction yesterday of taxable bonds was set at a 10 percent rate, up from 4.75 percent for identical securities Feb. 7.
Frank Hoadley, Wisconsin's director of capital finance, said he had no advance warning from bankers about the jump in rates. ``We are making decisions'' about converting the auction bonds to different kinds of debt, he said.
Local governments are obliged to pay the high rates until either the auctions start attracting more buyers or they modify the bonds to some other kind of variable-rate debt or a fixed interest rate. Bankers and borrowers have been working on conversion plans for several weeks.
Port Authority Bonds
The 20 percent rate for the $100 million of Port Authority auction bonds will cost it $388,889 until the next weekly auction, up from $83,611 last week. Interest on the bonds is subject to federal income tax.
``We have seen widening spreads, reduced demand for certain auction-rate securities and failed auctions, including some auctions in which Citi acted as broker dealer,'' Danielle Romero-Apsilos, a spokeswoman at New York-based Citigroup, said in a statement.
A Citibank-run auction for the New York state's Dormitory Authority failed yesterday, resulting in an interest rate of 6.26 percent, up from 3.12 percent a week earlier, according to Bloomberg data. Following the auction miss, the interest rate was set at twice one-month Libor, the London interbank offered rate for wholesale bank deposits, according to the official statement for the bonds.
Michael DuVally, a spokesman at New York-based Goldman, declined to comment.
Tuesday, 12 February 2008
Economy near contraction in 1st quarter: Philly Fed
(Reuters) - The U.S. economy will struggle to grow in the first quarter of this year and faces an almost 50 percent chance of contracting, a quarterly survey issued by the Philadelphia Federal Reserve Bank showed on Tuesday.
Unemployment will edge higher given feeble job creation in the first three months of the year as the world's largest economy teeters on the brink of shrinking for a second consecutive quarter.
Forecasters saw a 47 percent probability of contraction in gross domestic product this quarter and a 43 percent chance in the second quarter, levels not seen since the recession in 2001 in the wake of the dot-com bubble, the survey said.
"Although the forecasters' median estimate for real GDP this quarter and the next suggests slow but positive growth, they think the risk of a contraction is high," it said.
"These current-quarter and one-quarter-ahead risks have not been this high since the survey of 2001 Q4, when they were 82 percent and 49 percent, respectively," the survey added.
The 50 forecasters pegged current-quarter growth in real GDP at a rate of just 0.7 percent, a sharp drop from the previous forecast of 2.2 percent.
According to the government's initial estimates, U.S. GDP grew just 0.6 percent in the fourth quarter of 2007.
AIG says potential derivatives loss not material
(Reuters) - American International Group Inc (AIG.N: Quote, Profile, Research) on Tuesday moved to calm investors shaken by its earlier disclosure that derivatives losses could more than triple to about $5 billion, a development that earned it a rebuke from its auditor for a "material weakness" in internal controls.
AIG, the world's largest insurer, said in a statement on Tuesday that the size of any write-down was not expected to be material to the company.
AIG shares gained 4 percent to $46.60, after falling nearly 12 percent on Monday to the stock's lowest level in five years.
Investors pushed the shares down on Monday, after AIG disclosed in a regulatory filing that its mark-to-market unrealized losses on a credit default swap portfolio within its AIG Financial Products unit were expected to be about $4.88 billion through November, compared with an earlier indication of a loss of up to $1.5 billion.
The loss could wipe out AIG's fourth-quarter earnings, some analysts said.
AIG, which is expected to release quarterly results later this month, has not yet disclosed whether it saw further deterioration in December.
"The valuation adjustment as of December 31, 2007, is likely to be significant, and will likely cause AIG to report an accounting loss for the quarter," S&P credit analyst Rodney Clark said.
Vodafone still after Vodacom?
(Fin24) - Any notion that Vodafone will give in to Telkom's rejection of its offer for a controlling stake in Vodacom (the duo's joint cellular business) has been dismissed - at least given Vodafone CE Arun Sarin's declaration that Africa and Asia were firmly on Vodafone's growth radar screen.
Asked by Fin24 to state weather Vodafone would return for Vodacom with a revised offer, Sarin declined to answer before quickly making a dash to the exit door of a packed auditorium with a horde of Vodacom executives in tow.
In a carefully crafted speech steering clear of the company's intention to up its control of Vodacom, Sarin - addressing a large audience at the 3GSM Mobile Word Conference in Barcelona, Spain - said South Africa and India were two countries in emerging markets critical to Vodafone's growth strategy.
"Last year we recorded 15% growth in our South African-based business," said Sarin, adding that with most markets across Europe reaching saturation South Africa and India were critical to the company's growth plans.
In India - a market in which Vodafone made its foray after acquiring a controlling stake in Bharti Telecoms - the company had signed up nearly 1.5m subscribers.
"Our target in that particular market is to sign up close to 300m subscribers over the next three years," said Sarin.
Asked by Fin24 to state weather Vodafone would return for Vodacom with a revised offer, Sarin declined to answer before quickly making a dash to the exit door of a packed auditorium with a horde of Vodacom executives in tow.
Buffett Bids for MBIA, Ambac Municipal Bond Contracts
(Bloomberg) -- Billionaire investor Warren Buffett said he offered to shore up $800 billion of municipal bonds guaranteed by troubled MBIA Inc., Ambac Financial Group Inc. and FGIC Corp. in a bid to gain 33 percent of the debt insurance market.
Buffett's Omaha, Nebraska-based Berkshire Hathaway Inc. would assume the risk of the debt, he told CNBC television. The offer excludes the bond insurers' subprime-related obligations. One company has already rebuffed the proposal and the two others haven't responded, Buffett said.
The offer drove U.S. stocks higher on optimism the plan would help calm credit markets and prevent a slump in the value of municipal debt. MBIA and Ambac dropped on concern Buffett's proposal would leave them with mortgage securities that caused more than $5 billion of losses last quarter, while Berkshire would gain a municipal guaranty business that has generated profit for more than 14 years.
``He is offering to take the fattest, most profitable part of their business,'' said Jerry Bruni, president and portfolio manager, at J.V. Bruni and Co. in Colorado Springs, Colorado. Bruni has $650 million under management including Berkshire shares. The firm sold MBIA last month. ``I can't imagine why they would want to do that. If I were MBIA or Ambac, this does not sound like a good offer.''
$5 Billion
Berkshire would put up $5 billion as capital for the plan and is offering to insure the municipal debt for 1.5 times the premium charged by the bond insurers to take on the guarantee. The insurers could accept the offer and back out within 30 days for a fee, Buffett said.
Berkshire spokeswoman Jackie Wilson didn't return calls seeking more information on the plan, which Buffett announced during the CNBC interview. Spokespeople for MBIA, Ambac and FGIC didn't return calls seeking comment.
Armonk, New York-based MBIA, the largest bond insurer, Ambac and FGIC are on the verge of losing their AAA credit ratings, potentially crippling their sales to municipalities after losing $5 billion from insuring mortgage-related securities.
The bond insurers lend their AAA stamp to $2.4 trillion of debt, and face potential losses of as much as $41 billion if the value of debt they insure continues to decline, according to JPMorgan Chase & Co. analysts.
MBIA, which started as the Municipal Bond Insurance Association in 1974, Ambac and FGIC are reeling from their expansion beyond guaranteeing municipal debt to collateralized debt obligations, which repackage assets such as mortgage bonds and buyout loans into new securities with varying risk. As the value of some CDOs plummets, ratings companies are pressing the insurers to add more capital.
`Ceding the Book'
``If you gave up your entire municipal business, that's the book of business where the value in the companies is right now,'' said Robert Haines an analyst in New York for CreditSights Inc., an independent bond research firm. ``You'd essentially be ceding that whole book to Buffett and what you'd be left with would be the book of business where all the troubles are.''
MBIA's AAA insurance rating is being reviewed by Moody's Investors Service, Standard & Poor's and Fitch Ratings. Ambac's insurance unit had its AAA rating cut to AA by Fitch and is being scrutinized by Moody's and S&P. FGIC's guaranty business had its top rating cut to AA by Fitch and S&P and is being reviewed by Moody's.
MBIA fell $1.86, or 14 percent, to $11.72 at 12:45 p.m. in New York Stock Exchange composite trading. New York-based Ambac, the second-largest bond insurer, dropped $1.65 to $8.83. Berkshire declined $200 to $139,750.
U.S. Stocks Rise
Fourth-ranked FGIC, based in Stamford, Connecticut, is a closely held company owned in part by New York private-equity firm Blackstone Group LP and mortgage insurer PMI Group Inc. PMI, based in Walnut Creek, California, rose 20 cents, or 2.4 percent, to $8.47, and Blackstone rose 40 cents, or 2.3, to $18.18.
The Standard & Poor's 500 Index added 18.6 points, or 1.4 percent, to 1,357.73 on optimism Buffett's plan would protect municipal bonds, even if it comes at the expense of the insurers. Treasuries fell after the plan reduced demand for the safety of government debt.
``This news is encouraging,'' said Michael Ross, a municipal bond analyst at Morgan Keegan & Co. in Memphis, Tennessee. ``For weeks the focus has been on rating reviews and watching bonds tumble and stocks stumble. It tells us that behind the scenes discussions are occurring.''
Credit-Default Swaps
Credit-default swaps on MBIA were trading at 17.5 percent upfront and 5 percent a year, up from 16 percent initially and 5 percent a year yesterday, according to London-based CMA Datavision. That means it costs $1.75 million upfront and $500,000 a year to protect $10 million in MBIA bonds for five years.
Ambac's upfront price rose to 17.5 percent from 15.5 percent yesterday, CMA data show. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates worsening perceptions of credit quality; a decline, the opposite.
The threat of downgrades was great enough for New York Insurance Superintendent Eric Dinallo to attempt to organize a bank-led rescue of bond insurers.
Bank Rescue
Buffett's proposal ``provides one option to protect municipal issuers and investors,'' Dinallo said in a statement today in response to Buffett's plan.
``It would be a great deal for Berkshire Hathaway and a great deal for the municipal bondholders,'' though not the bond insurers, said David Havens, a credit analyst at UBS AG in Stamford, Connecticut. ``The regulators and the politicians would love to see this happen.''
Eight banks including New York-based Citigroup Inc. and UBS in Zurich are working on financing for Ambac, a person briefed on the plan said two weeks ago. Credit Agricole SA's Paris-based Calyon unit is leading talks to bail out FGIC, the Wall Street Journal reported last week, citing people familiar with the situation.
Buffett, 77, has built Berkshire into a company with a market capitalization of $216 billion by making contrarian bets, purchasing stocks he regards as undervalued and selling insurance on risks that others won't cover.
Monday, 11 February 2008
Platinum leaps over $1 900
(Fin24) - Platinum cleared the $1 900 an
ounce mark on Monday for the first time in its history as concerns of further supply disruptions due to power shortages continued to plague the market.
South Africa's ongoing electricity concerns have already seen several precious metals producers warn that their output would drop in 2008, as Eskom restricted mines operating in the country to a power supply that equated to 90% of their average requirements.
ounce mark on Monday for the first time in its history as concerns of further supply disruptions due to power shortages continued to plague the market.
The precious white metal gained $27 to trade at $1 917.50 an ounce by 13:45 after hitting $1 890 in late after-market trade on Friday.
Additionally, Eskom's prediction that power supply problems were likely to continue for several weeks made "further gains seem inevitable with the metal potentially testing $2 000/oz in the not too distant future," said James Moore of TheBullionDesk.
South Africa's ongoing electricity concerns have already seen several precious metals producers warn that their output would drop in 2008, as Eskom restricted mines operating in the country to a power supply that equated to 90% of their average requirements.
R343.8m shot for local Mittal op
(Fin24) - ArcelorMittal SA (ACL), the SA arm of the world's largest steel producer, announced on Monday that it would spend R343.8m in capital expenditure at its Newcastle works.
Construction and installation for the Hot Metal Desulphurisation project began in November 2007 with commissioning taking place in January 2008, while refurbishment work on the sinter plant and raw materials handling plant will begin in May 2008 to coincide with the mini-reline of Blast
Furnace No 5 at Newcastle.
The company said in a statement that the capital would be used to improve the plant's production capacity as well as improve its safety, health and environmental impact by bringing the plant in line with worldwide environmental standards.
Expenditure will be split into three parts, with R103.2m spent on the Sinter Plant refurbishment, R74.6m on a Hot Metal
Desulphurisation project and R166m on the Blast Furnace mini- reline.
The projects form part of ArcelorMittal SA's capacity
expansion programme to increase its liquid steel production to 9.5m tonnes by 2011, the company said.
Construction and installation for the Hot Metal Desulphurisation project began in November 2007 with commissioning taking place in January 2008, while refurbishment work on the sinter plant and raw materials handling plant will begin in May 2008 to coincide with the mini-reline of Blast
Furnace No 5 at Newcastle.
Random House to sell books by the chapter online: report
(Reuters) - Random House Publishing Group, the world's largest book publisher, is planning to test selling individual chapters of a popular book to gauge reader demand, according to a report in the Wall Street Journal.
Turkey Finds Growth Boom Hazardous as Unlicensed Kill
(Bloomberg) -- An explosion at an illegal fireworks factory in Istanbul on Jan. 31 sent bloodied survivors running for safety as bodies littered the street outside.
``One of them had his head smashed; I saw his brain,'' said Mustafa Guvenbag, 32, who works in a nearby sock factory and lives close to the area. ``These people have been making bombs and they are killing us. Someone has to stop them.''
The disaster, which killed 22 people and injured about 100, underscores the dangers of Turkey's unrestrained economic growth. Unlicensed businesses and those that employ unregistered workers account for almost half the country's economy, which expanded an average of 7 percent annually during the past five years, according to government estimates.
After the explosion, district Mayor Murat Aydin promised to do more to regulate businesses that have proliferated with little oversight. In the Davutpasa district, where the accident occurred, an estimated 20,000 factories have sprung up next door to homes and shops.
``We have been conducting very tight and serious inspections on such factories over the last few years, but this accident shows that we need to do more,'' Aydin said.
The destroyed factory was profiting from growing demand for sparklers and skyrockets. Increased incomes have spurred working- class families to set off fireworks at weddings and other celebrations, copying their rich neighbors.
Raining Metal
The disaster was caused by an explosion in a pressure boiler in a denim factory on the second floor of the building, Aydin said. The fire spread to the third and fourth floors, igniting materials used to make fireworks and causing a second, more powerful blast.
Metal and concrete debris rained down on an area 50 yards in diameter, blocking nearby roads and making it difficult for ambulances and aid workers to reach the scene. Most of the people killed were people on the streets outside, or workers in nearby buildings.
The fireworks plant was identified as unlicensed at the end of last year and ordered to submit a permit application, Aydin said. Inspectors who visited the site were told the factory produced plastic toys. The denim plant was also operating illegally and had been shut down by officials four times in the past, according to the mayor.
Municipalities have encouraged entrepreneurs to skirt licensing laws by repeatedly granting amnesties to businesses set up without planning permission and accepting bribes, said Tores Dincoz, a board member at the Chamber of Architects of Turkey.
800 Inspectors
``How did those explosives get there is one question, and how can the mayor claim his officials thought they were making plastic toys is another one,'' Dincoz said. ``If this is the way officials conduct inspections, I can't imagine the state of security in this country.''
Following the deaths, Labor Minister Faruk Celik ordered 800 inspectors to check all businesses in Istanbul to ensure they are being run legally.
Many factories in Davutpasa don't take basic safety precautions such as installing alarms or providing emergency exits and conducting regular machinery inspections, Aydin said. This is particularly dangerous in Davutpasa because a residential area sits about 100 yards away, separated from the plants by a gas station and a soccer field.
At least one-fifth of the area's factories are illegal, with many producing counterfeit money or bootleg raki, the national aniseed-flavored spirit, Referans newspaper reported today, citing municipal officials. More than 20 people died after being poisoned by fake raki in 2005.
Credit Suisse Topples UBS, Dodges `Subprime Bullet'
(Bloomberg) -- Credit Suisse Group is earning more than UBS AG for the first time in almost a decade after Chief Executive Officer Brady Dougan avoided the writedowns that forced his rival to report the biggest-ever quarterly loss by a bank.
Credit Suisse may report tomorrow that net income fell 69 percent in the fourth quarter to 1.43 billion Swiss francs ($1.29 billion), according to the median estimate of 11 analysts surveyed by Bloomberg. UBS, which marked down $14 billion on securities infected by U.S. subprime mortgages, gives details of its 12.5 billion-franc quarterly loss on Feb. 14.
Dougan, a former derivatives trader who became Credit Suisse's CEO in May after making investment banking the company's most profitable unit, scaled back debt holdings before the slump led to more than $145 billion in writedowns and loan losses at the world's biggest banks. By contrast, Marcel Rohner was named UBS's CEO in July after three quarters of declining earnings, the collapse of a hedge fund and the ouster of his predecessor.
``Credit Suisse is clearly the better positioned of the two,'' said Florian Esterer, who helps oversee $56 billion at Swisscanto Asset Management in Zurich, where both companies are based. ``There are still some tough times ahead for UBS.''
UBS, the world's biggest wealth manager, said Jan. 30 it had a net loss of 4.4 billion francs in 2007, the first time it earned less than Credit Suisse since being created in a merger in 1998. Credit Suisse, which posted losses in 2001 and 2002, had an 8.65 billion-franc profit last year, analysts estimate.
Wall Street Losses
Credit Suisse earned about 1 billion francs in the fourth quarter and 8.2 billion francs in 2007, Sonntag newspaper said Feb. 10, citing an unidentified ``reliable source.'' Credit Suisse spokesman Marc Dosch declined to comment on the report.
Like New York-based Merrill Lynch & Co., Citigroup Inc. and Morgan Stanley, which also reported record losses in Wall Street's worst ever quarter, UBS has turned to sovereign funds to shore up its finances. The Swiss bank will seek shareholders' approval on Feb. 27 to sell 13 billion francs in bonds that will convert to shares to investors in Singapore and the Middle East.
Credit Suisse fell 0.1 percent to 57 francs at 11:04 a.m. in Zurich trading, and UBS declined 1.7 percent to 40.3 francs. UBS has dropped 50 percent in the past year, making it the fourth-worst performer in the 60-member Bloomberg Europe Banks and Financial Services Index. Credit Suisse is down 36 percent.
UBS is rated ``sell'' by 11 of 41 analysts tracked by Bloomberg, a rating awarded by six of 37 analysts covering Credit Suisse.
`Dodged the Bullet'
``I think Credit Suisse will have dodged the subprime bullet,'' said Dieter Buchholz, who helps manage $107 billion at AIG Private Bank in Zurich, including Credit Suisse shares. Chairman Walter Kielholz has signaled the bank probably won't have large charges in the quarter.
Credit Suisse's results may be more similar to those of Frankfurt-based Deutsche Bank AG than UBS, Buchholz said. Germany's biggest bank said last week it avoided writedowns from the subprime market and reported a 44 million-euro ($64 million) markdown on leveraged loans.
Managers at Credit Suisse's SPS mortgage-servicing unit alerted the executive board more than a year ago to concerns about subprime assets. By the end of 2006, the company had originated about 40 percent fewer subprime mortgages than in 2005, according to Dougan.
``The hardest thing in all of these is not just seeing the issue but taking action,'' Dougan, 48, told business leaders in Zurich on Feb. 5. ``It's always very difficult to say no.''
Cheap Gas Seen Returning 20% as Oil Meets Slowdown
(Bloomberg) -- U.S. natural gas is the cheapest it's been relative to oil since the 1991 Gulf War, raising the prospect of a windfall for investors who sell crude and buy the other heating fuel.
Gas prices will probably rise because inventories are at a four-year low and below-normal temperatures are stoking demand, said Brian Hicks, who helps manage $1.5 billion at U.S. Global Investors in San Antonio. At the same time, he said, an increased supply of oil and a slowing U.S. economy will drag crude prices lower.
A barrel of crude has cost at least 11 times as much as 1 million British thermal units of gas for three months, compared with an average of 7.8 times in the past 10 years and 18 times in July 1991, when the Gulf War threatened oil supplies from Kuwait and Iraq. The spread, a function of oil's 54 percent surge in the past year, was as high as 13.6 times before oil peaked at $100.09 a barrel on Jan. 3. Gas has climbed just 5 percent in the year.
``In the world of hydrocarbons, natural gas is a bargain compared to crude,'' said Peter Beutel, the president of energy consulting firm Cameron Hanover Inc. in New Canaan, Connecticut. He correctly predicted oil would reach $98 a barrel last year.
Futures contracts on the New York Mercantile Exchange indicate traders are betting this year will be the first since 1993 that gas prices advance while oil declines. Consumers would pay higher household gas and electricity bills, and costs for companies such as Dow Chemical Co., the biggest U.S. chemicals maker, would climb. Profit at gas producers ConocoPhillips, biggest in the U.S., XTO Energy Inc. and EOG Resources Inc. will advance this year, according to analysts surveyed by Bloomberg.
Gas Seen Rising
Gas may increase to $9 or $10 per million British thermal units by May or June, up from $8.30 on Feb. 8, according to Neal McAtee, who was named to the All-Star Analysts Hall of Fame in 1998 by the Wall Street Journal. Oil, which ended last week at $91.77 a barrel, may go to $70 or $72, he said.
U.S. natural gas for March delivery rose as much as 15.3 cents, or 1.8 percent, to $8.454 per million Btu in electronic trading on the New York Mercantile exchange at 10:47 a.m. London time. Crude oil for March delivery traded at $91.66 a barrel, down 11 cents.
A trader who sells $10 million of Nymex oil and buys an equal amount of gas right now would come out about $4 million ahead, or 20 percent, should gas reach $10 and oil $70.
``Natural gas looks to be setting up for a bullish run going into the summer,'' said McAtee, who helps manage $18 million at Red Rock Asset Management in Memphis, Tennessee.
In the past decade, oil sold for more than 12 times natural gas in three stints prior to the latest one. Each time the gap narrowed to the average within four months.
XTO's Simpson
XTO Chief Executive Officer Bob Simpson is predicting something similar this time. Oil will sell for as little as 10 times gas next year and 8 times within five years, he said.
``There's a perceived oversupply of natural gas that's transitory and illusory,'' Simpson, 59, said in a telephone interview from the company's headquarters in Fort Worth, Texas. ``There's going to be a correcting event.''
The last such event was in August 2005, when Hurricane Katrina shut down every gas well and pipeline off the U.S. Gulf Coast. Gas prices peaked in December 2005 at $15.78.
XTO's profit will rise by 4 percent this year to $1.76 billion, according to analyst estimates compiled by Bloomberg. EOG, the Houston-based gas producer born out of Enron Corp., will post a 27 percent increase to $1.38 billion, the data show.
Hurricane Season Flopped
Natural gas represents 24 percent of U.S. energy supply, about as much as coal, according to statistics compiled by BP Plc. Oil contributes about 40 percent, and much of the rest comes from nuclear reactors and hydropower plants.
One reason not to buy gas is the unpredictable nature of weather. Amaranth Advisors LLC lost $6.6 billion on the expectation gas prices were poised to rebound in 2006, leading to the biggest hedge-fund collapse on record. When forecasts for a strong hurricane season proved incorrect, producers were able to keep output flowing from the Gulf of Mexico, the biggest domestic source of gas in the U.S.
Commercial traders such as power-plant owners had a record- large holding in natural gas at a net 81,263 contracts on Jan. 7, according to U.S. Commodity Futures Trading Commission data. As of Jan. 29, commercial traders held 24 percent more short positions than long positions on oil futures, meaning most were betting on declines in prices, and 15 percent more long positions than short positions on gas.
U.S. gas inventories fell 12 percent to 2.06 trillion cubic feet in the past 12 months, reaching the lowest for this time of year since 2004, according to Energy Department data.
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