By Michael Patterson
March 6 (Bloomberg) -- U.S. stocks fell to an 18-month low, led by banks, after home foreclosures climbed to a record and loan defaults by Thornburg Mortgage Inc. and a Carlyle Group bond fund spurred concern that credit losses are deepening.
Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. led financial shares to the lowest level since May 2003. Retailers J.C. Penney Co. and Gap Inc. fell on sales that trailed estimates. The Standard & Poor's 500 Index lost 10 points in the final half hour of trading as investors speculated tomorrow's U.S. employment report will show the economy has tipped closer to recession.
The S&P 500 tumbled 29.36 points, or 2.2 percent, to 1,304.34, the lowest closing level since September 2006. The Dow Jones Industrial Average lost 214.6, or 1.8 percent, to 12,040.39. The Nasdaq Composite Index decreased 52.31, or 2.3 percent, to 2,220.5. More than 11 stocks fell for every one that rose on the New York Stock Exchange.
``It's a tough environment,'' Paul Rasplicka, who manages $4 billion at AIM Investments, said in a Bloomberg Television interview in New York. ``Lending terms are tighter. The willingness to extend credit is less. It's making it very tough for business.''
Financial stocks dropped for a sixth day, the longest losing streak since November, after an industry report showed foreclosures surged at the end of 2007 and late payments rose to the highest in 23 years. The S&P 500 slid below its lowest close of the year on Jan. 22, the day Federal Reserve policy makers slashed interest rates by the most in 23 years in response to tumbling global stocks and concern the economy was contracting.
Banks Decline
Citigroup, the biggest U.S. bank by assets, fell 98 cents to $21.17, its lowest close since November 1998. Bank of America, the second-largest, decreased $1.03 to $36.52. JPMorgan, the No. 3, lost $1.37 to $37.37.
Yield spreads on some mortgage-backed securities climbed to 22-year highs today, signaling home loans will be more expensive for borrowers. The collapse in subprime mortgages has caused at least $181 billion of writedowns and credit losses worldwide, prompting banks to restrain lending.
J.C. Penney, the third-largest U.S. department-store chain, tumbled $5.34 to $42.77. Same-store sales last month dropped 6.7 percent, worse than the average estimate for a decline of 2.4 percent, according to Retail Metrics LLC.
Gap, the largest U.S. clothing retailer, lost $1.15 to $19.37. Sales fell 6 percent, almost twice the average estimate for a 3.1 percent decrease.
Luxury Department Stores
Nordstrom Inc., a luxury department-store chain, dropped $2.34 to $35 after posting sales that trailed estimates.
The S&P 500 Retailing Index declined 4 percent to the lowest since Jan. 17 as 30 of 31 members fell. The first drop in employment in more than four years in January and higher gasoline prices are causing Americans curtail spending. Gas prices climbed today and crude oil rose to a record $105.97 a barrel as the U.S. dollar fell to its lowest ever against the euro.
The S&P 500 Consumer Discretionary Index extended its decline to 2.6 percent after Fed data showed U.S. household wealth fell in the fourth quarter for the first time in five years and borrowing slowed as home values plunged and lenders restricted credit.
The Labor Department may report tomorrow that the U.S. added 23,000 jobs in February after losing 17,000 the previous month, according to the median estimate of economists surveyed by Bloomberg News.
`More Bad News'
``People are expecting more bad news,'' said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $5 billion in San Antonio. ``You're going to have a spillover effect into unemployment. It goes from one sector to another.''
All 10 industry groups in the S&P 500 dropped, with 483 members posting declines. Financial shares were the biggest drag on the index, falling 3.7 percent as a group.
Merrill Lynch declined $3.46 to $45.86, the lowest since June 2003. The securities firm said it would sweeten the terms on $2.2 billion of convertible bonds that investors can redeem next week, giving them the prospect of a bigger ultimate payout.
Separately, Merrill and four of its Wall Street rivals had their first-quarter profit estimates cut by Keefe, Bruyette & Woods Inc. analyst Lauren Smith for the second time in less than a month. More than a dozen analysts have lowered first-quarter profit estimates for the biggest U.S. securities firms in the last two weeks on expectations of more debt-related writedowns.
18-Month Low
Goldman Sachs Group Inc. lost $6.32 to $158.65, an 18-month low. Bear Stearns Cos. retreated $5.88, or 7.8 percent, to $69.90 for the steepest decline since October 2000. Lehman Brothers Holdings Inc. fell $2.03 to $46.03. Morgan Stanley dropped $1.80 to $39.67, the lowest since October 2004.
Thornburg Mortgage lost $1.75, or 51 percent, to $1.65. JPMorgan sent a default notice after Thornburg failed to meet a $28 million margin call, Thornburg said. That triggered defaults on other financing agreements and the amounts involved are ``material.'' RBC Capital Markets wrote in a research note today that ``bankruptcy is now a more likely outcome'' for Thornburg. Shares of Thornburg, a ``jumbo'' home mortgage specialist, had changed hands for more than $12 last week.
Fannie Mae, the largest source of money for U.S. home loans, declined $2.57 to $21.70, the lowest since April 1995. Freddie Mac, the second-biggest, lost $1.50 to $20.14.
Washington Mutual Inc. dropped $1.04 to $11.76, the lowest since May 1996. Standard & Poor's lowered its credit rating on the largest U.S. savings and loan and said another cut is possible.
Missed Margin Calls
Carlyle Capital Corp., Carlyle Group's publicly traded mortgage bond fund, said it missed four of seven margin calls yesterday totaling more than $37 million. The fund, which raised $300 million in July and used loans to buy about $22 billion of AAA-rated mortgage securities issued by Fannie Mae and Freddie Mac, expects to get at least one more notice of default related to the margin calls.
Carlyle Group, started by David Rubenstein in 1987, is the world's second-biggest private-equity firm.
UBS AG's U.S.-traded shares dropped $1.31 to $29.52, the lowest since October 2003. Europe's biggest bank by assets ``likely'' sold its 25 billion francs ($24 billion) prime Alt-A mortgage portfolio in a ``fire sale,'' JPMorgan said as it lifted its ``credit-crisis'' writedown estimate for the bank to 18.5 billion francs.
`Painful Exercise'
``Leverage is coming off across the system,'' said David Baker, the Boston-based chief investment officer at North American Management, which oversees $1.1 billion. ``It's going to be a painful exercise and I don't think the equity market has full appreciation of what it's going to mean and how it's going to be unwound.''
New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier, the Mortgage Bankers Association said. The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.82 percent, the highest since 1985.
The difference in yields, or spread, on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened about 11 basis points, to 227 basis points, the highest since 1986 and 93 basis points higher than Jan. 15. The spread helps determine the interest rate homeowners pay on new prime mortgages of $417,000 or less. A basis point is 0.01 percentage point.
More Capital Needed?
Ambac Financial Group Inc., the bond insurer that announced plans yesterday to raise $1.5 billion by selling common shares and equity units to salvage its AAA credit rating, dropped $1.28 to $7.42. JPMorgan analysts said the shares may fall in the ``near term'' and the company may need more capital to avoid a downgrade.
Wal-Mart Stores Inc. gained 43 cents, or 0.9 percent, to $49.98 for the only gain in the Dow average. The world's largest retailer said February sales increased 2.6 percent, exceeding its forecast, after price cuts spurred demand for groceries and medicines.
Fed Bank of New York President Timothy Geithner said the central bank may need to keep interest rates low for a while if financial markets remain under stress and threaten economic growth.
Traders priced in an 98 percent chance that the Fed will lower its benchmark lending rate by 0.75 percentage point to 2.25 percent by its March 18 policy meeting, up from 54 percent odds yesterday, according to Fed funds futures prices compiled by Bloomberg. The rest of the bets are for a 0.5 point reduction.
Treasuries rose and three-month bill rates fell to the lowest level since 2004 as investors took refuge in government securities.
``You don't know when the next shoe is going to drop and where the next writedown is going to come from,'' said John Buckingham, who helps oversee about $700 million as president of Al Frank Asset Management in Laguna Beach, California. ``The news in the short run is likely to continue to be ugly. You have to have a strong stomach.''
Thursday, March 6, 2008
Euro at Record High as Trichet Sees `Upward' Inflation Pressure
By Bo Nielsen
March 7 (Bloomberg) -- The euro traded at a record high against the dollar after European Central Bank President Jean- Claude Trichet said there is ``strong upward pressure on inflation,'' signaling he's in no hurry to cut interest rates.
Europe's 15-nation currency yesterday also reached an all- time high versus the U.K. pound as policy makers left the euro region's main rate at 4 percent, matching the forecast in a Bloomberg News survey. The yen rallied to the strongest since January 2005 compared with the dollar as tumbling stocks led traders to exit carry-trade purchases of higher-yielding securities funded with yen loans.
Trichet's comment ``gives the green light to sell the dollar,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``He's suggesting the ECB won't do anything overt to support the U.S. dollar.'' The remark indicated ``it's a hard time for the ECB to cut rates.''
The euro climbed to $1.5395, the highest level since its 1999 debut, before trading at $1.5393 at 7:53 a.m. in Tokyo. The yen rose to 102.46 per dollar, the highest since Jan. 28, 2005, before trading at 102.50 from 102.67 late yesterday. The euro bought 157.80 yen from 157.92.
The euro set a record for the eighth trading day in the past nine. After holding in a range since November of about $1.43 to $1.49, the euro began to rally after Fed Vice Chairman Donald Kohn said Feb. 26 that credit-market turmoil and slower growth pose a ``greater threat'' than inflation. The comments drove the euro above $1.50 for the first time.
`Pressures on Inflation'
``The latest information has confirmed the existence of strong upward pressures on inflation,'' Trichet said at a press conference in Frankfurt.
He also said policy makers ``don't underwrite the present future market interest rates'' and said he noted ``with extreme attention'' remarks from President George W. Bush last week that a strong dollar is in U.S. interests. Fellow policy maker Axel Weber said Feb. 27 investors betting on rate cuts in Europe are underestimating inflation.
``The market took the fact that he ducked the question about the dollar as a tacit acceptance of its weakness,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York.
The euro was at 76.56 British pence after yesterday advancing to an all-time high of 76.92 pence after the Bank of England kept borrowing costs at 5.25 percent.
Goldman's Pound Call
Goldman Sachs Group Inc. yesterday advised clients to buy the pound with an ``initial'' target of $2.06, analysts Thomas Stolper, Jens Nordvig and Kevin Edgeley wrote in a note. The U.K. economic outlook ``now looks more balanced,'' they said. The pound rose above $2 yesterday for the first time in two months.
The euro gained 17 percent against the dollar in the past year, undermining European exports. The synthetic euro, which estimates the European currency's value before its inception in 1999, advanced to the strongest level since at least January 1989, when Bloomberg's data on the measure began.
The U.S. Dollar Index traded on ICE Futures in New York declined for an eighth straight day yesterday, to a record low of 72.863 as an industry report showed U.S. mortgage foreclosures rose to a record at the end of 2007. The dollar touched a record low of 1.0214 Swiss francs.
Buying Yen
The central bank may need to keep rates low ``for some time'' if financial markets remain under stress, New York Fed President Timothy Geithner said in remarks to the Council on Foreign Relations in New York today.
Futures show traders see a 96 percent chance the Fed will lower its target rate 0.75 percentage point to 2.25 percent on March 18. The balance of bets is on a half-point cut.
Dollar losses against the yen deepened yesterday after CIFG Guaranty lost its Aaa bond insurer rating at Moody's Investors Service because of its exposure to the mortgage market. The rating was cut four levels to A1. CIFG insured $95 billion of debt as of year-end, according to its Web site.
The yen gained versus the 16 most-traded currencies as U.S. stocks fell on concern that credit losses will deepen. The yen gained 2.2 percent versus the Australian and 2 percent versus the New Zealand dollar.
The Standard & Poor's 500 Index dropped 2.2 percent. Falling stocks spur traders to shed high-yielding securities funded with loans in Japan. Japan's benchmark rate of 0.5 percent compares with 8.25 percent in New Zealand and 7.25 percent in Australia.
The U.S. currency may fall further before a government report today forecast to show the jobless rate rose to 5 percent in February from 4.9 percent the prior month. Payrolls probably expanded by 23,000, short of the roughly 100,000 needed to keep pace with increases in the labor force, according to the median estimate of economists surveyed by Bloomberg News. The economy lost 17,000 jobs in January.
March 7 (Bloomberg) -- The euro traded at a record high against the dollar after European Central Bank President Jean- Claude Trichet said there is ``strong upward pressure on inflation,'' signaling he's in no hurry to cut interest rates.
Europe's 15-nation currency yesterday also reached an all- time high versus the U.K. pound as policy makers left the euro region's main rate at 4 percent, matching the forecast in a Bloomberg News survey. The yen rallied to the strongest since January 2005 compared with the dollar as tumbling stocks led traders to exit carry-trade purchases of higher-yielding securities funded with yen loans.
Trichet's comment ``gives the green light to sell the dollar,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``He's suggesting the ECB won't do anything overt to support the U.S. dollar.'' The remark indicated ``it's a hard time for the ECB to cut rates.''
The euro climbed to $1.5395, the highest level since its 1999 debut, before trading at $1.5393 at 7:53 a.m. in Tokyo. The yen rose to 102.46 per dollar, the highest since Jan. 28, 2005, before trading at 102.50 from 102.67 late yesterday. The euro bought 157.80 yen from 157.92.
The euro set a record for the eighth trading day in the past nine. After holding in a range since November of about $1.43 to $1.49, the euro began to rally after Fed Vice Chairman Donald Kohn said Feb. 26 that credit-market turmoil and slower growth pose a ``greater threat'' than inflation. The comments drove the euro above $1.50 for the first time.
`Pressures on Inflation'
``The latest information has confirmed the existence of strong upward pressures on inflation,'' Trichet said at a press conference in Frankfurt.
He also said policy makers ``don't underwrite the present future market interest rates'' and said he noted ``with extreme attention'' remarks from President George W. Bush last week that a strong dollar is in U.S. interests. Fellow policy maker Axel Weber said Feb. 27 investors betting on rate cuts in Europe are underestimating inflation.
``The market took the fact that he ducked the question about the dollar as a tacit acceptance of its weakness,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York.
The euro was at 76.56 British pence after yesterday advancing to an all-time high of 76.92 pence after the Bank of England kept borrowing costs at 5.25 percent.
Goldman's Pound Call
Goldman Sachs Group Inc. yesterday advised clients to buy the pound with an ``initial'' target of $2.06, analysts Thomas Stolper, Jens Nordvig and Kevin Edgeley wrote in a note. The U.K. economic outlook ``now looks more balanced,'' they said. The pound rose above $2 yesterday for the first time in two months.
The euro gained 17 percent against the dollar in the past year, undermining European exports. The synthetic euro, which estimates the European currency's value before its inception in 1999, advanced to the strongest level since at least January 1989, when Bloomberg's data on the measure began.
The U.S. Dollar Index traded on ICE Futures in New York declined for an eighth straight day yesterday, to a record low of 72.863 as an industry report showed U.S. mortgage foreclosures rose to a record at the end of 2007. The dollar touched a record low of 1.0214 Swiss francs.
Buying Yen
The central bank may need to keep rates low ``for some time'' if financial markets remain under stress, New York Fed President Timothy Geithner said in remarks to the Council on Foreign Relations in New York today.
Futures show traders see a 96 percent chance the Fed will lower its target rate 0.75 percentage point to 2.25 percent on March 18. The balance of bets is on a half-point cut.
Dollar losses against the yen deepened yesterday after CIFG Guaranty lost its Aaa bond insurer rating at Moody's Investors Service because of its exposure to the mortgage market. The rating was cut four levels to A1. CIFG insured $95 billion of debt as of year-end, according to its Web site.
The yen gained versus the 16 most-traded currencies as U.S. stocks fell on concern that credit losses will deepen. The yen gained 2.2 percent versus the Australian and 2 percent versus the New Zealand dollar.
The Standard & Poor's 500 Index dropped 2.2 percent. Falling stocks spur traders to shed high-yielding securities funded with loans in Japan. Japan's benchmark rate of 0.5 percent compares with 8.25 percent in New Zealand and 7.25 percent in Australia.
The U.S. currency may fall further before a government report today forecast to show the jobless rate rose to 5 percent in February from 4.9 percent the prior month. Payrolls probably expanded by 23,000, short of the roughly 100,000 needed to keep pace with increases in the labor force, according to the median estimate of economists surveyed by Bloomberg News. The economy lost 17,000 jobs in January.
U.S. Mortgage Foreclosures Rise as Owners `Give Up' (Update3)
By Kathleen M. Howley
March 6 (Bloomberg) -- U.S. mortgage foreclosures rose to an all-time high at the end of 2007 as borrowers with adjustable-rate loans walked away from properties before their payments increased, the Mortgage Bankers Association said today.
New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier. Late payments rose to a 23-year high, the organization said in a report today.
``We're seeing people give up even before they get to the reset because they couldn't afford the home in the first place,'' said Jay Brinkmann, vice president of research and economics for the Washington-based trade group.
The Bush administration is urging lenders to avert foreclosures by modifying mortgage terms amid the worst housing slump in a quarter century. The Federal Reserve has slashed its benchmark interest rate twice this year to try to avert the first recession since 2001. The central bank yesterday said the net worth of U.S. households decreased by $532.9 billion during the fourth quarter as home values fell.
The share of all home loans with payments more than 30 days late, both prime and fixed-rate loans, rose to a seasonally adjusted 5.82 percent, the highest since 1985, the bankers' group said in today's report.
Buyers `Overstretched'
About 40 percent of all foreclosures are homeowners with prime or subprime loans who couldn't make their payments before the reset, Brinkmann estimated in an interview. Another 23 percent are borrowers who received some form of loan modification, typically a freezing or a reduction of their rate, and then default, he said
Forty-two percent of new foreclosures in the fourth quarter were people with adjustable-rate subprime mortgages, given to borrowers with limited or tainted credit records, according to the report. Those types of loans accounted for about 7 percent of all mortgages, the report said.
``It comes down to an overstretching of buyers to get into homes they couldn't afford and an overextending of credit by lenders who were more willing to take risk,'' Brinkmann said.
Another 20 percent of new foreclosures were prime adjustable-rate mortgages, which accounted for 15 percent of all home loans, according to the report.
Late Payments Data
Twenty percent of adjustable-rate subprime loans had late payments in the fourth quarter, a number that excludes the one of every eight mortgages already in foreclosure, the bankers group said in their report.
The share of late payments for adjustable prime loans was 5.51 percent, from 3.39 percent a year earlier, and the foreclosure inventory rose to 2.59 percent, almost tripling from a year earlier.
The Mortgage Bankers survey examines 46 million residential home loans, about 80 percent of the market. The study gives percentages without providing the number of loans they represent.
Homebuilding executives, economists and securities analysts predict the housing market won't begin to recover until at least 2009. U.S. sales of new and existing homes probably will fall to 5 million this year, a drop of 33 percent from the all-time high of 7.46 million in 2005, before rising to 5.23 million in 2009, Freddie Mac said in a March 3 forecast.
Freddie Mac and Fannie Mae, the biggest U.S. mortgage finance companies, have posted their largest-ever losses as rising defaults boosted credit costs. Fannie Mae had a $3.55 billion loss in the fourth quarter, the Washington-based company said Feb. 27. Freddie Mac reported $2.45 billion fourth-quarter loss the following day.
The Mortgage Bankers survey came on the same day that the National Association of Realtors reported that the number of Americans signing contracts to buy previously owned homes was unchanged in January.
The Realtors' index of signed purchase agreements held at 85.9, higher than forecast and the second-lowest level since the Chicago-based group began keeping records in 2001.
March 6 (Bloomberg) -- U.S. mortgage foreclosures rose to an all-time high at the end of 2007 as borrowers with adjustable-rate loans walked away from properties before their payments increased, the Mortgage Bankers Association said today.
New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier. Late payments rose to a 23-year high, the organization said in a report today.
``We're seeing people give up even before they get to the reset because they couldn't afford the home in the first place,'' said Jay Brinkmann, vice president of research and economics for the Washington-based trade group.
The Bush administration is urging lenders to avert foreclosures by modifying mortgage terms amid the worst housing slump in a quarter century. The Federal Reserve has slashed its benchmark interest rate twice this year to try to avert the first recession since 2001. The central bank yesterday said the net worth of U.S. households decreased by $532.9 billion during the fourth quarter as home values fell.
The share of all home loans with payments more than 30 days late, both prime and fixed-rate loans, rose to a seasonally adjusted 5.82 percent, the highest since 1985, the bankers' group said in today's report.
Buyers `Overstretched'
About 40 percent of all foreclosures are homeowners with prime or subprime loans who couldn't make their payments before the reset, Brinkmann estimated in an interview. Another 23 percent are borrowers who received some form of loan modification, typically a freezing or a reduction of their rate, and then default, he said
Forty-two percent of new foreclosures in the fourth quarter were people with adjustable-rate subprime mortgages, given to borrowers with limited or tainted credit records, according to the report. Those types of loans accounted for about 7 percent of all mortgages, the report said.
``It comes down to an overstretching of buyers to get into homes they couldn't afford and an overextending of credit by lenders who were more willing to take risk,'' Brinkmann said.
Another 20 percent of new foreclosures were prime adjustable-rate mortgages, which accounted for 15 percent of all home loans, according to the report.
Late Payments Data
Twenty percent of adjustable-rate subprime loans had late payments in the fourth quarter, a number that excludes the one of every eight mortgages already in foreclosure, the bankers group said in their report.
The share of late payments for adjustable prime loans was 5.51 percent, from 3.39 percent a year earlier, and the foreclosure inventory rose to 2.59 percent, almost tripling from a year earlier.
The Mortgage Bankers survey examines 46 million residential home loans, about 80 percent of the market. The study gives percentages without providing the number of loans they represent.
Homebuilding executives, economists and securities analysts predict the housing market won't begin to recover until at least 2009. U.S. sales of new and existing homes probably will fall to 5 million this year, a drop of 33 percent from the all-time high of 7.46 million in 2005, before rising to 5.23 million in 2009, Freddie Mac said in a March 3 forecast.
Freddie Mac and Fannie Mae, the biggest U.S. mortgage finance companies, have posted their largest-ever losses as rising defaults boosted credit costs. Fannie Mae had a $3.55 billion loss in the fourth quarter, the Washington-based company said Feb. 27. Freddie Mac reported $2.45 billion fourth-quarter loss the following day.
The Mortgage Bankers survey came on the same day that the National Association of Realtors reported that the number of Americans signing contracts to buy previously owned homes was unchanged in January.
The Realtors' index of signed purchase agreements held at 85.9, higher than forecast and the second-lowest level since the Chicago-based group began keeping records in 2001.
Tuesday, March 4, 2008
California Draws Record Demand as Muni Bonds Rally (Update2)
By Jeremy R. Cooke
March 4 (Bloomberg) -- California, the largest borrower in the U.S. municipal market, sold $1.75 billion of bonds after attracting record demand from individuals drawn to the highest tax-exempt yields in more than three years.
The state received orders from more than 4,000 investors equal to over 72 percent of the bonds available, said Tom Dresslar, spokesman for California Treasurer Bill Lockyer. Officials, who were to complete the sale tomorrow, wrapped it up early by selling the rest of the debt to institutions.
Municipal bonds snapped 14 days of declines as the highest long-term yields since July 2004 attracted individuals and investors who don't normally buy state and local debt, traders said. Benchmark tax-exempt rates compiled by Municipal Market Advisors exceed U.S. Treasury yields after last month's slump in demand from banks and selling by hedge funds.
``We're telling everyone we can to sell Treasuries and buy munis,'' said Robert Millikan, who manages $5 billion as director of fixed income at BB&T Asset Management in Raleigh, North Carolina. State and local government bonds typically yield less than Treasuries because they pay interest exempt from income taxes, while federal bonds don't.
Big Gains
Today's rally drove tax-exempt yields on top-rated debt lower by 5 basis points to 8 basis points, based on indexes from Municipal Market Advisors. A basis point is 0.01 percentage point. Yields on 30-year general obligation bonds fell 7 basis points, the most in six months, to 4.94 percent, the Concord, Massachusetts-based research firm said.
New York City bonds backed by school-building aid revenue from the state and due in 2026 traded in a $1 million block at 100.6 cents on the dollar for a yield of 4.92 percent today, compared with 97.7 cents and 5.20 percent yesterday.
California, with the second-lowest credit ratings among U.S. states after Louisiana, didn't buy insurance on its new bonds for at least the third time in four months.
``At this point and time, given the market and the situation with insurers, insurance has no value to taxpayers,'' Dresslar said. ``Until and unless the market assigns value to it again and it makes financial sense again for taxpayers, we are not going to buy insurance.''
Five of the seven top financial guarantors have seen their business decline in the municipal market since subprime-related losses prompted rating companies' scrutiny and downgrades.
Auction-Rate Woes
Concern that insurers' finances may deteriorate further prompted declines in the municipal bonds they guarantee, and led to record failures in the auction-rate market, driving up municipal debt costs as high as 20 percent last month.
The average rate for bonds whose interest is set at auctions every seven days was 6.52 percent Feb. 27, up from 3.92 percent on Jan. 30, according to a Securities Industry and Financial Markets Association index.
California, which is rated A+ by Standard & Poor's and Fitch Ratings and A1 by Moody's Investors Service, is leading an effort to change the way municipal bonds are ranked. Officials say their ratings exaggerate the risk that states and cities might default on their debt.
``The system misleads investors by providing inaccurate information about risk, and costs American taxpayers billions of dollars in higher interest rates and bond insurance premiums,'' Lockyer said in a statement today.
Top Ratings
California would be rated Aaa if assessed using the same criteria as corporations, along with every other state except Louisiana, according to Moody's Investors Service.
If the most populous U.S. state had top credit ratings, California might save more than $5 billion over the 30-year life of the $61 billion in yet-to-be-sold, voter-approved debt, Lockyer and 14 other municipal officials from Connecticut to Maine said in a letter to the three major rating companies.
Issuers are pushing for change after municipal bonds fell 4.9 percent last month, the most since Merrill Lynch & Co. started compiling the index in 1989. Insurers' woes boosted floating-rate borrowing costs and reduced the value of long-term bonds, squeezing hedge funds and other institutions that use borrowed money increase holdings.
``Billions and billions of dollars of bonds hit the market, and it has caused the municipal market to cheapen, as a percentage of Treasuries, to a point few if any traders have ever seen,'' said Kenneth Naehu, who oversees fixed income investments for Bel Air Investment Advisors LLC in Los Angeles. The firm manages $5 billion. ``That has created opportunities.''
More Than Treasuries
Naehu said he has bought 15- to 20-year municipal bonds for the last several weeks that yield as much as 140 percent of similarly dated Treasuries and also placed orders for the California debt. The rout has started to draw in new investors to the tax-exempt market, which saw prices collapse after hedge funds and dealers' ``tender-option bond'' programs sold holdings to raise cash to meet margin calls, he said.
``For the buyers, it has taken them a while to come to grips with the notion that this is not a credit issue, it's a liquidity issue,'' Naehu said. ``It's a tremendous buying opportunity.''
Among investors buying as municipal hedge funds sold last week was Bill Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, California, and manager of the world's biggest bond fund.
Gross told Reuters he bought $1.5 billion in municipal bonds on Feb. 29 at ``very attractive prices.''
In New York, the Thruway Authority sold almost $500 million of bonds today after individuals placed orders for about 54 percent of the deal during another order period dedicated to buyers of less than $1 million apiece. The Albany-based authority usually sells about 30 percent to ``retail buyers,'' said John Bryan, chief financial officer.
March 4 (Bloomberg) -- California, the largest borrower in the U.S. municipal market, sold $1.75 billion of bonds after attracting record demand from individuals drawn to the highest tax-exempt yields in more than three years.
The state received orders from more than 4,000 investors equal to over 72 percent of the bonds available, said Tom Dresslar, spokesman for California Treasurer Bill Lockyer. Officials, who were to complete the sale tomorrow, wrapped it up early by selling the rest of the debt to institutions.
Municipal bonds snapped 14 days of declines as the highest long-term yields since July 2004 attracted individuals and investors who don't normally buy state and local debt, traders said. Benchmark tax-exempt rates compiled by Municipal Market Advisors exceed U.S. Treasury yields after last month's slump in demand from banks and selling by hedge funds.
``We're telling everyone we can to sell Treasuries and buy munis,'' said Robert Millikan, who manages $5 billion as director of fixed income at BB&T Asset Management in Raleigh, North Carolina. State and local government bonds typically yield less than Treasuries because they pay interest exempt from income taxes, while federal bonds don't.
Big Gains
Today's rally drove tax-exempt yields on top-rated debt lower by 5 basis points to 8 basis points, based on indexes from Municipal Market Advisors. A basis point is 0.01 percentage point. Yields on 30-year general obligation bonds fell 7 basis points, the most in six months, to 4.94 percent, the Concord, Massachusetts-based research firm said.
New York City bonds backed by school-building aid revenue from the state and due in 2026 traded in a $1 million block at 100.6 cents on the dollar for a yield of 4.92 percent today, compared with 97.7 cents and 5.20 percent yesterday.
California, with the second-lowest credit ratings among U.S. states after Louisiana, didn't buy insurance on its new bonds for at least the third time in four months.
``At this point and time, given the market and the situation with insurers, insurance has no value to taxpayers,'' Dresslar said. ``Until and unless the market assigns value to it again and it makes financial sense again for taxpayers, we are not going to buy insurance.''
Five of the seven top financial guarantors have seen their business decline in the municipal market since subprime-related losses prompted rating companies' scrutiny and downgrades.
Auction-Rate Woes
Concern that insurers' finances may deteriorate further prompted declines in the municipal bonds they guarantee, and led to record failures in the auction-rate market, driving up municipal debt costs as high as 20 percent last month.
The average rate for bonds whose interest is set at auctions every seven days was 6.52 percent Feb. 27, up from 3.92 percent on Jan. 30, according to a Securities Industry and Financial Markets Association index.
California, which is rated A+ by Standard & Poor's and Fitch Ratings and A1 by Moody's Investors Service, is leading an effort to change the way municipal bonds are ranked. Officials say their ratings exaggerate the risk that states and cities might default on their debt.
``The system misleads investors by providing inaccurate information about risk, and costs American taxpayers billions of dollars in higher interest rates and bond insurance premiums,'' Lockyer said in a statement today.
Top Ratings
California would be rated Aaa if assessed using the same criteria as corporations, along with every other state except Louisiana, according to Moody's Investors Service.
If the most populous U.S. state had top credit ratings, California might save more than $5 billion over the 30-year life of the $61 billion in yet-to-be-sold, voter-approved debt, Lockyer and 14 other municipal officials from Connecticut to Maine said in a letter to the three major rating companies.
Issuers are pushing for change after municipal bonds fell 4.9 percent last month, the most since Merrill Lynch & Co. started compiling the index in 1989. Insurers' woes boosted floating-rate borrowing costs and reduced the value of long-term bonds, squeezing hedge funds and other institutions that use borrowed money increase holdings.
``Billions and billions of dollars of bonds hit the market, and it has caused the municipal market to cheapen, as a percentage of Treasuries, to a point few if any traders have ever seen,'' said Kenneth Naehu, who oversees fixed income investments for Bel Air Investment Advisors LLC in Los Angeles. The firm manages $5 billion. ``That has created opportunities.''
More Than Treasuries
Naehu said he has bought 15- to 20-year municipal bonds for the last several weeks that yield as much as 140 percent of similarly dated Treasuries and also placed orders for the California debt. The rout has started to draw in new investors to the tax-exempt market, which saw prices collapse after hedge funds and dealers' ``tender-option bond'' programs sold holdings to raise cash to meet margin calls, he said.
``For the buyers, it has taken them a while to come to grips with the notion that this is not a credit issue, it's a liquidity issue,'' Naehu said. ``It's a tremendous buying opportunity.''
Among investors buying as municipal hedge funds sold last week was Bill Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, California, and manager of the world's biggest bond fund.
Gross told Reuters he bought $1.5 billion in municipal bonds on Feb. 29 at ``very attractive prices.''
In New York, the Thruway Authority sold almost $500 million of bonds today after individuals placed orders for about 54 percent of the deal during another order period dedicated to buyers of less than $1 million apiece. The Albany-based authority usually sells about 30 percent to ``retail buyers,'' said John Bryan, chief financial officer.
U.S. Stocks Fall on Bernanke Plan, Oil's Retreat; Banks Decline
By Michael Patterson
March 4 (Bloomberg) -- U.S. stocks fell, led by financial and commodity shares, after Federal Reserve Chairman Ben S. Bernanke urged banks to forgive more late loans and oil, gold and copper prices dropped from records.
Shares pared declines in the last hour of trading after CNBC said a deal to bail out bond insurer Ambac Financial Group Inc. is progressing. Citigroup Inc. tumbled to a nine-year low and helped drag financial shares down for a fourth day after analysts slashed earnings estimates. ConocoPhillips and Freeport-McMoRan Copper & Gold Inc. led a retreat in energy and mining shares, the best-performing industries of the past year.
The Standard & Poor's 500 Index slid 4.59, or 0.3 percent, to 1,326.75 after earlier falling 1.8 percent. The Dow Jones Industrial Average lost 45.1, or 0.4 percent, to 12,213.8, paring a decline of 226 points. The Nasdaq Composite Index added 1.68, or 0.1 percent, to 2,260.28. Five stocks dropped for every three that rose on the New York Stock Exchange.
``Clearly there are more losses out there for the banks,'' Wendell Perkins, who helps manage about $1.7 billion as chief investment officer at Optique Capital Management in Racine, Wisconsin, said in an interview with Bloomberg Radio. The drop in commodities added to the ``gloom that's out there. It was quite a volatile day and unfortunately ended on the down side,'' he said.
The S&P 500 briefly dropped below its lowest closing level in 18 months after Bernanke warned in a speech in Florida that the housing slump may deepen. The benchmark for U.S. equities recovered most of its loss following the Ambac rescue report and after Cisco Systems Inc. said it plans to pursue more takeovers. European shares fell for a fifth day and Asia's benchmark index slid for a fourth, its longest losing streak of the year.
2008 Losses
The S&P 500 has retreated 9.6 percent this year on growing concern that the worst slump in profits since 2001 will continue after the collapse of the U.S. subprime mortgage market sent banks' credit losses to $181 billion worldwide.
Citigroup fell 99 cents to $22.10, its lowest price since December 1998. Merrill Lynch & Co.'s Guy Moszkowski said he expects $18 billion of credit writedowns related to the company's holdings of subprime mortgages, collateralized debt obligations, leveraged loans, consumer debt, real-estate loans and other investments. The analyst slashed his first-quarter estimate for Citigroup to a loss of $1.66 a share from a profit of 55 cents a share and his 2008 profit forecast to 24 cents a share from $2.74.
Goldman Sachs Group Inc. said today it cut its first- quarter estimate for Citigroup to a loss of $1 a share from a projection of a 15-cent profit due to a ``miscalculation in our model.''
Brokerage's Estimates Cut
Goldman, the biggest U.S. securities firm by market value, slipped $1.48 to $163.60. Bear Stearns Cos. lost 15 cents to $77.17. Lehman Brothers Holdings Inc. retreated 26 cents to $48.35. Morgan Stanley declined 23 cents to $41.35.
The securities firms had their first-quarter earnings estimates cut by Wachovia Corp. analyst Douglas Sipkin on expectations the value of mortgage assets will continue to fall. Sipkin is at least the 10th analyst in the past two weeks to reduce profit estimates for the biggest investment banks.
Bank of America Corp. dropped 40 cents to $38.78. Wachovia declined 93 cents to $29.48. Merrill also cut profit estimates for the two banks, the second and fourth largest in the U.S.
Separately, the head of an investment fund controlled by Dubai ruler Sheikh Mohammed bin Rashid al-Maktoum said Citigroup and other financial companies may need additional capital as credit losses increase. Global banks and securities firms have already raised about $105 billion of capital amid losses on subprime-related securities.
Earnings Slump
Earnings at financial companies in the S&P 500 may drop more than 20 percent in both the first and second quarters, according to analysts' estimates compiled by Bloomberg. Record losses at Citigroup, Merrill Lynch & Co. and other banks and brokerages helped spur a 22.7 percent drop in average earnings for S&P 500 members in the fourth quarter, the biggest decline since the third quarter of 2001, according to Bloomberg data.
The S&P 500 Financials Index dropped 0.8 percent, paring an early retreat of as much as 3.3 percent. Banks, brokerages and insurance companies recovered most of their losses after CNBC's Charlie Gasparino reported a bailout deal for Ambac is progressing though not yet completed, citing people in the New York State Insurance Department.
Bond-Insurance Bailout
New York Insurance Superintendent Eric Dinallo has orchestrated meetings with banks to provide capital to Ambac and other bond insurers, which have been hurt by the declining value of mortgage-linked securities they guaranteed.
Ambac shares jumped 78 cents, or 7.9 percent, to $10.72 for the second-biggest gain in the S&P 500. The stock had retreated as much as 9 percent earlier.
Thirty-four of 36 energy companies in the S&P 500 fell as oil slumped 2.9 percent and prices for gasoline and heating oil declined. Chakib Khelil, president of the Organization of Petroleum Exporting Countries, said the group will make ``no change'' to production targets when it meets in Vienna tomorrow. The S&P 500 Energy Index lost 1.5 percent, paring its gain over the past year to 33 percent. Crude futures rose to $103.95 a barrel yesterday, the highest since trading began in 1983.
ConocoPhillips, the third-biggest U.S. oil company, dropped $1.94 to $81.50. Lehman Brothers analyst Paul Cheng lowered his recommendation on the shares to ``equal weight'' from ``overweight.'' Cheng cut his earnings estimates for this year and next and wrote that the stock price may already reflect the impact of oil prices at $90 to $100 a barrel.
Exxon Mobil Corp., the biggest U.S. oil producer, dropped $1.06 to $86.69. Schlumberger Ltd., the world's largest oilfield-services provider, lost $2.43 to $84.55.
Freeport-McMoRan, Monsanto
Mining and agricultural companies declined after prices for copper, gold and corn fell from all-time highs.
Freeport-McMoRan, the largest publicly traded copper company, tumbled $4.52 to $98.93. The recent gains in copper prices pose a risk to demand from China, Chief Executive Officer Richard Adkerson said today in an interview on Bloomberg Television.
Newmont Mining Corp., the world's second-largest gold producer, dropped $2.18 to $50.20 after gold prices fell the most in a month as the decline in oil reduced the appeal of the precious metal as a hedge against inflation.
Materials Slump
Monsanto Co., the world's biggest seed producer, dropped $6.91 to $111.72. Corn tumbled the most in almost six weeks on speculation that overseas demand and U.S. animal-feed consumption will slow after grain prices reached a record yesterday. The drop today in oil and gasoline prices may also reduce demand for corn-based ethanol as a fuel substitute.
Agriculture Secretary Ed Schafer said today that the U.S. eventually must phase out federal incentives for corn-based ethanol in favor of cellulosic sources that don't compete with other crops for food.
The S&P 500 Materials Index retreated 2.2 percent, paring its gain over the past year to 12 percent. The broader S&P 500 has dropped about 4.4 percent over the same period.
Staples Inc. dropped 27 cents to $22.22. The world's largest office-supplies retailer said fourth-quarter profit fell 1 percent on lower North American retail sales to small companies and consumers. The company cut its full-year forecast.
Intel's Margins
Intel Corp. lost 1 cent to $20 after earlier falling as much as 57 cents. The company said gross margin, the percentage of sales remaining after deducting the cost of production, will be 54 percent, down from the 56 percent it predicted in January. Intel cited lower-than-expected prices of chips that store data in cameras and music players for the reduced forecast.
Intel's prediction sparked early declines in computer- related shares that sent the S&P 500 Information Technology Index down as much as 1.6 percent.
The index rebounded to end the day up 0.5 percent after Cisco Chief Executive Officer John Chambers said the biggest maker of network equipment will pursue more acquisitions. Chambers also said he's more comfortable with his company's long-term growth prospects than he was last month. Cisco shares slipped 11 cents, or 0.5 percent, to $24.29 after earlier falling as much as 2.7 percent.
Barr Pharmaceuticals Inc. rallied $3.80, or 8.3 percent, to $49.47 for the top gain in the S&P 500. A U.S. judge invalidated a patent on Bayer AG's Yasmin contraceptive. The ruling means Barr may be able to sell a generic version before Bayer's patent expires in 2020.
Fed Watch
Fed Vice Chairman Donald Kohn said U.S. banks face ``challenging market conditions'' that will likely hurt earnings and consumer lending, requiring closer scrutiny from regulators.
The collapse of the housing market has led to ``a substantial deterioration in asset quality and earnings'' and will force bank holding companies to continue to write down assets, he said. State banks also face ``deteriorating credit conditions'' this year. His remarks came from written testimony to the Senate Banking Committee.
Fed Bank of Dallas President Richard W. Fisher said U.S. growth is likely to remain ``subpar'' through the end of June and it isn't certain such a slowdown will curb inflation. Fisher, who votes on rates this year, called his growth forecast one of the most ``bearish'' of all the Federal Open Market Committee members, who are estimating 1.3 percent to 2 percent for this year. He spoke today to the Society of Business Economists in London.
Traders priced in a 70 percent chance that the Fed will lower its benchmark lending rate by 0.75 percentage point to 2.25 percent by its March 18 policy meeting, down from 74 percent odds yesterday, according to Fed funds futures prices compiled by Bloomberg. The rest of the bets are for a 0.5 point reduction.
Treasuries fell, led by 10-year notes, on speculation that a reorganization of Ambac will reduce demand for the relative safety of government debt.
March 4 (Bloomberg) -- U.S. stocks fell, led by financial and commodity shares, after Federal Reserve Chairman Ben S. Bernanke urged banks to forgive more late loans and oil, gold and copper prices dropped from records.
Shares pared declines in the last hour of trading after CNBC said a deal to bail out bond insurer Ambac Financial Group Inc. is progressing. Citigroup Inc. tumbled to a nine-year low and helped drag financial shares down for a fourth day after analysts slashed earnings estimates. ConocoPhillips and Freeport-McMoRan Copper & Gold Inc. led a retreat in energy and mining shares, the best-performing industries of the past year.
The Standard & Poor's 500 Index slid 4.59, or 0.3 percent, to 1,326.75 after earlier falling 1.8 percent. The Dow Jones Industrial Average lost 45.1, or 0.4 percent, to 12,213.8, paring a decline of 226 points. The Nasdaq Composite Index added 1.68, or 0.1 percent, to 2,260.28. Five stocks dropped for every three that rose on the New York Stock Exchange.
``Clearly there are more losses out there for the banks,'' Wendell Perkins, who helps manage about $1.7 billion as chief investment officer at Optique Capital Management in Racine, Wisconsin, said in an interview with Bloomberg Radio. The drop in commodities added to the ``gloom that's out there. It was quite a volatile day and unfortunately ended on the down side,'' he said.
The S&P 500 briefly dropped below its lowest closing level in 18 months after Bernanke warned in a speech in Florida that the housing slump may deepen. The benchmark for U.S. equities recovered most of its loss following the Ambac rescue report and after Cisco Systems Inc. said it plans to pursue more takeovers. European shares fell for a fifth day and Asia's benchmark index slid for a fourth, its longest losing streak of the year.
2008 Losses
The S&P 500 has retreated 9.6 percent this year on growing concern that the worst slump in profits since 2001 will continue after the collapse of the U.S. subprime mortgage market sent banks' credit losses to $181 billion worldwide.
Citigroup fell 99 cents to $22.10, its lowest price since December 1998. Merrill Lynch & Co.'s Guy Moszkowski said he expects $18 billion of credit writedowns related to the company's holdings of subprime mortgages, collateralized debt obligations, leveraged loans, consumer debt, real-estate loans and other investments. The analyst slashed his first-quarter estimate for Citigroup to a loss of $1.66 a share from a profit of 55 cents a share and his 2008 profit forecast to 24 cents a share from $2.74.
Goldman Sachs Group Inc. said today it cut its first- quarter estimate for Citigroup to a loss of $1 a share from a projection of a 15-cent profit due to a ``miscalculation in our model.''
Brokerage's Estimates Cut
Goldman, the biggest U.S. securities firm by market value, slipped $1.48 to $163.60. Bear Stearns Cos. lost 15 cents to $77.17. Lehman Brothers Holdings Inc. retreated 26 cents to $48.35. Morgan Stanley declined 23 cents to $41.35.
The securities firms had their first-quarter earnings estimates cut by Wachovia Corp. analyst Douglas Sipkin on expectations the value of mortgage assets will continue to fall. Sipkin is at least the 10th analyst in the past two weeks to reduce profit estimates for the biggest investment banks.
Bank of America Corp. dropped 40 cents to $38.78. Wachovia declined 93 cents to $29.48. Merrill also cut profit estimates for the two banks, the second and fourth largest in the U.S.
Separately, the head of an investment fund controlled by Dubai ruler Sheikh Mohammed bin Rashid al-Maktoum said Citigroup and other financial companies may need additional capital as credit losses increase. Global banks and securities firms have already raised about $105 billion of capital amid losses on subprime-related securities.
Earnings Slump
Earnings at financial companies in the S&P 500 may drop more than 20 percent in both the first and second quarters, according to analysts' estimates compiled by Bloomberg. Record losses at Citigroup, Merrill Lynch & Co. and other banks and brokerages helped spur a 22.7 percent drop in average earnings for S&P 500 members in the fourth quarter, the biggest decline since the third quarter of 2001, according to Bloomberg data.
The S&P 500 Financials Index dropped 0.8 percent, paring an early retreat of as much as 3.3 percent. Banks, brokerages and insurance companies recovered most of their losses after CNBC's Charlie Gasparino reported a bailout deal for Ambac is progressing though not yet completed, citing people in the New York State Insurance Department.
Bond-Insurance Bailout
New York Insurance Superintendent Eric Dinallo has orchestrated meetings with banks to provide capital to Ambac and other bond insurers, which have been hurt by the declining value of mortgage-linked securities they guaranteed.
Ambac shares jumped 78 cents, or 7.9 percent, to $10.72 for the second-biggest gain in the S&P 500. The stock had retreated as much as 9 percent earlier.
Thirty-four of 36 energy companies in the S&P 500 fell as oil slumped 2.9 percent and prices for gasoline and heating oil declined. Chakib Khelil, president of the Organization of Petroleum Exporting Countries, said the group will make ``no change'' to production targets when it meets in Vienna tomorrow. The S&P 500 Energy Index lost 1.5 percent, paring its gain over the past year to 33 percent. Crude futures rose to $103.95 a barrel yesterday, the highest since trading began in 1983.
ConocoPhillips, the third-biggest U.S. oil company, dropped $1.94 to $81.50. Lehman Brothers analyst Paul Cheng lowered his recommendation on the shares to ``equal weight'' from ``overweight.'' Cheng cut his earnings estimates for this year and next and wrote that the stock price may already reflect the impact of oil prices at $90 to $100 a barrel.
Exxon Mobil Corp., the biggest U.S. oil producer, dropped $1.06 to $86.69. Schlumberger Ltd., the world's largest oilfield-services provider, lost $2.43 to $84.55.
Freeport-McMoRan, Monsanto
Mining and agricultural companies declined after prices for copper, gold and corn fell from all-time highs.
Freeport-McMoRan, the largest publicly traded copper company, tumbled $4.52 to $98.93. The recent gains in copper prices pose a risk to demand from China, Chief Executive Officer Richard Adkerson said today in an interview on Bloomberg Television.
Newmont Mining Corp., the world's second-largest gold producer, dropped $2.18 to $50.20 after gold prices fell the most in a month as the decline in oil reduced the appeal of the precious metal as a hedge against inflation.
Materials Slump
Monsanto Co., the world's biggest seed producer, dropped $6.91 to $111.72. Corn tumbled the most in almost six weeks on speculation that overseas demand and U.S. animal-feed consumption will slow after grain prices reached a record yesterday. The drop today in oil and gasoline prices may also reduce demand for corn-based ethanol as a fuel substitute.
Agriculture Secretary Ed Schafer said today that the U.S. eventually must phase out federal incentives for corn-based ethanol in favor of cellulosic sources that don't compete with other crops for food.
The S&P 500 Materials Index retreated 2.2 percent, paring its gain over the past year to 12 percent. The broader S&P 500 has dropped about 4.4 percent over the same period.
Staples Inc. dropped 27 cents to $22.22. The world's largest office-supplies retailer said fourth-quarter profit fell 1 percent on lower North American retail sales to small companies and consumers. The company cut its full-year forecast.
Intel's Margins
Intel Corp. lost 1 cent to $20 after earlier falling as much as 57 cents. The company said gross margin, the percentage of sales remaining after deducting the cost of production, will be 54 percent, down from the 56 percent it predicted in January. Intel cited lower-than-expected prices of chips that store data in cameras and music players for the reduced forecast.
Intel's prediction sparked early declines in computer- related shares that sent the S&P 500 Information Technology Index down as much as 1.6 percent.
The index rebounded to end the day up 0.5 percent after Cisco Chief Executive Officer John Chambers said the biggest maker of network equipment will pursue more acquisitions. Chambers also said he's more comfortable with his company's long-term growth prospects than he was last month. Cisco shares slipped 11 cents, or 0.5 percent, to $24.29 after earlier falling as much as 2.7 percent.
Barr Pharmaceuticals Inc. rallied $3.80, or 8.3 percent, to $49.47 for the top gain in the S&P 500. A U.S. judge invalidated a patent on Bayer AG's Yasmin contraceptive. The ruling means Barr may be able to sell a generic version before Bayer's patent expires in 2020.
Fed Watch
Fed Vice Chairman Donald Kohn said U.S. banks face ``challenging market conditions'' that will likely hurt earnings and consumer lending, requiring closer scrutiny from regulators.
The collapse of the housing market has led to ``a substantial deterioration in asset quality and earnings'' and will force bank holding companies to continue to write down assets, he said. State banks also face ``deteriorating credit conditions'' this year. His remarks came from written testimony to the Senate Banking Committee.
Fed Bank of Dallas President Richard W. Fisher said U.S. growth is likely to remain ``subpar'' through the end of June and it isn't certain such a slowdown will curb inflation. Fisher, who votes on rates this year, called his growth forecast one of the most ``bearish'' of all the Federal Open Market Committee members, who are estimating 1.3 percent to 2 percent for this year. He spoke today to the Society of Business Economists in London.
Traders priced in a 70 percent chance that the Fed will lower its benchmark lending rate by 0.75 percentage point to 2.25 percent by its March 18 policy meeting, down from 74 percent odds yesterday, according to Fed funds futures prices compiled by Bloomberg. The rest of the bets are for a 0.5 point reduction.
Treasuries fell, led by 10-year notes, on speculation that a reorganization of Ambac will reduce demand for the relative safety of government debt.
Commodity Prices Plunge a Day After Records for Oil, Gold, Corn
By Millie Munshi
March 4 (Bloomberg) -- Commodities plunged the most in almost six weeks, as oil, gold and corn fell from records on renewed concern that a slowing U.S. economy will curb demand for raw materials.
The UBS Bloomberg Constant Maturity Commodity Index of 26 futures contracts fell 29.4346, or 1.9 percent, to 1,507.877 at 4:02 p.m. in New York. The decline was the biggest since Jan. 23, halting a rally that sent the index up 20 percent this year and to a record high on Feb. 29.
Demand for everything from gasoline to copper to food may slow as inflation accelerates, loan defaults rise and the U.S. housing market deteriorates, said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. ``Further declines in house prices are likely,'' Federal Reserve Chairman Ben S. Bernanke said today.
``If the U.S. continues to slow, it's not going to bode well for the supply and demand picture of these commodities,'' O'Neill said. ``Every time Bernanke speaks, the negativity about the U.S. economy comes forward.''
Bernanke, in a speech to bankers in Orlando, Florida, urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting. U.S. growth has been stifled, slowing to 0.6 percent in the fourth-quarter, as the subprime mortgage fallout triggered about $181 billion in writedowns and credit losses at the world's largest financial firms.
Dollar, Inflation
Commodities have surged this year, beating gains in stocks and bonds, as a slumping dollar and lower interest rates sparked demand for a hedge against inflation. U.S. consumer prices rose 4.1 percent last year, the fastest pace since 1990. The Fed has cut interest rates five times since September to avoid a recession, and speculators say more reductions are likely.
While the UBS Bloomberg index was setting records almost daily last month, the Standard & Poor's 500 Index has declined almost 10 percent in 2008.
``It's not that these markets are going to start backing up and going down now,'' O'Neill said. ``These things have just been going up and up, and you get to a point where the buying just slows down.''
Oil, gasoline and heating oil fell from records on signs that the Organization of Petroleum Exporting Countries will leave production targets unchanged when ministers meet tomorrow.
Crude-oil futures for April delivery slipped 2.9 percent to $99.52 a barrel on the New York Mercantile Exchange. The price touched $103.95 yesterday, the highest ever.
Gold, Corn, Consumers
Gold fell as lower energy prices eroded the metal's appeal as an inflation hedge. The metal for April delivery dropped 1.8 percent to $966.30 an ounce on the Comex division of the Nymex, after reaching a record $992 yesterday.
Corn fell for the first time in four sessions on speculation that overseas demand and U.S. animal-feed consumption will slow, after prices reached a record $5.7375 a bushel yesterday. Corn futures for May delivery dropped 2.1 percent to $5.545 a bushel on the Chicago Board of Trade. Earlier, the grain dropped as much as 20 cents, the exchange's limit.
Futures also fell today on concern that the commodity rally, driven by demand from investors and speculators, will discourage purchases of raw materials by manufacturers.
Smithfield Foods Inc., the world's largest hog producer, said last month it was reducing its breeding herd by as much as 5 percent because higher corn prices were leading to record feed costs.
Still, commodity prices may continue to climb this year because demand is growing in China and India, traders said.
``As commodities climb higher, there will be jagged movements to the downside,'' said Ralph Preston, a strategist at Heritage West Financial Inc. in San Diego. ``Today's volatility does not represent a reversal in commodity price trends, but simply an opportunity to add to existing positions or establish new ones.''
March 4 (Bloomberg) -- Commodities plunged the most in almost six weeks, as oil, gold and corn fell from records on renewed concern that a slowing U.S. economy will curb demand for raw materials.
The UBS Bloomberg Constant Maturity Commodity Index of 26 futures contracts fell 29.4346, or 1.9 percent, to 1,507.877 at 4:02 p.m. in New York. The decline was the biggest since Jan. 23, halting a rally that sent the index up 20 percent this year and to a record high on Feb. 29.
Demand for everything from gasoline to copper to food may slow as inflation accelerates, loan defaults rise and the U.S. housing market deteriorates, said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. ``Further declines in house prices are likely,'' Federal Reserve Chairman Ben S. Bernanke said today.
``If the U.S. continues to slow, it's not going to bode well for the supply and demand picture of these commodities,'' O'Neill said. ``Every time Bernanke speaks, the negativity about the U.S. economy comes forward.''
Bernanke, in a speech to bankers in Orlando, Florida, urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting. U.S. growth has been stifled, slowing to 0.6 percent in the fourth-quarter, as the subprime mortgage fallout triggered about $181 billion in writedowns and credit losses at the world's largest financial firms.
Dollar, Inflation
Commodities have surged this year, beating gains in stocks and bonds, as a slumping dollar and lower interest rates sparked demand for a hedge against inflation. U.S. consumer prices rose 4.1 percent last year, the fastest pace since 1990. The Fed has cut interest rates five times since September to avoid a recession, and speculators say more reductions are likely.
While the UBS Bloomberg index was setting records almost daily last month, the Standard & Poor's 500 Index has declined almost 10 percent in 2008.
``It's not that these markets are going to start backing up and going down now,'' O'Neill said. ``These things have just been going up and up, and you get to a point where the buying just slows down.''
Oil, gasoline and heating oil fell from records on signs that the Organization of Petroleum Exporting Countries will leave production targets unchanged when ministers meet tomorrow.
Crude-oil futures for April delivery slipped 2.9 percent to $99.52 a barrel on the New York Mercantile Exchange. The price touched $103.95 yesterday, the highest ever.
Gold, Corn, Consumers
Gold fell as lower energy prices eroded the metal's appeal as an inflation hedge. The metal for April delivery dropped 1.8 percent to $966.30 an ounce on the Comex division of the Nymex, after reaching a record $992 yesterday.
Corn fell for the first time in four sessions on speculation that overseas demand and U.S. animal-feed consumption will slow, after prices reached a record $5.7375 a bushel yesterday. Corn futures for May delivery dropped 2.1 percent to $5.545 a bushel on the Chicago Board of Trade. Earlier, the grain dropped as much as 20 cents, the exchange's limit.
Futures also fell today on concern that the commodity rally, driven by demand from investors and speculators, will discourage purchases of raw materials by manufacturers.
Smithfield Foods Inc., the world's largest hog producer, said last month it was reducing its breeding herd by as much as 5 percent because higher corn prices were leading to record feed costs.
Still, commodity prices may continue to climb this year because demand is growing in China and India, traders said.
``As commodities climb higher, there will be jagged movements to the downside,'' said Ralph Preston, a strategist at Heritage West Financial Inc. in San Diego. ``Today's volatility does not represent a reversal in commodity price trends, but simply an opportunity to add to existing positions or establish new ones.''
Bernanke Urges Banks to Forgive Portion of Mortgages (Update5)
By Scott Lanman and Steve Matthews
March 4 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke, battling the worst housing recession in a quarter century, urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting.
``Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,'' Bernanke said in a speech to bankers in Orlando, Florida, today. ``Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.''
Bernanke's call goes beyond the stance of the Bush administration and previous Fed comments, indicating that he sees housing as a serious threat to the economy that can't be addressed by fiscal or monetary policy alone. The Fed's Feb. 27 report to Congress called for lenders to ``pursue prudent loan workouts'' through means such as modifying mortgage terms and deferring payments.
The Fed chief highlighted the threat posed by home values falling below mortgage balances, something Treasury Secretary Henry Paulson played down yesterday. Bernanke said the ``recent surge'' in delinquencies has been ``closely linked'' to the slide of home equity.
Paulson said in an interview with Bloomberg Television yesterday that ``almost too much'' has been made out of concerns about homeowners whose house prices have dropped below their mortgages. He also said the administration's strategy of encouraging lenders to modify loans is ``the right approach and we are making substantial progress.''
Won't `Dictate'
``We're not going to dictate'' how lenders should alter mortgage contracts, Treasury spokeswoman Brookly McLaughlin said in an e-mailed response to questions. ``If lenders find that in some cases a principal writedown is less costly than foreclosure, then that is an option they have the incentive to consider.''
Mortgage servicers ``should have a clear basis for concluding'' that borrowers are unable to make their payments, ``rather than simply being unwilling to do so'' before reducing loan principal, the American Securitization Forum said.
The forum, whose members include Goldman Sachs Group Inc. and Citigroup Inc., lobbies for investors, traders, underwriters, accounting firms, ratings companies and other institutions involved in the creation and sale of mortgage-backed securities. The group commented in a statement today.
The Mortgage Bankers Association also stopped short of endorsing Bernanke's call.
Legal Contracts
``It is not a casual thing to disrupt an existing legal contract, as those contracts are the basis on which our market system is based,'' the group's president, Jonathan Kempner, said in a statement. ``That said, there is an incentive for lenders, borrowers and investors to work together to maximize the value of the relationship.''
The American Financial Services Association, a 350-member trade group for the U.S. consumer-credit industry, is supportive of Bernanke's idea, as long as it's voluntary, said spokeswoman Lynne Strang.
The Standard & Poor's 500 Thrifts and Mortgage Finance Index, based on seven stocks including Fannie Mae and Countrywide Financial Corp., fell 2.5 percent to 42.61 today. That compares with a 0.3 percent drop in the full S&P 500 benchmark stock index.
Democrats in Congress have said relying on lenders to alter loan terms hasn't yielded enough progress and are pushing for a stronger government response.
House Declines
Bernanke warned today that the housing crisis may deepen.
``Delinquencies and foreclosures likely will continue to rise for a while longer,'' Bernanke said in the comments to the Independent Community Bankers of America. A surfeit of homes for sale indicates ``further declines in house prices are likely,'' he said.
The Standard & Poor's Thrift & Mortgage index, which includes Countrywide Financial Corp. and Washington Mutual Inc. slumped 4.2 percent today to 40.83 at 1:56 p.m. in New York.
Bernanke spoke in a state that's among the worst affected by the housing collapse. Miami home prices have dropped 17.5 percent in the past year, the most of 20 large U.S. cities, according to the S&P/Case-Shiller index. Foreclosures in Florida jumped at more than double the nationwide pace, rising 158 percent in the past year, according to RealtyTrac.
Subprime borrowers are about to see their mortgage rates increase more than 1 percentage point, he said. ``Declines in short-term interest rates and initiatives involving rate freezes will reduce the impact somewhat, but interest-rate resets will nevertheless impose stress on many households.''
`Vigorous' Response
In the past, homeowners could refinance, though that option is now ``largely'' gone because sales of bonds backed by subprime mortgages ``have virtually halted,'' Bernanke said. ``This situation calls for a vigorous response.''
Bernanke didn't comment on the outlook for interest rates. Traders expect the Federal Open Market Committee to lower the benchmark rate by 0.75 percentage point by or at the panel's next meeting on March 18, based on futures prices.
Fed Vice Chairman Donald Kohn told lawmakers today that officials are considering whether ``we have adequate insurance'' against the risks of a deeper downturn in growth. He also reiterated policy makers' call for banks to raise capital, and added that they ought to review their dividend plans.
``Lenders tell us that they are reluctant to write down principal,'' Bernanke said. ``They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.''
Short Payoffs
The Fed chairman countered that by reducing the amount of the loan, this ``may increase the expected payoff by reducing the risk of default and foreclosure.''
Bernanke also urged investors in mortgage bonds to accept ``short payoffs'' of loans by allowing borrowers to refinance at a lower principal.
For investors, a reduction in principal that's ``sufficient to make borrowers eligible for a new loan would remove the downside risk'' of further writedowns or defaults, Bernanke said. Investors may be able to share in future gains in home prices under some plans, he said, citing a proposal by the Office of Thrift Supervision.
Paulson, by contrast, has declined to endorse the OTS plan. John Reich, director of the OTS, last month proposed a program where borrowers would refinance mortgages at current home values. The lender would receive a ``negative equity'' certificate that could be redeemed if the house is sold.
Owners' Responsibility
The Treasury chief yesterday stressed that it's the responsibility of borrowers to get in touch with lenders if they're facing payment problems. He said 80 percent of homeowners who were sent letters by the Hope Now alliance of mortgage servicers haven't responded.
The number of U.S. homeowners entering foreclosure rose 75 percent in 2007, with more than 1 percent in some stage of foreclosure during the year, according to RealtyTrac Inc. of Irvine, California. For the year, more than 2.2 million default notices, auction notices and bank repossessions were reported on about 1.3 million properties.
Yesterday, the Fed and other regulators sent letters to institutions they supervise, encouraging the banks to report on their efforts to modify mortgages at risk of default.
``This will make it easier for regulators, the mortgage industry, lawmakers and homeowners to assess the effectiveness of these efforts,'' Fed Governor Randall Kroszner said in a statement yesterday.
March 4 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke, battling the worst housing recession in a quarter century, urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting.
``Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,'' Bernanke said in a speech to bankers in Orlando, Florida, today. ``Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.''
Bernanke's call goes beyond the stance of the Bush administration and previous Fed comments, indicating that he sees housing as a serious threat to the economy that can't be addressed by fiscal or monetary policy alone. The Fed's Feb. 27 report to Congress called for lenders to ``pursue prudent loan workouts'' through means such as modifying mortgage terms and deferring payments.
The Fed chief highlighted the threat posed by home values falling below mortgage balances, something Treasury Secretary Henry Paulson played down yesterday. Bernanke said the ``recent surge'' in delinquencies has been ``closely linked'' to the slide of home equity.
Paulson said in an interview with Bloomberg Television yesterday that ``almost too much'' has been made out of concerns about homeowners whose house prices have dropped below their mortgages. He also said the administration's strategy of encouraging lenders to modify loans is ``the right approach and we are making substantial progress.''
Won't `Dictate'
``We're not going to dictate'' how lenders should alter mortgage contracts, Treasury spokeswoman Brookly McLaughlin said in an e-mailed response to questions. ``If lenders find that in some cases a principal writedown is less costly than foreclosure, then that is an option they have the incentive to consider.''
Mortgage servicers ``should have a clear basis for concluding'' that borrowers are unable to make their payments, ``rather than simply being unwilling to do so'' before reducing loan principal, the American Securitization Forum said.
The forum, whose members include Goldman Sachs Group Inc. and Citigroup Inc., lobbies for investors, traders, underwriters, accounting firms, ratings companies and other institutions involved in the creation and sale of mortgage-backed securities. The group commented in a statement today.
The Mortgage Bankers Association also stopped short of endorsing Bernanke's call.
Legal Contracts
``It is not a casual thing to disrupt an existing legal contract, as those contracts are the basis on which our market system is based,'' the group's president, Jonathan Kempner, said in a statement. ``That said, there is an incentive for lenders, borrowers and investors to work together to maximize the value of the relationship.''
The American Financial Services Association, a 350-member trade group for the U.S. consumer-credit industry, is supportive of Bernanke's idea, as long as it's voluntary, said spokeswoman Lynne Strang.
The Standard & Poor's 500 Thrifts and Mortgage Finance Index, based on seven stocks including Fannie Mae and Countrywide Financial Corp., fell 2.5 percent to 42.61 today. That compares with a 0.3 percent drop in the full S&P 500 benchmark stock index.
Democrats in Congress have said relying on lenders to alter loan terms hasn't yielded enough progress and are pushing for a stronger government response.
House Declines
Bernanke warned today that the housing crisis may deepen.
``Delinquencies and foreclosures likely will continue to rise for a while longer,'' Bernanke said in the comments to the Independent Community Bankers of America. A surfeit of homes for sale indicates ``further declines in house prices are likely,'' he said.
The Standard & Poor's Thrift & Mortgage index, which includes Countrywide Financial Corp. and Washington Mutual Inc. slumped 4.2 percent today to 40.83 at 1:56 p.m. in New York.
Bernanke spoke in a state that's among the worst affected by the housing collapse. Miami home prices have dropped 17.5 percent in the past year, the most of 20 large U.S. cities, according to the S&P/Case-Shiller index. Foreclosures in Florida jumped at more than double the nationwide pace, rising 158 percent in the past year, according to RealtyTrac.
Subprime borrowers are about to see their mortgage rates increase more than 1 percentage point, he said. ``Declines in short-term interest rates and initiatives involving rate freezes will reduce the impact somewhat, but interest-rate resets will nevertheless impose stress on many households.''
`Vigorous' Response
In the past, homeowners could refinance, though that option is now ``largely'' gone because sales of bonds backed by subprime mortgages ``have virtually halted,'' Bernanke said. ``This situation calls for a vigorous response.''
Bernanke didn't comment on the outlook for interest rates. Traders expect the Federal Open Market Committee to lower the benchmark rate by 0.75 percentage point by or at the panel's next meeting on March 18, based on futures prices.
Fed Vice Chairman Donald Kohn told lawmakers today that officials are considering whether ``we have adequate insurance'' against the risks of a deeper downturn in growth. He also reiterated policy makers' call for banks to raise capital, and added that they ought to review their dividend plans.
``Lenders tell us that they are reluctant to write down principal,'' Bernanke said. ``They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.''
Short Payoffs
The Fed chairman countered that by reducing the amount of the loan, this ``may increase the expected payoff by reducing the risk of default and foreclosure.''
Bernanke also urged investors in mortgage bonds to accept ``short payoffs'' of loans by allowing borrowers to refinance at a lower principal.
For investors, a reduction in principal that's ``sufficient to make borrowers eligible for a new loan would remove the downside risk'' of further writedowns or defaults, Bernanke said. Investors may be able to share in future gains in home prices under some plans, he said, citing a proposal by the Office of Thrift Supervision.
Paulson, by contrast, has declined to endorse the OTS plan. John Reich, director of the OTS, last month proposed a program where borrowers would refinance mortgages at current home values. The lender would receive a ``negative equity'' certificate that could be redeemed if the house is sold.
Owners' Responsibility
The Treasury chief yesterday stressed that it's the responsibility of borrowers to get in touch with lenders if they're facing payment problems. He said 80 percent of homeowners who were sent letters by the Hope Now alliance of mortgage servicers haven't responded.
The number of U.S. homeowners entering foreclosure rose 75 percent in 2007, with more than 1 percent in some stage of foreclosure during the year, according to RealtyTrac Inc. of Irvine, California. For the year, more than 2.2 million default notices, auction notices and bank repossessions were reported on about 1.3 million properties.
Yesterday, the Fed and other regulators sent letters to institutions they supervise, encouraging the banks to report on their efforts to modify mortgages at risk of default.
``This will make it easier for regulators, the mortgage industry, lawmakers and homeowners to assess the effectiveness of these efforts,'' Fed Governor Randall Kroszner said in a statement yesterday.
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