Monday, March 31, 2008

Lehman to Sell $3 Billion of Shares to Raise Capital (Update4)

By Yalman Onaran

March 31 (Bloomberg) -- Lehman Brothers Holdings Inc. is selling at least $3 billion of new shares to bolster capital and squash speculation about a cash shortage that pushed the stock down 42 percent this year.

Lehman, the fourth-biggest U.S. securities firm, will offer 3 million convertible preferred shares, the company said in a statement today. Demand for the shares was already three times greater than the amount offered as of 6:30 p.m. in New York, according to a person familiar with the offering who declined to be identified before the sale is completed tomorrow.

``We still maintain that we don't need capital, but we've realized that perception is the dominant issue in today's markets,'' Chief Financial Officer Erin Callan said in an interview. ``This is an endorsement of our balance sheet by investors.''

Lehman, led by Chief Executive Officer Richard Fuld, fell as much as 48 percent on March 17 on speculation the New York- based firm would face the same cash shortage that broke Bear Stearns Cos. following a run on the company. Merrill Lynch & Co., Citigroup Inc. and Morgan Stanley have also raised cash from investors after more than $200 billion of writedowns and losses tied to the collapse mortgage markets at the world's biggest financial companies.

Shares Fall

The stock fell 2.8 percent $36.60 in New York trading after the market's official close, while credit-default swaps declined, showing investors believe Lehman's ability to pay debts has improved. Lehman closed at $37.64 during the regular session. Credit-default swaps tied to Lehman's senior unsecured bonds narrowed 15 basis points after the announcement to 285 basis points, according to broker Phoenix Partners Group in New York. A decline signals improvement in investor confidence.

Terms of the offering include a coupon payment of 7 percent to 7.5 percent. The conversion premium will be 30 to 35 percent above the current stock price, according to people familiar with the offering who declined to be identified.

``They have to make their balance sheet stronger in this environment,'' said CreditSights Inc. analyst David Hendler. ``Banks and brokers need to write down their weak positions, and they need capital in order to do that.''

The capital increase will provide ``financial flexibility,'' the firm said in the statement.

Lehman said on March 18 that it had $30 billion of cash and $64 billion in assets that could easily be turned into cash. The securities firm has access to an additional $200 billion from a Federal Reserve credit facility, according to Prashant Bhatia, an analyst at New York-based Citigroup.

Reality Check

Bhatia upgraded his recommendation for Lehman to ``buy'' from ``neutral'' last week, saying the stock price drop was overdone.

``Reality will trump fear,'' Bhatia wrote on March 28. ``Lehman has ample liquidity to run its business.''

The firm's net income declined 57 percent in the quarter, less than analysts estimated, because of a $1.8 billion writedown on mortgage assets. Merger advisory fees jumped 34 percent, investment-management revenue surged 39 percent and equities rose 6 percent.

Bear Stearns, formerly the fifth-largest U.S. securities firm, was forced to sell itself to JPMorgan Chase & Co. this month at a fraction of its market value with financial support from the Fed.

Merrill Lynch raised $6.6 billion in January by selling preferred shares to a group including the Kuwaiti Investment Authority and Japan's Mizuho Financial Group Inc.

U.S. Stocks Gain, Led by Financial Firms; Merck Shares Tumble

By Michael Patterson

March 31 (Bloomberg) -- U.S. stocks rose for the first time in four days as lower oil prices, improved business activity and a Treasury plan to help prevent financial crises boosted expectations the economy will weather growing credit losses.

Citigroup Inc., Wachovia Corp. and JPMorgan Chase & Co. helped the Standard & Poor's 500 Index pare its biggest quarterly decline since 2002. General Electric Co. and FedEx Corp. rallied after the National Association of Purchasing Management-Chicago's business index increased more than forecast. Merck & Co. fell the most since 2004, limiting the market's advance, after doctors recommended not using two of its cholesterol pills in favor of low-cost alternatives.

Changes in financial regulation ``really could be good for the markets,'' Peter Sorrentino, a senior portfolio manager at Huntington Asset Management, which oversees $15 billion in Cincinnati, said in an interview on Bloomberg Television. ``It could restore confidence and it could bring investors back into the marketplace.''

The S&P 500 climbed 7.48 points, or 0.6 percent, to 1,322.7, reducing its monthly loss to 0.6 percent. The Dow Jones Industrial Average increased 46.49, or 0.4 percent, to 12,262.89. The Nasdaq Composite Index added 17.92, or 0.8 percent, to 2,279.1. Almost two stocks rose for every one that fell on the New York Stock Exchange.

Quarterly Tumble

The S&P 500 pared its yearly decline to less than 10 percent as the Chicago purchasers' group report showed exports spurred new orders, easing concern that business investment would dry up as the economy slows. Treasury Secretary Henry Paulson said the Federal Reserve, which engineered JPMorgan's takeover of Bear Stearns Cos. this month and became lender of last resort to the biggest securities firms, should expand its oversight of financial services beyond banks.

Retailers rallied 1.4 percent as a group, led by Macy's Inc., after crude oil fell more than $4 a barrel in New York.

The S&P 500 still posted its worst quarter since September 2002, when the fallout from telephone company WorldCom Inc.'s bankruptcy sent the index down almost 18 percent. The benchmark for U.S. equities has declined for five straight months, the longest losing streak since 1990.

The S&P 500 Financials Index gained 0.9 percent today, paring its decline this year to less than 15 percent, and contributed the most to the broader index's advance. Wachovia, the fourth-largest U.S. bank, gained $1.01 to $27. JPMorgan, the third-biggest, rose 24 cents to $42.95.

Paulson's `Blueprint'

Paulson's 218-page ``Blueprint for Regulatory Reform,'' commissioned two months before credit markets seized up in August, said more rules aren't the answer to the current period of turmoil. The former chairman of Goldman Sachs Group Inc. said the structure of regulating banks, securities firms and insurance companies is outmoded, and he acknowledged that the changes will take ``many years to complete'' and most will require legislative approval.

The world's biggest financial institutions have reported more than $200 billion in asset writedowns and credit losses stemming from the collapse of the U.S. subprime-mortgage market.

Citigroup added 59 cents to $21.42. The biggest U.S. lender by assets said it reorganized its flagging consumer division as Chief Executive Officer Vikram Pandit tries to reverse a profit slide at the company's biggest revenue generator.

Morgan Stanley

Morgan Stanley climbed after Sanford C. Bernstein & Co. analyst Brad Hintz advised clients to buy shares of the second- biggest U.S. securities firm because it can weather credit- market losses better than its rivals.

Morgan Stanley and Merrill Lynch & Co. have the ``strongest liquidity position'' among the largest securities firms, Hintz wrote in a research note. Morgan Stanley shares gained 96 cents to $45.70. Merrill added 81 cents to $40.74.

Financial shares may pare their gain tomorrow. Lehman Brothers Holdings Inc. said after the official close of U.S. exchanges that it's selling at least $3 billion of convertible preferred shares to U.S. institutions to reassure investors it has ample access to capital. Lehman, which slipped 0.6 percent in regular trading, extended its decline by $1.73 to $35.91 in after-hours trading as of 4:50 p.m. in New York.

GE, the second-biggest U.S. company by market value, gained 40 cents to $37.01. FedEx, the second-largest U.S. package- shipping company, rose $1.40 to $92.67. Deere & Co., the largest maker of farm equipment, increased 50 cents to $80.44.

The Chicago purchasers' group said its business index rose to 48.2 in March from a six-year low of 44.5 a month earlier. Figures lower than 50 signal contraction. The median forecast of economists surveyed by Bloomberg News projected a gain to 46.

``The news still isn't going to be tremendous, but it's going to be, in a lot of cases, better than people expected,'' said Eric Thorne, an investment adviser at Bryn Mawr Trust Co., which oversees about $2.6 billion in Bryn Mawr, Pennsylvania. ``We like the more economically sensitive parts of the market.''


Micron Technology Inc. led semiconductor companies in the S&P 500 to their biggest rally in a week. Citigroup analyst Glen Yeung wrote in a report that the average selling prices for so- called dynamic random access memory chips rose 3.1 percent in February from a month earlier, the first increase since August. Micron, the largest U.S. maker of memory chips, rose 51 cents, or 9.3 percent, to $5.97 for the biggest gain in the S&P 500.

SanDisk Corp., the largest maker of digital-camera memory cards, added $1.31 to $22.57. Intel Corp., the world's biggest chipmaker, increased 39 cents to $21.18.

Crude oil fell 3.8 percent to $101.58 a barrel in New York on signs that a U.S. report will show inventories rose for the 11th time in 12 weeks, helping boost shares of automakers and retailers.

GM, Retailers Rally

General Motors Corp., the biggest U.S. carmaker, gained 38 cents to $19.05. Automakers, which release March results tomorrow, may report sales in the U.S. declined for a fifth straight month, according to analysts surveyed by Bloomberg.

Macy's climbed $1.09 to $23.06. Wal-Mart Stores Inc., the world's largest retailer, advanced 56 cents to $52.68. Target Corp., the second-biggest U.S. discount retailer, increased 99 cents to $50.68 today.

AT&T Inc. gained 64 cents to $38.30, the highest level since Feb. 13. The biggest U.S. phone company won a $1.6 billion contract to provide communications services to Royal Dutch Shell Plc, its largest deal with a European company.

Fortune Brands, Rowan

Fortune Brands Inc., the holding company for Jim Beam bourbon, jumped $5.64 to $69.50 on a plan to repurchase as many as 15 million shares after losing the bidding for the Absolut vodka brand.

Rowan Cos. advanced $3.30, or 8.7 percent, to $41.18 for the largest gain since July 2002. The U.S. oil and natural-gas driller with a fleet of 21 rigs said it will pursue monetization of its manufacturing unit LeTourneau Technologies Inc. Options include an initial public offering, Rowan said.

Merck declined $6.56, or 15 percent, to $37.95. Schering- Plough Corp. sank $5.06, or 26 percent, to $14.41 for the biggest drop since Bloomberg began tracking price data in July 1980.

Heart doctors at the American College of Cardiology meeting in Chicago said physicians should limit prescriptions for the companies' jointly sold cholesterol pills Vytorin and Zetia.

The drugmakers sold $5.2 billion of Vytorin and Zetia last year. The study showing the drugs work no better than a generic medicine at one-fifth the price may cost the two companies $1.3 billion in sales this year and $1 billion next year, according to Goldman Sachs analyst Jim Kelly.

`Real Risk'

S&P 500 members may report a 9.9 percent average drop in first-quarter profit, according to analysts' estimates compiled by Bloomberg. Earnings at health-care companies had been expected to rise 1.3 percent during the first three months of 2008, according to the March 28 survey.

``The real risk in the market going forward is earnings,'' Craig Hester, who oversees about $1.5 billion as president and chief investment officer of Hester Capital Management, said in an interview on Bloomberg Television from Austin, Texas. ``I'm sure we'll see a lot of revisions downward.''

The MSCI World Index of developed nations dropped 9.5 percent this year for the biggest quarterly retreat since September 2002.

The S&P 500 has outperformed stock benchmarks in 15 of the world's 20 biggest equity markets this year, including Japan's Topix Index and the U.K.'s FTSE 100 Index, according to data compiled by Bloomberg. Taiwan's Taiex index was the only winner among the biggest markets' indexes in the first quarter, rising 0.8 percent. China's CSI 300 Index, which surged 162 percent last year, has retreated 29 percent in 2008 for the worst performance.

Treasuries rose today, rounding out their best annual start since 1995. The dollar traded within a cent of a record low against the euro, completing its biggest quarterly loss against the European currency in almost four years.

Oil Is Little Changed After Falling $4 on Supply Speculation

By Mark Shenk

April 1 (Bloomberg) -- Crude oil was little changed after falling more than $4 a barrel in New York yesterday on signs that a U.S. report will show inventories rose for the 11th time in 12 weeks as demand weakened.

Crude-oil supplies increased by 2.25 million barrels in the week ended March 28, according to the median of responses by 10 analysts surveyed by Bloomberg News before the Energy Department releases its weekly inventory data tomorrow.

``We're expecting that this week's Energy Department report will show crude supplies are still building as demand slumps,'' said Phil Flynn, a senior trader at Alaron Trading Corp. in Chicago.

Crude oil for May delivery was unchanged at $101.58 a barrel at 9:47 a.m. Sydney time in after-hours trading on the New York Mercantile Exchange. Oil gained 5.8 percent in the first quarter of 2008 and is up 54 percent from a year ago.

Yesterday, futures fell $4.04, or 3.8 percent, the biggest one-day drop since March 19. Prices rose as much as $1.16 earlier in yesterday's session.

Brent crude for May settlement fell $3.47, or 3.3 percent, Yesterday to settle at $100.30 a barrel on London's ICE Futures Europe exchange. Futures reached a record $108.02 a barrel on March 14.

New York futures prices rose to a record $111.80 a barrel on March 17 as investors purchased commodities in response to the plunging U.S. dollar. The currency's fall spurred interest in energy and metals as an inflation hedge.

`Out of Steam'

``I'm surprised we didn't move to the downside earlier today because we closed so weak on Friday,'' Tom Bentz, a broker at BNP Paribas in New York, said yesterday. ``Now it looks like we will test the $100 area in the short term. There's no headline you can point to; the market just ran out of steam.''

``Refinery runs are on the low side so there's not much demand for oil,'' Bentz said. ``There is no shortage of supply, at least in the U.S.''

Refineries operated at 82.2 percent of capacity in the week ended March 21, the lowest since October 2005, the department said last week.

``Prices are so high that we are susceptible to pullbacks unless there are bullish headlines,'' said Eric Wittenauer, an energy analyst at Wachovia Securities in St. Louis. ``Demand and product support just isn't there to support these prices.''

Gasoline Contracts

Gasoline for April delivery fell 10.07 cents, or 3.7 percent, to close at $2.6163 a gallon in New York yesterday. Futures touched $2.7752 on March 26, an intraday record for gasoline to be blended with ethanol, known as RBOB, which began trading in October 2005.

The April gasoline contract expired yesterday. The more- active May futures contract fell 8.64 cents, or 3.2 percent, to $2.6271 a gallon. It was up 0.29 cent, or 0.1 percent, to $2.63 a gallon at 9:18 a.m. in Sydney.

Total implied fuel demand averaged 20.3 million barrels a day in the four weeks ended March 21, down 2.2 percent from a year earlier, the Energy Department said last week.

Economists surveyed by Bloomberg News forecast that the Institute for Supply Management's national manufacturing survey today will show the measure fell to the lowest in almost five years. A government report this week will show that the nation lost jobs for a third month in March, economists said. The U.S. is the world's biggest energy-consuming country.

Treasury Secretary Henry Paulson proposed to overhaul how U.S. financial markets are regulated.

Paulson `Blueprint'

Paulson's 218-page ``Blueprint for Regulatory Reform'' said more rules aren't ``the answer'' to the current period of turmoil. The former chairman of Goldman Sachs Group Inc. said the structure of regulating banks, securities firms and insurance companies is outmoded, and the Fed should expand its oversight of financial services beyond banks.

Fighting between government forces and militiamen in Iraq eased after a truce offer from Moqtada al-Sadr. Iraq has the world's third biggest oil reserves, according to BP Plc.

An Iraqi oil pipeline that carries about 100,000 barrels a day to the Basra oil terminal was damaged by a fire started by an explosive device on March 27. Two larger pipelines, which together move about 1.5 million barrels a day of crude to the port on the Persian Gulf, were unaffected by the blast.

``We failed to hit the previous highs when the Basra pipeline was shut last week, which is important technically,'' Wittenauer said. ``This may be a sign of a further move lower.''

Australia Stocks Have Worst Quarter in 20 Years as Rates Rise

By Shani Raja and Malcolm Scott

April 1 (Bloomberg) -- Australian stocks fell the most in 20 years during the first quarter after rising interest rates cut demand for bank shares and slowed the economy's 17th year of expansion.

The All Ordinaries Index declined 16 percent in the first three months of the year, the most since the end of 1987, following the October crash. The benchmark S&P/ASX 200 Index, started in 1992, lost 16 percent in its worst quarter on record.

Commonwealth Bank of Australia, the nation's biggest provider of home loans, dropped 29 percent in the first three months as the Reserve Bank of Australia lifted the overnight cash rate target to an 11-year high to stem the fastest inflation since 1991. Higher borrowing costs are weighing on an expansion driven by demand for the nation's iron ore and coal and adding to global concern that credit-market losses will curb financial earnings.

``Australia has been hit on multiple fronts, not only by the global turmoil, but also by higher interest rates,'' said Shane Oliver, Sydney-based head of investment strategy and chief economist at AMP Capital Investors, which manages about $108 billion. ``Australia has a higher-than-average weighting of financials, which have been at the heart of the crisis.''

AMP Capital, which reduced equity holdings in the first quarter in favor of bonds, is starting to buy Australian banks after valuations slumped, Oliver said.

Financial firms in the S&P/ASX 200 trade for 9.8 times reported profit, the cheapest since records began in November 2001. The price-to-earnings multiple for Melbourne-based National Australia Bank Ltd., the nation's biggest by assets, sank to 9.9 times earnings in March, the lowest since 1996.

Cheaper Shares

The S&P/ASX 200 is valued at 13.8 times estimated earnings, about 21 percent below its five-year average, and down from a high of 24.9 times in December 2004.

The declines in Australian stocks compare with a 10 percent drop this year in the Standard & Poor's 500 Index, the benchmark for American equities, and the MSCI World Index's 9.7 percent retreat. Australia's All Ordinaries index also dropped more in the fourth quarter of 1987, losing 41 percent compared with a 23 percent decline in the S&P 500.

The 49-member S&P/ASX 200 Finance Index has slumped 23 percent this year, the worst-performing group. Financial stocks make up 37 percent of the S&P/ASX 200 by weighting, compared with 17 percent in the S&P 500.

Allco, Centro Plunge

Allco Finance Group Ltd., the Sydney-based asset manager that breached loan obligations, plunged the most in the S&P/ASX 200, sinking 92 percent to 48 Australian cents. Centro Properties Ltd., the Australian property trust seeking to refinance A$4.9 billion ($4.5 billion) of debt, lost 70 percent, the third- biggest decline.

Commonwealth posted its worst quarterly decline since the Sydney-based bank sold shares to the public in 1991. The Reserve Bank, headed by Governor Glenn Stevens, raised the benchmark rate by a quarter percentage point four times since August to cool core inflation, which accelerated to 3.8 percent in the fourth quarter. Stevens boosted interest rates to 7.25 percent as the U.S., Canada and the U.K. cut borrowing costs to revive growth.

Australia's $1 trillion economy grew at the slowest pace in more than a year in the fourth quarter compared with the previous three months as construction declined and bottlenecks at ports cut shipments. Gross domestic product rose 0.6 percent from the third quarter and 3.9 percent from a year earlier. The annual rate dropped from 4.3 percent in the third quarter.

Nearing Bottom

The market may be nearing its bottom, Paul Brunker, JPMorgan Chase & Co.'s Sydney-based strategist for Australia, wrote in a March 31 report. Financial shares led the S&P/ASX 200's 5.3 percent rebound from a 17-month low set March 18. Raw-material companies were the only industry out of 10 that declined during that period.

``In terms of the speed of the correction, we've probably seen the largest part of it,'' said Troy Angus, who helps oversee A$3.6 billion at Paradice Investment Management in Sydney. ``In the last week or two we've been buying financials. Some of them were very beaten up, and we considered them to have attractive valuations.''

Michael Birch, who helps manage the equivalent of $140 million at Wallace Funds Management in Sydney, expects demand for oil and metals will help commodities companies.

Melbourne-based BHP Billiton Ltd., the world's largest mining company, has a P/E of 14.3. That's 21 percent less than the valuation for raw-materials companies in the S&P 500.

While all of the S&P/ASX 200 Index's 10 groups have dropped this year, measures of energy and materials shares have done better, declining 4.6 percent and 6.7 percent, respectively. The three biggest gainers, topped by Felix Resources Ltd., are coal- mining companies benefiting from record prices for the fuel.

``We think resources stocks have pretty good underlying fundamentals and should continue to perform well over this year,'' he said.

Sunday, March 30, 2008

Japan's Industrial Output Falls for Second Month (Update1)

By Jason Clenfield

March 31 (Bloomberg) -- Japan's manufacturers cut production in February for a second month as the U.S., the country's biggest export market, verges on a recession.

Output fell 1.2 percent from January, when it slid 2 percent, the Trade Ministry said today in Tokyo. The median estimate of 32 economists surveyed by Bloomberg News was for a 2 percent drop.

The first back-to-back declines in production in nine months indicate companies are concerned world demand will slow as the U.S. economy grinds to a halt. Economic and Fiscal Policy Minister Hiroko Ota said last week the U.S. slowdown may start to take its toll on the emerging markets where Japan ships more than half its exports.

``Companies are becoming more and more cautious,'' Masamichi Adachi, an economist at JPMorgan Securities in Tokyo, said before the report was released. ``Everybody expects external demand to slow.''

The yen traded at 99.39 per dollar as of 9:03 a.m. in Tokyo from 99.24 before the report was published.

Companies surveyed said production will rise 2 percent in March before falling 1 percent in April, the report showed.

Reports last week showed a deepened housing slump is taking its toll on American consumers and that the economy's six-year expansion may be coming to an end. Japan's economy is also deteriorating, with inflation quickening to the fastest pace in a decade, unemployment rising and household spending stalling.

Tankan Survey

The Bank of Japan's quarterly Tankan survey of business confidence, due tomorrow, will probably show that sentiment among the country's biggest manufacturers fell in March to its lowest level in four years. The yen's rise and record oil prices are eroding profits, just as the U.S. slowdown is hurting sales.

Toyota Motor Corp., Japan's biggest carmaker, this month said the company may miss its 2008 sales target because the yen's gains make its cars more expensive overseas. The rising cost of steel is also making each sale less profitable, it said. The yen has risen 13 percent against the dollar this year.

Canon Inc., the nation's largest camera maker, forecast that belt-tightening among U.S. consumers will cause sales in the Americas to fall for the first time in nine years.

The risk of a slowdown and worsening sentiment among businesses and consumers has investors betting the Bank of Japan will cut interest rates this year. Traders see a 54 percent chance the central bank will lower the key rate from 0.5 percent by December, according to JPMorgan Chase & Co. calculations.

Still, demand from Asia and Europe has so far helped manufacturers weather the drop in U.S. sales.

`Still Holding Up'

``There's no question that there's a severe downturn in the U.S. economy, almost certainly a recession, but the rest of the world is still holding up,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London.

Japanese export growth unexpectedly accelerated in February, thanks to higher demand from emerging markets, even as shipments to the U.S. fell for a sixth month.

Mitsubishi Motors Corp. said last month its overseas sales surged 41 percent in 2007, led by Russian demand. Japan's exports to Russia, where oil revenue is helping to expand the economy, have more than doubled in the past two years.

Demand from developing economies prompted Mitsubishi Motor, Toyota and Nissan Motor Co. to increase production in February, even as U.S. sales slow. Nissan, which forecasts sales to China will rise 11 percent to half a million cars this year, raised domestic output 28 percent from a year earlier.

Payrolls May Have Slumped for Third Month: U.S. Economy Preview

By Bob Willis

March 30 (Bloomberg) -- The U.S. lost jobs for a third month in March and manufacturing contracted at the fastest pace in five years, signs the economy continues to turn down, economists said before reports this week.

Payrolls probably shrank by 50,000, according to the median estimate of economists surveyed by Bloomberg News before the Labor Department's April 4 report. The last time the economy lost jobs for at least three consecutive months coincided with the start of the Iraq War in 2003.

``The economy has slipped into a recession,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``We expect the labor market to weaken, with payrolls falling steadily through the middle of next year.''

Job losses, slumping confidence and the biggest plunge in housing in a generation all point to a slowdown in consumer spending that will weaken growth. Federal Reserve Chairman Ben S. Bernanke will testify before Congress this week after lowering interest rates and extending credit to non-banks in an attempt to calm financial markets.

The projected decrease in payrolls would follow a decline of 63,000 in February and a smaller drop in January. The jobless rate likely rose to 5 percent from 4.8 percent, the survey said.

Factory payrolls in March probably shrank by 40,000 workers, reflecting automakers' efforts to trim costs and a strike at a suppler for General Motors Corp., economists project the jobs report may show.

Strike's Influence

A walkout by workers at American Axle & Manufacturing over pay and benefits that started on Feb. 26 has idled almost half of GM's North American workforce. The payroll figures may be reduced by as much as 20,000 workers because of the effects of the strike, according to Morgan Stanley economist David Greenlaw.

Ford Motor Co., which lost $15.3 billion in the past two years, may cut more jobs in North America, Chief Executive Officer Alan Mulally said earlier this month.

``The old ways of doing business are gone,'' Joe Hinrichs, Ford's manufacturing chief, and Marty Mulloy, vice president of labor affairs, said in a March 19 commentary sent to newspapers in communities where Ford has plants. ``We must continue to downsize and simply will not have enough jobs for all of our current hourly workers.''

Job losses in financial markets are also mounting following the collapse in subprime lending.

Wall Street banks hit by mortgage losses and writedowns have cut more than 34,000 jobs in the past nine months, the most since the dot-com boom fizzled in 2001, according to the Securities Industry and Financial Markets Association.

Job Losses

This year, banks including Lehman, Citigroup Inc. and Morgan Stanley have been reducing staff in fixed income trading, securitization and investment banking. So far, Lehman has eliminated 18 percent of its workforce, Morgan Stanley has cut 6.2 percent, and Merrill Lynch & Co. has trimmed 4.5 percent.

``Rising unemployment should continue to slow wage growth, adding to the strain on consumers,'' said Lehman's Harris.

Manufacturers are retrenching as demand weakens. The Tempe, Arizona-based Institute for Supply Management may report April 1 that its factory index fell to 47.5 this month, the lowest level since April 2003, from 48.3 in February, according to the survey median. A reading of 50 is the dividing line between expansion and contraction.

The following day, the Commerce Department may report that factory orders in February dropped 0.8 percent following a 2.5 percent decline the prior month.

Services Contract

In another sign that the housing recession is dragging down other areas, service industries contracted for a third month in March, the ISM is projected to report on April 3.

The group's non-manufacturing index, which covers 90 percent of the economy, fell to 48.5 this month, from 49.3 in February, according to the median forecast. Services haven't contracted for three consecutive months since 2001-2002, when the economy was emerging from the last recession.

``The tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters,'' the Fed said March 18 following its last policy meeting. ``Growth in consumer spending has slowed and labor markets have softened.''

Bernanke will elaborate on the outlook before the Joint Economic Committee of Congress on April 2.

Seeking to ease credit, restore confidence to financial markets and cushion the slowdown, the Fed on March 18 lowered its key rate by three-quarters of a point and vowed to act ``as needed'' to cushion the economy. The Fed has cut the benchmark rate by 3 percentage points since September.

Bloomberg Survey

Release Period Prior Median
Indicator Date Value Forecast
Chicago PM Index 3/31 March 44.5 46.0
ISM Manu Index 4/1 March 48.3 47.5
ISM Prices Index 4/1 March 75.5 75.0
Construct Spending MOM% 4/1 Feb. -1.7% -1.0%
Factory Orders MOM% 4/2 Jan. -2.5% -0.8%
Initial Claims ,000's 4/3 30-Mar 366 366
Cont. Claims ,000's 4/3 23-Mar 2845 2848
ISM NonManu Index 4/3 March 49.3 48.5
Nonfarm Payrolls ,000's 4/4 March -63 -50
Unemploy Rate % 4/4 March 4.8% 5.0%
Manu Payrolls ,000's 4/4 March -52 -40
Hourly Earnings MOM% 4/4 March 0.3% 0.3%
Hourly Earnings YOY% 4/4 March 3.7% 3.6%
Avg Weekly Hours 4/4 March 33.7 33.7

Australia Probably Will Leave Key Rate at 12-Year High of 7.25%

By Jacob Greber

March 31 (Bloomberg) -- Australia's central bank probably will keep interest rates unchanged to gauge fallout from the global credit squeeze, the worst quarterly slump on the nation's stock market since 1987 and waning consumer confidence.

Governor Glenn Stevens will leave the overnight cash rate target at 7.25 percent tomorrow in Melbourne after quarter-point increases this month and in February to cool the fastest inflation since 1991, according to all 24 economists surveyed by Bloomberg.

Stevens has scope to delay increases in borrowing costs after the local stock market shed 16 percent this year and consumer and business confidence slumped. Households are also paying more for mortgages after Australia's five largest banks boosted lending rates by more than the central bank this year.

``Some dust needs to settle after the recent increases,'' said Joshua Williamson, a Sydney-based economist at TD Securities Ltd. ``The Reserve Bank will want to assess how consumers and businesses are adapting to a higher interest-rate environment.''

Tomorrow's rate decision will follow the first back-to-back monthly increase in more than four years on March 4. That was the 12th boost since May 2002, when the rate was 4.25 percent. Policy makers will announce their decision at 2:30 p.m. in Melbourne tomorrow.

Twelve of the economists surveyed by Bloomberg last week say the bank will raise rates in May.

The past nine months have ``been a very challenging time in international financial markets,'' and Australia's ``financial community has certainly been affected by the global turmoil,'' prompting banks to tighten lending standards, Stevens said last week.

Stocks Slump

The All Ordinaries Index has slumped 16 percent this year, and is set to complete its worst quarter since the final three months of 1987, when it tumbled 41 percent. The benchmark S&P/ASX 200 Index, which dates back to 1992, has lost the same amount to record its worst quarter.

The U.S. Federal Reserve has responded to the freeze in credit markets by cutting its benchmark interest rate at the fastest pace in two decades to 2.25 percent.

In an emergency action earlier this month, the Fed also reduced the rate on direct loans to banks and said it will provide up to $30 billion to JPMorgan Chase & Co. to help finance the purchase of Bear Stearns Cos. after a run on that securities dealer.

Australia's five largest lenders, led by Commonwealth Bank of Australia, have added an average of 79 basis points, or 0.79 percentage point, to their home-loan interest rates this year, more than the 50 basis points added by the Reserve Bank to the overnight cash rate target in that period.

Spending Plans

Surging housing costs, as well as higher fuel and food prices, are forcing consumers and businesses to review spending plans.

Retail-sales growth stalled in January after rising for seven months, consumer confidence plunged to the lowest level in almost 15 years in March, and business sentiment in February held close to the weakest since the September 2001 terrorist attacks in the U.S.

Growth in the nation's $1 trillion economy slowed to 0.6 percent in the December quarter from the previous three months, when it expanded 1.1 percent, a report showed earlier this month.

Concern that the lowest unemployment in 33 years is driving up wages was a key reason central bank policy makers raised the benchmark rate by 25 basis points this month.

``Members viewed the standard macroeconomic considerations as continuing to suggest the need for further tightening,'' minutes from the March 4 policy meeting show. ``The economy still faced a period in which inflation could be uncomfortably high.''

Core Inflation

Annual core inflation surged to 3.8 percent in the fourth quarter, the fastest pace since 1991. The government is due to publish its first-quarter consumer prices report on April 23.

``When we get the March 2008 figures toward the end of April, we will most likely find that the rise over the four quarters is more like 4 percent,'' Governor Stevens said on March 14. ``It is far better to resist rising inflation now.''

The central bank, which aims to keep annual inflation between 2 percent and 3 percent on average, forecast last month that inflation will remain above 3 percent until 2010 as Chinese demand for coal and iron ore prompts companies such as miner Rio Tinto Group to expand and hire more workers. The jobless rate fell to 4 percent in February.

``The Reserve Bank is likely to continue warning of the dangers of higher inflation,'' TD Securities' Williamson said.

Bloomberg Survey

Following is a table of forecasts for the chance of an interest-rate increase tomorrow, the rate on April 1, May 6 and at the end of the second, third and fourth quarters:

Chance April 1 May 6 Q2 Q3 Q4
of move Rate Rate
Median 10% 7.25% 7.38% 7.38% 7.50% 7.50%
High Forecast 30% 7.25% 7.50% 7.50% 7.50% 7.50%
Low Forecast 0% 7.25% 7.25% 7.25% 7.25% 7.00%
No. of replies 24 24 24 24 24 24
4Cast 0% 7.25% 7.50% 7.50% 7.50% 7.50%
ABN Amro 2% 7.25% 7.25% 7.25% 7.25% 7.25%
AMP Capital 15% 7.25% 7.25% 7.25% 7.25% 7.25%
ANZ Bank 10% 7.25% 7.25% 7.25% 7.25% 7.25%
Ausbil Dexia 10% 7.25% 7.25% 7.25% 7.00% 7.00%
Barclays Capital 20% 7.25% 7.25% 7.25% 7.25% 7.25%
Citi 10% 7.25% 7.50% 7.50% 7.50% 7.50%
Commonwealth Bank 5% 7.25% 7.50% 7.50% 7.50% 7.50%
Deutsche Bank 5% 7.25% 7.50% 7.50% 7.50% 7.50%
Goldman Sachs 10% 7.25% 7.25% 7.25% 7.25% 7.25%
ICAP Australia 1% 7.25% 7.25% 7.25% 7.50% 7.50%
JPMorgan Chase 30% 7.25% 7.50% 7.50% 7.50% 7.50%
Lehman Brothers 0% 7.25% 7.25% 7.50% 7.25% 7.25%
Macquarie 2% 7.25% 7.50% 7.50% 7.50% 7.50%
Merrill Lynch 5% 7.25% 7.50% 7.50% 7.50% 7.50%
National Australia 5% 7.25% 7.25% 7.25% 7.25% 7.25%
Nomura Australia 10% 7.25% 7.50% 7.50% 7.50% 7.50%
RBC Capital 10% 7.25% 7.50% 7.50% 7.50% 7.50%
St. George Bank 0% 7.25% 7.50% 7.50% 7.50% 7.50%
Suncorp Banking 15% 7.25% 7.25% 7.25% 7.50% 7.50%
TD Securities 20% 7.25% 7.25% 7.25% 7.25% 7.00%
Thomson 25% 7.25% 7.50% 7.50% 7.50% 7.50%
UBS Australia 10% 7.25% 7.50% 7.50% 7.50% 7.50%
Westpac Bank 10% 7.25% 7.25% 7.25% 7.25% 7.25%

Thursday, March 27, 2008

Japan's Inflation Rate Rises to Highest in Decade (Update1)

By Mayumi Otsuma

March 28 (Bloomberg) -- Japan's consumer prices rose at the fastest pace in a decade in February as companies passed on higher costs of oil and food to households.

Core consumer prices, which exclude fruit, fish and vegetables, climbed 1 percent from a year earlier, compared with a 0.8 percent gain in January, the government's statistics bureau said today in Tokyo. The median estimate of economists surveyed by Bloomberg News was for a 0.9 percent increase.

Faster inflation amid slowing growth is a headache for the Bank of Japan, which may have to reverse its policy and cut interest rates to avert a recession. Bank of Japan acting Governor Masaaki Shirakawa and Deputy Governor Kiyohiko Nishimura, both of whom were appointed this month, say costlier energy and raw materials are dimming the economic outlook and the bank is ready to take ``flexible'' steps.

``Core inflation numbers will hover at high levels for a while because of oil and food and will hurt confidence'' of businesses and households, said Masamichi Adachi, a senior economist at JPMorgan Securities in Tokyo. ``We can't completely rule out the possibility of a rate cut'' later this year.

Traders see a 46 percent chance the central bank will lower the key overnight lending rate from 0.5 percent by December, JPMorgan Chase & Co. calculations show.

Rising Unemployment

Other reports today showed the unemployment rate unexpectedly rose to 3.9 percent in February and the ratio of jobs to applicants worsened, sliding to a two-year low of 0.97. Household spending was unchanged, the statistics bureau said. Economists estimated a 2.4 percent increase.

The yen traded at 99.53 per dollar at 8:52 a.m. in Tokyo, from 99.44 before the reports were published.

The bank's Tankan business survey on April 1 will probably show confidence of large manufacturers falling to the lowest level in four years as higher costs and a stronger yen erode profits, according to economists surveyed by Bloomberg News.

``No one can deny that the economy has been underperforming'' from the central bank's outlook, said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. ``Recent developments in the economy are pressuring the bank's new leaders to clearly downgrade their projections.''

Miyako Suda, a central bank board member, said yesterday growth in the year starting April 1 will probably fall short of the bank's 2.1 percent projection made in its twice-annual outlook last October. The central bank will release its next projections on April 30.

Consumers Pessimistic

Consumer confidence slid to a five-year low in February as prices of daily necessities rose while pay stagnated. Wages slid 0.7 percent in 2007, the steepest decline in three years.

Japanese food makers have raised prices of noodles, beer and bread in the past year because of higher costs of grains. Crude oil rose to a record $111.80 a barrel on March 17 and wheat soared to the highest ever this month.

Morinaga Milk Industry Co., Japan's second-largest maker of dairy products, this month said it will raise butter prices for the first time in 23 years to reflect costlier milk. Snow Brand Milk Products Co. and Calpis Co. said they'll follow suit.

``The dairy manufacturers had no other choice but to turn on price hikes to avoid making losses,'' said Tomonobu Tsunoyama, an analyst at Tokai Tokyo Securities. ``With little prospect that wages will rise any time soon, there's a concern that the price hikes may end up hurting sales.''

Tokyo's core prices, a harbinger of the nationwide index, rose 0.6 percent in March from a year earlier, following a 0.4 percent gain in February. Tokyo prices rose 0.l percent in the year ending March 31, the first increase in a decade.

Inflation Outlook

Core prices started rising in October after declining for eight months. They either hovered near zero or fell since March 1998, when an increase in the country's sales tax pushed gains to 1.8 percent.

Some economists say inflation may wane later this year as oil and commodities costs ease and consumer demand fails to pick up amid sluggish wage growth.

``With growth slowing and demand weakening in coming months, oil prices will probably fall and companies will continue to struggle to raise prices beyond oil and food,'' said Azusa Kato, an economist at BNP Paribas in Tokyo. ``Core-price inflation may slump to almost zero in the first quarter of 2009.''

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

Parliament's decision on whether to extend a higher tax on gasoline may also affect consumer prices. The tax is set to expire on March 31 after the opposition Democratic Party of Japan refused to discuss a bill to extend it.

The tax may be renewed in a month or disappear indefinitely. An permanent end to the levy would lower core prices by 0.4 percentage point and warrant a change in the inflation outlook, said Chiwoong Lee, an associate economist at Goldman Sachs Group Inc. in Tokyo.

Dollar Heads for Biggest Weekly Drop Against Euro in Two Years

By Kosuke Goto

March 28 (Bloomberg) -- The dollar fell against the euro, headed for its biggest weekly decline since January 2006, as traders increased bets that the Federal Reserve will cut interest rates again to avert a recession.

The dollar dropped versus 13 of the 16 most-traded currencies this week, falling 2.5 percent versus the euro before a government report today that is forecast by economists to show spending in the U.S. posted the smallest gain in more than a year last month. New Zealand's dollar rose after a government report showed the nation's economic growth accelerated at the fastest annual pace in three years in the fourth quarter.

``The U.S. may have already entered into a recession,'' said Michiyoshi Kato, a senior vice president of currency sales at Mizuho Corporate Bank Ltd. in Tokyo, a unit of Japan's second-largest publicly traded lender by assets. ``The Fed will keep lowering rates to defuse criticism that it always falls behind the curve. I am super dollar bearish.''

The dollar fell to $1.5812 per euro at 8:54 a.m. in Tokyo from $1.5779 in late New York yesterday and $1.5431 a week ago. The U.S. currency was at 99.53 yen from 99.65 yesterday and 99.58 a week ago. Japan's currency was little changed against the euro at 157.38, following a 2.5 percent loss this week.

The dollar may fall to $1.60 a euro next month, Kato forecast. That would surpass the low of $1.5903 reached March 17, the weakest level since the European currency debuted in 1999.

The New Zealand dollar rose against all 16 of the most- traded currencies, gaining to 80.61 U.S. cents from 80.35 cents in New York yesterday, and 80.25 yen from 80.06 yen.

Sixth Quarterly Loss

The U.S. dollar has fallen 7.7 percent against the euro this year, heading for its sixth straight quarterly loss and the biggest since 2004 as the Federal Reserve slashed interest rates by 3 percentage points since September to 2.25 percent to kick start economic growth.

Futures on the Chicago Board of Trade show traders increased bets the Fed will lower its benchmark target lending rate by a half-percentage point at a meeting ending April 30. The futures showed a 42 percent chance of a reduction of that size, compared with 36 percent the prior day. The remaining bets were for a cut of a quarter-point.

U.S. stocks dropped the most in a week on concern banks and securities firms will add to the $208 billion in asset writedowns and credit losses stemming from the collapse of the U.S. subprime-mortgage market since the start of 2007.

`Head South'

``With U.S. stocks falling amid concern over additional writedowns in U.S. financial institutions, there is still no situation for the dollar to recover,'' Masafumi Yamamoto, the Tokyo-based head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc, the fourth-biggest currency trader, wrote in a research note today. ``The dollar has further room to head south.''

The dollar may fall to $1.62 per euro by the middle of the year, Yamamoto forecast.

Japan's currency was little changed after a government report showed Japan's consumer prices rose at the fastest pace in a decade in February as companies passed on higher costs of oil and food to households.

Core consumer prices, which exclude fruit, fish and vegetables, climbed 1 percent from a year earlier, compared with a 0.8 percent gain in January, the government's statistics bureau said in Tokyo. The median estimate of economists surveyed by Bloomberg News was for a 0.9 percent increase.

New Zealand Economy Grows at Fastest Pace in 3 Years (Update3)

By Tracy Withers and Gavin Evans

March 28 (Bloomberg) -- New Zealand's economic growth accelerated in the fourth quarter, reaching the fastest annual pace in three years as it exported more butter, cheese and crude oil.

Gross domestic product increased 1 percent from the third quarter, when it gained 0.5 percent, Statistics New Zealand said in Wellington today. The median estimate of 13 economists surveyed by Bloomberg News was for a 0.8 percent expansion. The economy grew 3.7 percent from a year earlier.

The fastest annual growth since mid-2004 justifies Reserve Bank Governor Alan Bollard's decision to leave interest rates at a record-high 8.25 percent to combat inflation in the $104 billion economy. Economists say growth will slow as the property market cools and a drought cuts farm production, raising the prospect borrowing costs could be reduced in the second half of the year.

``The New Zealand economy finished 2007 with a flurry,'' said Hayden Atkins, an economist at Macquarie Group Ltd. in Sydney. ``But really this data doesn't tell the story of the headwinds the economy is facing coming into 2008. It's probably downhill from now.''

New Zealand's dollar rose to 80.62 U.S. cents at 12:42 p.m. in Wellington from 80.23 cents immediately before the report was released.

Bollard forecast this month that economic growth will slow to 2 percent in 2008. The average estimate of 11 economists surveyed by the New Zealand Institute of Research is for 1.7 percent.

Interest Rates

Consumer confidence slumped to a 10-year low in the first quarter, according to a survey published on March 26 by Westpac Banking Corp. and McDermott Miller Ltd. Finance Minister Michael Cullen last week said he couldn't rule out the possibility the economy may slip into a recession.

Seven of 15 economists surveyed by Bloomberg News say Bollard will cut interest rates this year. Eight expect no change until 2009. The central bank reviews the official cash rate on April 24.

Bollard said on March 6 rates needed to stay high ``for a significant time yet'' because annual inflation will stay above the 1 percent-to-3 percent range he targets until mid-2009. Consumer prices rose 3.2 percent in the fourth quarter from a year earlier.

``We'd expect inflationary pressure to dissipate quicker than expected, so the Reserve Bank of New Zealand could turn around on their more hawkish bias in the next couple of months,'' Macquarie's Atkins said.

Economic growth in the fourth quarter was stoked by commercial building, dairy exports and production from the Tui oil field, which began output in late July.

Dairy, Oil

Overseas shipments of goods and services rose 5.4 percent in the quarter, led by dairy products and oil, the statistics agency said. Imports volumes rose 4.3 percent.

Dairy shipments, which make up one-fifth of the nation's exports, rose after a late start to the season slowed third-quarter sales. Auckland-based Fonterra Cooperative Group Ltd., the world's biggest dairy exporter, said on Jan. 29 that sales in the six months through November were buoyed by rising milk production and higher prices.

Still, on Feb. 8 the company said drought had cut output in January, which may restrict the company's ability to fill new export orders.

Commercial construction rose 2.3 percent in the fourth quarter and manufacturing increased, led by dairy and meat processing. Business investment surged 6.2 percent as companies purchased plant and machinery to relieve capacity constraints.

Farm production increased, led by output from dairy farms. Mining, forestry and fishing rose 7.9 percent.

Consumer Spending

Residential construction fell 1.6 percent. Demand for property is declining amid rising home-loan interest rates and a slump in immigration to the lowest in more than six years. House sales dropped 32 percent in February from a year earlier, according to Real Estate Institute figures.

Consumer spending, which makes up 60 percent of the economy, rose 0.5 percent from the third quarter, when it gained 0.4 percent. Spending on alcohol, food and other so-called non-durable goods fell 1.4 percent. Purchases of durable items rose 1.5 percent, led mostly by clothing and recreation goods.

New Zealanders are cutting back on purchases of cars, computers and appliances as they pay higher interest costs on their mortgages and credit cards. The lending rate on a two-year fixed home loan was 9.5 percent in January compared with 8.2 percent a year earlier.

Hallenstein Glasson Ltd., the third-biggest publicly traded retailer, said this week that profit at its clothing stores fell in the six months ended Feb. 1.

``Retail conditions will continue to be challenging for the immediate future as high interest rates, increased fuel costs and cost-of-living increases restrict consumer spending,'' Chairman Warren Bell said in a statement to the stock exchange.

The GDP deflator was 4.1 percent in the year ended Dec. 31, the statistics agency said.

Tuesday, March 25, 2008

Japan's Export Growth Unexpectedly Quickens to 8.7% (Update2)

By Jason Clenfield

March 26 (Bloomberg) -- Japan's export growth unexpectedly accelerated in February as demand from emerging markets helped automakers ride out the U.S. slump.

Exports, which contributed more than half of the economy's expansion last quarter, climbed 8.7 percent from a year earlier after increasing 7.6 percent in January, the Finance Ministry said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg News was for a 7.5 percent gain.

Consumers in emerging economies are helping Hino Motors Ltd. and Honda Motor Co. make up for waning demand in the U.S., Japan's largest market. The resilience of the nation's shipments overseas even as the U.S. heads for a recession may mean Japan's slowdown won't be as pronounced as analysts have predicted.

``This is an impressively strong number and we may need to reassess the outlook for exports,'' said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. ``It looks like exports are less sensitive to the U.S. slowdown than expected.''

Imports increased 10.1 percent, and the trade surplus widened 0.9 percent to 969.9 billion yen ($9.7 billion), the ministry said.

The yen rose to 99.74 per dollar at 9:33 a.m. in Tokyo from 100.07 before the report was published.

Export growth to Asia quickened to 13.9 percent in February from 8.l percent a month earlier, the report showed. Shipments to China rose 14.9 percent, and sales to Europe gained 7.2 percent. Exports to the U.S., meanwhile, slid 6 percent from a year earlier, a sixth monthly decline.

Global Demand

``Global demand so far has held up far better than people have hoped,'' said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. ``We've got the Chinese and the Russians to thank for that. They've got money and they're spending it.''

Japan's sales to Russia doubled in the past two years. Those to China expanded 45 percent. That growth has reduced the importance of the U.S., which accounted for only 20 percent of total exports last year, compared with about 30 percent in 2000.

Hino Motors, Japan's largest maker of heavy-duty trucks, said yesterday operating profit for the year ending March 31 probably beat its own forecast because of higher sales in Indonesia and Latin America.

The International Monetary Fund forecasts that, despite the slower U.S. growth, the global economy will expand 4.1 percent this year, above the average 3.7 percent over the past quarter century. Emerging markets including China and India aren't only boosting world growth, they're also creating new customers for other Asian exporters.

South Korea, Taiwan

South Korea's exports climbed 20 percent in February, as Samsung Electronics Co. and Hyundai Heavy Industries Co. sold more mobile phones and ships to China and the Middle East. Orders for Taiwanese exports, an indicator of shipments over the next 90 days, rose 18 percent.

``If Korea and Taiwan can do it, why can't Japan?'' Action Economics' Cohen said.

Some companies are wary that the yen's rise against the dollar may crimp exporter earnings in coming months. Japan's currency has gained 7.1 percent in the past month, making it the best performer of 10 major currencies tracked by Bloomberg.

Toyota Motor Corp., Japan's biggest carmaker, last week said the company may miss its sales target this year because the yen's gains make its cars more expensive in the U.S. Canon Inc., the nation's biggest camera maker, forecasts profit growth in 2008 will be the slowest in nine years, as U.S. consumers tighten their belts.

Waning demand in the U.S, the world's biggest economy, may also eventually take its toll on the emerging markets where Japan ships about half its goods, according to Economic and Fiscal Policy Minister Hiroko Ota.

``We need to watch the depth and duration of the U.S. slowdown and the effect it will have on the corporate sector,'' she said yesterday.

Yen Rises as Stock Losses Cut Demand for Higher-Yielding Assets

By Kosuke Goto and Stanley White

March 26 (Bloomberg) -- The yen rose against the euro on speculation declines in stocks will prompt investors to pare holdings of higher-yielding assets funded with loans in Japan.

The currency gained against the Australian and New Zealand dollars, two favorites for so-called carry trades, after Asian equities fell for the first time in three days. The dollar traded close to a one-week low against the euro before a government report today that may show new home sales dropped.

``Japanese stocks are falling much more than U.S. stocks,'' said Ayako Sera, a global market strategist at Sumitomo Trust & Banking Co. in Tokyo, Japan's sixth-largest publicly traded lender by assets. ``Currency dealers are buying up the yen.''

The yen rose to 156.15 versus the euro as of 10:15 a.m. in Tokyo from 156.49 in New York yesterday. Against the U.S. dollar it rose to 98.79 from 99.98. Japan's currency advanced to 91.57 per Australian dollar from 91.75. It also gained to 80.54 per New Zealand dollar from 80.65.

The dollar traded at $1.5643 per euro after slumping 1.5 percent yesterday, the biggest drop since Jan. 3, 2006.

The yen may rise to 96 a dollar this week, Sera forecast.

One-month implied volatility for the yen rose to 16.26 percent from 16.22 percent yesterday. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options. Sharper currency swings may erode profits from carry trades.

In carry trades, speculators get funds in a country with low borrowing costs and invest in one with higher returns, earning the spread between the two.

Fiscal Year-End

The dollar may decline against the yen on March 31 as Japanese companies start to sell the currency to hedge their exposure for the year ahead following the final exchange rate fixing of the fiscal year, according to Tohru Sasaki, chief currency strategist in Tokyo at JPMorgan Chase & Co., the third- largest U.S. bank.

Major Japanese banks announce the yen fixing rate at 10 a.m. in Tokyo each day to their customers, based on the spot rate on 9:55 a.m.

The dollar traded near a one-week low against the euro and the British pound as traders bet the Federal Reserve will cut its target lending rate by as much as a half-percentage point next month to revive economic growth.

Purchases of new homes in the U.S. may have fallen 1.7 percent to an annual rate of 578,000 in February, from a 588,000 pace the prior month, according to the median forecast in a survey by Bloomberg News. The Commerce Department is scheduled to release the report at 10 a.m. in New York.

`A Dollar Bear'

``I am a dollar bear,'' said Takashi Miyachi, a senior currency dealer in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded lender by assets. ``With the excessive credit uneasiness being soothed, the markets are focusing more on the widening gap in interest rates between the U.S. and other nations.''

The dollar traded at $2.0052 versus the pound after touching $2.0067, the highest level since March 19, from $2.0059 yesterday. It was also at 1.0064 versus the Swiss franc from 1.0052. The dollar may fall to $1.57 a euro today, Miyachi said.

The Fed on March 18 cut its target lending rate by 0.75 percentage point to 2.25 percent, a smaller cut than economists forecast.

Rate Bets

Futures on the Chicago Board of Trade showed traders see a 28 percent chance the Fed will lower the fed funds target by a half-point to 1.75 percent by its next meeting on April 30, compared with no chance for that big a reduction a month ago. The remaining bets are for a quarter-point cut.

The U.S. currency touched $1.5903 against the euro on March 17, the lowest since the European currency debuted in 1999. The dollar will rebound to $1.45 against the euro and 104 yen by year-end as the U.S. economy recovers, according to the median forecast of 42 analysts surveyed by Bloomberg.

Any gains for the euro against the yen may be limited by speculation a report today will show German business confidence fell in March, adding to evidence economic expansion in Europe's largest economy is cooling.

The currency ended a three-day winning run against the yen as signs of a weakening economy may prompt traders to add to bets the European Central Bank will cut interest rates to spur growth, diminishing the appeal of euro-denominated assets.

The Ifo institute's business climate index declined to 103.5 from 104.1 in February, according to the median of 37 forecasts in a Bloomberg News survey.

``Should Ifo data fall by much more than expected, that would raise speculation the slowdown in the U.S. economy is spreading to other regions,'' Sasaki and Junya Tanase, at JPMorgan wrote in a research note today. ``This may push down the euro against the dollar.''

The ECB will lower its main lending rate to 3.75 percent from 4 percent by mid-year and to 3.5 percent by year-end, according to the weighted average of 20 forecasts in a Bloomberg survey.

Australian, N.Z. Dollars Advance as Rate Advantage May Widen

By Ron Harui and Tracy Withers

March 26 (Bloomberg) -- The Australian and New Zealand dollars rose for a third day as speculation the nations' interest-rate advantage over the U.S. will widen boosted the appeal of their higher-yielding fixed-income assets.

The currencies climbed to the highest in almost a week as traders increased bets the Federal Reserve will cut its 2.25 percent target lending rate by as much as a half-percentage point next month. New Zealand's dollar may head for a seventh monthly gain, its longest since 1995, as a U.S. government report today will probably show purchases of new homes fell to a 13-year low in February.

``The Australian dollar has a strong backing from its economy,'' said Sue Trinh, a currency strategist in Sydney at RBC Capital Market, the global investment banking unit of Royal Bank of Canada. ``U.S. data is abysmal. The Fed faces a huge challenge in engineering a U.S. recovery,'' she said.

The Australian dollar advanced to 91.63 U.S. cents as of 11:01 a.m. in Sydney from 91.42 cents late in Asia yesterday. The currency traded at 91.68 yen from 91.89 yen. It will gain to 93 cents next quarter, Trinh said. Australia's dollar is poised for a quarterly gain as the central bank raised rates this month to an 11-year high of 7.25 percent.

The New Zealand dollar strengthened to 80.54 U.S. cents from 80.33 cents late in Asian trading yesterday. The currency bought 80.59 yen from 80.76 yen.

Second Quarterly Advance

New Zealand's dollar is set for a second quarterly advance as new U.S. home sales probably dropped to an annual pace of 578,000 in February, the fewest in three years, according to a Bloomberg News survey of economists. The Commerce Department releases the report at 10 a.m. in Washington.

A private report yesterday showed consumer expectations for the U.S. economy fell to the lowest since December 1973. Futures contracts on the Chicago Board of Trade show a 28 percent chance the Fed will trim its target rate by a half-percentage point to 1.75 percent on April 30, compared with a zero percent likelihood a month earlier.

New Zealand's official cash rate is 6 percentage points higher than the Fed's target, helping the nation's currency gain 8.5 percent against the U.S. dollar the past six months.

``It's hard to steer away from yields like ours,'' said Alex Sinton, a currency trader at ANZ National Bank Ltd. in Auckland. ``The kiwi found a lift from general U.S. dollar weakness,'' he said, referring to the currency by its nickname.

Consumer Confidence

Investors shrugged off a report today that New Zealand consumer confidence slumped to a 10-year low in the first quarter. The survey by Westpac Banking Corp. and McDermott Miller Ltd. showed consumer expectations for their own finances over the coming year fell to the lowest since 1992.

The slump in confidence adds to signs economic growth will slow this year, which may prompt Reserve Bank of New Zealand Governor Alan Bollard to cut the benchmark interest rate, now at a record high 8.25 percent.

Australian government bonds gained. The yield on the benchmark 10-year bond fell 6 basis points, or 0.06 percentage point, to 6.08 percent. The price of the 5 1/4 percent bond maturing in March 2019 rose 0.434, or A$4.34 per A$1,000 face amount, to 93.466.

New Zealand government bonds rose. The yield on the 6 percent note due December 2017 fell 7 basis points to 6.42 percent, according to data compiled by Bloomberg. The three-year yield dropped 4 basis points to 6.54 percent.

Monday, March 24, 2008

Yen Trades Near One-Week Low Against Dollar on Rising Stocks

By Stanley White and Ye Xie

March 25 (Bloomberg) -- The yen traded near a one-week low against the dollar on speculation rising Asian stocks will renew investors' confidence in higher-yielding currencies.

Japan's currency declined against the Australian and New Zealand dollars, two favorites of so-called carry trades, after JPMorgan Chase & Co. agreed to buy 39.5 percent of Bear Stearns Cos., increasing the chance that a Federal Reserve-sponsored bailout will succeed. The dollar traded near a two-week high against the euro on optimism U.S. interest rate cuts will support economic growth.

``The yen is likely to pull back further,'' said Hiroshi Yoshida, foreign-exchange trader in Tokyo at Shinkin Central Bank, Japan's fifth-largest publicly traded lender by assets. ``We've reached an inflection point in bad news from the U.S. That restores confidence in carry and also helps the dollar.''

The yen traded at 100.69 per dollar at 8:43 a.m. in Tokyo after dropping 1.2 percent yesterday when it reached 100.89, the lowest since March 14. It traded at 155.47 per euro following a 1.2 percent decline yesterday. The dollar traded at $1.5431 against the euro after rising yesterday to $1.5341, the highest since March 12.

Japan's currency and the Swiss franc depreciated against the Australian and New Zealand dollars on speculation investors are increasing carry trades. The yen traded at 91.62 per Australian dollar from 91.26 and was at 80.71 per New Zealand dollar from 80.38 yesterday.

U.S. stocks rallied yesterday to the highest levels this month as JPMorgan quadrupled its bid for Bear Stearns to about $10 a share. The Standard & Poor's 500 Index and the Dow Jones Industrial Average rose 1.5 percent.

`Under Control'

``It does appear that the Fed has this credit crisis under control at the moment,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``Some of the risk- averse trades are being taken off, and that weakens the yen.''

The benchmark lending rate is 0.5 percent in Japan and 2.75 percent in Switzerland, among the lowest in industrialized countries. When risk aversion falls, traders borrow in the currencies of those countries to buy assets where borrowing costs are higher, benefiting from differences in yields. The risk of such investments is that currency fluctuations wipe out gains. The target lending rates are 8.25 percent and 7.25 percent in New Zealand and Australia, respectively.

The dollar posted its first weekly gain against the euro in a month after the Fed on March 18 cut the target lending rate by 0.75 percentage point to 2.25 percent and said signs ``of inflation expectations have risen.''

Fed Actions

The Fed two days earlier said it would allow securities firms to borrow at the same interest rate as commercial banks. It also backed the sale of Bear Stearns to JPMorgan Chase.

Even with the dollar's recent gains, strategists at Deutsche Bank AG, the world's biggest foreign-exchange trader, say the U.S. currency is likely to weaken to $1.60 versus the euro and may lead the so-called Group of Seven nations to coordinated intervention, in which central banks agree to purchase a currency to boost its value.

``The risks of coordinated intervention are going to increase in the second quarter for sure as the dollar weakens further,'' said Mitul Kotecha, head of foreign-exchange research in London at Calyon. The firm is the securities unit of Credit Agricole SA, France's second-biggest bank.

The G-7, which comprises the U.S., U.K., Canada, Japan, Germany, France and Italy, said Feb. 9 that ``excess volatility and disorderly movements in exchange rates are undesirable.''

Currency Volatility

The implied volatility of the three-month dollar-yen option fell to 13.8 percent after touching 19.5 percent last week, the most since 1999. The G-7 next meets April 12-13 in Washington.

The dollar has rebounded about 5 cents from $1.5903 per euro on March 17, the lowest level since the European currency made its debut in 1999.

The U.S. currency briefly rose against the euro yesterday after sales of existing homes unexpectedly rose in February for the first time in seven months. Purchases increased 2.9 percent to an annual rate of 5.03 million, the National Association of Realtors said in Washington.

``We expect the dollar to rebound here,'' said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon, the world's largest custodian bank, in an interview with Bloomberg Television.

U.S. Stocks Rise; Bear Stearns, Tiffany, Monsanto Shares Climb

By Elizabeth Stanton

March 24 (Bloomberg) -- U.S. stocks rallied to the highest level this month as JPMorgan Chase & Co.'s increased bid for Bear Stearns Cos. and a gain in home sales boosted speculation the economy will recover from $200 billion in credit losses.

Bear Stearns, which almost collapsed before the Federal Reserve helped broker a takeover, nearly doubled after JPMorgan raised its offer to about $10 a share from $2.52. Tiffany & Co., the second-largest luxury jewelry retailer, climbed the most in more than two years on better-than-forecast earnings. Monsanto Co., the biggest seed producer, posted its steepest advance since January after UBS AG advised buying the shares.

The Standard & Poor's 500 Index added 20.37 points, or 1.5 percent, to 1,349.88 as nine of its 10 industry groups advanced. The Dow Jones Industrial Average increased 187.32, or 1.5 percent, to 12,548.64. The Nasdaq Composite Index gained 68.64, or 3 percent, to 2,326.75. Nine stocks rose for every two that fell on the New York Stock Exchange.

``It appears that people are interested in buying stocks every time there's just a whiff of good news,'' John Carey, who manages $13 billion at Pioneer Investments in Boston, said in an interview with Bloomberg Radio. ``We're starting from a fairly modest level of valuations in this downturn and so perhaps people are right in suggesting that downside is limited.''

The S&P 500 trimmed its loss for the year to 8.1 percent and posted its first back-to-back gains of the month. The market extended its rally after an industry report showed existing home sales climbed in February for the first time in seven months. Asian shares advanced, led by Taiwan's biggest increase in six weeks. All major European markets were closed for a holiday.

Bonds, Gold Drop

Yields on Treasury securities climbed, the dollar advanced against the yen, and gold fell as traders pared bets on additional interest-rate cuts by the Federal Reserve.

Bear Stearns climbed $5.29, or 89 percent, to $11.25. JPMorgan will exchange stock worth about $10 for each Bear Stearns share, the New York-based firms said in a statement. Under the terms of the deal the two firms struck March 16, the takeover price had been $2.52 a share, based on last week's closing price.

Banks, brokerages and insurance companies in the S&P 500 rose 0.7 percent as a group, extending their advance in the past week to 14 percent. Citigroup Inc., the biggest U.S. bank, contributed the most to the gain, adding 77 cents, or 3.4 percent, to $23.27.

``A lot of market turns tend to happen on watershed events'' such as the takeover of Bear Stearns, said Greg Woodard, a portfolio strategist at Manning & Napier in Fairport, New York, which oversees $18 billion. The increased bid holds out hope for ``a quick culmination,'' rather than ``a long, drawn-out battle with the shareholders.''

$150 Billion in Mortgage Bonds

Financial shares also gained after Federal Home Loan Banks were freed to increase their purchases of mortgage-backed bonds by about $150 billion, the latest in a series of government initiatives to resuscitate lending by financial institutions.

Lehman Brothers Holdings Inc. fell $2.01, or 4.1 percent, to $46.64 after being downgraded to ``perform'' by Oppenheimer & Co.'s Meredith Whitney. Whitney, who correctly predicted Citigroup would cut its dividend this year, cited a ``protracted challenging capital markets environment'' and abandoned her price target for Lehman.

Tiffany rallied $4.05, or 10 percent, to $42.65 after saying ongoing earnings excluding items were $1.27 in the fourth quarter, six cents better than the average analyst estimate in a Bloomberg survey. Fourth-quarter revenue was $1.053 billion, beating the $1.049 billion average estimate.

'Not That Bad Off'

``Tiffany is bringing back to focus that the economy still is not that bad off,'' said Tom Wirth, senior investment officer at Chemung Canal Trust Co. in Elmira, New York, which manages $1.8 billion.

Monsanto climbed $7.13, or 7.3 percent, to $104.26 after UBS analyst Chris Shaw said results from the company's seed and agricultural productivity businesses may help boost the shares to $125 in the next 12 months.

Companies in the S&P 500 traded at 13.82 times estimated profit when the market opened, according to Bloomberg data. Index members last traded at a valuation of less than 14 times historic earnings in October 1990.

Sales of existing homes in the U.S. unexpectedly rose in February, easing concern credit restrictions and falling prices would hurt demand. Purchases increased 2.9 percent to an annual rate of 5.03 million, the National Association of Realtors said. Economists in a survey had forecast a decline of 0.8 percent.

Homebuilders Rally

D.R. Horton Inc., the second-largest U.S. homebuilder, climbed $1.02 to $16.70, leading gains in 14 of 15 homebuilders in S&P indexes. The group's 5.2 percent advance extended its climb in the past week to almost 26 percent.

Home-improvement specialists Home Depot Inc. and Lowe's Cos. led retailers in the S&P 500 to a 3.5 percent gain. Home Depot climbed $1.20 to $29.26. Lowe's added $1.06 to $24.29.

CIT Group Inc. surged $3.40, or 35 percent, to $13.03. The commercial finance company that tapped $7.3 billion of emergency credit lines last week climbed after Stifel Nicolaus & Co. said it may be a takeover target.

Walgreen Co. added $1.83 to $38.61. The largest U.S. drugstore chain's second-quarter profit was bigger than analysts estimated because of increased sales of prescription drugs. Walgreen's net income of 69 cents a share beat the average analyst estimate of 67 cents a share in a Bloomberg poll.

Best Buy, HCP

Best Buy Co. rose 86 cents to $43.27. The largest U.S. consumer-electronics retailer, which is gaining market share from Circuit City Stores Inc., is benefiting from growth in sales of video-game software, Barron's reported. Best Buy shares may climb to $52 once investors overcome fears of how the retailer will fare in a recession, Barron's reported, citing unnamed analysts.

HCP Inc. increased $1.37 to $33.11. The largest U.S. health- care real-estate investment trust will replace Commerce Bancorp Inc. in the S&P 500 on March 31, S&P said March 20. Commerce Bancorp added 9 cents to $36.44.

Sirius Satellite Radio Inc. rose 25 cents, or 8.6 percent, to $3.15. Its proposed acquisition of XM Satellite Radio Holdings Inc. to create a single U.S. satellite-radio provider won U.S. antitrust clearance. XM Satellite Radio surged 15 percent to $13.79.

The odds implied by interest-rate futures prices of a half- point rate cut at the Fed's next meeting on April 30 fell to 28 percent from 56 percent. The remaining bets are on a quarter- point cut.

The S&P 500 climbed 3.2 percent last week after the Federal Reserve injected more cash into the banking system and Wall Street's largest securities firms reported earnings that topped estimates.

The Russell 2000 Index, a benchmark for companies with a median market value of $532 million, gained 2.9 percent to 701.28. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, rose 1.8 percent to 13,570.78. Based on its advance, the value of stocks increased by $293 billion.

N.Z., Australian Dollars Advance on Demand for Higher Yields

By Tracy Withers

March 25 (Bloomberg) -- The New Zealand and Australian dollars rose as gains in U.S. stocks encouraged investors to buy higher-yielding assets funded by cheap loans in Japan.

The currencies climbed for a second day against the U.S. dollar and yen as JPMorgan Chase & Co. increased its bid for Bear Stearns Cos., boosting investors' confidence in credit markets. New Zealand's 8.25 percent benchmark interest rate and Australia's 7.25 percent make the currencies favorites for so- called carry trades, where funds borrowed in countries with lower rates are invested in places offering higher returns.

``Improving investor confidence helped reinvigorate demand for high-yielding currencies like the New Zealand dollar,'' said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington.

New Zealand's dollar bought 79.89 U.S. cents at 11:37 a.m. in Wellington from 79.38 cents in late Asian trading yesterday. The currency rose 1.6 percent to 80.46 yen.

Australia's currency was at 90.86 U.S. cents from 90.50 cents yesterday. It jumped 1.3 percent to 91.50 yen.

The New Zealand dollar appreciated against 15 of the 16 most-actively traded currencies and Australia's dollar gained versus 12 after JPMorgan quadrupled its bid for Bear Stearns, once the biggest U.S. underwriter of mortgage bonds that almost collapsed before the Federal Reserve helped broker a takeover.

Optimism that the U.S. economy will recover from $200 billion of credit losses helped the Standard & Poor's 500 Index rise 1.5 percent. Sales of existing homes in the U.S. unexpectedly rose in February for the first increase in seven months, the National Association of Realtors said yesterday.

Carry Trades

Rising stocks typically make investors more comfortable entering carry trades, which are deemed risky because the currency's movements can erase the profit earned on the two rates of interest.

New Zealand's currency has gained 9.1 percent against the U.S. dollar the past six months and Australia's added 5.3 percent as investors are attracted to the nations' higher yields.

New Zealand's benchmark rate is 6 percentage points higher than the U.S. target, and 7.75 points more than Japan's.

New Zealand and Australian government bonds fell. The yield on New Zealand's 6 percent note due December 2017 rose 10 basis points, or 0.1 percentage point, to 6.52 percent, according to data compiled by Bloomberg. The price fell 0.69, or NZ$0.69 per NZ$1,000 face amount, to 96.32.

The yield on Australia's 10-year bond rose 17 basis points to 6.14 percent. The price of the 6 percent bond maturing in February 2017 fell 1.315, or A$13.15 per A$1,000 face amount, to 92.949. Bond yields move inversely to prices.

Sunday, March 23, 2008

Fed's Next Move May Be to Buy Mortgages, Treasury Investors Bet

By Daniel Kruger

March 24 (Bloomberg) -- Forget lower interest rates. For the Federal Reserve to keep the financial markets from imploding it needs to buy troubled mortgage bonds from banks and securities firms, say the world's biggest Treasury investors.

Even after cutting rates by 3 percentage points since September, expanding the range of securities it accepts as collateral for loans and giving dealers access to its discount window, the Fed has been unable to promote confidence. The difference between what the government and banks pay for three- month loans doubled in the past month to 2.03 percentage points.

The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. While purchasing the some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk.

``An RTC-type structure is interesting, and it may not be that much of a burden on taxpayers in the long run,'' said Barr Segal, a managing director at Los Angeles-based TCW Group Inc. who helps oversee $80 billion in fixed-income assets. The government should purchase the mortgages and reissue ``debt that's backed by the U.S. government and there you go, you've unclogged the drain,'' he said.

Bill Rates Plunge

New York Life Investment Management is considering buying ``high-quality mortgages,'' Thomas Girard, a money manager at the New York-based insurer, said. ``At some point here you've got to increase your allocation to non-Treasury securities,'' he said.

Mortgage bonds rallied last week. Yields on the securities fell to an average of 1.25 percentage points more than Treasuries from 1.57 percentage points on March 14, according to Merrill Lynch & Co.'s Mortgage Master Index. The so-called spread is still twice as wide as the average for all of 2007.

Investors, averse to holding most any debt except Treasuries, drove rates on three-month bills to 0.387 percent on March 20, the lowest since 1954. Rates on the securities, the safest assets next to cash, tumbled 0.59 percentage point last week to 0.57 percent. They were as high as 4.29 percent as recently as Oct. 15.

``Something like that would be very helpful, but the Fed was not designed to and shouldn't assume a huge amount of risk on behalf of taxpayers,'' said Alan Blinder, a Princeton University professor and former vice chairman of the central bank. ``That should come out of the elected parts of the government, which means the administration and Congress.''

Resisting Calls

President George W. Bush and Treasury Secretary Henry Paulson have resisted calls urging the use of government funds or guarantees to stem a record amount of mortgage foreclosures, the root of the financial crisis, preferring that the markets resolve the trouble. Bush said March 15 he wanted to avoid ``bad policy decisions'' that would do more harm than good.

President George H.W. Bush, the current president's father, signed the 1989 law which created the RTC to dispose of the assets of insolvent savings and loans banks. From 1986 through 1995, 1,043 savings banks with over $500 billion in assets failed, costing taxpayers $75.6 billion, according to a Federal Deposit Insurance Corp. analysis.

The Fed, the Bank of England and the European Central Bank are exploring the feasibility of using taxpayers' money to shore up the mortgage-backed securities market, the Financial Times reported on March 22, without saying where it obtained the information. A Federal Reserve official denied to Bloomberg News that day that it's in discussions to buy mortgage debt.

Fed Moves

Smaller steps are already being taken. The Bush administration reduced the amount of capital Fannie Mae and Freddie Mac are required to hold as a cushion against losses. The March 19 agreement allows the government-chartered companies, the largest sources of money for U.S. home loans, to expand their purchases of mortgages by as much as $200 billion.

The Fed has also lowered borrowing costs, opened the so- called discount window to investment banks and arranged the sale of Bear Stearns Cos. since March 16 to ease financial-market turmoil. The world's biggest financial companies have posted at least $195 billion in writedowns and credit losses tied to subprime mortgages and collateralized debt obligations as of March 20, according to data compiled by Bloomberg.

JPMorgan Chase & Co. agreed to pay about $240 million for the fifth-largest securities firm in a transaction that includes as much as $30 billion of financing provided by the Fed for Bear Stearns's ``less-liquid'' assets.

`Done That Already'

``In a sense they've done that already with Bear Stearns,'' Michael Materasso, senior portfolio manager and co-chairman of the fixed-income policy committee at Franklin Templeton Investments, said of the government taking on the risk of owning mortgage securities. ``This was not just a temporary situation. The process has begun, the question is how far can it go?''

Franklin Templeton manages $110 billion of bonds. Materasso is based in New York.

A March 13 proposal by Senator Christopher Dodd and Congressman Barney Frank that the Federal Housing Administration insure refinanced mortgages after lenders reduce the loan principal to make payments more affordable to homeowners ``is the next step,'' Senator Charles Schumer, a New York Democrat, said in a Bloomberg Television interview on March 19. It's a ``broader step, but not as broad as RTC,'' he said.

For Pimco's Gross that's not enough. ``If Washington gets off its high `moral hazard' horse and moves to support housing prices, investors will return in a rush,'' he wrote in a note to investors published Feb. 26. Gross, who runs the $122 billion Total Return Fund from Newport Beach, California, didn't return calls seeking additional comment.

An RTC-like entity may not be ``the best idea, but maybe it's the idea that gets us through this,'' said New York Life's Girard. ``The likelihood of it happening has certainly increased.''

Spending Probably Slowed, Home Sales Fell: U.S. Economy Preview

By Courtney Schlisserman

March 23 (Bloomberg) -- Spending by American consumers slowed in February and home sales continued to drop, signaling the biggest housing slump in a generation has brought the U.S. expansion to a halt, economists said before reports this week.

Spending was up 0.1 percent last month, the smallest gain in more than a year, according to the median estimate of economists surveyed by Bloomberg News ahead of a Commerce Department report due March 28. Combined sales of new and existing homes dropped to the lowest level in at least nine years, government and private figures may also show.

``The economy is likely in the throes of recession,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``We will face a deteriorating labor market, weak household income creation and a pullback in consumer spending.''

The collapse in subprime lending will continue to ripple through the economy as property values fall, banks shut off access to credit and payrolls shrink. The worsening outlook indicates the Federal Reserve will keep lowering interest rates to stabilize financial markets and promote lending.

``Because market interest rates have been stubbornly sticky, the Fed probably has to make even more rate cuts,'' LaVorgna said.

The biggest job losses in five years and record fuel costs are eroding consumer confidence and spending. Retail sales unexpectedly fell in February, paced by declines in purchases of autos, furniture, appliances and restaurant meals. The 0.6 percent drop followed a 0.4 percent gain in January, the Commerce Department said March 13.

Services, Incomes

This week's Commerce Department spending report includes figures on purchases of services, such as utilities and medical care, not tracked by retail sales. The report is also forecast to show personal income rose 0.3 percent in February for a second month, according to the survey median.

The Fed last week lowered the benchmark overnight lending rate between banks by three-quarters of a percentage point to 2.25 percent. The rate has been reduced a total of 3 percentage points since September. Policy makers also said recent reports showed the economic outlook had ``weakened further.''

The cuts ``are definitely serious medicine for the economy which is very sick,'' Michael Jackson, chief executive officer of AutoNation Inc., the largest publicly traded U.S. car dealer, said in a March 19 interview with Bloomberg Television. ``The consumer is under extreme stress.''

Drop in Auto Sales

Jackson said he expected a ``double-digit'' decline in auto industry retail sales this year after decreases of 6 percent in each of the last two years.

The slump in home sales is also not abating. Purchases of existing houses fell 0.8 percent last month to an annual pace of 4.85 million, the lowest level since at least 1999, economists forecast the National Association of Realtors will report tomorrow. The group's combined figures for houses and condominiums go back only nine years.

Sales of new homes, due from the Commerce Department on March 26, fell to an annual pace of 579,000 in February, the fewest in 13 years, according to the survey median.

``We still have tight credit conditions and we still have widespread expectations that prices will fall, so that points to declines in both existing and new home sales,'' said Dana Saporta, an economist at Dresdner Kleinwort in New York.

Residential construction is down 29 percent since reaching a peak in the last three months of 2005, the biggest drop since 1982, according to figures from Commerce.

Prolonged Slump

The economy this quarter is projected to expand at a 0.1 percent pace, according to the median estimate of economists surveyed by Bloomberg News earlier this month.

The slump is likely to extend through the middle of the year, according to a forecast issued March 20 by the Paris-based Organization for Economic Cooperation and Development. The U.S. economy may not grow at all in the second quarter, the agency said.

Americans are growing more pessimistic as the economy falters. The Conference Board is scheduled to report on March 25 that its consumer confidence index fell this month to 73.8, the lowest reading since the start of the Iraq war five years ago, according to the survey median.

The Reuters/University of Michigan's final reading on sentiment for this month, due March 28, is projected to decline to a 16-year low of 70, the survey showed.

Finally, economists forecast orders for long-lasting goods, such as autos and machinery, rose 0.8 percent in February, led by a rebound in bookings for commercial aircraft. Excluding orders for transportation equipment, which tend to be volatile, the Commerce Department's March 26 report is forecast to show demand dropped 0.3 percent, a second consecutive decline.

Bloomberg Survey

Release Period Prior Median
Indicator Date Value Forecast
Exist Homes Mlns 3/24 Feb. 4.89 4.85
Exist Homes MOM% 3/24 Feb. -0.4% -0.8%
Case Shiller Monthly YO 3/25 Jan. -9.1% -10.5%
Case Shiller Monthly In 3/25 Jan. 184.9 181.4
Consumer Conf Index 3/25 March 75.0 73.5
Durables Orders MOM% 3/26 Feb. -5.1% 0.8%
Durables Ex-Trans MOM% 3/26 Feb. -1.5% -0.3%
New Home Sales ,000's 3/26 Feb. 588 578
New Home Sales MOM% 3/26 Feb. -2.8% -1.7%
GDP Annual QOQ% 3/27 4Q F 0.6% 0.6%
Initial Claims ,000's 3/27 23-Mar 378 370
Cont. Claims ,000's 3/27 16-Mar 2865 2900
Pers Inc MOM% 3/28 Feb. 0.3% 0.3%
Pers Spend MOM% 3/28 Feb. 0.4% 0.1%
PCE Deflator YOY% 3/28 Feb. 3.7% 3.5%
Core PCE Prices MOM% 3/28 Feb. 0.3% 0.1%
Core PCE Prices YOY% 3/28 Feb. 2.2% 2.1%
U of Mich Conf. Index 3/28 March F 70.5 70.0

Gasoline Pump Price in U.S. Rises to $3.26, Lundberg Says

By Jordan Burke and Victor Epstein

March 23 (Bloomberg) -- The average price of a gallon of regular gasoline at U.S. filling stations rose to $3.26, an industry survey showed.

The price climbed 7 cents on March 21 from two weeks earlier, according to oil industry analyst Trilby Lundberg's survey of 7,000 filling stations nationwide. Gasoline futures rose to $2.6051 a gallon on the New York Mercantile Exchange on March 20.

``Gasoline prices moved up 7 cents while crude oil prices lost about 8 cents per gallon equivalent during the same period,'' Lundberg said in an interview today. ``They moved in the opposite direction because ethanol prices were spiking, our spring demand is awakening and because refiners and retailers each took a little better profit margin.''

On March 12, gasoline futures rose to $2.7286 a gallon, a record closing price. The contract, which covers reformulated fuel ready to be mixed with ethanol, began trading in 2005.

AAA, the nation's biggest motoring club, said gasoline at the pump reached a record $3.285 a gallon on March 15.

Gasoline prices rose after crude-oil futures climbed to a record close of $110.33 a barrel on March 13. Oil prices increased as the dollar weakened to a record low against the euro. The euro climbed to $1.573 on March 17, the highest since the currency's debut in 1999.

The cost of crude oil determines about 68 percent of the pump price of gasoline, according to the Energy Department.

Consumer Confidence

Rising gasoline prices are taking a toll on consumers, whose spending makes up two-thirds of the economy. Consumer confidence sank to a 16-year low this month and Americans braced for higher inflation, with the economy teetering on the brink of a recession.

The total number of people receiving unemployment insurance rose to the highest since August 2004, the Labor Department said on March 20.

``This new price beats the previous inflation-adjusted high by about 2.5 cents,'' Lundberg said of the average price for a gallon of gasoline March 21. ``Back in May of 2007, the price was just over $3.18, but because of inflation it now looks like $3.24.''

The threat of recession and a credit freeze caused the Federal Reserve to cut its main lending rate by three-quarters of a percentage point on March 18.

Rising prices have caused demand for gasoline to fall 1.8 percent from a year ago to 9.07 million barrels a day, the U.S. Energy Department reported on March 19.

The highest average price for self-serve regular gasoline was $3.66 a gallon in San Francisco, Lundberg said. The lowest was in Newark, at $3.03 a gallon. On New York's Long Island, the price was $3.37 a gallon.

Friday, March 21, 2008

Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke

By Pham-Duy Nguyen

March 21 (Bloomberg) -- The biggest commodity collapse in at least five decades may signal Federal Reserve Chairman Ben S. Bernanke has revived confidence in U.S. financial firms.

The Standard & Poor's 500 Index posted its first weekly gain in a month, and the dollar leapt from its lowest level since 1973 after the Fed stepped in March 16 to rescue Bear Stearns Cos., the fifth-largest U.S. securities firm, and expanded its role as lender of last resort to embrace the biggest dealers in Treasury notes.

Investors who had poured money into gold, oil and corn, seeking a hedge against inflation and a weak dollar, sold commodities to raise cash or buy stocks. The Reuters/Jefferies CRB Index of 19 commodities tumbled 8.3 percent this week, the most since at least 1956, after touching a record on Feb. 29.

``Bernanke took care of the commodity bubble,'' said Ron Goodis, the retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``Commodities are coming back to earth. The stock market looks OK, and Bernanke is starting to look a little better.''

Concern that the central bank would let inflation get out of control eased after the Fed cut its key interest rate by 0.75 percentage point on March 18, less than the reduction of at least 1 point that investors had expected.

``Clearly they've gotten some stability,'' said Keith Hembre, a former Fed researcher and chief economist at FAF Advisors Inc. in Minneapolis, which oversees more than $107 billion in assets. ``You have to stand back and say, for the time being, it looks to be a pretty successful combination of moves that have worked.''

Oil Plunges

Gold had its biggest weekly loss since August 1990 after reaching a record $1,033.90 an ounce on March 17. Oil plunged almost $10 over three days, after rallying to $111.80 a barrel, the highest ever. Corn dropped more than 9 percent for the week, the most since July.

Until this week, commodities had outperformed stocks and bonds as the Fed reduced its benchmark rate five times since September, eroding the value of the dollar and fueling concern that inflation would accelerate. This week's rate cut brought the Fed's target for overnight loans among banks down to 2.25 percent.

Because commodities such as oil and gold are priced in dollars, they have risen as the U.S. currency has weakened in response to the Fed's previous rate cuts.

Oil, soybeans, platinum and wheat all jumped to records this year. The weighted UBS Bloomberg Constant Maturity Commodity Index of 26 futures has gained more than 20 percent every year since 2001. The index is up 10 percent this year.

Gold had rallied as much as 43 percent since Sept. 18, when the policy makers began lowering the federal-funds rate for the first time in four years.

Buying Euros

``The markets have been buying euros against the dollar, buying oil and buying gold as hedges,'' said Andrew Busch, a global currency strategist at BMO Capital Markets in Chicago, a unit of Bank of Montreal. ``The Fed calmed the markets.''

Bernanke, 54, is expanding the Fed's monetary-policy toolkit as he seeks to keep strains in financial markets from spiraling into a full-blown meltdown. The world's biggest banks and securities firms have reported $195 billion in asset writedowns and credit losses since 2007 stemming from the collapse of the U.S. subprime mortgage market.

Expanded Collateral

Fed officials on March 11 announced a program to swap $200 billion in Treasuries for debt including mortgage-backed securities. Yesterday, the Fed expanded collateral eligible for its auction of Treasuries to include bundled mortgage debt and securities linked to commercial-property loans.

Earlier this month, the Fed increased the size of separate funding auctions to $100 billion in March from a previously announced $60 billion.

The Fed yesterday said it had lent $28.8 billion to large U.S. securities firms under the program announced on March 16, its first extension of credit to non-banks since the 1930s.

The Fed also put taxpayer money at risk by making available up to $30 billion to JPMorgan Chase & Co. for the purchase of Bear Stearns.

Not everyone is convinced that Bernanke has managed to turn the tide for financial firms.

``He has taken extraordinary measures, things that we haven't seen since the Great Depression,'' said former Fed vice chairman Alan Blinder, a Princeton University professor. ``He's working overtime, literally and figuratively, to get this panic under control. But so far, it's not under control.''

U.S. Treasury three-month bill rates dropped to the lowest since at least 1954 yesterday as investors sought the safety of government debt. Bill rates declined as low as 0.387 percent as finance company CIT Group Inc. drew on $7.3 billion in credit lines after being shut out of short-term debt markets.

``This is all about money,'' said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois, who has been trading gold since 1973. ``The Fed can control the price of money but the banks still don't want to lend.''