Friday, February 29, 2008

U.S. Stocks Decline on Economic Concern; AIG, Sprint Retreat

By Elizabeth Stanton

Feb. 29 (Bloomberg) -- U.S. stocks tumbled, capping the market's fourth-straight monthly drop, after a report showed business activity fell to the lowest level since 2001 and UBS AG said losses in credit markets may top $600 billion.

American International Group Inc., the world's largest insurer, declined the most in two weeks after posting the widest quarterly deficit in its 89-year history. Sprint Nextel Corp. slumped to an almost six-year low on concern more customers will defect from the third-biggest U.S. wireless carrier. All 10 industries in the Standard & Poor's 500 Index retreated, led by banks and phone companies.

The S&P 500 fell 37.05 points, or 2.7 percent, to 1,330.63, its biggest drop since Feb. 5. The Dow Jones Industrial Average slid 315.79, or 2.5 percent, to 12,266.39. The Nasdaq Composite Index lost 60.09, or 2.6 percent, to 2,271.48. Eleven stocks fell for every one that rose on the New York Stock Exchange.

``There is certainly no shortage of negative news out there,'' Michael Magiera, senior analyst at Manning & Napier Advisors, which manages $17 billion in Fairport, New York, said in an interview on Bloomberg Television.

The S&P 500 extended its February decline to 3.5 percent after the National Association of Purchasing Management-Chicago said its business barometer contracted as production and employment weakened, boosting concern the worst earnings slump in six years will continue. The four-month losing streaks for the S&P 500 and Dow are the longest since 2002.

Global Slump

Shares in Europe and Asia retreated on concern that the U.S. economy is tipping into recession. Europe's Dow Jones Stoxx 600 Index retreated 1.4 percent, while the MSCI Asia Pacific Index lost 1.2 percent. The MSCI EM Latin America Index dropped 4.5 percent, the most in almost six weeks.

Profits at S&P 500 companies fell 23 percent on average in the fourth quarter of 2007, and analysts surveyed by Bloomberg expect a 3 percent drop in the first quarter followed by profit growth of 13.7 percent for the year. Two months ago, the forecasts were for increases of 4.7 percent in the first quarter and 15.1 percent for the year.

AIG tumbled $3.29, or 6.6 percent, to $46.86 after posting a fourth-quarter net loss of $5.29 billion, or $2.08 a share, following an $11.1 billion writedown on investments linked in part to subprime mortgages. AIG said it expects more writedowns this year.

``Fridays are tough days'' because investors don't want to be long stocks in case more bad news is reported over the weekend, said David Goerz, chief investment officer of Highmark Capital Management, which oversees $22 billion in San Francisco. ``The news with AIG just put everybody in a foul mood.''

Citigroup Inc., the largest U.S. bank, slid $1.30 to $23.71. Goldman Sachs Group Inc., the biggest securities firm, fell $7.07 to $169.63.

`Cancer in the Market'

Credit-market losses will climb to at least $600 billion from about $160 billion written down so far as investments funded with borrowed money are unwound, UBS credit strategist Geraud Charpin wrote in a note to clients.

``Leveraged risk positions are a cancer in this market and the sooner it is treated the better,'' Charpin wrote. AIG's writedown ``is also the clearest indication that banks are not the only ones to suffer potential losses.''

Lehman Brothers Holdings Inc. and Bear Stearns Cos. fell after Deutsche Bank AG analyst Michael Mayo forecast further writedowns of subprime assets and lowered first-quarter profit estimates for the firms. At least five other analysts have cut their first-quarter analysts for banks and brokers in the last two weeks. Lehman fell $3.69 to $50.99. Bear Stearns lost $4.36 to $79.86.

September 2002

Financial shares in the S&P 500 fell 4 percent today and tumbled 11 percent in February, the steepest monthly loss since September 2002.

Ambac Financial Group Inc. fell 66 cents to $11.14 after CNBC reported that a deal to boost capital at the second-largest bond insurer hit a snag Feb. 27. The group of banks engaged in the bailout will come back with another proposal to keep Ambac together, the financial news network reported. CNBC cited people familiar with the situation.

MBIA Inc., Ambac's larger rival, decreased $1.09 to $12.97. The company is writing ``very little'' new bond insurance business as borrowers balk at buying a guarantee from a money- losing company without stable AAA credit ratings. MBIA said losses on mortgage-backed securities will probably increase this year and expand beyond subprime mortgages.

Subscriber Losses

Sprint slid 98 cents to $7.11. The company said it will likely lose 1.2 million subscribers in the first quarter. That was triple the number Stanford Group Co. analyst Michael Nelson in New York had forecast and represents 2.2 percent of Sprint's wireless customers.

Exxon Mobil Corp. and Chevron Corp. fell as crude oil retreated from a record and natural gas declined from a two-year high in New York. Exxon lost $2.37 to $87.01. Chevron tumbled $2.36 to $86.66.

Novell Inc. posted the biggest gain in the S&P 500, adding 91 cents, or 14 percent, to $7.45. The second-biggest seller of Linux operating-system software in the U.S. reported a fiscal first-quarter profit that beat analysts' estimates after cutting costs by eliminating jobs and changing sales tactics. The company raised its full-year sales forecast.

Gap Inc. rose 72 cents to $20.17. The largest U.S. clothing retailer said fourth-quarter profit advanced for the first time in three years and forecast further gains this year after it sold more full-priced sweaters and jeans during the holiday season.

3Com Buyout

3Com Corp. jumped 38 cents, or 13 percent, to $3.29. Bain Capital LLC and Huawei Technologies Co. plan to reapply within several weeks for U.S. approval to acquire the networking systems and services provider for $2.2 billion, the Wall Street Journal reported, citing people familiar with the matter.

Today was the most active trading day on the NYSE since Feb. 1, with 1.76 billion shares changing hands. Over the past three months, average daily volume has been 1.59 billion shares.

The National Association of Purchasing Management-Chicago said its business barometer dropped to 44.5 in February from 51.5 a month earlier. Figures less than 50 signal a contraction.

Consumer spending in the U.S. rose more than forecast in January, reflecting a jump in prices that is eroding buying power. The 0.4 percent rise in spending followed a revised 0.3 percent gain in December, the Commerce Department said. The Federal Reserve's preferred measure of inflation climbed 0.3 percent, the most in four months.

Treasury Yields Fall

Yields on Treasury securities slid, sending the two-year note under 1.7 percent for the first time since April 2004, as investors increased bets on interest-rate cuts by the Federal Reserve.

Interest-rate futures indicate traders for the first time assign a higher probability to a three-quarter-point cut than to a half-point cut at the Fed's next meeting on March 18. The odds of a three-quarter point cut implied by futures prices rose to 70 percent from 36 percent yesterday and 2 percent a week ago. The remaining bets are on a half-point cut.

The central bank has lowered its target for the overnight lending rate between banks five times since September, most recently to 3 percent on Jan. 30.

``The market has been of the belief that the Fed's aggressive easing action would relieve the pressures,'' said Henry Herrmann, president of Waddell & Reed Financial Inc., which manages $65 billion in Overland Park, Kansas. ``The complications are not diminishing, they're growing.''

Economic Slowdown

Stocks slid yesterday after slower-than-forecast economic growth, rising jobless claims and Federal Reserve Chairman Ben S. Bernanke's warning of possible failures among smaller banks deepened concern that the economy has tipped into a recession.

U.S. equities, as measured by the S&P 500, fared the worst among the world's 10 largest markets in February on concern that a recession is inevitable. Japan posted the second-biggest decline, with a drop of 1.6 percent in the Topix index.

Six of the 10 biggest markets have fallen more this year than the S&P 500, which is down 9.4 percent in 2008. Canada's Standard & Poor's/TSX Composite Index has lost 1.8 percent and Brazil's Bovespa fell 0.6 percent.

The S&P 500 trades at less than 14 times expected earnings, the lowest valuation since October 1990, reflecting investors' lack of confidence in profit estimates.

Financial companies and telephone stocks posted the biggest drops among 10 S&P 500 industries in February, declining 11 percent and 9.6 percent, respectively.

The Russell 2000 Index, a benchmark for companies with a median market value 22 times smaller than the S&P 500, dropped 2.8 percent today to 686.18. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 2.6 percent to 13,455.96. Based on its decline, the value of stocks decreased by $450.9 billion.

U.S. Economy: Spending Eroded by Inflation, Chicago Index Drops

By Shobhana Chandra

Feb. 29 (Bloomberg) -- Inflation eroded gains in U.S. consumer spending and a gauge of business sentiment fell to the lowest level in more than six years, pushing the economy toward a recession.

While purchases rose 0.4 percent in January, the Federal Reserve's preferred measure of inflation climbed 0.3 percent, the most in four months, the Commerce Department said today in Washington. The National Association of Purchasing Management- Chicago said its index of business activity tumbled to 44.5 in February. Readings below 50 signal a contraction.

The reports pushed Treasury notes higher and stocks down. Confidence among consumers is waning as fuel costs jump and house values slide, leaving exports to drive factory production.

``There is no growth in consumption except to keep up with price increases,'' said Chris Low, chief economist at FTN Financial in New York. ``Consumers are clearly hard-pressed to maintain their standard of living and are cutting back.''

Traders increasingly anticipate the Fed will reduce its benchmark interest rate by 0.75 percentage point at or before the March 18 meeting of policy makers, according to futures prices. The chance of a three-quarter-point cut rose to 56 percent from 36 percent yesterday and 2 percent a week ago.

Treasury notes extended their advance, pushing the yield on the benchmark 10-year note down 9 basis points to 3.57 percent at 11:11 a.m. in New York. A basis point is 0.01 percentage point. The Dow Jones Industrial Average weakened 1.7 percent to 12,369. The dollar remained lower against the yen.

`Big Issue'

``The big issue is the fact that inflation is accelerating and it's taxing consumer spending,'' said Drew Matus, a senior economist at Lehman Brothers Holdings Inc. in New York. ``The first half is not going to look all that good.''

The Reuters/University of Michigan final index of consumer confidence decreased to 70.8, from 78.4 in January. The measure is the lowest final reading since February 1992 and compares with a preliminary level of 69.6 reported two weeks ago.

Incomes rose 0.3 percent after a 0.5 percent gain the prior month, today's spending report showed. The median forecast was a gain of 0.2 percent.

The report's measure of overall prices rose 0.4 percent and was up a more-than-expected 3.7 percent in the year ended January, the most since September 2005.

The inflation gauge tracked by the Fed, which excludes food and fuel costs, rose 2.2 percent from January 2007.

`Nearly Flat'

``In real terms, we are still aiming for nearly flat real consumption for the quarter,'' Mickey Levy, chief economist at Bank of America Corp. in New York, said in a Bloomberg Television interview.

Economists forecast spending would rise 0.2 percent, after an originally reported 0.2 percent increase in December, according to the median of estimates in a Bloomberg News survey.

The savings rate dropped 0.1 percent for a second month. A negative rate suggests consumers are drawing down savings to maintain spending.

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, dropped 1.3 percent. Purchases of non-durable goods decreased 0.2 percent and spending on services, which account for almost 60 percent of all outlays, increased 0.4 percent.

The economy lost jobs in January for the first time in more than four years, and economists surveyed by Bloomberg this month forecast the unemployment rate will rise through midyear.

Warning From Toll

Toll Brothers Inc., the largest U.S. luxury homebuilder, this week reported its biggest quarterly loss in 22 years as the worst housing recession in more than two decades forced the company to write down the value of developments.

``Ceaseless talk of a recession continues to dampen the mood of consumers,'' Chief Executive Officer Robert Toll said on a Feb. 27 conference call. ``This drumbeat, coupled with concerns over mortgages, the direction of home prices, and foreclosures, has kept pent-up demand on the sidelines.''

For now, policy makers have signaled they are more concerned about the economic growth outlook than the acceleration in inflation.

``Downside risks to growth remain,'' Bernanke said in semiannual testimony to Congress this week. The Fed ``will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.''

The Congress and the administration have also passed a $168 billion stimulus package to try to revive growth. Still, a Bloomberg/Los Angeles Times survey from Feb. 21 to Feb. 25 showed most Americans plan to save rather than spend the plan's tax rebates, indicating it may give less of a boost than intended.

Thursday, February 28, 2008

Dollar Trades Near Record Low Versus Euro Before Spending Data

By Kosuke Goto

Feb. 29 (Bloomberg) -- The dollar traded near a record low against the euro before a U.S. report forecast to show consumer spending stayed at the weakest in six months in January.

The U.S. currency headed for the biggest monthly loss against the euro since September as a cooling economy fueled bets the Federal Reserve will cut interest rates at least twice more this year. The dollar also approached a 2 1/2-year low versus the yen after Fed Chairman Ben S. Bernanke said the dollar's depreciation is ``a positive factor'' for reducing the U.S. trade deficit.

``This is the Bernanke shock, causing much faster dollar depreciation than expected,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded lender by assets. ``We are entering into another world of dollar weakness. The Fed is not unhappy about that.''

The U.S. currency traded at $1.5188 per euro as of 8:26 a.m. in Tokyo, from $1.5193 in New York late yesterday when it touched $1.5229, the weakest since the euro began trading at about $1.17 in January 1999. The U.S. currency was at 105.33 yen and approached the 2 1/2-year low of 104.97 yen touched on Jan. 23. It was at 105.37 yen late yesterday in New York.

The dollar may fall to $1.5230 per euro and 105 yen today, Kato forecast.

`Some Improvement'

``Part of the effect of that depreciation has been that we are at least seeing some improvement in that trade deficit, which is a positive -- a positive factor,'' Bernanke said before a Senate panel yesterday.

The Australian dollar and the Brazilian real are the best performers among all 16 major currencies this month as a rebound in stocks prompted investors to resume so-called carry trades.

U.S. personal spending rose 0.2 percent last month, matching a gain in December that was the smallest since June, according to the median estimate of economists surveyed by Bloomberg News before the Commerce Department report today.

The dollar extended its slump yesterday as the government said initial jobless claims rose 19,000 to 373,000 in the week to Feb. 23. The U.S. grew at an annual rate of 0.6 percent last quarter, from 4.9 percent the prior three months, the government also said. The median forecast in a Bloomberg survey was for growth of 0.8 percent.

The U.S. currency has dropped 13 percent versus the euro in the past year as subprime-mortgage losses, the worst housing market in 25 years and soaring credit costs spurred the Fed to cut rates five times since September. The U.S. Dollar Index, which tracks the currency against six major counterparts, yesterday touched 73.63, the lowest since its start in 1973. The index is traded on ICE Futures in New York.

Yen Gains

The yen yesterday advanced 2.8 percent to 13.92 per rand and gained 1.2 percent versus the New Zealand dollar as investors reduced carry trades, where they get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between them.

Japan's benchmark rate of 0.5 percent, the industrialized world's lowest, compares with 11 percent in South Africa, 8.25 percent in New Zealand and 7 percent in Australia.

President George W. Bush said yesterday his administration supports a ``strong dollar,'' and the currency's value will be reflected by markets as the economy grows. He spoke at a news conference at the White House.

Euro's Gain

The euro is 30 percent above its debut level, and up 84 percent from a record low of 82.30 U.S. cents in October 2000.

After trading in a range since November of about $1.43 to $1.49 per euro, the dollar's decline gained momentum this week after Fed Vice Chairman Donald Kohn said on Feb. 26 that turmoil in credit markets and the possibility of a slower economy pose a ``greater threat'' than inflation. The comments drove the euro above $1.50 for the first time.

The dollar weakened past $1.51 per euro on Feb. 27 after Bernanke said the Fed ``will act in a timely manner'' to insure against ``downside risks'' to the economy. His remarks came in a testimony to the House Financial Services Committee.

``He said the Fed is in a more difficult situation than 2001,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``He sent a signal that the Fed may be pushing on a string, and they will have to cut rates more aggressively.''

Futures on the Chicago Board of Trade show a majority of traders expect the Fed to cut rates to at least 2 percent by mid-year, from 3 percent now. The bank has slashed its benchmark from 5.25 percent in September, and is scheduled to meet next on March 18.

European Central Bank President Jean-Claude Trichet yesterday said ``price stability is a necessary condition'' for ongoing economic expansion and employment. The ECB next meets on March 6 to decide on the main rate, which is at 4 percent.

Japan's Inflation Rate Matches Fastest in Nine Years (Update1)

By Mayumi Otsuma

Feb. 29 (Bloomberg) -- Japan's consumer prices rose for a fourth month in January, matching the fastest pace in more than nine years, as companies passed on higher costs of oil, wheat and soybeans.

Core consumer prices, which exclude fresh food, climbed 0.8 percent from a year earlier, the same rate as December, the statistics bureau said today in Tokyo. The median estimate of 46 economists surveyed by Bloomberg News was for a 0.9 percent gain.

The successor to Toshihiko Fukui, who steps down as Bank of Japan governor next month, will have to find a way to implement monetary policy as economic growth slows and inflation accelerates. Price pressure will mount even as the expansion cools, central bank policy maker Atsushi Mizuno said yesterday.

``The next central bank governor will have a tough task,'' said Eisuke Sakakibara, a former top currency official at the Finance Ministry and now a professor of Waseda University in Tokyo. ``It's getting more and more difficult to manage policy in Japan, which is experiencing rising prices and an economic slowdown -- the worst combination.''

Separate reports showed the unemployment rate stayed at 3.8 percent and the ratio of jobs to applicants remained at a two- year low. Household spending rose 3.6 percent from a year ago.

The yen traded at 104.91 per dollar at 8:47 a.m. in Tokyo, from 105.33 before the reports were released.

Fukui, who has been seeking rate increases since 2006, will probably finish his five-year term on March 19 by leaving the benchmark overnight lending rate at 0.5 percent, the lowest among major economies. Rising prices of daily necessities including gasoline and food dragged consumer sentiment to the lowest level in more than four years in January.

Production Cuts

Japan's prices are rising just as manufacturers cut production amid concern a deepening U.S. slump will weaken exports to emerging markets. Output slid 2 percent in January from a month earlier, twice the pace economists predicted.

Investors see a 30 percent chance of a rate cut by December, according to calculations by JPMorgan Chase & Co. based on overnight interest-rate swaps trading.

``Consumer prices will keep surging, driven by oil and food, and may hit 1 percent in a few months,'' said Masaaki Kanno, a former central bank official and now chief economist at JPMorgan Securities in Tokyo. ``Wages are stagnating, and there are plenty of negative factors for consumer spending.''

Tokyo's core prices, a harbinger of the nationwide index, rose 0.4 percent in February from a year earlier, the same pace as January. Gasoline has a lower weight in the index for Tokyo because residents of the capital don't drive as much.

Crude Oil

Excluding energy as well as food, Japan's consumer prices fell 0.1 percent in January. By that measure, prices have failed to rise for more than nine years.

Crude oil rose to a record $102.08 a barrel on Feb. 27. Japan's gasoline prices averaged 154 yen a liter ($5.50 a gallon) in January, close to December's record 156 yen, according to the Tokyo-based Oil Information Center.

Japan, Asia's biggest wheat importer, will increase prices of the grain sold to flour millers by 30 percent in April, the Ministry of Agriculture, Forestry and Fisheries said this month. Wheat prices rose to a record this week.

Nisshin Seifun Group Inc., the nation's biggest miller, and Yamazaki Baking Co., the largest bread maker, will raise prices of pasta, bread and pastry. Kikkoman Corp., Japan's No. 1 soy- sauce maker, is planning its first price increase in 18 years.

Under the new governor, the Bank of Japan will have to decide whether to focus on spurring growth or curbing inflation, said Hiromichi Shirakawa, a former central bank official.

``If the economy deteriorates further, price gains will eventually calm down, but if the economy maintains its strength, inflation may accelerate,'' said Shirakawa, who's now chief economist at Credit Suisse Group Inc. in Tokyo. ``The bank will need to decide which scenario to gear its policy toward.''

Japan Stock Futures Drop on Stronger Yen, Slowing U.S. Economy

By Masaki Kondo

Feb. 29 (Bloomberg) -- Japan's Nikkei 225 Stock Average futures dropped in Chicago after the yen strengthened against the dollar and the U.S. economy grew slower than expected last quarter.

U.S.-traded receipts of Canon Inc., the world's biggest digital-camera maker, retreated 2.5 percent from the closing share price in Tokyo yesterday. Matsushita Electric Industrial Co. declined 2.3 percent, while Honda Motor Co. slid 1.8 percent.

The yen strengthened against the dollar to as much as 105.08 from 106.35 at the close of stock trading in Tokyo yesterday. U.S. gross domestic product rose at a 0.6 percent annualized rate, lower than the 0.8 percent pace estimated by economists surveyed by Bloomberg News. Aeon Corp., Japan's biggest supermarket operator, said annual profit missed its target.

``We have lots of bad news inside and outside of the country,'' Soichiro Monji, chief strategist at Daiwa SB Investments Ltd., which manages about $57 billion in assets, said in an interview with Bloomberg Television. ``Day by day, the risk of an economic slowdown in the U.S. heightens, and the outlook for the Japanese economy is worrisome too.''

Nikkei 225 Stock Average futures expiring in March last traded at 13,685 in Chicago, down from the close of 13,920 in Osaka and 13,895 in Singapore yesterday. The Bank of New York Japan ADR Index, which tracks American depositary receipts of Japanese companies, slumped 1.2 percent.

The Nikkei dropped 0.8 percent to 13,925.51 yesterday, while the broader Topix index lost 0.8 percent to 1,353.10.

Below Estimate

Aeon yesterday said net income in the year to Feb. 20 fell 24 percent to about 44 billion yen ($418 million), below a forecast range of 60 billion yen to 63 billion yen. The company cited a writedown on a supermarket subsidiary, the performance of its credit-card business and lower-than-expected earnings at a U.S. unit.

Japan's unemployment rate stood at 3.8 percent for a third- straight month in January, the statistics bureau said today. Core consumer prices, which exclude fresh food, rose 0.8 percent last month from a year earlier, the agency said.

Today, Seven Bank Ltd., which solely operates through automated teller machines in convenience stores, will start trading on the Jasdaq Securities Exchange. The initial public offering price is set at 140,000 yen.

U.S. Economy: GDP Rose 0.6%, Less Than Anticipated (Update2)

By Courtney Schlisserman

Feb. 28 (Bloomberg) -- The U.S. economy expanded less than forecast in the fourth quarter as domestic spending declined and only an increase in exports prevented an overall contraction.

Gross domestic product rose at a 0.6 percent annualized rate, unchanged from the initial estimate last month, after a 4.9 percent gain in the third quarter, the Commerce Department said today in Washington.

``There's a better-than-even chance that we have actually entered a recession,'' Harvard University economist Martin Feldstein said in a Bloomberg Television interview. ``The numbers for December and January have basically been flat to down.''

The report, combined with figures today showing claims for unemployment insurance jumped last week, reinforced traders' expectations that the Federal Reserve will cut interest rates again and helped drive the dollar to a record low against the euro. Investors raised the odds of a three-quarter point cut in the benchmark rate by the end of the next meeting on March 18 to 34 percent from 10 percent yesterday.

Fed Chairman Ben S. Bernanke, testifying to the Senate Banking Committee today, signaled he's ready to lower interest rates again to sustain the expansion.

The median estimate in a Bloomberg News survey of 74 economists was for a 0.8 percent increase in GDP.

Jobless Claims

Harvard's Feldstein is also president of the National Bureau of Economic Research and a member of the group's business-cycle dating committee, which marks the beginning and end of expansions. He said in the interview it could be months before the NBER declares if a recession has officially started.

The Labor Department said initial claims for unemployment insurance climbed 19,000 last week to 373,000, higher than forecast. The level was the second-highest since a surge in claims in the aftermath of Hurricane Katrina in 2005.

``We have absolutely no momentum going into the first quarter,'' said Josh Shapiro, chief U.S. economist in New York at Maria Fiorini Ramirez Inc. ``Things are looking pretty grim for the economy. If we're not in a recession already, we're very close.''

The dollar, which had risen as much as 0.3 percent earlier today, erased its gains after the reports and reached a record low against the euro. It traded at $1.5212 at 4:02 p.m. in New York, after touching $1.5229 earlier. Stocks declined.

The trade deficit narrowed to an annualized $506.8 billion, adding 0.9 percentage point to GDP.

Excluding the improvement in trade, the economy would have shrunk at a 0.3 percent annual pace, the first decline since 2001, when the U.S. was last in a recession.

Rate Cuts, Stimulus

``Obviously there's been slowing and that's what we expected,'' said Ed Lazear, chairman of the White House Council of Economic Advisers, said in an interview with Bloomberg Television. ``We do think the Fed has moved quickly enough to help get the economy going,'' along with the $168 billion fiscal stimulus enacted this month, he said.

Consumer spending, which accounts for more than two-thirds of the economy, rose at a 1.9 percent annual rate in the fourth quarter, down from the 2 percent increase estimated last month, according to today's report.

Deteriorating sentiment is likely to keep restraining spending. Purchases may grow at a 1 percent pace this quarter, according the median estimate in a Bloomberg survey. The survey also projected 0.5 percent growth this quarter.

Slowdown, Not Recession

``I don't think we're headed to a recession, but there's no question there's a slowdown,'' President George W. Bush told a press conference in Washington today.

Consumer confidence fell this month to the lowest level since 2003 as the job market deteriorated, according to a report this week from the Conference Board, a New York-based research group. Americans' expectations for the next six months dropped to the lowest level since January 1991.

Adding to concerns about spending, revisions for the third and fourth quarters also showed smaller gains in incomes, according to today's report. Personal income increased at a 4.1 percent annual pace from October through December, compared with an initial projection of 4.5 percent.

Income growth may slow further in coming months as the labor market softens. The U.S. lost jobs for the first time in four years in January and weekly initial jobless for jobless benefits have risen.


Fourth-quarter estimates for commercial construction, business investment on new equipment, government spending and inventories were also revised down.

Residential construction decreased at a 25 percent pace, more than previously estimated and the most since 1981. Declines are likely to continue through much of 2008.

Lowe's Cos., the world's second-largest home-improvement retailer, said this week that fourth-quarter profit fell and several ``challenging'' quarters remain as the worst housing slump in more than 25 years deepened.

``It will still be a tough housing market through the balance of 2008,'' Lowe's Chief Executive Officer Robert Niblock said in a Feb. 25 interview. ``It'll probably be into 2009 before you're seeing a recovery.''

Today's report is the second of three estimates released by the Commerce Department. The data will be revised again next month as more information becomes available.

Wednesday, February 27, 2008

Most U.S. Stocks Fall, Led by Utilities, Drugmakers; Banks Gain

By Elizabeth Stanton

Feb. 27 (Bloomberg) -- Most U.S. stocks fell for the first time in four days as a slump in utility and drugmaker shares overshadowed speculation Federal Reserve Chairman Ben S. Bernanke will cut interest rates to stave off a recession.

Dynegy Inc., owner of power plants in 13 states, tumbled the most in three years on earnings that missed estimates. Johnson & Johnson and Amgen Inc. declined after the Journal of American Medical Association reported their anemia drugs increased the risk of death in cancer patients. Bernanke's pledge to act quickly to boost growth sparked a rally in banks and eased concern over a drop in durable goods orders.

The Standard & Poor's 500 Index, which swung between gains and losses at least 25 times, slid 1.27 points, or 0.1 percent, to 1,380.02. The Dow Jones Industrial Average added 9.36, or 0.1 percent, to 12,694.28. The Nasdaq Composite Index rose 8.79, or 0.4 percent, to 2,353.78, led by Apple Inc. About four stocks fell for every three that rose on the New York Stock Exchange.

``It's a friendly Fed, but the market is torn,'' said Dean Gulis, part of a group that manages $3 billion in Bloomfield Hills, Michigan for Loomis Sayles & Co. ``Most people think we're in or on the edge of a recession. That's certainly being discounted to some degree, but not fully.''

The declines ended the market's biggest three-day rally of the year that was spurred by a rally in energy shares after oil surged to a record. Exxon Mobil Corp. led a retreat in the industry today as higher inventories sent crude lower.

Bernanke's testimony to Congress prompted traders to increase bets on larger rate cuts and sent the dollar to a record low against the euro. Financial shares also gained after regulators allowed Fannie Mae and Freddie Mac to buy more mortgages.

Dynegy Slumps

Dynegy fell 70 cents, or 8.5 percent, to $7.56, leading utilities in the S&P 500 to a 1.9 percent drop, the biggest decline among 10 industry groups. The company reported an unexpected fourth-quarter net loss of $46 million. Analysts expected a profit.

Utilities also dropped after Jonathan Golub, the New York- based chief investment strategist at Bear Stearns Cos., advised clients to sell shares of companies in the industry.

``The market is currently underestimating a number of potential risks,'' he said.

Amgen, J&J

Amgen lost $1.22 to $46.60. Johnson & Johnson, the world's biggest health-products maker, slipped 68 cents to $63.04. A study published in this week's Journal of the American Medical Association found that cancer patients who take anemia drugs sold by the companies have a 10 percent higher risk of dying than those who didn't take the treatments.

The risks of the anemia drugs are ``well-defined,'' and the newly published analysis ``looks exactly like what we've seen before,'' Roger Perlmutter, Amgen's head of research and development, said in an interview.

Goldman Sachs Group Inc., the largest securities firm, and Citigroup Inc., the biggest U.S. bank, led financial shares to their fourth straight gain. Goldman rose $8.10, or 4.7 percent, to $180.80 for the second-biggest gain in the S&P 500. Citigroup added 77 cents, or 3.1 percent, to $25.72 for the biggest gain in the Dow average.

Bernanke told Congress that the Fed ``will act in a timely manner'' to insure against ``downside risks'' to the economy.

Fed Watch

Traders boosted bets that the Fed will cut interest rates by 0.75 percentage point to 2.25 percent by the central bank's next meeting on March 18. Futures trading showed 10 percent odds of a three-quarter-point cut, compared with no chance yesterday. The remaining bets are for a half-point reduction to 2.5 percent.

The dollar weakened to more than $1.51 per euro for the first time today, and an index that tracks the currency against six major counterparts fell to a record.

The Fed has lowered its target for the overnight lending rate between banks five times since September, most recently to 3 percent on Jan. 30. The rate cuts aimed to blunt the economic impact of bank and brokerage firm losses stemming from the worst U.S. housing decline in more than 20 years.

Freeport-McMoRan Copper & Gold Inc. led mining companies higher as bullion futures rose to a record $967.70 an ounce and copper reached a 21-month high of $3.85 a pound. Freeport- McMoRan rose $3.30, or 3.3 percent, to $103.62.

`Firming Up'

``This is a market which I think is firming up,'' Laszlo Birinyi, president of Westport, Connecticut-based research and investment firm Birinyi Associates Inc., said in an interview with Bloomberg Television. ``People are getting a little more optimistic.''

Technology shares also gained, led by Cisco Systems Inc., Apple Inc. and International Business Machines Corp. Cisco, the biggest maker of computer-networking equipment, rose 88 cents to $24.95 after being added to the ``buy list'' at Wells Fargo Investments. Juniper Networks Inc., the second-largest, rose $1.78, or 6.5 percent, to $29.29, the biggest gain in the S&P 500.

Apple added $3.81 to $122.96. The company said it plans to move up the release of a software kit that gives outside developers the ability to modify its iPhone.

IBM climbed for a fourth day, adding $2.08 to $116.46 after Chief Financial Officer Mark Loughridge said in a statement published on the company's Web site that U.S. business may improve this quarter. The company said there is ``strong customer demand'' in the U.S. for products and services that help customers save costs and improve productivity.

IBM, the world's biggest computer-services company, climbed to a four-month high yesterday and led the market higher after announcing plans to buy back up to $15 billion of its own stock.

Northwest, Delta

Northwest Airlines Corp. and Delta Air Lines Inc. led airline shares lower. Delta, in talks to merge with Northwest, said it hasn't reached a satisfactory agreement, while bargaining between the carriers' pilots unions stalled over seniority. Northwest fell 91 cents to $15.10. Delta dropped 91 cents to $15.

Autodesk Inc. retreated $6.11 to $32.99, the biggest drop in the S&P 500. The software maker reported fourth-quarter profit, excluding compensation and acquisition costs, of 52 cents a share. That missed the 54-cent average of analysts' estimates.

Bernanke Signals Fed Prepared to Lower Rates Again (Update6)

By Craig Torres and Scott Lanman

Feb. 27 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke signaled the U.S. central bank is prepared to lower interest rates again even as inflation accelerates.

The Fed ``will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,'' Bernanke said in testimony to the House Financial Services Committee in Washington.

Bernanke's remarks may reinforce investors' expectations that policy makers will lower rates further to shore up the faltering economy. While officials have expressed concern that inflation is accelerating, Bernanke indicated he shares Vice Chairman Donald Kohn's view that financial-market turmoil and slowing growth pose the ``greater threat.''

Bernanke's testimony came as government reports today showed the U.S. expansion, now in its seventh year, is in peril. Durable-goods orders fell 5.3 percent, more than forecast, in January as companies cut spending. New-home sales fell last month to the lowest level since February 1995 and house prices slid by a record 15 percent from a year ago.

``The Fed is in full risk-management mode, which means it has to prioritize financial market stability and growth over inflation,'' said Diane Swonk, chief economist of Mesirow Financial Inc. in Chicago. ``The discussion of inflation and inflation expectations, however, effectively sets the stage for a fairly quick normalization of rates once growth stabilizes.''

Regulatory `Mistakes'

Lawmakers have accused the central bank of failing to protect consumers and supervise mortgage lending adequately. Committee Chairman Barney Frank, a Massachusetts Democrat, said yesterday ``excessive deregulation'' was the ``single biggest cause'' of the downturn. In today's hearing, Bernanke acknowledged ``mistakes in terms of regulation and oversight.''

Bernanke referred to ``downside'' risks for the economy four times in his testimony, and noted that data since the last Fed meeting in January pointed to ``sluggish'' growth. Policy choices have also become more complicated as energy and commodity prices rose in recent weeks, he indicated.

Stocks and Treasuries were little changed. The Standard & Poor's 500 index fell 0.09 percent to 1,380.02 in New York, while 10-year note yields held at 3.85 percent.

Inflation Concern

Inflation is picking up and the public's expectations for prices may also be rising, Bernanke said. He reiterated remarks made to a Senate hearing on Feb. 14 indicating the Fed will increasingly take account of the inflation outlook later in the year as the economy stabilizes.

``Further increases in the prices of energy and other commodities in recent weeks, together with the latest data on consumer prices, suggest slightly greater upside risks to the projections of both overall and core inflation than we saw last month,'' Bernanke said.

Consumer prices last year surged 4.1 percent, the most in 17 years, spurred by higher fuel and food costs. A government report yesterday showed the 12-month increase in wholesale costs accelerated to 7.4 percent in January, the biggest jump since 1981.

Risks to the outlook include ``the possibilities that the housing market or the labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further,'' the Fed chairman said.

Offsetting Impact

Bernanke said pressures in credit markets have offset some of the impact of the Fed's interest-rate cuts.

``Even as the Fed has lowered interest rates and as the general pattern of interest rates has declined, the pressures in the credit markets has caused greater and greater spreads, particularly for risky borrowers,'' Bernanke said in response to a question from Representative Luis Gutierrez, an Illinois Democrat.

Traders anticipate the central bank will lower the benchmark rate by at least half a point by the end of the next meeting, on March 18, futures prices show. Officials have lowered the rate by 2.25 percentage points since September, to 3 percent.

A half-point reduction to 2.5 percent would bring the rate adjusted for inflation, less food and energy, to almost zero.

Bank Losses

Bernanke, 54, is in the seventh month of a credit crisis that began with rising delinquencies on subprime mortgages, while also grappling with the economic impact of the worst housing recession in a quarter century. Banks are making it tougher to get loans after financial companies posted $162 billion in asset writedowns and credit losses since the beginning of 2007.

In its separate monetary-policy report released with the testimony, the Fed said near-term inflation expectations, measured by surveys, ``rose somewhat in 2007 and early 2008, presumably because of the increase in headline inflation.'' Longer-term expectations ``changed only slightly.''

``A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives of maximum employment and price stability,'' the Fed chairman said.

Economic reports since the Fed last met on Jan. 29-30 showed the first decline in U.S. payrolls in more than four years in January and a slide this month in consumer confidence to the lowest level since 2003.

`Less Favorable'

``The economic situation has become distinctly less favorable since the time of our July report,'' Bernanke said. Still, the $168 billion stimulus package enacted by Congress and signed by President George W. Bush this month and continued gains in exports should help growth, he said.

In the semiannual report, the Fed said that the U.S. economy ``seems to have entered 2008 with little momentum.'' Labor demand ``has slowed further of late,'' it said.

Bernanke focused the final pages of his testimony on the Fed's efforts to strengthen consumer protections and prevent foreclosures. He said in answering questions that the final rules will be released before July.

Dollar Falls to Record Against Euro on Fed Rate-Cut Speculation

By Ye Xie and Kim-Mai Cutler

Feb. 28 (Bloomberg) -- The dollar traded at a record low below $1.51 per euro after Federal Reserve Chairman Ben S. Bernanke signaled he's ready to lower interest rates again to support the weakening U.S. economy.

An index that tracks the currency against six major counterparts dropped yesterday to the lowest since its inception in 1973, as European Central Bank policy maker Axel Weber said investors expecting rate cuts in the region are underestimating inflation. The U.S. currency fell to an all-time low against the Swiss franc and to a 23-year low versus the Australian dollar.

``This is a new chapter for the dollar,'' said Russell LaScala, head of foreign-exchange trading in North America at Deutsche Bank AG in New York. ``You are seeing divergence of central banks' views.''

The dollar traded at $1.5118 per euro at 7:07 a.m. in Tokyo, after touching $1.5144 yesterday, the weakest since euro's debut in 1999. The dollar traded at 106.47 yen, after falling 0.8 percent yesterday and coming within 1 percent of a 2 1/2-year low reached in January. The euro traded at 160.99 yen.

LaScala said dollar-selling gained momentum on Feb. 26 after Fed Vice Chairman Donald Kohn said turmoil in credit markets and the possibility of a slower economy pose a ``greater threat'' than inflation. The currency has slid 4 percent against the euro in the past three weeks as the housing recession worsened and consumer confidence sank, leading traders to exit bets on a dollar rebound. The dollar will rise to $1.45 per euro by mid-year, according to the median forecast in a Bloomberg survey.

Bernanke Speaks

The dollar weakened past $1.51 per euro yesterday after Bernanke said the Fed ``will act in a timely manner'' to insure against ``downside risks'' to the economy. His remarks came in testimony to the House Financial Services Committee in Washington. The Fed watches the dollar ``very carefully,'' and has no ``target'' for it, he also said.

Futures on the Chicago Board of Trade show most traders expect the Fed to cut rates to at least 2 percent by mid-year, from 3 percent now. The bank has slashed rates from 5.25 percent in September, and is scheduled to meet next on March 18.

``The dollar is undermined by lower U.S. yields,'' said Daniel Katzive, a senior currency strategist at Credit Suisse Group in New York. ``I don't think there's much scope for that to change; the dollar will remain weak.''

Deutsche Bank, the world's biggest foreign-exchange trader, predicts the euro, which is shared by 15 European countries, will rise to $1.55 by March 31.

Synthetic Euro

The Australian dollar yesterday climbed to 94.30 U.S. cents, the strongest since 1984. Australia's main rate is 4 percentage points above the Fed's target.

A Fed trade-weighted index of the dollar against major currencies has fallen 11.3 percent in the past year. The U.S. Dollar Index traded on ICE Futures in York, which tracks the currency against six major counterparts, dropped to 74.07 yesterday, the lowest since its inception in 1973. The euro is 29 percent above its debut level of about $1.17, and 83 percent higher than its record low of 82.30 U.S. cents in October 2000.

The so-called synthetic euro, which estimates the European currency's value before 1999, reached the strongest since at least January 1989, when Bloomberg's data on the measure begin.

The U.S. currency has dropped 12 percent versus the euro in the past year. It has weakened against 15 of the 16 most- active currencies as subprime-mortgage losses, the worst housing market in 25 years and soaring credit costs spurred the Fed to cut rates five times since Sept. 18.

Contrast With ECB

By contrast, the ECB has held its main rate at a six-year high of 4 percent since June to counter inflation pressures from surging food and oil prices. Traders increased wagers on rate cuts after ECB President Jean-Claude Trichet on Feb. 7 dropped a threat to raise borrowing costs and said uncertainty about economic growth is ``unusually high.''

``The consensus expectation for interest rates on the market at the moment clearly underestimates, in my opinion, the inflation risks,'' Weber said yesterday, according to the text of a speech in Bonn. ``In 2009, inflation will not slow as markedly as supposed in the December projections, which were based on lower oil prices.''

The euro at $1.45 isn't the ``hurdle'' the ECB thought it was, council member Nout Wellink said yesterday in an interview in New York. Europe's economy is in ``rather good shape,'' he said.

`Vicious Cycle'

The slump in the dollar helped push oil prices to a record above $102 and increased the cost of buying precious metals.

``We're talking about a vicious cycle if you look at price increases in commodities,'' said Stephen Jen, Morgan Stanley's global currency economist in London. ``The dollar weakens first, then food and oil prices rise, which complicates policy-making. At this point, the dollar is hurting itself.''

The dollar will continue to trade below $1.50 for the next few weeks, Robert Sinche, head of global currency strategy at Bank of America N.A. in New York, wrote in a research note dated yesterday.

U.S. new home sales dropped 2.8 percent to an annual pace of 588,000 last month, the lowest pace since 1995, the Commerce Department said yesterday.

The dollar's decline was ``slightly quicker than we thought,'' said Derek Halpenny, a senior currency strategist with Bank of Tokyo-Mitsubishi in London. ``A lot of hedge fund players have missed this move.''

These speculators' bets on euro gains against the dollar are close to a two-year low, the latest figures from the Washington-based Commodity Futures Trading Commission show.

Tuesday, February 26, 2008

Asian Stocks Rise for Third Day, Led by BHP Billiton and Marui

By Chen Shiyin and Patrick Rial

Feb. 27 (Bloomberg) -- Asian stocks rose for a third day, led by commodity producers and department-store operators, after raw-material prices advanced and U.S. retailers reported an increase in earnings.

BHP Billiton Ltd. gained after the price of crude oil advanced to a record and copper futures rose. Noble Group Ltd., a Hong Kong-based supplier of raw materials, had the biggest jump on the MSCI Asia Pacific Index after saying profit almost doubled. Marui Group Co. climbed the most in almost eight years after the Japanese retailer boosted its profit forecast.

``The commodities-related shares are being thrust to the forefront today'' after oil's climb, Hiroichi Nishi, an equities manager at Nikko Cordial Securities Inc., said in an interview with Bloomberg Television.

MSCI's Asia Index added 1.6 percent to 148.53 as of 11:18 a.m. in Tokyo, extending a two-day, 1.8 percent rally. All 10 of the benchmark's industry groups advanced.

Japan's Nikkei 225 Stock Average added 1.4 percent to 14,016.44, poised for the highest close since Jan. 11. Benchmarks also advanced in all other markets open for trading.

The Standard & Poor's 500 Index added 0.7 percent yesterday, rounding off its biggest three-day advance of the year. U.S. stocks were boosted after International Business Machines Corp., the world's biggest computer-services company, said a $15 billion share buy-back may boost earnings by 5 cents a share this year.

BHP, Inpex

BHP, the world's largest mining company and Australia's biggest oil producer, gained 1.9 percent to A$39.49. Santos Ltd., Australia's No. 3 oil and gas explorer, jumped 7.5 percent to A$12.70. Inpex Holdings Inc., Japan's largest energy explorer, advanced 2.5 percent to 1.21 million yen.

Crude oil for April delivery rose to as high as $101.43 a barrel on the New York Mercantile Exchange yesterday, and was recently at $101.21. Copper futures advanced 0.9 percent in New York on speculation demand from emerging markets such as China and India will erode inventories.

Other commodity prices also gained. Gold climbed to a record in Asia today, while wheat prices rose to a high in Chicago yesterday.

Noble Group, which supplies raw materials from coffee to energy, surged 13 percent to S$2.34 in Singapore, the biggest percentage gain on MSCI's Asian index. Fourth-quarter profit jumped 92 percent as demand and prices increased and it stepped up investments in agriculture and energy.

Marui, Retailers

Marui jumped 9.3 percent to 1,086 yen in Tokyo. Net income may be as much as 8.5 billion yen ($79 million) this year, helped by a gain from the sale of its fixed assets, the company said.

Shares of retailers climbed in the U.S. after Target Corp., the No. 2 U.S. discount chain, reported a smaller-than-expected drop in profit and RadioShack Corp. reported an increase in net income. Macy's Inc., owner of its namesake chain and Bloomingdales, also reported higher-than-expected profit.

Fast Retailing Co., Japan's biggest clothing retailer, advanced 2.4 percent to 7,970 yen. Hyundai Department Store Co., South Korea's No. 2 department-store operator, added 4.5 percent to 85,300 won, snapping a three-day, 6.5 percent retreat.

Technology shares advanced. Sony Corp., the world's second- largest maker of consumer electronics, added 2.3 percent to 5,320 yen. Hon Hai Precision Industry Co., the world's largest contract electronics manufacturer, gained 1.1 percent to NT$190.50.

IBM climbed to a four-month high in New York trading after saying it will earn at least $8.25 a share, following the buyback. The company had previously forecast earnings of at least $8.20.

Oil Trades Near Record as U.S. Dollar Falls, Commodities Surge

By Christian Schmollinger

Feb. 27 (Bloomberg) -- Crude oil traded near a record in New York as the U.S. dollar dropped to an all-time low against the euro and investors pumped funds into the market to reap returns from rising commodities.

Brent oil, the benchmark for two-thirds of world supply, rose to a record $100 a barrel in London as the dollar, which is used to price crude, fell against most major currencies. New York futures yesterday reached $101.43. The UBS Bloomberg Constant Maturity Commodity Index increased to the highest ever, on gains for wheat, sugar, copper, cotton and cocoa.

``Because oil has an intrinsic value, it's not exactly sensible that it become cheaper in other currencies so you get an adjustment upward in the U.S. dollar value of oil,'' said David Moore, commodity strategist at Commonwealth Bank of Australia Ltd. in Sydney. ``The general strength of commodity prices would instantly improve sentiment toward the oil price.''

Crude oil for April delivery rose as much as 47 cents, or 0.5 percent, to $101.35 a barrel on the New York Mercantile Exchange and was trading at $101.05 at 10:25 a.m. in Singapore.

Yesterday, crude futures settled at $100.88 a barrel, a gain of $1.65, or 1.7 percent. It was the highest close since trading began in 1983.

The dollar weakened to $1.5047 per euro, the lowest since the European single currency was introduced in 1999, before trading at $1.4987 as of 10:10 a.m. in Singapore. The dollar declined against all of the world's 16 biggest currencies in the past 12 months apart from the Korean won and South African rand.

``The dollar has fallen against the Canadian dollar, the Aussie dollar and also the Brazilian real, so all the major commodity currencies are up,'' said Tetsu Emori, fund manager at Astmax Ltd. in Tokyo. ``In U.S. dollar terms the commodity prices should be rising, including crude oil.''

Brent, Funds

Brent crude for April settlement climbed as much as 53 cents, or 0.5 percent, to $100 a barrel on London's ICE Futures Europe exchange, the highest since trading began in 1988. It was at $99.60 at 10:23 a.m. in Singapore, Yesterday, the contract gained $1.78 to $99.47 a barrel, a record close.

Hedge-fund managers and other large speculators increased net-long positions, or bets on higher oil prices, in the week ended Feb. 19, according to a Commodity Futures Trading Commission report.

Investors have pushed prices higher in the past six years as they put money into energy because returns outpaced those of other markets.

``Crude oil is just chasing the other commodities,'' said Astmax's Emori. ``The fundamentals haven't changed so there is no reason to buy except it's being pushed up by fresh money inflows.''

OPEC To Meet

OPEC crude-oil supply will fall 200,000 barrels a day, or 0.6 percent, to 32.45 million barrels a day this month, according to preliminary estimates from PetroLogistics Ltd. The group supplied 32.65 million barrels a day in January, data from the Geneva-based tanker-tracking service showed.

Ministers from the 13 members of the Organization of Petroleum Exporting Countries are scheduled to meet in Vienna on March 5 to discuss oil quotas. OPEC produces more than 40 percent of the world's crude oil.

Chakib Khelil, Algerian oil minister and the OPEC president, said on Feb. 24 that the group might cut output at the meeting because of an expected decline in demand in the second quarter.

OPEC agreed in September to increase their output by 500,000 barrels a day starting Nov. 1.

``Bear in mind that when they increased production by a half a million barrels one reason was to make sure the Northern Hemisphere winter was adequately supplied,'' said Commonwealth Bank's Moore. ``Now that we're past the winter, the rationale for that increase is unwound effectively.''

Dollar Falls to Record Low of $1.50 per Euro on Rate Outlook

By Kosuke Goto and Stanley White

Feb. 27 (Bloomberg) -- The dollar fell to a record low of $1.50 per euro on speculation Federal Reserve Chairman Ben S. Bernanke today will indicate the U.S. central bank is prepared to keep lowering interest rates.

The currency is headed for its second straight monthly decline on expectations a U.S. government report today will show a drop in new home sales, bolstering the Fed's case for cutting its 3 percent target for the overnight lending rate between banks. The euro climbed to a six-week high against the yen as traders bet the European Central Bank will keep its 4 percent benchmark rate unchanged in coming months.

``We're going into a new leg of dollar weakness,'' Tony Morriss, a currency strategist in Sydney at Australia & New Zealand Banking Group Ltd., Australia's third-biggest bank, said in an interview with Bloomberg Television. ``The Federal Reserve is sending a pretty clear signal they need to support growth.''

The U.S. currency touched $1.5047 per euro, the lowest since the European single currency was introduced in 1999, before trading at $1.4991 as of 10:46 a.m. in Tokyo from $1.4974 in late New York yesterday. It was little changed at 107.22 yen. The euro rose to 160.73 yen from 160.67. The dollar may fall to $1.53 per euro in the next three months, Morriss said.

The U.S. dollar slid against 11 of the 16 most-active currencies before Bernanke delivers his semi-annual testimony to the House Financial Services Committee at 10 a.m. in Washington today. Fed Vice Chairman Donald Kohn said yesterday turmoil in credit markets and the possibility of slower economic growth pose a ``greater threat'' than inflation.

Commodities Fallout

The slump in the dollar pushed oil prices to a record yesterday and increased the cost of buying wheat, sugar, copper, cotton and cocoa. Asian currencies rallied, with China's yuan posting the biggest gain in a week. Chinese Premier Wen Jiabao yesterday told visiting U.S. Secretary of State Condoleezza Rice a stable dollar is good for the U.S. and the rest of the world, Xinhua news agency reported.

The greenback has lost about a quarter of its value in the past five years, according to the Fed's U.S. Trade Weighted Major Currency Dollar index, which comprises seven currencies of U.S. trading partners. The index declined 0.6 percent to 72.06 yesterday, approaching a three-month low set on Nov. 26. The weaker dollar has made U.S. goods cheaper abroad, boosting exports to a record and shrinking the nation's trade deficit last year for the first time since 2001.

All of the 10 most actively-traded currencies in Asia outside Japan gained against the dollar today, led by the Taiwan dollar with a 0.5 percent rally to NT$31.071. Indonesia's rupiah rose 0.4 percent to 9,068 and the Singapore dollar climbed 0.3 percent to S$1.4018. The yuan advanced 0.1 percent to 7.1484.

`Crunch Time'

``It's crunch time for the dollar,'' said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, a unit of France's second-largest bank by market value. ``Bernanke may know that monetary policy alone cannot support the slowing U.S. economy.''

The U.S. currency may fall to $1.51 per euro and 106.80 yen today, Saito forecast.

The dollar will rebound to $1.48 per euro by the end of March, according to the median forecast in a Bloomberg News survey of 41 analysts. Merrill Lynch & Co., the third-biggest U.S. securities firm, is the most bearish, predicting it will fall to $1.57 per euro by March-end.

New home sales dropped 0.7 percent to an annual pace of 600,000 last month, according to the Bloomberg survey median estimate before today's Commerce Department report.

`Shifting Away'

The dollar may fall at least another 10 percent on a trade- weighted basis, said Kenneth Rogoff, an economics professor at Harvard University in Cambridge, Massachusetts, and formerly chief economist at the International Monetary Fund.

``We're seeing demand shifting away from the U.S. to Europe and Asia,'' he said.

The U.S. will expand 1.5 percent this year, compared with a 4.1 percent rate for the global economy, the Washington-based IMF said in January.

Futures on the Chicago Board of Trade show traders see a 96 percent chance the U.S. central bank will reduce the 3 percent target rate for overnight lending between banks by 50 basis points at their March 18 meeting, and a 4 percent likelihood of a quarter-point cut. The Fed has already cut rates five times since Sept. 18.

ECB on Hold

The euro gained as the Munich-based Ifo institute yesterday said its business climate index rose to 104.1 in February, from 103.4 in January. The median estimate in a Bloomberg survey was for a drop to 102.9. After the report, traders pared bets the ECB will lower its target from the current 4 percent level.

``Germany's business sentiment was unexpectedly strong,'' said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany's second-largest bank. ``The ECB is likely to keep borrowing costs unchanged instead of cutting rates as some had expected.''

The euro may rise to 161.40 yen today, Muramatsu forecast.

The odds of the ECB lowering borrowing costs fell yesterday, with the implied yield on the Euribor futures contract for June rising 4 basis points to 4.15 percent. The yield averaged 0.18 percentage point more than the ECB's benchmark from 1999 until August. A basis point is 0.01 percentage point.

U.S. Economy: Confidence Falls, Producer Prices Rise (Update1)

By Courtney Schlisserman and Bob Willis

Feb. 26 (Bloomberg) -- U.S. consumer confidence fell to the lowest level in five years and wholesale inflation picked up, limiting the Federal Reserve's room to maneuver as it tries to avert a recession.

The Conference Board's index of confidence dropped to 75.0 in February, lower than forecast, from 87.3 in January, the New York-based group said today. The Labor Department reported that producer prices rose 1 percent last month. Excluding food and energy, expenses climbed 0.4 percent, the most in almost a year.

Consumers, whose spending accounts for most of the economy, are being buffeted by lower home values, rising unemployment and elevated gasoline and food prices. Fed Vice Chairman Donald Kohn, speaking today ahead of Chairman Ben S. Bernanke's Congressional testimony tomorrow, signaled the central banker is willing to keep interest rates low to revive the economy.

``It's maybe a mini bout of stagflation and it's troubling,'' Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts, said in an interview on Bloomberg Television in New York. ``It does limit the extent to which the Fed's going to be able to act further.''

Home prices in 20 U.S. cities fell in December by the most on record, a separate report showed today. The S&P/Case-Shiller home-price index dropped 9.1 percent from a year ago, after a 7.7 percent decrease in November. Home Depot Inc., the world's largest home-improvement retailer, today said fourth-quarter profit fell and forecast earnings below analysts' estimates.

``Consumers are feeling beset on all fronts,'' said Gault.

Market Reaction

Stocks fell, before recouping losses later, government bonds rose and the dollar extended its decline. The Standard & Poor's 500 Index dropped as much as 0.6 percent before trading little changed at 1,371.14 at 11:10 a.m. in New York. Ten-year note yields fell to 3.86 percent from 3.90 percent late yesterday and the dollar lost 0.4 percent to $1.4884 per euro.

Economists expected the Conference Board's measure would fall to 82 from a previously reported 87.9, according to the median of 66 forecasts in a Bloomberg News survey. Estimates ranged from 76.3 to 87.

The share of consumers who said jobs are plentiful declined to 20.6 percent, from 23.8 percent last month. Those saying jobs are hard to get increased to 23.8 percent from 20.6 percent a month ago.

The proportion of people who expect their incomes to rise over the next six months decreased to 17.0 percent from 18.1 percent. The share expecting more jobs dropped to 9 percent from 10.5 percent.

`Tough Spot'

``The consumer's been in a tough spot for a while now and it seems like the years of elevated oil prices and weakening housing market are starting to catch up in the sentiment numbers, especially now that we have the employment situation trending downward,'' said Ryan Reed, an economist at National City Corp. in Cleveland. He forecast confidence would fall to 76.3, the lowest projection in the Bloomberg survey.

Kohn today said turmoil in credit markets and the possibility of even slower economic growth pose a ``greater threat'' than inflation.

``I do not expect the recent elevated inflation rates to persist,'' Kohn said in the text of a speech to the University of North Carolina, Wilmington. ``The adverse dynamics of the financial markets and the economy have presented the greater threat to economic welfare in the United States.''

Mishkin's Concern

Other Fed officials, including Governor Frederic Mishkin yesterday, have warned that higher prices may stoke inflation expectations.

Combined with figures last week showing consumer prices also rose more than forecast, today's producer-price report may prevent prompt the Fed to consider raising rates as soon as the economy stabilizes.

``What you've got is a lot of inflationary pressures building,'' said Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York, who correctly forecast the rise in core prices. For now, ``the Fed will put them in second position in terms of priority until this financial strife settles down,'' he said.

Over the past 12 months, producer prices rose 7.4 percent, the most since October 1981. Wholesale prices excluding food and energy advanced 2.3 percent in the year through January.

The median forecast of 70 economists in a Bloomberg News survey was for wholesale prices to rise 0.4 percent from December. Core prices were expected to advance 0.2 percent, according to the survey median.

Food Costs Escalate

Energy costs increased 1.5 percent after falling 3 percent in December. The price of gasoline rose 2.9 percent. Food prices climbed 1.7 percent, the most since October 2004. Crude food prices, which cover costs of corn and wheat, increased 2.7 percent.

Kellogg Co., the largest U.S. cereal maker, last week affirmed its 2008 profit forecast after boosting prices to counter rising wheat and energy costs.

``Unprecedented commodity and energy inflation'' forced Battle Creek, Michigan-based Kellogg to raise prices, Chief Executive Officer David Mackay said at conference in Boca Raton, Florida. The increases were ``across our global portfolio and across almost all segments.''

Fed officials last month cut their forecast for U.S. growth this year to a range of 1.3 percent to 2 percent, from 1.8 percent to 2.5 percent predicted in October. Two members of the National Bureau of Economic Research's business cycle dating committee, the panel charged with dating U.S. economic cycles, said last week that it's too early to decide whether the U.S. is in recession.

Fed Policy

Fed policy makers last month lowered their benchmark rate by 1.25 percentage point to 3 percent, including a three- quarters-of-a-point cut in an emergency meeting on Jan. 22. Central bankers are scheduled to next vote on the direction of interest rates March 18.

Higher energy and food bills also are hurting consumers' outlooks and their ability to spend on non-essential items. The amount of Americans must spend each month on debt service, housing, medical care, food and energy rose to 66.9 percent of their total spending in December, the highest since record- keeping began in 1980, according to Bloomberg figures.

Consumers are scaling back spending. Retail sales excluding automobiles and gasoline were unchanged in January, the Commerce Department reported on Feb. 13.

In December, consumer spending, which makes up about 70 percent of gross domestic product, grew at the slowest pace in six months. The government is scheduled to release its January report on spending on Feb. 29.

Monday, February 25, 2008

Asian Stocks Rise After Bond Insurers Keep Ratings; Banks Gain

By Chen Shiyin and Patrick Rial

Feb. 26 (Bloomberg) -- Asian stocks rose to their highest in three weeks after the world's largest bond insurers retained top credit ratings, easing concern that global economic growth will slow on new credit losses.

Mitsubishi UFJ Financial Group Inc. and National Australia Bank Ltd. gained after Standard & Poor's kept MBIA Inc. and Ambac Financial Group Inc.'s AAA debt ratings. Posco led an advance by steelmakers after HSBC Holdings Plc said prices of the alloy will continue to climb. Woolworths Ltd., Australia's biggest retailer, rose to a one-month high after reporting increased profit.

``S&P's reiteration of AAA ratings on MBIA and Ambac will lead to buying of finance-related shares,'' Mitsuo Shimizu, an analyst at Cosmo Securities Co. in Tokyo, said in an interview with Bloomberg Television.

The MSCI Asia Pacific Index added 0.9 percent to 146.77 as of 11:23 a.m. in Tokyo, poised for its highest close since Feb. 5. Gains today helped trim the benchmark's 2008 loss to 7 percent.

Japan's Nikkei 225 Stock Average climbed 0.5 percent to 13,983.51. Benchmarks advanced in all markets open for trading, except New Zealand.

U.S. stocks climbed yesterday, helping the Standard & Poor's 500 Index to its biggest rally this month.

Mitsubishi UFJ, Japan's largest publicly traded bank, advanced 2 percent to 994 yen. Mizuho Financial Group Inc., the third-largest by market value, jumped 2.9 percent to 465,000 yen. National Australia, the country's largest, climbed 2.5 percent to A$29.85.

MBIA, Ambac

MBIA is no longer under review for a downgrade by S&P, indicating the bond insurer is a step further away from losing its AAA insurance credit rating. Ambac, which ranks second to MBIA among bond insurers, is still being reviewed for a possible downgrade, the ratings agency said.

Real-estate stocks climbed in Japan on speculation developers will be able to finance projects as the credit squeeze eases. The Topix Real Estate Index, which plunged 19 percent in the past three months and was the worst performer among the broader index's 33 industry groups, jumped 3.9 percent today.

Mitsubishi Estate Co., Japan's biggest developer by market value, surged 6 percent to 2,735 yen. Mitsui Fudosan Co., the second-largest, added 5.1 percent to 2,260 yen.

In South Korea, Posco advanced 3.7 percent to 533,000 won. Asia's third-largest steelmaker is ``very likely'' to raise prices for its products as early as March, Hyundai Securities Co. said in a report.

`Exploding' Steel Prices

``Regional steel prices are exploding, driven by a powerful mix of surging costs and a steel shortage,'' HSBC analysts including Daniel Kang wrote in a report. ``We expect this shortage to continue into the second quarter, driving further price hikes as mills look to recover massive cost increases.''

China Steel Corp., Taiwan's biggest steelmaker, added 3.6 percent to NT$47.25. JFE Holdings Inc., the world's third-largest steelmaker, advanced 1.5 percent to 4,800 yen.

Woolworths gained 4 percent to A$30.16, poised for the highest close since Jan. 29. First-half profit rose 28 percent to A$891.3 million ($826 million) after the Australian retailer won market share, cut costs to supply its supermarkets and added more profitable groceries.

Also in Australia, ABC Learning Centres Ltd. plunged 62 percent to A$1.435, the biggest slump by percentage on MSCI's Asian index. First-half profit at the world's biggest publicly traded owner of child-care centers tumbled 42 percent to A$37.1 million, fueling concerns it may struggle to repay debt.

QBE Insurance Group Ltd., Australia's biggest property and casualty insurer, slumped 11 percent to A$25.46, poised for the biggest decline since Dec. 8, 2006. Net income rose 13 percent last year to A$1.93 billion, missing the A$2.02 billion median estimate of 12 analysts surveyed by Bloomberg.

Stocks Rise in Europe, Asia, Led by UBS; U.S. Futures Advance

By Andreas Hippin

Feb. 25 (Bloomberg) -- Stocks gained in Europe and Asia, led by financial companies, on speculation bond insurers will avoid a cut in their credit ratings and limit further losses related to subprime-mortgage defaults. U.S. index futures advanced.

UBS AG and BNP Paribas SA led banks higher in Europe, while Millea Holdings Inc., Japan's biggest insurer, and Commonwealth Bank of Australia climbed in Asia. Royal Bank of Scotland Group Plc gained on expectations Qatar Investment Authority may buy a stake, while Alliance & Leicester Plc jumped on speculation it may get a bid from Lloyds TSB Group Plc. Genentech Inc. rose 9 percent in Frankfurt after winning approval to market its Avastin treatment for breast cancer.

The MSCI World Index added 0.7 percent to 1,459.56 as of 12:27 p.m. in London, while futures on the Standard & Poor's 500 Index increased 0.2 percent. The MSCI World Financials Index jumped 1.5 percent, the most in almost two weeks, as investors speculated Ambac Financial Group Inc. may get new capital.

``We're making our way toward a rescue plan for Ambac,'' said Salah Seddik, who helps oversee $5.9 billion at Richelieu Finance in Paris. ``This is reassuring and good news for financial stocks. It means that in terms of writedowns, the worst is behind us.''

Speculation that companies in the bond-insurance industry may not be able to maintain the AAA credit ratings they rely on to insure about $2.4 trillion in securities has contributed to an 8.1 percent decline in the MSCI World this year.

Europe's Dow Jones Stoxx 600 Index advanced 1.5 percent, with all 18 national markets gaining. Germany's DAX added 1.2 percent, while France's CAC 40 rose 1.7 percent. The U.K.'s FTSE 100 jumped 1.6 percent.

Asian Indexes

The MSCI Asia Pacific Index climbed 1.4 percent. Japan's Nikkei 225 Stock Average increased 3.1 percent to 13,914.57, the highest close since Jan. 15.

UBS, Europe's largest bank by assets, rallied 4 percent to 37.1 Swiss francs. BNP Paribas, France's biggest bank, advanced 4.4 percent to 63.92 euros. Deutsche Bank AG, Germany's largest lender, gained 2.7 percent to 76.36 euros.

Millea jumped 8.9 percent to 4,030 yen, the most since Oct. 2. Commonwealth Bank, Australia's biggest mortgage lender, rose 4.9 percent to A$44.67.

Ambac may get $3 billion in new capital as part of a rescue agreement with banks, according to a person with knowledge of the discussions. Ambac spokeswoman Vandana Sharma declined to comment specifically on the discussions.

Bailout Plan

Stocks climbed in late trading in the U.S. on Feb. 22 after CNBC on-air editor Charles Gasparino said that a bailout may be announced this week, citing bankers working on the deal. Gasparino also said ``the entire deal could fall apart.''

``The efforts to prevent Ambac from collapsing will push the market up today, particularly financial stocks,'' said Erhan Aslan, a sales trader at Concord Investmentbank AG in Frankfurt.

Royal Bank of Scotland rallied 7.3 percent to 405.5 pence. The Qatari government is considering an investment in the U.K.'s second-largest bank, the Sunday Telegraph Business reported, citing unidentified people with knowledge of the matter.

Alliance & Leicester gained 8.3 percent to 552.5 pence, and Bradford & Bingley Plc jumped 7.2 percent to 202 pence.

Lloyds TSB, the biggest U.K. provider of personal loans, is in the ``early stages'' of assessing approaches to smaller rivals Alliance & Leicester and Bradford & Bingley, the Sunday Telegraph reported, citing unidentified people close to the bank.

Considering Acquisitions

RBS spokeswoman Carolyn McAdam, Lloyds TSB spokeswoman Kirsty Clay and Alliance & Leicester spokesman Stuart Dawkins declined to comment today. QIA board member Hussain al-Abdulla couldn't immediately be reached for comment at his Doha office.

Lloyds TSB will consider acquisitions in the U.K., Chief Executive Officer Eric Daniels said on Feb. 22. Lehman Brothers Holdings Inc. raised its recommendation on the stock to ``overweight'' from ``equal weight.'' The shares increased 2.9 percent to 470.75 pence.

Genentech rallied $7.37 to $78.97 in Frankfurt. The company may add more than $700 million in sales this year after it won U.S. approval to market Avastin for breast cancer treatment.

Avastin generated $2.3 billion in U.S. sales in 2007. Switzerland's Roche Holding AG, Genentech's largest shareholder, markets Avastin outside the U.S.

Roche, the world's biggest maker of tumor treatments, rose 4.1 percent to 204.2 francs, the most in six weeks.

Solarworld AG gained 3.3 percent to 33.06 euros after UBS analysts upgraded shares of the solar-energy company to ``buy'' from ``neutral.''

Munich Re

Munich Re advanced 1.9 percent to 118.85 euros. The world's second-biggest reinsurer forecast profit of 3 billion euros ($4.44 billion) to 3.4 billion euros this year and said operating profit beat analysts' estimates. Fourth-quarter subprime losses were 15 million euros, reducing the remaining exposure to 340 million euros, Chief Financial Officer Joerg Schneider said.

``Munich Re is a proxy for the state of the industry as a whole,'' said Wolfgang Matejka, who oversees $3 billion as chief investment officer at Vienna-based Meinl Bank AG, in a Bloomberg Television interview. ``The company made a significant step to improve transparency. Investors appreciate this.''

Allianz SE, Europe's largest insurer, jumped 2.7 percent to 119.30 euros. Dresdner Bank AG, the German banking arm of Allianz, is sticking to its medium-term profitability and cost targets after 1.3 billion euros in U.S. subprime-related writedowns.

Renault, Daimler

Renault SA and Daimler AG led shares of carmakers higher after strategists at Lehman Brothers raised their allocation for the industry to ``overweight'' in their European equity portfolio.

A slowdown in sales growth is ``well reflected in valuation and earnings,'' Ian Scott and Jane Pearce, London-based equity strategists, wrote in a report today. Previously, car stocks were not represented in the recommended portfolio, the note said.

Renault advanced 2.4 percent to 71.41 euros, and Daimler gained 1.5 percent to 55.93 euros.

Hammerson Plc, the British developer that owns Birmingham's Bullring and London's Brent Cross shopping centers, jumped 6 percent to 1,122 pence after the company's 2007 net asset value beat analysts' estimates

Hammerson said net asset value increased 3 percent to 15.45 pounds a share last year. John Perry, an analyst at Deutsche Bank in London, had estimated net asset value of 15.12 pounds.

Premier Foods Plc, the maker of Hovis bread, plummeted 9.2 percent to 96.23 pence, the steepest loss in the Stoxx 600 today. ABN Amro Holding NV is managing the sale of 15 million shares in the company at a 9.4 percent discount to last week's close. The bank is offering the shares at 96 pence each, according to details of the sale e-mailed to clients and obtained by Bloomberg News.

Bernanke, Bush Fail to Build Better Economy With Cuts, Stimulus

By Rich Miller

Feb. 25 (Bloomberg) -- Even if Ben S. Bernanke, George W. Bush and Congress win the battle to avert a recession this year, they risk losing the war to strengthen the economy for the long term.

Growth will get a boost in the second half of this year as consumers spend some of the $107 billion in tax rebates passed by Congress and signed by Bush this month. The U.S. may suffer a letdown afterward as the kick from the stimulus wears off, leaving the economy vulnerable to its underlying weaknesses: a retrenching financial industry, indebted consumers and slowing productivity growth.

``This is not a one- or two-quarter phenomenon,'' says economist Neal Soss of Credit Suisse Group, who worked as an aide to former Federal Reserve Chairman Paul Volcker. ``This is not a V-shaped event. It's a slow-growth scenario.''

Fed officials see growth picking up to more than 2 percent next year as inflation ebbs to 2 percent or below. Fed Chairman Bernanke, 54, is slated to discuss the central bank's forecast in testimony to Congress Feb. 27 and 28.

So far, the Fed's deepest interest-rate cuts since 2001 haven't helped the financial markets or the economy. What they have caused is an increase in inflation expectations, with the price of gold soaring to a record $958.40 an ounce last week.

`Not Easy'

``The Fed is trying to stabilize the financial markets, the real economy and the price level with a single interest rate,'' says Louis Crandall, a former Fed official who's now chief economist at Jersey City, New Jersey-based Wrightson ICAP LLP. ``That's not easy to do.''

What's more, say economists Soss and Ethan Harris of Lehman Brothers Holdings Inc., policy makers face structural changes in the economy that aren't so susceptible to the traditional tools of interest-rate and tax cuts. As a result, Soss sees the economy expanding just 1.3 percent in 2008 and about 1.5 percent in 2009. Harris is even more pessimistic. He sees growth easing to 0.9 percent in 2009 from 1.1 percent in 2008 and 2.5 percent in 2007.

Fed officials acknowledged in the minutes of their last meeting Jan. 29-30 that they were having trouble getting ahead of the credit squeeze in financial markets.

The financial industry is curtailing credit and conserving capital after a decade-long boom in profits went bust in the third quarter. Following mounting losses on past loans, banks have already taken write-offs of $163 billion since the beginning of 2007.


A Fed survey released Feb. 4 found that banks had become stingier in granting credit during the previous three months. Fed officials say they expect that to continue, making it harder for the central bank to stimulate the economy through lower borrowing costs.

``The Fed's policy tools may not be very well suited to deal with this particular situation,'' Robert McTeer, former Dallas Fed president and a fellow at the National Center for Policy Analysis in Dallas, said in a Bloomberg Television interview Feb. 20. ``The Fed can give liquidity to the markets, but the Fed cannot do much if the markets are afraid of solvency risks.''

Consumers, until now the driving force behind the expansion, are feeling the squeeze. While households will get a short-term boost from the coming tax rebates from Washington, their longer-run finances look shakier.

Households reduced their savings rate to virtually nil in December from close to 10 percent of disposable income 15 years earlier. That trend may reverse as credit becomes scarcer and home prices fall.

Credit-card companies are adopting stricter lending standards and making it harder for consumers to borrow, says Robert McKinley, president of Ft. Myers, Florida-based, a research organization that tracks the industry.

Home Prices

That comes on top of the hit homeowners are taking from the drop in housing prices, which fell 7.7 percent in 20 metropolitan areas during November from a year earlier, according to the S&P/Case-Shiller price index.

Allen Sinai, chief economist at Decision Economics in New York, calls the pullback by consumers ``a seismic shift. For several years, the growth of consumer spending is going to be significantly below its long-run average of 3.5 percent.''

Consumers have also been pinched by the rising cost of food, fuel and other necessities. Inflation, as measured by the personal consumption price index, clocked in at a 3.5 percent year-over-year rate in December, the highest for that month since 1990.


The increase is stoking fears of more to come. The yield on the 10-year Treasury note, which acts as a benchmark for mortgage rates, rose to 3.80 percent on Feb. 22 from 3.44 percent a month earlier, even though the Fed reduced its overnight lending rate by 1.25 percentage points during the period.

Behind the heightened inflation concerns: slowing productivity growth, making it harder for companies to recoup higher costs through increased efficiency.

Robert Gordon, a professor at Northwestern University in Evanston, Illinois, says the surge in productivity that began around 1995 was a one-time event sparked by the advent of the Internet. He pegs the underlying growth rate of productivity at about 1.8 percent, down from a high of 2.9 percent earlier this decade.

Nobel laureate Edmund Phelps says there's little the Fed can do when faced with such a structural change. ``We've had a series of booms, and it seems to me they are now over,'' says Phelps, an economics professor at Columbia University in New York. ``As a result, we're going to see a period of slower growth than in the past.''

Home Resales in U.S. Probably Dropped, Further Eroding Growth

By Courtney Schlisserman

Feb. 25 (Bloomberg) -- Sales of existing homes in the U.S. probably dropped in January to the lowest level in at least nine years, according to a survey of economists, signaling the housing slump is deepening and will weigh on growth in 2008.

The National Association of Realtors will report that purchases fell 1.8 percent to an annual rate of 4.8 million, the fewest since record-keeping began in 1999, according to the median forecast in a Bloomberg News survey of 63 economists.

Mounting foreclosures are adding to a glut of unsold homes that is driving down property values. Would-be homebuyers may be waiting for even lower prices, keeping the housing market depressed for a third year and dragging the economy close to a recession.

``With the backdrop of elevated inventories of unsold homes and continued falling home prices, prospects for the housing market in general seem quite grim,'' said Dana Saporta, an economist at Dresdner Kleinwort in New York.

The Realtors group is scheduled to release the report at 10 a.m. in Washington. Estimates in the Bloomberg News survey ranged from 4.65 million to 5 million.

For all of last year, sales of single-family homes declined 13 percent, the most since 1982, the group said Jan. 24. Earlier this month, it forecast sales this year would slip to 5.38 million, from 5.65 million for all of 2007.

The effects of the worst housing recession in 25 years have spread into other areas of the economy. The Federal Reserve Bank of Philadelphia's general economic index fell this month to minus 24, the weakest reading in seven years.

Recession Odds Rising

Economists surveyed by Bloomberg News this month put the chance of the U.S. entering a recession at 50-50, up from 40 percent odds a month earlier. The Federal Reserve last week said it lowered its growth forecast and now expects the economy to expand 1.3 percent to 2 percent in the fourth quarter from the same period of 2007, compared with the 1.8 percent to 2.5 percent it projected in October.

The Commerce Department is scheduled to release the January report on new home sales on Feb. 27. While economists expect that figure to decline, some measures indicate demand for new home sales may be near the bottom.

Homebuilder Confidence

For example, confidence among U.S. homebuilders rose for a second straight month in February and companies said there were more prospective buyers touring properties, the National Association of Homebuilders said on Feb. 19. In addition, the Reuters/University of Michigan index of consumer sentiment showed a record number of Americans said lower prices made conditions more favorable for buying a house.

Elevated inventories and sluggish demand are prompting sellers to lower their prices. The National Association of Realtors forecast on Feb. 7 that prices for existing homes will decline 1.2 percent this year.

``We're seeing prices now that are basically back to '02, '03 levels,'' Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., said in a Bloomberg Television interview on Feb. 21. ``That begins to get compelling for customers.''

Even so, the housing market ``continues to be in a very difficult position right now,'' and weaker sales are cutting into builders' profits, Hovnanian said.

Bloomberg Survey


Date of Release 02/25
Observation Period Jan.
Median 4.80
Average 4.81
High Forecast 5.00
Low Forecast 4.65
Number of Participants 63
Previous 4.89
4CAST Ltd. 4.80
Action Economics 4.88
Aletti Gestielle SGR 4.80
Analytical Synthesis 4.70
Argus Research Corp. 4.88
Banc of America Securitie 4.85
Bank of Tokyo- Mitsubishi 4.84
Bantleon Bank AG 4.75
Barclays Capital 4.85
BBVA 4.83
BMO Capital Markets 4.79
BNP Paribas 4.85 4.90
Calyon 4.79
CIBC World Markets 4.79
Citi 4.84
Collineo Asset Mgmt 4.65
Commerzbank AG 4.80
Credit Suisse 4.80
Daiwa Securities America 4.80
DekaBank 4.80
Desjardins Group 4.84
Deutsche Bank Securities 4.75
Dresdner Kleinwort 4.70
First Trust Advisors 4.65
Fortis 4.95
FTN Financial 4.80
Global Insight Inc. 4.76
H&R Block Financial Advis 4.88
Helaba 4.80
IDEAglobal 4.70
Informa Global Markets 4.80
ING Financial Markets 4.79
Insight Economics 4.80
Intesa-SanPaulo 4.80
J.P. Morgan Chase 4.77
Janney Montgomery Scott L 4.74
JPMorgan Private Client 4.82
Landesbank Berlin 4.85
Landesbank BW 4.85
Lehman Brothers 4.80
Lloyds TSB 4.80
Maria Fiorini Ramirez Inc 5.00
Merrill Lynch 4.80
MFC Global Investment Man 4.75
Mizuho Securities 4.85
Moody's 4.75
Morgan Stanley & Co. 4.80
National City Bank 4.75
Nomura Securities Intl. 4.90
PNC Bank 4.82
RBS Greenwich Capital 4.85
Ried, Thunberg & Co. 4.82
Scotia Capital 4.85
Stone & McCarthy Research 4.81
Thomson Financial/IFR 4.85
Unicredit MIB 4.75
University of Maryland 4.83
Wachovia Corp. 4.70
Wells Fargo & Co. 4.85
WestLB AG 4.85
Westpac Banking Co. 4.84
Wrightson Associates 4.84

Friday, February 22, 2008

Stocks in Europe, Asia Retreat; RWE, KDDI, Freddie Mac Decline

By Sarah Jones

Feb. 22 (Bloomberg) -- Stocks fell in Europe and Asia after RWE AG's earnings missed analysts' estimates and phone companies cut prices. U.S. index futures retreated.

RWE declined in Frankfurt after Germany's second-largest utility had an unexpected loss. KDDI Corp. and NTT DoCoMo Inc. tumbled in Japan on concern lower prices will hurt earnings. Freddie Mac dropped in Germany after Merrill Lynch & Co. recommended selling shares in the second-biggest provider of money for U.S. home loans.

Europe's Dow Jones Stoxx 600 Index slid 0.3 percent at 12:30 p.m., with about two stocks declining for every one that rose. The MSCI Asia Pacific Index fell 0.7 percent. Futures on the Standard & Poor's 500 Index lost 0.3 percent.

``The concern at the moment is that earnings expectations in the market have to come down quite a long way,'' said Jane Coffey, head of equities at Royal London Asset Management, where she helps oversee about $1 billion. ``It's about how the market reacts to that.'' Coffey commented in a Bloomberg TV interview.

The MSCI World Index has retreated 9.1 percent this year on concern losses related to subprime mortgages and an economic slowdown in the U.S. will curb profit growth. Profits at S&P 500 companies are expected to shrink this quarter and next, while analysts have cut their estimates for Stoxx 600 members' 2008 earnings growth to 9.2 percent from 11 percent at the end of last year, Bloomberg data show.

National benchmarks dropped in 16 of the 18 markets in western Europe. Germany's DAX lost 1.3 percent, while France's CAC 40 slipped 0.6 percent. The U.K.'s FTSE 100 lost 0.2 percent. In Asia, Japan's Nikkei 225 Stock Average and Hong Kong's Hang Seng Index both decreased 1.4 percent.


RWE tumbled 5.8 percent to 80.15 euros after the utility posted a fourth-quarter net loss of 168 million euros ($249 million) because of power plant halts and regulatory changes.

This compares with a profit of 1.76 billion euros a year earlier, according to Bloomberg calculations based on full-year earnings distributed today. The median estimate of nine analysts surveyed by Bloomberg News was for profit of 439 million euros.

KDDI, Japan's second-biggest mobile-phone operator, sank 10 percent to 650,000 yen, the most since September 2001. A plan to waive calling fees for family and corporate customers who sign up for a two-year contract will reduce annual sales by 25 billion yen ($233 million) in the fiscal year to March 2009, the company said yesterday.

NTT DoCoMo, the largest wireless carrier in Japan, fell 4.8 percent to 158,000 yen. Softbank Corp., the country's No. 3 mobile-phone operator, slid 2 percent to 2,210 yen.

``The profit outlook for the whole industry is taking a downturn,'' said Hiroshi Fujimoto, who helps manage the equivalent of $3.2 billion at Shinkin Asset Management Co. ``The fear that mobile-phone operators would get aggressive in competing with each other has become a reality.''

`Financial Headwinds'

Freddie Mac fell 10 cents to $27.65 in Germany after Merrill downgraded the shares to ``sell'' from ``neutral.'' The brokerage also lowered its recommendation for Fannie Mae, the largest provider of money for U.S. home loans. Fannie Mae shares didn't trade in Europe.

``We do not think the stocks fully reflect the severity or duration of the financial headwinds facing the companies,'' analysts including San Francisco-based Kenneth Bruce wrote in a research note to clients dated today. There is ``more pain than gain,'' he wrote.

Caltex Australia Ltd., the country's largest refiner, tumbled 11 percent to A$14.72, the biggest drop since September 2001. The company forecast weaker profits from processing crude oil this year and cut its final dividend.

New Star Asset Management Group Ltd. and Henderson Group Plc fell in London after Citigroup Inc. cut price estimates for the stocks and recommended lowering holdings in ``traditional'' U.K. asset managers.

`Further Downside'

New Star, the fund company set up by John Duffield in 2000, fell 3.6 percent to 95 pence after Citigroup lowered its share- price estimate 39 percent to 86 pence. Henderson dropped 2.1 percent to 95.5 pence. Citigroup cut its estimate 21 percent to 115 pence.

``There is further downside for the U.K. asset managers,'' analyst Carolyn Dorrett wrote in a note to clients today. ``We would use any market strength as an opportunity to reduce holdings in traditional asset managers.''

Renault SA led carmakers lower after Morgan Stanley cut its share price estimate for the company by 19 percent to 66 euros, saying Renault's Nissan Motor Co. unit is ``deteriorating'' and cash flows will disappoint. The stock dropped 4.8 percent to 69.9 euros.

Biffa Plc climbed 1.3 percent to 369.75 pence after the Daily Telegraph reported Terra Firma Capital Partners Ltd., the buyout firm run by financier Guy Hands, may make a 1.5 billion- pound counter-bid jointly with France's Suez SA for Biffa. The Telegraph didn't say where it got its information.

Biffa accepted a 1.2 billion pound bid this month from Montagu Private Equity LLP and Global Infrastructure Partners, the Telegraph said.