Friday, December 28, 2007

U.S. Economy: New-Home Sales Tumble to 12-Year Low (Update2)

By Bob Willis

Dec. 28 (Bloomberg) -- Sales of new homes in the U.S. fell to a 12-year low in November, pointing to bigger declines in construction that will hinder economic growth in 2008.

Purchases dropped 9 percent to an annual pace of 647,000 and October sales were revised lower, the Commerce Department said today in Washington. Last month's sales were weaker than the lowest forecast in a Bloomberg News survey of economists.

Treasury notes extended their rally and traders added to bets that the Federal Reserve will cut interest rates again in January to prevent a recession. New-home sales are down 25.4 percent so far this year, heading for the biggest annual decline since at least 1963.

``This gives a dire picture,'' said Dana Saporta, an economist at Dresdner Kleinwort in New York. ``The weak data raise the risk of the economy slowing faster than Fed officials would like.''

A separate report showed the National Association of Purchasing Management-Chicago's index of American business activity rose this month as new orders increased. The group's index climbed to 56.6, from 52.9 the previous month.

The deepest housing recession in 16 years will worsen as discounts fail to lure buyers and mounting foreclosures swell the glut of unsold properties, economists said. Falling property values may cause consumer spending to cool, increasing the odds the expansion will falter in 2008.

``The most important implication of this is it's going to drive down construction outlays and that's a direct effect on GDP,'' said Neal Soss, chief economist at Credit Suisse Group in New York.

Yields Retreat

Treasuries rose. The yield on the benchmark 10-year note fell 12 basis points to 4.08 percent at 4:18 p.m. in New York. The dollar weakened against the euro and stocks ended the day little changed. Standard & Poor's Supercomposite Homebuilding Index, which includes KB Home, Pulte Homes Inc. and D.R. Horton Inc., declined 2.5 percent to 307.2.

A Bloomberg survey of 68 economists forecast sales would fall to an annual pace of 717,000 from a previously reported 728,000 rate in October, according to the median estimate. Economists' forecasts ranged from a low of 685,000 to a high of 750,000. Government records only go back to 1963.

Sales of new homes were down 34 percent from the same time last year, the biggest 12-month drop since January 1991. The median price fell 0.4 percent from November 2006 to $239,100.

Inventories Swell

The number of homes for sale at the end of November decreased 1.8 percent to 505,000, the fewest in two years. Still, because sales dropped even more, the inventory of unsold homes at the current sales pace jumped to 9.3 months from 8.8 months in October.

Purchases fell in three of four regions, led by a 28 percent plunge in the Midwest. Sales dropped 19 percent in the Northeast and 6.4 percent in the South. They rose 4 percent in the West.

The housing recession has deepened since the August turmoil in subprime mortgages led to a worldwide credit shortage. Stricter borrowing standards and a freeze on lending to borrowers with poor credit put mortgages out of reach for more potential buyers. That's driving home prices lower, weakening sales as people hold out for even bigger reductions.

Sales of new houses will probably tumble 8.9 percent in 2008 after a 25 percent drop this year, according to a Dec. 13 forecast from Fannie Mae, the largest mortgage buyer. Sales of new homes in November were 53 percent down from their July 2005 peak.

Prices Decline

Home prices in 20 metropolitan areas fell 6.1 percent in the 12 months to October, the most in at least six years, according to a report this week by S&P/Case-Shiller. The decline raises the risk that more Americans will walk away from properties that are worth less than they owe, economists said.

Lehman Brothers Holdings Inc. is forecasting prices will fall at least 15 percent from peak to trough. By that measure, the S&P/Case-Shiller index is down 6.6 percent so far.

With sales and prices falling, foreclosures rose 68 percent in November from a year earlier. They may continue surging in 2008 as mortgages for some subprime borrowers with adjustable rates reset.

As foreclosures throw more homes onto the market, homebuilders such as Hovnanian Enterprises Inc., New Jersey's largest, are scaling back.

`Difficult Year'

Hovnanian plans to ``pare down our inventories in virtually all our markets,'' Chief Executive Officer Ara Hovnanian said on a conference call Dec. 19. ``It will be a difficult year.''

Housing starts are near a 14-year low and have fallen 48 percent since their January 2006 peak. Declining home construction has subtracted from economic growth for the last seven quarters, and economists are expecting the drag to continue in 2008.

The weaker housing market is also forecast to undermine consumer spending, which makes up two thirds of the economy, as falling property values leave owners feeling less wealthy and with less equity to tap for extra cash.

The odds of recession have increased since the credit markets froze as a result of the subprime crisis. The economy will expand at a 1 percent annual pace in the fourth quarter after growing at a 4.9 percent rate from July through September, according to the median forecast of economists surveyed this month by Bloomberg News.

``The probability of recession is 50 percent for next year at some point,'' Martin Feldstein, head of the National Bureau of Economic Research, which determines when contractions start and end, said in a Dec. 14 interview. ``We could see a downturn starting sometime in the spring or the second quarter of next year.''

Treasuries Gain After New Home Sales Decline to a 12-Year Low

By Deborah Finestone

Dec. 28 (Bloomberg) -- Treasuries rose the most in more than two weeks and headed for the best annual returns since 2002 after a government report showed sales of new homes in the U.S. declined to a 12-year low last month.

Ten-year note yields fell to the lowest level in a week after the Commerce Department said sales dropped 9 percent, compared with the forecast for a 1.6 percent decline. Treasuries have returned 8.1 percent this year as traders anticipate the Federal Reserve will extend interest-rate cuts next month.

``The argument for a potential recession has been fortified,'' said Andrew Harding, chief investment officer for fixed income in Cleveland at Allegiant Asset Management, which manages $18 billion. ``We'll see low rates for some period of time.''

The yield on the benchmark 10-year note decreased 12 basis points to 4.07 percent at 4:08 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 1/4 percent security due in November 2017 rose 31/32, or $9.69 per $1,000 face amount, to 101 13/32.

Ten-year notes gained for a second week, with yields falling 9 basis points. Yields have declined 63 basis points this year. Two-year yields dropped 9 basis points this week to 3.10 percent, down 1.71 percentage points this year.

Yield Curve

The yield premium 10-year notes offer over two-year Treasuries reached 97 basis points, showing investors favor shorter-dated notes in expectation of lower interest rates. At the beginning of the year, two-year notes yielded 11 basis points more than 10-year securities, inverting the so-called yield curve.

About $158.7 billion in Treasuries traded through ICAP Plc. The three-month daily average for the world's biggest broker of trades between banks is about $312 billion.

Fed funds futures on the Chicago Board of Trade indicate a 90 percent chance the Fed will reduce its target rate for overnight bank loans a quarter-percentage point from 4.25 percent at its Jan. 30 meeting, up from 76 percent odds yesterday.

``The fed funds rate is in the wrong place,'' Paul McCulley, a money manager at Pacific Investment Management Co. in Newport Beach, California, said in an interview on Bloomberg Television. ``Recessions are always about tipping points. That's what I worry about.''

McCulley said in a note yesterday the Fed will cut rates at each upcoming meeting to at least 3 percent.

Declining Sales

Sales of new homes fell to an annual pace of 647,000, and October sales were revised down to a 711,000 rate, according to the Commerce Department in Washington.

``It's clear that housing is a problem and is going to continue to be a problem,'' said John Canavan, a fixed-income analyst in Princeton, New Jersey, at Stone & McCarthy Research Associates. ``There's a good possibility for yields to head lower still.''

Market rates for inter-bank loans have declined since the Fed, European Central Bank and three other central banks announced a combined effort on Dec. 12 to revive that market. The rates remain above the levels of July, before the collapse of the U.S. subprime-mortgage market caused banks to stop lending to all but the safest borrowers.

Less Concerned

The rate banks charge to lend each other dollars fell, indicating they are less concerned about having funding at year- end. The three-month London interbank offered rate, or Libor, fell 10 basis points to a 22-month low of 4.73 percent, the British Bankers' Association said.

The gap between the Libor and overnight index swap rate, viewed as an indirect measure of the availability of funds in the money market, fell to 66 basis points today, from as much as 106 basis points on Dec. 4, which was the widest since at least December 2001, as far back as Bloomberg compiles the data.

The gap averaged 11 basis points between 2001 and when credit market concern began mounting in August.

``People are beginning to get the creeping sense that funding issues will persist well into 2008,'' said William O'Donnell, head of U.S. government bond strategy in Stamford, Connecticut, at UBS Securities LLC, one of the 20 primary securities dealers that trade with the Fed. ``We continue to see slightly better buying of Treasuries.''

The ``TED'' spread, the difference between what banks and the U.S. government pay for three-month loans, narrowed to 1.58 percentage points from 2.40 percentage points in August. The gap was 32 basis points on Jan. 2.

Riots in Pakistan after the assassination of former prime minister Benazir Bhutto added to investors' desire for the safety of government debt.

`Uncertainty and Unrest'

``Global uncertainty and unrest are usually good for Treasuries,'' said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.

Traders may also be unwinding bets that prices will fall before the weekend amid light New Year's holiday trading, Canavan said. The Securities Industry and Financial Markets Association recommended trading of Treasuries close at 2 p.m. New York time on Dec. 31 and stay shut on Jan. 1 in Japan, the U.K. and the U.S. for New Year's Day.

The Fibonacci series of numbers, a technical indicator used by some investors to identify targets, suggested 10-year yields need to hold below 4.16 percent if they are to decline further.

A move past one level in the series indicates the rate may fall or rise to another. The next target is 3.79 percent.

Yields on 10-year Treasuries will climb to 4.48 percent by the end of 2008 as investors reduce bets the world's largest economy will slide into recession, according to the median forecast of 71 economists surveyed by Bloomberg.

Returns this year were the best since gaining 11.6 percent in 2002, according to indexes complied by Merrill Lynch & Co.

MBIA, Ambac Fall as Buffett Starts Up Bond Insurer (Update5)

By Josh P. Hamilton and Christine Richard

Dec. 28 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, fell in New York Stock Exchange trading after billionaire investor Warren Buffett said he plans to start a rival company to guarantee municipal debt.

Ambac dropped as much 15 percent, the most in two months, and MBIA fell as much as 17 percent after Buffett's Berkshire Hathaway Inc. said it plans to insure bonds in New York and at least four other states.

Berkshire, which gets half its profit from insurance, is challenging the bond insurers as they struggle to retain the AAA credit ratings that allow them to guarantee about $1.2 trillion of municipal bonds. MBIA, Ambac and other guarantors are under scrutiny amid concern they don't have enough capital set aside to cover potential losses on bonds they insure that are linked to subprime mortgages.

``Investors might feel more comfortable investing in bonds insured by Buffett than those backed by an insurer with the legacy of the credit crisis hanging over them,'' said Matthew Maxwell, a London-based credit analyst at Calyon, the investment banking unit of Credit Agricole SA. Bond insurers ``are hurting, so now is a good time for Buffett to be getting into the market.''

Buffett, 77, said in an interview today on News Corp.'s Fox Business Network that it will be easier to break into the bond insurance market now than it would've been a couple of years ago because rivals are facing pressure on their ratings. He told the Wall Street Journal that Berkshire Hathaway Assurance Corp. will also seek permission to operate in California, Puerto Rico, Texas, Illinois and Florida. Jackie Wilson, a spokeswoman for Omaha, Nebraska-based Berkshire, confirmed Buffett's plans.

Shares Drop

New York State Insurance Department granted the license today, spokesman David Neustadt said. Jerry Hagens, a spokesman for the Texas Department of Insurance, and Jason Kimbrough, a spokesman for California's regulator, said their states hadn't yet received applications from Berkshire. A call to Vern Iverson with the state of Florida wasn't returned.

MBIA, down 74 percent this year, closed down $3.53 to $18.74. Ambac, down 72 percent for the year, dropped $4.02 to $25.12. Buffett's decision also indicates he is unlikely to bail out any of the bond insurers.

``Warren Buffett's entry into the financial guaranty insurance business is a significant validation of the valuable role our industry plays in helping public entities issue debt,'' said Willard Hill, a spokesman for MBIA in Armonk, New York. ``We look forward to growing our company over the long term and competing with him and others in our industry for a long time to come.''

A telephone call to Peter Poillon, a spokesman for New York-based Ambac, wasn't returned.

Default Risk

Credit-default swaps on MBIA, which rise as perceptions of credit quality drop, rose 30 basis points to 610 basis points, the highest ever, according to CMA Datavision in London. Ambac increased 10 basis points to 620, the widest in three weeks.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

The bond insurance venture is Buffett's third move in a week as he seeks investments to absorb $45 billion in cash. Buffett said Dec. 25 that he will pay $4.5 billion to gain control of Marmon Holdings Inc., the Pritzker family's closely held collection of 125 companies and Berkshire today agreed to buy a reinsurance unit of ING Groep NV for about 300 million euros ($440 million).

`Positive Development'

``Having new entrants in the market to provide municipalities with options to enhance the credit of new bonds or to potentially provide enhanced credit for outstanding downgraded bonds is a very positive development,'' New York insurance department Superintendent Eric Dinallo said in a statement today.

Berkshire Hathaway has AAA ratings from Fitch Ratings, Moody's Investors Service and Standard & Poor's and its guarantee would enable municipal bond issuers to cut the cost of financing everything from hospitals to schools to sports stadiums. Berkshire Hathaway is the largest investor in Moody's Corp., with a 19 percent stake as of Sept. 30.

``If Berkshire Hathaway Assurance knocks on the door of a municipal official, they all know who Warren Buffett is and they all know that the other major players in this business are suddenly suspect,'' said Frank Betz, who helps manage $800 million, including Berkshire shares, at Carret Zane Capital Management in Warren, New Jersey. ``It is such vintage Warren Buffett.''

Top Ratings

MBIA, as well as Ambac and FGIC Corp. of New York, are trying to convince Moody's, Fitch and S&P that they deserve to keep their top ratings.

Fitch has given MBIA and Ambac less than six weeks to raise $1 billion each or face losing their AAA ratings. Moody's and S&P earlier month placed MBIA's ranking on negative outlook. MBIA on Dec. 10 said it will get $1 billion from private-equity firm Warburg Pincus LLC to bolster its capital and Ambac took out reinsurance on $29 billion of securities it guarantees.

``MBIA and Ambac are probably going to be able to get through this and raise the capital needed to retain their AAA ratings,'' said Rob Haines, an analyst at CreditSights Inc. in New York. ``But it hurts them.''


A bond insurer with a stable credit rating should find demand from municipalities, said Frank Hoadley, director of Capital Finance for the State of Wisconsin, and the chairman of the Government Finance Officers Association, an organization for executives in government-debt management.

``It seems to me that the debt insurance business has been hurt severely and it opens up some significant business opportunities,'' Hoadley said in a telephone interview.

Bonds sold by state governments make up about 33 percent of the insurance premiums collected by MBIA, the biggest of the monolines, and 50 percent of revenue for No. 2 competitor Ambac.

The companies stumbled as they expanded beyond municipal securities into structured finance such as collateralized debt obligations, which package pools of bonds and loans and slice them into separate pieces. The insurers guarantee about $1.2 trillion of structured finance debt.

Buffett, who has described derivatives as ``financial weapons of mass destruction,'' told the Journal he will focus on insuring municipal debt rather than CDOs.

``We're not going to stray off municipal bond insurance,'' Buffett said in the Fox interview. ``It's too hard to figure out those other things.''

``We would plan to charge more'' than existing bond insurers on the expectation that the strength of Berkshire's guarantee will merit the extra cost, he told Fox television.

Profit From Turmoil

Berkshire's Class A stock reached a record $151,650 a share on Dec. 11, having surged about 27 percent this year. The shares rose $3,300 to $141,100 today.

Buffett has profited in the past from turmoil in the insurance business. Berkshire's after-tax profit from insurance underwriting soared to $2.5 billion last year from $27 million in 2005 after providing insurance coverage for coastal properties vulnerable to storms as some premiums quadrupled because of record U.S. hurricane losses.

``If Buffett smells an opportunity, his track record suggests there is one,'' said Georg Grodzki, head of credit research at London-based Legal & General Group Plc. ``Buffett seems to believe the market is viable and the bond insurer has a future.''

Drake Management Curtails Withdrawals From Largest Hedge Fund

By Katherine Burton

Dec. 28 (Bloomberg) -- Drake Management LLC suspended most redemptions from its largest hedge fund after losing 23.7 percent through November, according to a letter sent to investors of the New York-based firm.

Drake will meet about 25 percent of requested withdrawals from its $3 billion Global Opportunities Fund, which tries to profit from macroeconomic trends by trading bonds, stocks, currencies and commodities. The letter didn't disclose how much investors had asked to withdraw at the end of the year.

``This decision was made only after we attempted to convince redeeming investors to voluntarily rescind their redemption requests,'' said the letter, signed by Drake Management and sent out today.

The partial redemptions were made possible by an agreement with Drake's banks, the letter said. The firm's lenders would have been allowed to terminate transactions and seize collateral if net assets had fallen by 30 percent.

Drake was founded in May 2001 by Anthony Faillace, chief investment officer, and Steve Luttrell, chief operating officer, who both previously worked at New York-based BlackRock Inc. and Pacific Investment Management Co. of Newport Beach, California. The firm manages about $13 billion, including traditional bond funds.

Redemption policies for the firm's other funds are unchanged, the letter said. Faillace and Luttrell declined to comment through a spokesman.

The firm's assets more than doubled this year, after the Global Opportunities Fund advanced 41 percent in 2006. At the end of 2005, assets were $2.5 billion. This year Drake opened research offices in Miami, Sao Paulo and Istanbul.

Comparative Returns

The Global Opportunities Fund, managed by Faillace, has returned 13.4 percent a year on average since beginning trading on Nov. 30, 2002. That compares with a 13.1 percent gain by the CSFB/Tremont Global Macro Index.

Drake's $1.74 billion Absolute Return Fund, a multistrategy pool that primarily trades bonds, fell 11.5 percent this year through November. It has returned an average of 10.1 percent a year since inception on Dec. 31, 2001.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.

U.S. Stocks Gain, Led by Energy; Exxon, ConocoPhillips Advance

By Elizabeth Stanton

Dec. 28 (Bloomberg) -- U.S. stocks rose, led by energy shares, after a gain in natural gas prices boosted the earnings outlook for the stock market's best-performing industry of 2007.

Exxon Mobil Corp., the world's biggest energy company, advanced for the seventh time in eight days. ConocoPhillips, the largest U.S. natural gas producer, rose to three-month high. Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., the biggest U.S. banks, erased early gains and led financial shares to the steepest decline in the Standard & Poor's 500 Index after a report showed new-home sales fell to a 12-year low.

The S&P 500 advanced 2.12, or 0.1 percent, to 1,478.49, extending its fifth straight annual advance. The Dow Jones Industrial Average added 6.26, or 0.1 percent, to 13,365.87. The Nasdaq Composite Index decreased 2.33, or 0.1 percent, to 2,674.46. About the same number of stocks rose as fell on the New York Stock Exchange.

``We don't think the prices on the energy stocks are overdone at all,'' said Ted Baszler, who helps manage $3 billion at Heartland Advisors Inc. in Milwaukee. ``They definitely have more room to run here. The long-term story for oil remains very bullish.''

The S&P 500 lost 0.4 percent for the week, while the Dow slipped 0.6 percent and the Nasdaq dropped 0.7 percent.

Energy and mining companies have led the S&P 500 to a 4.2 percent advance this year as speculation the global economy will keep growing overshadowed a worsening U.S. housing slump. Oil drillers, refiners and drilling services companies have rallied 34 percent in 2007, helping the S&P 500 Energy Index more than triple in five years.

Yearly Gains

The Dow average has risen 7.2 percent in 2007, while the Nasdaq Composite has gained 11 percent.

Natural gas for February delivery rose 2.6 percent to $7.386 per million British thermal units, the highest since Dec. 12. Crude oil for February delivery touched $97.92 a barrel, rising within $1 of its record close of $98.18 on Nov. 23, before falling 51 cents to $96.11.

ConocoPhillips added 48 cents to $89.13. Exxon, also a producer of natural gas, increased $1.33 to $95. The rise in energy shares helped erase earlier losses spurred by concern falling home sales will cause a recession.

Energy ``is not the best leader to have because it's typically based on higher energy prices,'' said Richard Sichel, chief investment officer at Philadelphia Trust Co., which manages $1.5 billion in Philadelphia. ``You would rather see consumer and financial stocks leading the way. That would be a healthier environment.''

Financial Shares

Financial shares lost 0.5 percent for their third consecutive retreat. Citigroup fell 27 cents to a five-year low of $29.29. Bank of America slid 36 cents to a three-year low of $41.10. JPMorgan Chase declined 38 cents to $43.26. Fannie Mae dropped $1.27 to $38.34.

Banks and brokerages retreated even as traders increased bets the Federal Reserve will lower interest rates at its next two meetings. The odds of a quarter-point cut to 4 percent at the Jan. 30 meeting increased to 90 percent from 76 percent, and the chances of a reduction to 3.75 percent on March 18 rose to 58 percent from 44 percent, future contracts indicate.

Purchases of new homes slid 9 percent to an annual pace of 647,000 in November and October sales were revised down to a 711,000 rate, the Commerce Department said. Last month's sales were weaker than the lowest forecast in a Bloomberg survey.

``The market has been slow to grasp just how bad things were going to be for housing,'' said Doug Peta, market strategist at J.&W. Seligman & Co. in New York, which manages $20 billion.

Homebuilders Decline

D.R. Horton Inc. and Centex Corp., two of the four largest U.S. builders by revenue, led homebuilders in S&P indexes to a 2.6 percent decline. D.R. Horton, fell 56 cents to $13.10. Centex lost 75 cents to $24.97.

MBIA Inc. and Ambac Financial Group Inc., the largest bond insurers, declined the most in the S&P 500. Billionaire investor Warren Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., started a rival company to insure only municipal bonds. MBIA and Ambac, which began as municipal bond insurers, are struggling to maintain the AAA credit ratings that allow them to do business after downgrades of mortgage-related securities they also guarantee.

MBIA, down 74 percent this year, fell $3.53 to $18.74. Ambac, down 72 percent, fell $4.02 to $25.12.

Gold producers gained as bullion rose 1.3 percent to $842.70 an ounce, extending its the biggest annual gain since 1979. Barrick Gold Corp., the world's largest, added $2.60, or 6.5 percent, to $42.88.

Best-Performing Stocks

Gains by the year's best-performing stocks in its final days are at least partly ``a calendar function,'' said Peter Kenny, managing director in institutional sales at Knight Equity Markets in Jersey City, New Jersey. ``Stocks that have done very well are not being sold. Those that own them want to show that they own them.''

The Russell 2000 Index, a benchmark for companies with a median market value of $591 million, dropped 0.2 percent to 771.76. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, rose 0.1 percent to 14,911.63. Based on its advance, the value of stocks increased by $19.8 billion.

Ambac Financial Group Inc. (ABK US)
Bank of America Corp. (BAC US)
Barrick Gold Corp. (ABX US)
Centex Corp. (CTX US)
Citigroup Inc. (C US)
ConocoPhillips (COP US)
D.R. Horton Inc. (DHI US)
Exxon Mobil Corp. (XOM US)
Fannie Mae (FNM US)

Legg Mason Shores Up Cash Funds With $1.12 Billion (Update2)

By Sree Vidya Bhaktavatsalam

Dec. 28 (Bloomberg) -- Legg Mason Inc. pumped $1.12 billion into two non-U.S. cash funds to prevent losses, the biggest bailout by a money manager tied to asset-backed debt sold by structured investment vehicles.

The move, along with an earlier cash infusion, will reduce earnings per share by 15 cents in the quarter ending Dec. 31, the Baltimore-based company said today in a statement. Legg Mason has provided $1.47 billion to support money funds and other cash- management portfolios since November.

SIVs were popular investments for money funds looking to increase yields. The vehicles sold commercial paper or medium- term debt, some backed by subprime mortgages, that has plunged in value on fears that they will be hurt by rising home loan defaults. Bank of America Corp., Federated Investors Inc. and SunTrust Banks Inc. propped up funds with SIV-issued debt in the past month to prevent losses for investors.

``This action is consistent with our ongoing efforts to reduce the ABCP exposure in our liquidity funds in light of current stresses in the credit markets,'' Raymond ``Chip'' Mason, Legg Mason's chief executive officer, said today in a statement, referring to asset-backed commercial paper.

To raise the capital, Legg Mason entered a total-return swap with Barclays Plc, which purchased SIV securities from Legg Mason.

Names of SIVs

Barclays bought securities issued by K2 (USA) LLC, Whistlejacket Capital Ltd. and White Pine Finance LLC. K2, a Dresdner Bank AG SIV, has between $22 billion and $25 billion of assets. Dresdner, owned by Munich-based Allianz SE, has no obligation to consolidate the SIV's assets and no plan to do so, Allianz Chief Financial Officer Helmut Perlet said Nov. 9. Whistlejacket is a SIV managed by Standard Chartered Plc.

SIVs now account for 3.2 percent of Legg Mason's $164 billion in cash funds, compared with 6.4 percent on Oct. 31. Some 1.1 percent of Legg Mason's cash-fund assets are invested in bank-sponsored SIVs, which have announced their support of those securities, Legg Mason said.

SIVs use proceeds from short-term debt to buy longer-term securities backed by assets including subprime mortgages and credit-card receivables.

Legg Mason announced its move after the close of regular U.S. trading. Legg Mason shares fell 41 cents to $71.23 today in New York Stock Exchange composite trading. The shares have slumped 25 percent this year.

Thursday, December 27, 2007

Treasuries Snap Four-Day Decline on Durables, Jobless Data

By Deborah Finestone

Dec. 27 (Bloomberg) -- Treasuries rose for the first time in five days after government reports showed a weaker-than- forecast gain in durable goods orders and jobless claims reached a two-year high.

Ten-year notes increased the most in more than a week on speculation U.S. consumers will reduce spending as rising delinquencies on subprime mortgages crimp economic growth. Treasuries also gained as the assassination of Benazir Bhutto, Pakistan's former prime minister, prompted investors to seek the safety of government debt.

``We're seeing a tremendous amount of slowdown in the economy,'' Michael Franzese, head of government bond trading for Standard Chartered in New York, said during an interview on Bloomberg Radio. ``There's still value in bonds.''

Benchmark 10-year note yields declined 9 basis points to 4.19 percent at 4 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield fell the most since Dec. 19. The price of the 4 1/4 percent security due November 2017 rose 22/32, or $6.88 per $1,000 face amount, to 100 15/32.

Fed funds futures contracts on the Chicago Board of Trade indicate a 78 percent chance the Federal Reserve will cut its target rate for overnight loans between banks by a quarter- percentage point to 4 percent on Jan. 30, up from 68 percent odds yesterday.

The central bank will reduce interest rates at every policy-setting meeting ``for the next two to three quarters,'' Pacific Investment Management Co.'s Paul McCulley said in a note released today to clients.

TED Spread

The ``TED'' spread, the difference between what banks and the U.S. government pay for three-month loans, rose to 1.74 percentage points, from 1.53 percentage points yesterday, indicating banks became less willing to lend to each other. The spread was less than half a percentage point before credit markets froze up in August.

Three-month bill yields fell for the first time in six days as investors sought the safety of short-term debt. Yields fell 21 basis points, the most since Nov. 7, to 3.10 percent.

Bhutto, 54, died of injuries sustained in a suicide bomb attack on a rally in Rawalpindi before elections scheduled for January. She had survived an assassination attempt when she returned to Pakistan in October to contest parliamentary elections after eight years of self-imposed exile.

Instability in Pakistan, a nuclear-armed country, is contributing to the gains in Treasuries, said Andrew Brenner, co-head of structured products in New York at MF Global Ltd., in an e-mail message.

Unemployment Insurance

The number of Americans filing first-time claims for unemployment insurance unexpectedly rose by 1,000 to 349,000 in the week that ended Dec. 22. Workers continuing to collect unemployment benefits jumped by 75,000 to 2.713 million, the highest since November 2005, in the week ended Dec. 15, the Labor Department said in Washington.

Durable goods orders rose 0.1 percent last month. The median forecast in a Bloomberg survey was for a 2 percent gain.

``When we get data that confirms the economy is slowing, it's only going to keep a bid in the market,'' said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co., a St. Louis-based brokerage firm.

Treasuries remained higher even as a private report showed consumer confidence unexpectedly increased in December. The Conference Board's index rose to 88.6, from a revised 87.8 during November. The median forecast in a Bloomberg survey was for the gauge to fall to 86.5.

Annual Return

Treasuries have returned 7.6 percent so far in 2007, the most since 2002, according to an index compiled by Merrill Lynch & Co., as defaulted subprime mortgages sent corporate borrowing costs surging and fed demand for the safest assets.

Notes gained earlier on reports that Citigroup Inc., the biggest U.S. bank, may cut its dividend by 40 percent to ``preserve its capital position,'' according to Goldman Sachs Group Inc. Writedowns at the biggest banks are still likely to be ``significantly larger than investors are anticipating,'' analysts including William F. Tanona wrote in a note to clients yesterday.

The Treasury's $13 billion sale of five-year notes drew a yield of 3.651 percent, less than the 3.668 percent median forecast by eight bond-trading firms surveyed by Bloomberg. For every $1 sold, there was $2.31 worth of bids. For the past 10 sales of the same amount, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, averaged $2.49.

Indirect bidders, the class of investors that includes foreign central banks, bought 28.6 percent of the securities, the most since September.

The 10-year Treasury yield will decline to 4.03 percent by the end of March, according to a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.

Citigroup, Merrill Face More Writedowns, Goldman Says (Update1)

By Elizabeth Hester and Adam Haigh

Dec. 27 (Bloomberg) -- Citigroup Inc., JPMorgan Chase & Co. and Merrill Lynch & Co. may write down an additional $34 billion in securities linked to the collapse of the subprime mortgage market, according to Goldman Sachs Group Inc.

Citigroup, the biggest U.S. bank, may reduce the value of its holdings by $18.7 billion in the fourth quarter and cut its dividend 40 percent, Goldman analyst William Tanona said in a Dec. 26 report on the New York-based companies. JPMorgan Chase & Co., the third-largest U.S. bank, may write off $3.4 billion, double Goldman's previous estimate. Merrill Lynch & Co. may reduce its holdings by $11.5 billion, he wrote.

Losses and writedowns at the world's biggest banks and securities firms total $97 billion this year, according to data compiled by Bloomberg. The market for collateralized debt obligations, loans packaged into new securities, has dried up after surging subprime mortgage defaults led to rating downgrades and convinced many investors to buy only the safest debt.

``It will be a couple of quarters before the current credit crisis is fully digested by the markets,'' wrote Tanona, who has a ``sell'' rating on Citigroup's stock and a ``neutral'' rating on JPMorgan and Merrill. ``Given the magnitude of the writedowns we assume and Citi's remaining exposure, we believe the firm has a serious need to preserve or raise additional capital.''

Tanona downgraded Citigroup's shares on Nov. 19 and was the last of six analysts who follow the company to advise clients to sell the stock. Nine analysts rate Citigroup a ``buy'' while eight recommend holding the stock, according to Bloomberg data.

Shares Decline

Citigroup, which has fallen 47 percent this year, dropped 89 cents to $29.66 on the New York Stock Exchange at 4 p.m. JPMorgan, down 9.7 percent this year, fell $1.30 to $43.64. Merrill Lynch declined $1.34, or 2.5 percent, to $53.20.

Citigroup is trying to preserve capital after reporting a 57 percent drop in earnings for the third quarter and forecasting as much as $11 billion in losses and writedowns in the fourth quarter. The New York-based bank, which pays a 54-cent dividend, will have to raise $6.2 billion to meet its capital needs, according to Tanona.

Citigroup Chief Executive Officer Charles O. ``Chuck'' Prince III stepped down last month and the bank got a $7.5 billion investment from Abu Dhabi's sovereign wealth fund after predicting further losses.

Writedowns at the biggest banks are still likely to be ``significantly larger than investors are anticipating,'' Tanona wrote.

Dividend Predictions

Citigroup tumbled 8.1 percent on Nov. 1 after CIBC World Markets analyst Meredith Whitney said it may have to trim its dividend. Deutsche Bank AG analyst Michael Mayo also predicted a dividend cut, saying the investment from Abu Dhabi is ``probably not enough'' to absorb credit losses.

The company pays a dividend equal to 7.1 percent of its stock price, more than twice the 3.3 percent yield of the average financial stock in the Standard & Poor's 500 Index. Executives have said they intend to maintain the payout.

Citigroup, which picked former Morgan Stanley investment banker Vikram Pandit to succeed Prince, will still have about $24.5 billion in CDO investments after the writedown, Goldman said.

Tanona previously had estimated that Merrill, which replaced CEO Stan O'Neal with John Thain, would have to write down $6 billion of securities.

``Many of the December year-end firms are likely to be more aggressive with their marks,'' Tanona wrote. ``Particularly those with high levels of exposure such as Citi and Merrill Lynch, both of whom have new CEOs at their helms.''

Sanford C. Bernstein & Co. analyst Brad Hintz estimated in a note dated today that Merrill will have a CDO-related writedown of $10 billion in the fourth quarter.

U.S. Economy: Durable Goods Orders Miss Forecast (Update1)

By Courtney Schlisserman and Robert Willis

Dec. 27 (Bloomberg) -- The U.S. economic slowdown spread beyond housing as companies ordered fewer durable goods than forecast, even as consumer confidence improved.

Demand for cars, aircraft and other items made to last several years increased 0.1 percent in November, the Commerce Department said today in Washington. The previous month's drop was revised to 0.4 percent, greater than estimated. Excluding transportation, orders fell 0.7 percent.

Treasury notes rallied and the dollar fell as the durable goods report suggested business investment, which has helped the economy survive the housing recession, will weaken. A reduction in corporate spending would make the expansion increasingly dependent on consumers, whose view of current conditions grew more pessimistic despite their optimism about the future.

``Momentum has just nosedived over the last couple of months,'' said Michael Gregory, a senior economist at BMO Nesbitt Burns in Toronto. ``When businesses see those order books getting a lot leaner, they start to change their plans in terms of hiring and so forth.''

Stocks fell the most in a week after the reports. The Standard & Poor's 500 Index fell 1.43 percent to 1,476.27.

The Conference Board's confidence index rose to 88.6 in December from 87.8 the previous month, the New York-based group said today. The organization's measure of present conditions fell to 108.3 from 115.7. The gauge of expectations for the next six months increased to 75.5 from 69.1.


The increase in expectations ``is just one of those anomalies that sometimes happen,'' said Brian Bethune, an economist at Global Insight Inc., a Lexington, Massachusetts, forecasting firm. ``The present situation is more influenced by the problem with energy prices. Unless we get some relief from oil prices, we are in for a very rough first quarter.''

The share of consumers who said jobs are plentiful dropped to 22.7 percent in November from 23.3 percent the prior month, today's report showed. The proportion who said jobs are hard to get increased to 23.5 percent from 21.4 percent.

Separate figures from the Labor Department showed jobless claims unexpectedly rose last week by 1,000 to 349,000. The number of people continuing to collect unemployment benefits climbed to 2.713 million in the week that ended Dec. 15, the highest in more than two years.

Economists forecast durable goods orders would increase 2 percent in November, according to the median of 67 estimates in a Bloomberg News survey. Excluding transportation equipment, orders were projected to rise 0.5 percent.

Orders for military gear weakened 24 percent, led by a drop in aircraft demand. Those figures are considered volatile, so economists prefer to look at underlying trends. Bookings excluding defense equipment rose 1.2 percent.

Role of Investment

Demand for capital goods also softened, suggesting business investment will be a drag on economic growth. Orders for non- defense capital goods excluding aircraft, a proxy for future business investment, fell 0.4 percent after a 2.9 percent decrease in October that was larger than previously estimated.

``You are starting to see some evidence that housing weakness is spilling over to the broader economy,'' said Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York. ``The overall economy will weaken under the weight of a severe housing recession and tighter credit markets.''

Shipments of those items, used in calculating gross domestic product, increased 0.2 percent after dropping a larger than previously estimated 1.2 percent in October.

Orders for transportation equipment rose 1.9 percent, led by a 21 percent jump in commercial aircraft demand. Auto bookings also rose.

Boeing Business

Boeing Co. orders more than tripled in November, to 177 planes, from the prior month. Bookings at the world's second- largest commercial plane maker have averaged 122 a month over the last three months.

Other manufacturers aren't faring as well as the housing slump deepens. Illinois Tool Works Inc., the maker of Duo-Fast nail guns, and Black & Decker Corp., the largest U.S. power-tool maker, reduced profit forecasts this month as sales in North America slowed.

Retailers have placed fewer orders with Black & Decker this quarter because consumers are buying fewer tools for home remodeling projects as the housing slump enters its third year.

``We are seeing the U.S. economy slowing,'' said Alexander M. Cutler, chief executive officer at Eaton Corp., in a Dec. 21 interview. There is the ``potential that industrial production could move to flat to slightly negative in the first quarter.''

Impact on Fedex

Even service businesses are feeling the pinch. FedEx Corp., the second-largest U.S. package-delivery company, said last week that quarterly profit fell 6.3 percent as a slowing economy cut demand for freight shipments and fuel spending rose.

The Memphis, Tennessee-based company also lowered its capital spending forecast for the full year by 11 percent, to $3.1 billion, and said additional reductions are ``possible'' as executives review investment plans.

Regional reports have shown the manufacturing outlook has dimmed. The New York Federal Reserve Bank's general economic index fell more than forecast this month and expectations for orders six months from now were the lowest in six years. The Philadelphia Fed's business gauge contracted for the first time in more than two years and a measure from the Richmond Fed shrank for the second time in three months.

Exports Climb

Faster growth outside the U.S. has led to a surge in exports that's helped American companies weather the slowdown in domestic demand, economists said. Shipments to overseas buyers rose 0.9 percent to a record in October, the Commerce Department said earlier this month.

General Electric Co., the world's biggest maker of electricity-generating equipment, this month won an order for 28 Jenbacher natural-gas engines, the largest ever, to supply power in rural Bangladesh.

Of the 177 plane orders received by Boeing in November, 46 were from customers abroad compared with 3 from U.S. companies. The Chicago-based company didn't identify the origin of the remaining 128 bookings.

Japan's Nikkei 225 Futures Slump on Slower U.S. Growth Concern

By Patrick Rial

Dec. 28 (Bloomberg) -- Japan's Nikkei 225 Stock Average futures slumped in Chicago after economic data pointed to slower growth in the U.S. and the yen strengthened against the dollar.

U.S.-traded receipts of Sony Corp., the maker of the PlayStation 3 game console, dipped 1.8 percent. Durable goods orders rose less than forecast last month, while jobless claims unexpectedly increased.

Mizuho Financial Group Inc.'s receipts slid after Goldman, Sachs & Co. predicted three U.S. banks will write down an additional $34 billion on securities losses, raising concern the subprime problem will persist.

Asian receipts also fell in the U.S. after Pakistani opposition leader Benazir Bhutto was assassinated, threatening stability on the Indian sub-continent.

``With the weak U.S. economic indicators and the stronger yen, exporters and electronics companies do not look attractive,'' Soichiro Monji, who helps oversee $47 billion at Daiwa SB Investments Ltd. in Tokyo, said in an interview with Bloomberg TV. ``The terrorist attack in Pakistan does not directly affect corporate earnings, but it may have implications for companies doing a lot of business with India.''

Nikkei 225 futures expiring in March closed in Chicago yesterday at 15,465, down from 15,600 earlier in Osaka and 15,605 in Singapore. The Bank of New York Japan ADR Index, which tracks the nation's American depositary receipts, slid 1.6 percent.

Unemployment, Inflation

Yesterday, the Nikkei lost 0.6 percent to 15,564.69 and the Topix index declined 0.6 percent to 1,499.94. Today is the last trading day of the year and the Tokyo Stock Exchange will close after a two-hour morning session. The Nikkei has dropped 9.6 percent in 2007, its first annual loss in five years. The Topix has tumbled 11 percent.

Shares may also be active after the government said core consumer prices climbed 0.4 percent in November, the fastest pace since October 2006, and the unemployment rate dropped to 3.8 percent. Economists had forecast prices would climb 0.3 percent and the jobless rate to remain steady at 4 percent. Consumer prices excluding food and energy fell 0.1 percent.

Investors will also be focused on data on industrial production set to be released 10 minutes before the start of trading in Tokyo.

Receipts of Nissan Motor Co., Japan's third-biggest automaker, dropped 1.1 percent. Canon Inc., the world's largest seller of digital cameras, declined 1. percent.

U.S. orders for items made to last several years rose 0.1 percent in November, compared with a forecast of 2 percent in a Bloomberg survey, Separate figures from the Labor Department showed jobless claims unexpectedly rose last week. That was the first time since August claims increased for two consecutive weeks.

More Writedowns?

Receipts of Mizuho, the country's third-biggest bank by market value, fell 2.2 percent. Those of Sumitomo Mitsui Financial Group Inc., the second biggest, slid 2.4 percent.

Citigroup Inc., JPMorgan Chase & Co. and Merrill Lynch & Co. may write down an additional $34 billion in securities linked to the collapse of the subprime mortgage market, Goldman said in a report. Citigroup may also be forced to cut its dividend by 40 percent to preserve capital, according to the report.

Nippon Steel Corp. may advance after the world's No. 2 maker of the alloy said yesterday it will spend about 25 billion yen ($219 million) to increase automotive sheet production at a venture in China with Baoshan Iron & Steel Co. and ArcelorMittal.

Suzuki Motor Corp., which has a 50 percent market share in the Indian car market, may climb after the Nikkei newspaper said the company will spend about 100 billion yen to double its dealership network there by 2010.

Takashimaya Co., Japan's second-biggest department store operator, may advance. after third-quarter net income rose 34 percent as the company spent less on rent and advertising.

Japan's stock markets will reopen on Jan. 4 after the New Year holiday.

U.S. Stocks Drop on Economic Concern; Citigroup, Merrill Fall

By Elizabeth Stanton

Dec. 27 (Bloomberg) -- U.S. stocks fell the most in a week after government reports on durable goods and unemployment heightened concern growth is slowing and an analyst predicted Citigroup Inc. will cut its dividend by 40 percent.

Hewlett-Packard Co., General Motors Corp., and Caterpillar Inc. dropped after orders for durable goods rose less than forecast. Citigroup, the biggest U.S. bank, fell to a five-year low after Goldman Sachs Group Inc. analyst William F. Tanona said it will cut its 54-cent dividend to preserve capital as the value of its assets declines.

The Standard & Poor's 500 Index lost 21.39, or 1.4 percent, to 1,476.27. The Dow Jones Industrial Average decreased 192.08, or 1.4 percent, to 13,359.61. The Nasdaq Composite Index retreated 47.62, or 1.8 percent, to 2,676.79. About seven stocks fell for every one that gained on the New York Stock Exchange.

``The economy is definitely weak, and we all know financials are still in the box,'' said John Kornitzer, who manages $6 billion at Kornitzer Capital Management in Shawnee Mission, Kansas. ``It's going to be a tough year.''

Stocks turned lower before the U.S. economic reports were released on concern the assassination of Pakistani opposition leader Benazir Bhutto will further destabilize the region.

Monsanto, Freeport

Financial companies were today's worst-performing industry in the S&P 500, followed by materials producers including Monsanto Co. and Freeport-McMoRan Copper & Gold Inc.

Orders for cars, aircraft and other items made to last several years rose 0.1 percent in November, compared with a median forecast of 2 percent in a Bloomberg survey of economists, as companies cut spending on capital goods. Separate figures from the Labor Department showed jobless claims unexpectedly rose last week. Treasuries rose for the first time in five days following the reports.

The S&P 500 has gained 4.1 percent for the year, while the Dow average has climbed 7.2 percent and the Nasdaq has advanced 11 percent.

General Motors slipped 46 cents to $26.06. Hewlett-Packard lost $1.16 to $51.61. Caterpillar retreated 96 cents to $72.73.

``The economy is slowing,'' said Michael Nasto, senior trader at U.S. Global Investors Inc., which manages about $6 billion in San Antonio. ``It's one more point for those people who think we might be headed for a recession in the new year.''

Citigroup had the second-steepest drop in the Dow average, losing 89 cents, or 2.9 percent, to $29.56. Goldman's Tanona said the New York-based bank may write off $18.7 billion in debt securities, more than the analyst's Nov. 4 estimate of as much as $11 billion.

American Express Co. posted the steepest decline in the Dow average, losing $1.80, or 3.4 percent, to $51.10.

Bigger Loss Estimate

JPMorgan Chase & Co. fell $1.30 to $43.64. Tanona said the third-largest U.S. bank by assets may write off $3.4 billion in fixed-income securities, double Goldman's previous estimate, because of the collapse of the subprime mortgage market. Merrill Lynch & Co. may write off $11.5 billion, compared with an earlier estimate of $6 billion. Merrill, the world's largest brokerage, fell $1.34 to $53.20.

Falling home prices and the expiration of low teaser rates have rendered mortgages unaffordable for many homeowners, leading to an increase in foreclosures. The world's biggest banks and brokerage firms have reported combined losses and writedowns on assets including mortgage-backed bonds of $97 billion this year.

The S&P 500 has lost 3.3 percent this quarter, heading for its first quarterly decline since the three months ended June 2006.

Bhutto's Assassination

Bhutto was assassinated in an election-rally attack in Rawalpindi, threatening the stability of a nuclear-armed nation that is a focal point of the West's war on terror. Rioting broke out as her supporters gathered outside the hospital where her death was confirmed and in cities across Pakistan.

Fannie Mae and Freddie Mac, the largest U.S. sources of money for home loans, rose after their regulator said they met their capital requirements in the third quarter. Freddie Mac rose the most in the S&P 500, climbing $1.28, or 4 percent, to $33.70. Fannie Mae was the second-biggest gainer, adding 81 cents, or 2.1 percent, to $39.61.

SLM Corp. fell the most in the S&P 500, losing $2.48, or 11 percent, to $19.65, an almost seven-year low. The biggest provider of student loans plans to sell $2.5 billion of stock to raise money for settling contracts to buy back existing shares.

Fall From Record

Energy companies in the S&P 500 fell from a record, their first drop in seven trading days, even as crude oil rose 0.7 percent to $96.62 a barrel in New York after an Energy Department report showed that U.S. inventories fell more than expected. Futures closed at a record $98.18 a barrel on Nov. 23.

Gold rose a fourth day after energy costs jumped, boosting the appeal of the precious metal as an inflation hedge. Futures increased 0.3 percent to $831.80 an ounce on the Comex division of the New York Mercantile Exchange.

Barrick Gold Corp., the world's largest producer of the metal, rose 36 cents to $40.28.

The Russell 2000 Index, a benchmark for companies with a median market value of $594.8 million, dropped 3 percent to 773.51. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 1.5 percent to 14,895.77. Based on its decline, the value of stocks decreased by $287.7 billion.

Barrick Gold Corp. (ABX US)
Caterpillar Inc. (CAT US)
Citigroup Inc. (C US)
Fannie Mae (FNM US)
Freddie Mac (FRE US)
Freeport-McMoRan Copper & Gold Inc. (FCX US)
General Motors Corp. (GM US)
Hewlett-Packard Co. (HPQ US)
JPMorgan Chase & Co. (JPM US)
Merrill Lynch & Co. (MER US)
Monsanto Co. (MON US)
SLM Corp. (SLM US)

Wednesday, December 26, 2007

U.S. Economy: Home Prices Declined at Faster Pace (Update3)

By Joe Richter and Courtney Schlisserman

Dec. 26 (Bloomberg) -- Home prices in 20 U.S. metropolitan areas fell in October by the most in at least six years, raising the risk that more Americans will walk away from properties that are worth less than they owe.

Values fell a greater-than-forecast 6.1 percent from October 2006, the S&P/Case-Shiller home-price index showed today. The decrease was the biggest since the group started keeping year-over-year records in 2001.

Prices will continue falling as record foreclosures put even more homes on the market while stricter lending rules make financing tougher to get. Declining values also pose a risk to consumer spending by making it harder for owners to tap home equity for extra cash.

``You are likely to see more people giving up on their loans as they end up with little or no equity in their homes,'' said Abiel Reinhart, an economist at JPMorgan Chase & Co. in New York. ``It's one more factor that weighs on the path of consumption.''

Compared with a month earlier, home prices dropped 1.4 percent, the biggest one-month decline since records began. The figures aren't seasonally adjusted, so economists prefer to focus on the year-over-year change.

The median forecast of 12 economists surveyed by Bloomberg News projected a 5.7 percent decline after the index dropped 4.9 percent in the 12 months ended in September.

Manufacturing Slumps

A report from the Federal Reserve Bank of Richmond today also showed manufacturing in its region contracted for the second time in three months in December. Combined with earlier reports this month that showed factory activity slowed in New York and also shrank in the Philadelphia region, the reports suggest the housing slump is filtering through the economy.

Seventeen of the 20 cities in the S&P/Case-Shiller index showed a year-over-year decline in prices, led by 12 percent slumps in Miami and Tampa, Florida. Three cities, Charlotte, North Carolina, Seattle and Portland, Oregon, showed an increase from a year earlier.

All 20 areas covered showed a drop in prices compared with September.

``There is no silver lining'' in the report, said David Blitzer, chairman of the index committee at Standard & Poor's, in an interview on Bloomberg Television. ``If you look across the cities, more often than not, the bigger the run-up, the more it comes down. There is no clear sign of a bottom in these numbers.''

Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.

Prices to Worsen

The housing market may continue to weaken as an increase in foreclosures adds to a glut of unsold homes on the market, spurring sellers to cut prices, economists said.

``With supply overhang enormous and mortgage financing tougher to obtain, home prices are going to decline considerably further in the quarters ahead,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm.

Lower home prices may also threaten spending. This holiday shopping season is forecast to be the weakest in five years, according to the National Retail Federation. A jump in November sales and a rush of last-minute purchases the weekend before Christmas probably weren't enough to change that outlook, according to analysts.

Stocks dropped following the reports and later pared losses. The S&P 500 index rose 1.2 points, or 0.1 percent, to close at 1,497.66 in New York. The supercomposite homebuilder index gained 0.3 percent.

Fewer Sales

Figures later this week from the Commerce Department may show new homes sold at an annual rate of 718,000 in November, down from October's 728,000 rate, based on the median estimate of economists surveyed by Bloomberg News.

Sales of new houses probably will fall 8.9 percent in 2008 after a 25 percent drop this year, according to a Dec. 13 forecast from Fannie Mae, the largest mortgage buyer.

``The market is too challenging to make predictions for fiscal 2008,'' Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., said on a conference call on Dec. 19. ``It will be a difficult year.'' The Red Bank, New Jersey- based company reported a net loss of $467 million for the three months ended Oct. 31.

Residential investment has subtracted from economic growth for the past seven quarters. Home building dropped at a 20.5 percent annual pace in the third quarter, the most since 1991.

The S&P/Case-Shiller index and another by the Office of Federal Housing Enterprise Oversight track the same home over time and more accurately reflect price trends, economists said.

Price gauges from the Commerce Department and the Realtors group can be influenced by changes in the types of homes sold. Higher sales of cheaper homes relative to more-expensive properties will bias the figures down.

Most U.S. Stocks Drop on Target's Outlook, Home Price Decline

By Elizabeth Stanton

Dec. 26 (Bloomberg) -- Most U.S. stocks fell for the first time in four days as slower sales at Target Corp. and a bigger- than-expected drop in home prices overshadowed a rally in energy companies.

Circuit City Stores Inc., Big Lots Inc. and Dillard's Inc. led declines in 28 of 31 members of the Standard & Poor's 500 Retailing Index. CB Richard Ellis Group Inc., the world's largest commercial real estate broker, posted its steepest retreat in two weeks. Citigroup Inc., the biggest U.S. bank, fell the most in the Dow Jones Industrial Average after billionaire investor Warren Buffett said he rebuffed financial firms that approached him about buying stakes.

About six stocks fell for every five that rose on the New York Stock Exchange. The S&P 500 added 0.1 percent to 1,497.65 and the Dow average climbed 2.36 to 13,551.69, lifted by Exxon Mobil Corp. after crude oil surpassed $96 a barrel for the first time this month. The Nasdaq Composite Index increased 0.4 percent to 2,724.41, helped by Inc.'s gain.

``The consumer is feeling some pain,'' said Frederic Dickson, chief market strategist at D.A. Davidson & Co., which manages $23 billion in Lake Oswego, Oregon. ``Investors are going to be looking for a spillover effect.''

The S&P 500 is headed for its first quarterly decline since the three months ended June 2006. The benchmark for American equities has risen 5.6 percent this year, while the Dow average and Nasdaq have added 8.7 percent and 13 percent, respectively.

Lower Home Values

Target's forecast that December sales at stores open at least a year may drop 1 percent added to evidence that chain stores will post the weakest holiday sales growth in five years. Retailers in the S&P 500 have tumbled 17 percent as a group this year after home values decline and energy prices climb. The S&P/Case-Shiller index today showed home values slid 6.1 percent in October.

MBIA Inc., the world's largest bond insurer, and Bear Stearns Cos., the fifth-biggest U.S. securities firm, also limited the market's losses after investors disclosed increased stakes.

Target, the second-largest U.S. discount retailer, fell $1.31 to $51.16. Target had previously predicted that December sales at stores open at least a year would rise as much as 5 percent. The lowered forecast ranges from a possible increase of 1 percent to a drop of 1 percent in sales.

Circuit City lost the most in the S&P 500, slipping 6.7 percent to $4.62. Big Lots retreated $1.01 to $15.65. Dillard's, the retailer that operates mostly in the South, slid $1.11 to $19.19. Macy's, the owner of the namesake department store chain and Bloomingdale's, lost $1.06 to a three-year low of $25.95.

Smallest Since 2002

Wal-Mart Stores Inc., the world's biggest retailer, slumped 36 cents to $48.38. The National Retail Federation has forecast a 4 percent increase in total sales for the holidays, the smallest gain since 2002.

``We're definitely heading into a consumer-led recession,'' said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based consulting and investment banking firm for retailers. ``Retail stocks have been killed this year and rightfully so, but the worst is yet to come.''

Financial firms in the S&P 500 fell 0.5 percent, bringing their loss this year to 19 percent. CB Richard Ellis slipped 89 cents to $21.75. Citigroup declined 1.7 percent to $30.45.

``We've seen some deals as you can imagine in this period,'' Buffett said today in an interview on CNBC. ``So far, we have not seen a deal that causes me to start salivating.'' Buffett didn't say which firms contacted him.

$96 Billion

The biggest U.S. residential real-estate slump in 16 years has rendered mortgages unaffordable for many homeowners, leading to an increase in foreclosures. The world's biggest banks and brokerage firms have written down the value of their assets, including mortgage-backed bonds, by at least $96 billion.

Energy companies in the S&P 500 added 1.2 percent. Crude oil rose above $96 a barrel in New York for the first time this month as a government report tomorrow may show a U.S. inventory decline and as Turkish planes bombed suspected Kurdish sites in northern Iraq.

Exxon, the biggest U.S. oil company, rose $1.15 to a two- month high of $94.81. Hess Corp. added $2.02 to a record $104.40. rallied $1.84 to $92.85, the highest since Dec. 10. The world's largest Internet retailer said 2007 was its ``best ever'' for holiday sales as Web purchases outpaced overall U.S. spending.

MBIA, Ambac Surge

MBIA and Ambac Financial Group Inc., its smaller rival, had the steepest gains in the S&P 500. Davis Selected Advisers LP, a New York-based money manager that also plans to take a $1.2 billion stake in Merrill Lynch & Co., said today in a filing with the U.S. Securities and Exchange Commission that it increased its stake in MBIA to 5.1 percent.

MBIA rose 11 percent to $22.33. Ambac added 13 percent to $30.14.

Bear Stearns added 49 cents to $89.29. Billionaire investor Joseph Lewis raised his stake for the second time this month. The 70-year-old high-school dropout bought a 7 percent stake in September and increased it to 8 percent earlier in December. He now owns 9.6 percent.

``There's a lot of liquidity around the world, and you're seeing some of it going into supposedly distressed U.S. financial markets,'' said Kent Croft, who manages $650 million at Baltimore-based Croft-Leominster Inc. ``That should help prop up some of these names.''

Buffett's Berkshire Hathaway Inc. rose $520 to $138,500 after agreeing to pay $4.5 billion to gain control of Marmon Holdings Inc., the Pritzker family's closely held collection of 125 companies, in what may be his biggest non-insurance acquisition.

In other markets, Treasury notes dropped after the government's $22 billion sale of two-year securities, the largest auction in more than a year, drew a higher yield than traders expected. Gold rose to a four-week high. Inc. (AMZN US)
Ambac Financial Group Inc. (ABK US)
Bear Stearns Cos. (BSC US)
Berkshire Hathaway Inc. (BRK/A US)
Big Lots Inc. (BIG US)
CB Richard Ellis Group Inc. (CBG US)
Circuit City Stores Inc. (CC US)
Citigroup Inc. (C US)
Dillard's Inc. (DDS US)
Exxon Mobil Corp. (XOM US)
Macy's (M US)
Target Corp. (TGT US)

Oil Rises to 1-Month High on Supply Outlook, Turkish Air Strike

By Mark Shenk

Dec. 26 (Bloomberg) -- Crude oil rose to a one-month high in New York as a government report tomorrow may show a U.S. inventory decline, and as Turkish planes bombed suspected Kurdish sites in northern Iraq.

Oil supplies probably dropped 1.63 million barrels in the week ended Dec. 21, according to the median of 10 responses in a Bloomberg News survey of analysts. The Turkish strikes were the latest in a series of cross-border attacks on the outlawed Kurdistan Workers Party, or PKK.

``We're looking for the sixth straight weekly'' drop in oil supplies, said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. ``The Turkish attacks are factored in but this isn't a new problem and it has had no impact on the oil flow.''

Crude oil for February delivery rose $1.84, or 2 percent, to settle at $95.97 a barrel at 2:47 p.m. on the New York Mercantile Exchange. It was the highest close since Nov. 26. Futures touched a record $99.29 on Nov. 21 and are up 57 percent from a year ago.

``We're going to see traders push prices back towards $100 during the next few days,'' said Justin Fohsz, a broker at Starsupply Petroleum, a division of GFI Group Inc., in Englewood, New Jersey. ``The market will continue to move around a lot because trading is so light.''

Trading has been lower than usual because of the end-of- year holidays. Nymex oil traders exchanged 81,634 contracts on Dec. 24, down 82 percent from a week earlier, according to data compiled by Bloomberg.

``The main thing today is that this is a thin, volatile market,'' Armstrong said. ``If someone wants to push this market, they clearly can.''

Weekly Report

The Energy Department is scheduled to release its weekly report on inventories tomorrow at 10:30 a.m. in Washington, a day later than usual because of Christmas.

Today's bombing raid was at least the third air operation in Iraq this month. Troops were briefly sent across the border on Dec. 17, according to the army. Turkey says it is using intelligence from the U.S. to target the PKK.

Iraq has the world's third-largest crude-oil reserves. The country's northern region is controlled by a semi-autonomous Kurdish administration. Kirkuk, at the center of the region's biggest oil field, is about 100 miles (161 kilometers) from the Turkish border.

Exports from northern Iraqi fields, which run by pipeline to Turkey's Ceyhan export terminal on the Mediterranean Sea, averaged 400,000 barrels a day last month.

``The ongoing Turkish air attacks are an excuse to push prices to the upside,'' said Tim Evans, an energy analyst at Citigroup Global Markets Inc. in New York. ``It's debatable whether this will have any effect on Iraqi shipments.''

Falling Dollar

Crude-oil prices also rose because the U.S. dollar fell against the euro, which bolstered the appeal of commodities as a hedge against inflation. Weak Christmas retail sales in the U.S. indicate consumers are starting to feel pressured by the slowdown in the housing market. The U.S. uses about 25 percent of the world's oil.

Brent crude for February settlement rose $1.24, or 1.3 percent, to close at $93.94 a barrel on London's ICE Futures Europe exchange. It was the highest close since Dec. 12.

Tuesday, December 25, 2007

Weekend Surge May Not Rescue U.S. Retailers From Holiday Slump

By Joseph Galante

Dec. 25 (Bloomberg) -- A surge in spending during the weekend before Christmas may not have been enough to rescue Target Corp., Sears Holdings Corp. and Macy's Inc. from the slowest holiday spending season in five years.

Sales rose 19 percent from Dec. 21 to Dec. 23 as U.S. shoppers took advantage of half-off sales and extended hours, Chicago-based ShopperTrak RCT Corp. said yesterday. Even with the late increase, spending during the week through Dec. 22 fell 2.2 percent, the fourth straight week of declines.

``It's not going to overcome the negative forecasts,'' Frederick Crawford, managing director at Southfield, Michigan- based AlixPartners LLP, said of the weekend in a Bloomberg Television interview. ``It's going to be a good start, a very weak midsection, and a strong finish. But those two barbells at the end are not going to be able to overcome these last three weeks, which have been very weak.''

Gasoline at $3 a gallon and rising food prices have discouraged shoppers from spending during November and December, which account for 20 percent of retailers' annual revenue, according to the NRF. Target, the second-biggest U.S. discounter, said yesterday that sales at stores open more than a year may decline in December after customer visits slowed in the weeks after Thanksgiving.

Sales in November and December this year may rise 4 percent, the slowest growth since 2002, according to the National Retail Federation. ShopperTrak has predicted a 3.6 percent increase.

Late Shoppers

Less than one-fifth of consumers had finished their holiday shopping as of Dec. 16, according to the International Council of Shopping Centers in New York. J.C. Penney Co., Sears and Toys ``R'' Us Inc. tried to lure late buyers with discounts over the weekend, helping boost U.S. retailers' sales by 7.6 percent on Dec. 22, the Saturday before Christmas.

Chris Lewis, a cleaning-franchise owner, began shopping for his two children on Dec. 21, and may buy more items after Christmas.

``I try to stay kind of frugal,'' the 35-year-old resident of Silver Spring, Maryland, said. ``I'm not going to give everything I have in one day.''

While U.S. Internet sales are rising at a faster pace than store purchases, they may increase at the slowest pace on record this year.

Online spending from Nov. 1 through Dec. 21 increased 19 percent from the same period a year earlier to $26.3 billion, Reston, Virginia-based ComScore Inc. said Dec. 23. Sales trailed last year's 26 percent growth and the research firm's forecast for a 20 percent gain during this year's holidays.

Although customer visits increased for the week ended Dec. 22, ``this increase was not sufficient to compensate for the unfavorable traffic trends that carried over into December from the week following Thanksgiving,'' Target said on a recorded call.

Japanese Stocks Rise for Third Day; Mitsubishi UFJ Leads Banks

By Patrick Rial

Dec. 25 (Bloomberg) -- Japanese stocks rose for a third day, led by financial shares, after a decline in interbank borrowing costs signaled a global credit-market slump is easing.

``The chaos in short-term financing markets has calmed down,'' said Mitsushige Akino, who oversees $468 million in assets at Ichiyoshi Investment Management Co. in Tokyo.

Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. gained the most in two weeks after the London interbank offered rate, a global benchmark, dropped to the lowest since March 2006.

The U.S. market and European bourses, except in Russia, are shut today for Christmas. U.S. stocks rose yesterday, sending benchmark indexes to the highest in two weeks, as falling interest rates and a $33.3 billion agreement to restructure Canadian commercial debt improved the credit-markets outlook.

Benchmark indexes increased in Israel and Egypt today and declined in Russia, Saudi Arabia and Turkey.

The Nikkei 225 Stock Average rose 295.59, or 1.9 percent, to 15,552.59 at the close in Tokyo. It has fallen 9.7 percent so far in 2007. The broader Topix index added 26.83, or 1.8 percent, to 1,496.03.

Mitsui & Co., which generates most of its profit from commodities trading, had its steepest gain this month after crude oil advanced to a two-week high.

The total value of shares traded in Tokyo was 1.73 trillion yen ($15.1 billion), the first time since Christmas Day, 2006, that the total was below 2 trillion yen on a full day.

Borrowing Costs

Elsewhere in Asia, indexes climbed in China, Taiwan and Thailand, while Vietnam fell.

In Russia, the ruble-denominated Micex Index declined 0.5 percent to 1,920.21 at 12:23 p.m. in Moscow. The dollar- denominated RTS Index dropped 0.2 percent to 2,298.43.

Saudi Arabia's Tadawul All Share Index lost 0.5 percent to 11540.15 at 12:30 p.m. local time. Egypt's CASE 30 Index added 0.4 percent. Israel's benchmark TA-25 Index rose 0.4 percent to 1,228.26 at 11:26 a.m. in Tel Aviv. The ISE National 100 Index fell 255,17, or 0.4 percent, to 55,307.28 in Istanbul.

The U.S. market will be open tomorrow and most bourses in Europe will remain closed for a second day.

The Standard & Poor's 500 Index climbed 3 percent the last three trading days, trimming its fourth-quarter drop to 2 percent, after a concerted effort by central banks in North America and Europe helped push down borrowing costs. The benchmark for American equities has advanced 5.5 percent this year and is headed for its fifth straight annual gain.

Annual Increase

Concern tighter credit markets may slow U.S. economic growth has pushed stocks lower this quarter. The S&P 500 and Europe's Dow Jones Stoxx 600 Index may post their first fourth- quarter decline since 2000. The Dow Jones Stocks 600 Index has dropped 3.5 percent since the end of September.

The MSCI Asia-Pacific Index is still on pace for its fifth straight annual increase. Asia's regional gauge has added 10 percent in 2007.

Mitsubishi UFJ, Japan's biggest publicly traded bank by assets, surged 39 yen, or 3.8 percent, to 1,080, its sharpest gain since Dec. 6. Mizuho, No. 2 in Japan, rose 20,000 yen, or 3.7 percent, to 557,000.

Sumitomo Mitsui Financial Group Inc., the third-largest, climbed 30,000 yen, or 3.6 percent, to 869,000. A gauge of banks contributed the most to the Topix index's advance today out of the 33 industry groups.

Investor Confidence

Financial companies also advanced after Merrill Lynch & Co. said yesterday it will get as much as $6.2 billion in new capital, boosting investor confidence in the outlook for banks.

Mitsui & Co. climbed 110 yen, or 4.8 percent, to 2,415, its steepest rally since Nov. 30. Inpex Holdings Inc., Japan's biggest oil explorer, gained 40,000 yen, or 3.4 percent, to 1.21 million yen. Mitsubishi Corp., which generates the second- biggest proportion of its sales from selling crude oil and industrial fuel, rose 110 yen, or 3.6 percent, to 3,190.

Crude oil for February delivery rose 3.4 percent in the last two days to $94.13 a barrel in New York, the highest close since Dec. 12. A measure of six metals traded on the London Metal Exchange, including copper and zinc, added 2.8 percent.

Shipping companies climbed as demand for commodities boosted the outlook for sea transporters. Mitsui O.S.K. Lines Ltd., Japan's second-largest shipping-line, soared 79 yen, or 5.6 percent, to 1,479. Kawasaki Kisen Kaisha Ltd., the third- biggest, advanced 67 yen, or 6.2 percent, to 1,150.

Mitsubishi Chemical Corp. dropped 29 yen, or 3.2 percent, to 871 after the Nikkei said a fire at the company's plant in Ibaraki prefecture may hinder its strategy of diversifying into raw materials for ethylene and other products.

Nikkei futures expiring in March gained 1 percent to 15,600 in Osaka, Japan, and 1.9 percent to 15,590 in Singapore.

Sunday, December 23, 2007

Holiday Internet Sales in U.S. Rise at Slowest Pace on Record

By Mark Clothier

Dec. 24 (Bloomberg) -- U.S. Internet sales rose at the slowest pace on record as discounts cut revenue in the final days of the holiday shopping season.

Online spending from Nov. 1 through Dec. 21 increased 19 percent from the same period a year earlier to $26.3 billion, Reston, Virginia-based ComScore Inc. said yesterday in a statement. Sales trailed last year's 26 percent growth and the research firm's forecast for a 20 percent gain during this year's holidays.

Consumers have limited spending growth this year as gasoline and food prices rise and mortgage defaults increase. The Reuters/University of Michigan final index of consumer sentiment for December dropped to 75.5, the lowest since October 2005.

``This year will be the year of the discount,'' Fred Crawford, managing director at AlixPartners LLP, told Bloomberg Television on Dec. 21. AlixPartners is a consulting firm based in Southfield, Michigan.

ComScore hasn't recorded growth of less than 20 percent since it began reporting online sales figures in 2002.

Wal-Mart Stores Inc., Best Buy Co. and Circuit City Inc. offered discounts of 50 percent or more and promoted savings for in-store pickup of products purchased online to attract shoppers during what may be the worst holiday shopping season in five years. The peak period for Internet purchases has passed, ComScore Chairman Gian Fulgoni said in the statement.

``However, with some online retailers offering deliveries before Christmas for orders placed by Dec. 22, and in-store pickup available for orders placed on Christmas Eve, we expect to see above-average growth rates,'' Fulgoni said.

Last-Minute Gains

Sales rose 25 percent in the five days through Dec. 21 from the same period a year earlier, ComScore said.

``Online has done well considering the tough economic spending situation,'' said Larry Freed, chief executive officer of online research firm ForeSee Results Inc. in Ann Arbor, Michigan.

Shoppers are grappling with $3-a-gallon gasoline and consumer prices that rose the most in more than two years in November. The National Retail Federation in Washington said sales may increase 4 percent this November and December, the smallest gain in five years.

Increased sales both this weekend and during the days after Thanksgiving won't be enough to make up for slower growth during the weeks in between, Crawford said.

Cutting Back

Laverne Chamberlain, 60, said she cut back on spending this year by about 60 percent. The Atlanta resident said she's reluctant to buy toys for her kids because of safety concerns. She's considering a digital camera for her husband, if the price falls enough on Monday.

``It's not like I have to have it, so we'll see if it's good on Monday,'' she said. ``If it's good on Monday, then he'll get a camera.''

U.S. retailers' shares have dropped during the holiday season, with the Standard & Poor's 500 Retailing Index falling 10 percent since the start of November, compared with a 4.2 percent decline by the S&P 500. Inc., the world's largest online retailer, climbed 68 cents to $91.26 on Dec. 21 in Nasdaq Stock Market composite trading. EBay Inc., the largest global auctioneer, jumped 93 cents, or 2.8 percent, to $34.30. Wal-Mart rose 36 cents to $48.21 in New York Stock Exchange composite trading, leaving it with a 4.4 percent gain this year.

Surveys show that consumers are completing their holiday gift buying later this year than in the past three seasons at least, said Michael Niemira, chief economist of the International Council of Shopping Centers in New York. Eighteen percent of consumers surveyed said they had completed their holiday shopping as of Dec. 16.

Spending through Web sites, which makes up more than 3 percent of all retail sales, may climb to $29.5 billion in November and December, ComScore estimated. That's a slower pace than the 26 percent growth in online sales during the holidays in 2006.

Asian Stocks Rise for Second Day; Hon Hai, BHP Lead Advance

By Hanny Wan and Kyung Bok Cho

Dec. 24 (Bloomberg) -- Asian stocks rose for a second day, led by electronics makers, after consumer spending increased more than forecast in the U.S., the region's biggest export market.

Hon Hai Precision Industry Co., which makes iPods for Apple Inc., and Samsung Electronics Co. climbed to the highest in more than a week. The U.S. Standard & Poor's index advanced the most in three weeks on Dec. 21 after the report on November spending eased concern about recession in the world's biggest economy.

``U.S. shares showed firm gains, and we're seeing the influence in shares today,'' said Kim Jae Dong, who oversees the equivalent of $8.6 billion at Korea Investment Trust Management Co. in Seoul.

BHP Billiton Ltd. led an increase among miners after metals prices climbed and a U.K. regulator set a deadline for a formal takeover bid for Rio Tinto Group.

The MSCI Asia Pacific excluding Japan Index rose 1.9 percent to 523.79 at 2:35 p.m. in Hong Kong, with all 10 industry groups climbing. The measure has added 32 percent this year and is on course for its fifth annual increase.

Benchmarks in all Asian markets open for trading rose. Markets in Japan, Indonesia, the Philippines and Thailand were shut today, and closed early in Australia, Hong Kong and Singapore. China, Japan, Thailand and Taiwan will be the main Asian markets open tomorrow, with the rest closed for Christmas.

Hon Hai climbed 4.4 percent to NT$200, the biggest single contributor to gains in Taiwan's benchmark index. Samsung Electronics, South Korea's biggest exporter, advanced 3.2 percent to 578,000 won, leading the increase in South Korea's Kospi.

Consumer Spending

U.S. consumer spending rose 1.1 percent in November, the Commerce Department said Dec. 21. That was higher than the median estimate of 0.7 percent in a Bloomberg News survey of economists and was the biggest increase since July 2005.

``Signs of a sustainable U.S. economy will mitigate investor worries about demand for Asian exporters,'' said Ernest Chiang, who helps manage $1.7 billion at IBT Securities Co. in Taipei.

Mediatek Inc., Taiwan's biggest maker of mobile-phone chips, climbed 5.9 percent to NT$428 after the Taipei-based Commercial Times newspaper said the company may ship 65 million handset chips in the first quarter, an 8 percent increase from the three months through December.

BHP, the world's No. 1 miner, advanced 2.2 percent to A$40.52 and Rio, the third-biggest, added 3 percent to A$132.44. Both climbed to the highest in a week.

Metals Prices, Bid

A measure of six metals traded on the London Metal Exchange, including copper and nickel, gained 2.8 percent on Dec. 21, the most since Sept. 19. Copper climbed 4.1 percent, nickel rose 2.3 percent, and zinc jumped 4.1 percent, the most since Nov. 28.

BHP must bid for Rio by 5 p.m. on Feb. 6 or walk away until six months from when it announces its decision, the U.K. Takeover Panel said on Dec. 21. Rio asked the panel on Dec. 10 to force BHP to formalize its bid, currently worth $123 billion.

``By setting a date, the U.K. regulator is encouraging something to be achieved, which provides a nice platform for shareholders,'' said Jamie Spiteri, head dealer at Shaw Stockbroking Ltd. in Sydney.

Zijin Mining Group Co. surged 16 percent to HK$11.90 in Hong Kong, its biggest jump since December 2003. The owner of China's largest gold mine predicted on Dec. 21 that its 2007 profit will increase to 2.5 billion yuan ($340 million). Zijin also said it submitted a plan to sell as many as 1.5 billion yuan-denominated A shares on the Shanghai stock exchange.

Centro, Singapore Property

Centro Retail Group, a trust owned and managed by Centro Properties Group, climbed 7 percent to A$1.07 in Sydney, the biggest gain in the MSCI World Index. Centro Properties said today it hired three advisers to help refinance debt and negotiate funding options.

CapitaLand Ltd. led gains among Singapore's property stocks after Global Property Guide said the city-state's residential real-estate market expanded the fastest globally this year, outpacing gains in China and Bulgaria.

CapitaLand, the city-state's biggest developer, rose 2.6 percent to S$6.31, its biggest advance since Nov. 29. City Developments Ltd., CapitaLand's closest local rival, added 2.6 percent to S$14.16.

The house price increases have been ``mainly due to strong economic growth,'' Global Property Guide said in its report.

China Unicom Ltd., the smaller of the nation's two mobile- phone operators, climbed 3.6 percent to HK$17.36, its highest close since Nov. 30. The National Development and Reform Commission said allowing China's fixed-line carriers to acquire Unicom's mobile networks is the most efficient plan for the industry, the Shanghai Securities News said, citing a research report by the agency.

Standard Chartered Plc, which gets most of its profit from Asia, added 1.8 percent to HK$291 after saying on Dec. 21 that Singapore-based Temasek Holdings Pte, its biggest shareholder, increased its stake by 1 percentage point to 18 percent.

Yen Trades Near Six-Week Low as Investors Seek Higher Yields

By Kosuke Goto and David McIntyre

Dec. 24 (Bloomberg) -- The yen traded near a six-week low against the dollar as Asian stocks gained, boosting demand for higher-yielding assets funded by loans from Japan.

Japan's currency has fallen against nine of the 16 major currencies this year as speculation the Bank of Japan will refrain from raising interest rates spurred so-called carry trades. A U.S. report this week will probably show durable-goods orders rebounded, suggesting the world's largest economy is weathering the worst housing slump in 16 years. Financial markets are shut in Japan today for a holiday.

``We're likely to see yen weakness in the short term,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney, Australia's third-biggest lender. ``Money is going to head out of Japan at the year-end for yield.''

The yen was at 114.06 per dollar as of 3 p.m. in Tokyo from 114.04 in New York on Dec. 21 when it touched 114.21, the weakest since Nov. 7. Japan's currency traded at 164.05 per euro, after falling to 164.19, the lowest since Dec. 14, compared with 163.98 at the end of last week. The dollar was at $1.4387 per euro from $1.4382.

The yuan climbed as high as 7.3405 per dollar today, the strongest since a dollar link was scrapped two years ago, from 7.3696 at the end of last week.

The yen may decline to 115 per dollar and 164.60 per euro this week, Morriss forecast.

Currency trading will be about 25 percent of usual levels because of the public holiday in Japan and many investors will be taking vacation before the Christmas break tomorrow, said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney, Australia's fourth-biggest lender. The MSCI Asia Pacific Excluding Japan Index rose 1 percent after U.S. stocks climbed at the end of last week.

Carry Trades

In carry trades, investors borrow funds in countries with lower lending rates, such as Japan's 0.5 percent benchmark, and use the cash to buy fixed-income assets in nations that offer higher returns. The U.S. benchmark rate is 4.25 percent, Europe's is 4 percent, Australia's 6.75 percent and New Zealand's 8.25 percent.

Carry trades are considered risky because currency fluctuations can erase the profits earned. Japan's currency weakened to 99.11 against the Australian dollar from 98.90 in New York late last week. It was at 86.98 per New Zealand dollar from 87.06. The yen fell to 16.2863 against South Africa's rand from 16.2255 in New York on Dec. 21.

One-month implied volatility for the yen fell to 9.7 percent, from 10.45 percent a week ago. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options. Lower volatility may encourage carry trades.

Durable Goods

The U.S. currency has gained against 13 of the 16 major currencies this month. Demand for cars, aircraft and other items made to last several years may have gained 2 percent in November in the U.S., according to the median estimate of economists surveyed by Bloomberg News, indicating the economy may be more resilient than traders had speculated. The Commerce Department will release the report on Dec. 27 in Washington.

The yen is heading for its eighth annual decline against the euro, having dropped 4.2 percent. Against the dollar, it is up 4.4 percent so far this year, its best performance since 2003.

The dollar has weakened against 13 of the 16 most-active currencies this year as widening credit-market losses and the worst housing slump in 16 years caused the Fed to cut interest rates three times to prop up economic growth.

The U.S. currency fell 8 percent against the euro in 2007, less than last year's 10.2 percent loss and weakened 1.3 percent against the pound compared with a 12 percent slide last year.

Rate Futures

Interest-rate futures on the Chicago Board of Trade indicate 80 percent odds the Federal Reserve will reduce the benchmark rate a quarter-percentage point to 4 percent at its Jan. 30 meeting compared with a 94 percent chance a month ago.

Losses in the euro may be limited by speculation the European Central Bank will refrain from lowering borrowing costs. The Financial Times reported the central bank will continue to focus on keeping inflation in check and will not be diverted by the interest-rate cuts by counterparts in the U.S. and U.K. The newspaper cited an interview with the bank's president, Jean- Claude Trichet, on Dec. 13.

``Europe's inflation risks have not reduced at all,'' said Takashi Yamamoto, chief trader at Mitsubishi UFJ Trust & Banking Corp. in Singapore, a unit of Japan's biggest publicly traded lender by assets. ``The ECB won't easily cut its rate. This will support the euro.''

The 13-nation currency may rise to $1.50 against the dollar by the end of March, Yamamoto said.

China's Yuan Rises to Strongest Since Dollar Peg Ended in 2005

By Belinda Cao

Dec. 24 (Bloomberg) -- The yuan climbed to the highest since a dollar link was scrapped two years ago after the central bank said exchange-rate flexibility will increase, raising speculation it plans to widen the daily trading band.

Policy makers allowed the currency to rise 6 percent in 2007, almost twice as much as last year, to cool an export-led expansion that has flooded banks with cash and driven inflation to an 11-year high. U.S. Treasury Secretary Henry Paulson this month said it is in China's interest to allow faster gains. The yuan is now limited to a 0.5 percent move either side of a daily reference rate set by the central bank.

``The yuan's trading band versus the dollar may be expanded in the near future,'' said Li Huiyong, an economist at Shenyin Wanguo Research and Consulting Co. in Shanghai. ``This factor supported the acceleration of the yuan's gain.''

The yuan rose 0.11 percent to 7.3621 per dollar at 2:19 a.m. in Shanghai, bringing gains this month to 0.5 percent. The central bank set the reference rate at 7.3315 today, according to the China Foreign Exchange Trade System.

The People's Bank of China said in a statement on Dec. 21 that it will let the market play a bigger role in setting the exchange rate.

The central bank put a proposal to the State Council, China's cabinet, to use currency gains to curb money supply, the official Securities Times reported today, citing an unidentified person from ``the authorities.'' The paper said the proposal, which included opinions of local and foreign economists, suggests approaches including a faster yuan gain over time and a ``one-off'' appreciation.

Trading Band Discussion

China's leaders discussed the widening of the trading band to 0.8 percent each side of the so-called parity rate or conducting a revaluation, the Hong Kong-based Ta Kung Pao newspaper reported on Nov. 27, citing an unidentified person. The yuan has never touched the 0.5 percent daily trading limit.

Vietnam's central bank widened its trading band today for the dong to 0.75 percent on either side of a fixed daily rate from 0.5 percent, according to Dao Xuan Tuan, head of foreign exchange at the central bank's currency department.

Paulson on Dec. 19 urged the nation to allow faster gains whilst refraining from naming China a currency manipulator. Senator Charles Grassley, a Republican from Iowa, and other lawmakers are threatening punitive legislation unless China's government loosens controls on the yuan.

New Debt Supply

China's trade surplus, which surged 52 percent in the 11 months through November to $238.1 billion, has driven the country's foreign-exchange reserves to an all-time high of $1.46 trillion, making it difficult for the government to slow growth.

The economy expanded 11.5 percent in the third quarter, while inflation reached 6.9 percent in November. The central bank has raised interest rates six times this year in a bid to curb prices and prevent the economy from overheating. It last raised the benchmark deposit and lending rates on Dec. 20.

In the nation's bond market, China Development Bank, the biggest bond seller after the finance ministry, raised the coupon on a 20 billion yuan ($2.7 billion) sale of seven-year debt today. The coupon was raised to 5.14 percent, 0.2 percentage point higher than the previously announced rate, according to a Dec. 21 statement on the Chinabond Web site.

The adjustment was based on ``requests from brokers after the central bank increased rates,'' the bank said.

The higher coupon and falling money market rates will mean there should be no problem in selling the debt, said Xie Xin, a bond trader with Industrial Bank Co. Ltd. in Shanghai. ``No other big long-term debt offering is expected by the year-end.''

China's benchmark interbank seven-day repo fixing dropped 5 basis points to 2.08 percent, the lowest since Nov. 16. The Shanghai interbank offered rate, or Shibor, for one-month funding declined 27 basis points to 3.23 percent, the lowest since Oct. 8. A basis point is 0.01 percentage point.

Debt sales were limited this year because of rising tax revenues. China collected 4.8 trillion yuan of revenue in the first 11 months of this year, 34 percent more than the same period in 2006, and government spending rose 25 percent to 3.7 trillion yuan, finance minister Xie Xuren said on Dec. 19.

Thursday, December 20, 2007

European Stocks Rise; Johnson Matthey, Daimler, Cap Gemini Gain

By Andreas Hippin

Dec. 20 (Bloomberg) -- European stocks gained for the first time in four days, as investors speculated that concern world economies will stagnate was exaggerated. U.S. index futures rose.

``Fears of a global slowdown and more credit-market turmoil were going over the top,'' said Herbert Perus, who helps oversee the equivalent of $57 billion as head of global equities at Raiffeisen Capital Management in Vienna. ``Companies sensitive to economic growth were sold without looking at their value.''

Johnson Matthey Plc, the maker of a third of all autocatalysts, led the Dow Jones Europe Stoxx Chemicals Index higher on takeover speculation. Daimler AG advanced after heavy- truck sales in the region rebounded last month. Cap Gemini SA, Europe's biggest computer-services company, rose after earnings at U.S. rival Accenture Ltd. beat analysts' estimates.

The Stoxx 600 Index added 0.4 percent to 360.15 at 12:06 p.m. in London. The measure has lost 1.4 percent this year and is down 10 percent from a 6 1/2-year high reached Jun. 1 on concern losses tied to U.S. subprime mortgages will slow economic growth and hurt corporate earnings.

Futures on the Standard & Poor's 500 Index expiring in March climbed 0.2 percent to 1,467.80. European government bonds declined, snapping three days of gains. The cost of borrowing in euros fell for a third day as central banks keep injecting cash into global money markets to ease a year-end lending squeeze.

The U.K. economy expanded 3.3 percent in the third quarter, the Office for National Statistics said in London today. That was faster than economists estimated. German consumer confidence unexpectedly recovered from the lowest in almost two years as shoppers grew more willing to spend over the holiday season.

National Benchmarks

National benchmarks gained in 14 of the 18 western European markets. France's CAC 40 climbed 0.6 percent, as did the FTSE 100. Germany's DAX added 0.4 percent. The Stoxx 50 rose 0.5 percent, as did the Euro Stoxx 50, a measure for the euro region.

Johnson Matthey soared as much as 19 percent to 2,067 pence. The stock last traded up 8 percent at 1,882 pence, the steepest gain in the Stoxx 600.

``Shares in Johnson Matthey have spiked this morning on market speculation of an impending bid from Dow Chemical'' Co. said Lee Humphreys, a sales trader at Instinet.

Ian Godwin, director of corporate communications at Johnson Matthey, declined to comment on market speculation. Sue Breach, a spokeswoman for Dow in London, declined to comment.

Umicore SA, one of the world's three biggest makers of automotive catalysts, jumped 7 percent to 161.8 euros.

Daimler, Continental

Daimler, the world's largest truckmaker, advanced 0.8 percent to 64.63 euros. European heavy-truck sales surged 16 percent last month as demand recovered from a slump following the introduction of stricter emission standards a year ago.

Registrations of trucks heavier than 16 tons rose to 28,204 vehicles in November from 24,237 a year earlier, the Brussels- based European Automobile Manufacturers Association said.

Continental AG rallied 2.8 percent to 86.54 euros. The region's second-biggest tiremaker plans to sell a large part of Siemens AG's VDO auto-parts division only two weeks after it acquired the unit, Sueddeutsche Zeitung reported, without saying where it obtained the information.

Cap Gemini gained 2.5 percent to 40.18 euros. Accenture posted fiscal first-quarter profit that topped analysts' estimates after the close of U.S. exchanges yesterday.

`Strong Spending'

``Accenture beat consensus expectations, indicated continued strong spending in software and IT services and gave strong guidance for 2008,'' said Jesper Kruger, who helps manage about $64 billion at ATP in Copenhagen.

ArcelorMittal, the largest steelmaker, climbed 2 percent to 49.79 euros. Chief Executive Officer Lakshmi Mittal told Frankfurter Allgemeine Zeitung that problems in financial markets won't hurt worldwide demand.

Accor SA added 1.2 percent to 53.45 euros. Europe's biggest lodging company agreed to sell 57 hotels in France and Switzerland for 518 million euros ($744 million) to focus on running properties rather than owning them.

Debenhams Plc, Britain's second-largest department-store company, rose 2.2 percent to 82.25 pence. The Times said Micky Jagtiani, chairman and chief executive officer of Dubai retailer Landmark Group, may consider a joint bid for the company. An out-of-hours call to Landmark's Dubai office was not answered.

Total SA and OMV AG led oil companies higher. Crude climbed for a second day after a government report showed U.S. inventories declined more than expected last week.

Total, the region's largest refiner, added 1.6 percent to 55.41 euros. OMV, the biggest oil company in central Europe, gained 3 percent to 53.46 euros.

Tullow Oil Plc, the U.K. explorer that's seeking to boost reserves with discoveries in Africa, slid 3.7 percent to 626 pence after results from a well in Uganda indicated fewer reserves than expected.