Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and Bear Stearns Cos., four of the five largest securities firms, will earn less than expected through next year after a rout in U.S. subprime mortgages, according to Lehman Brothers Holdings Inc.
Lehman analyst Roger Freeman trimmed his share price estimates for Goldman to $214, for Morgan Stanley to $81, for Merrill to $106 and for Bear Stearns to $142 in a note sent to clients today. He cut his third- and fourth-quarter and 2008 earnings estimates for the New York-based firms.
``Third-quarter earnings will be significantly impacted by the dislocation in the credit and asset-backed and mortgage markets,'' New York-based Freeman said in the note. He has an ``equal-weight'' rating on Goldman and Morgan Stanley, the two biggest U.S. securities firms by market value, and an ``overweight'' rating on Merrill and Bear Stearns.
Wall Street firms have posted three straight years of record earnings, fueled by fixed-income trading. Defaults on U.S. housing loans to subprime borrowers with poor credit histories have reached a 10-year high, driving down the value of bonds backed by mortgages and prompting a global slide in stocks.
Goldman, Morgan Stanley, Lehman and Bear Stearns end their fiscal third quarter tomorrow and are scheduled to report results next month. Merrill Lynch, the third-biggest U.S. securities firm after Goldman and Morgan Stanley, will finish its quarter at the end of September.
Worse than 1998
Two days ago, Merrill Lynch analyst Guy Moszkowski, cut his stock recommendation on Lehman, Bear Stearns and Citigroup Inc. to ``neutral'' from ``buy,'' citing a likely slowdown in revenue from investment banking. Standard & Poor's said yesterday that business conditions for securities firms are worse than in the second half of 1998, after Russia defaulted on its debt. S&P predicted that revenue from investment banking and trading could fall 47 percent in the last six months of the year.
``We believe 1998 is a relevant comparison period because it was also characterized by a liquidity crisis in an otherwise pretty favorable economic and corporate earnings environment,'' Lehman's Freeman wrote today.
The 12-member Amex Broker/Dealer Index had fallen 9.5 percent this year through yesterday. At 9:51 a.m. in New York Stock Exchange composite trading, Morgan Stanley was down 1.9 percent to $60.02, while Goldman declined 1.3 percent to $171.45. Merrill stock slipped 1.2 percent to $72.21 and Bear Stearns fell 0.6 percent to $106.47. Lehman dropped 1.1 percent.
Time to Buy
Analysts still expect the firms to earn more than they did last year. The average estimate of analysts surveyed by Bloomberg News is for earnings per share at Goldman, Morgan Stanley, Lehman Brothers and Bear Stearns to rise in the third-quarter from a year earlier.
For Douglas Ciocca, who helps manage about $1.4 billion at Renaissance Financial in Leawood, Kansas, the drop in stock prices and earnings estimates make the shares more attractive. He owns stock in Goldman, Morgan Stanley and is considering buying shares in Merrill Lynch, which he said could win customers as investors seek guidance amid declining markets.
``It makes sense to consider initiating positions in these companies with the appropriate time frame,'' he said in an interview today. ``Down markets are really good for our business -- Merrill is going to gather a lot of assets.''
`Wall of Worry'
Earnings from most divisions at the banks are likely to be little changed next year, with ``slight increases'' in equities and fixed-income trading and from faster-growing economies, Lehman's Freeman wrote. ``We admittedly have limited conviction about 2008 ourselves sitting here at the end of August with a wall of worry to climb between now and October,'' he wrote.
Freeman halved his third-quarter estimate for Bear Stearns to $1.45 a share from $3.28. He cut his estimate for Goldman to $4.26 from $4.47, for Merrill to $1.74 from $1.90 and for Morgan Stanley to $1.43 from $1.80.
Two Bear Stearns hedge funds collapsed in the past two months because of bad subprime-mortgage bets. Goldman, the world's second-largest hedge fund manager, was forced to put $2 billion of its own cash into one of its funds and waive some fees after it lost money.
Lehman Brothers and Bear Stearns are the fourth- and fifth- biggest U.S. securities firms.
Thursday, August 30, 2007
Goldman, Wall Street Firms' Estimates Cut by Lehman
Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and Bear Stearns Cos., four of the five largest securities firms, will earn less than expected through next year after a rout in U.S. subprime mortgages, according to Lehman Brothers Holdings Inc.
Lehman analyst Roger Freeman trimmed his share price estimates for Goldman to $214, for Morgan Stanley to $81, for Merrill to $106 and for Bear Stearns to $142 in a note sent to clients today. He cut his third- and fourth-quarter and 2008 earnings estimates for the New York-based firms.
``Third-quarter earnings will be significantly impacted by the dislocation in the credit and asset-backed and mortgage markets,'' New York-based Freeman said in the note. He has an ``equal-weight'' rating on Goldman and Morgan Stanley, the two biggest U.S. securities firms by market value, and an ``overweight'' rating on Merrill and Bear Stearns.
Wall Street firms have posted three straight years of record earnings, fueled by fixed-income trading. Defaults on U.S. housing loans to subprime borrowers with poor credit histories have reached a 10-year high, driving down the value of bonds backed by mortgages and prompting a global slide in stocks.
Goldman, Morgan Stanley, Lehman and Bear Stearns end their fiscal third quarter tomorrow and are scheduled to report results next month. Merrill Lynch, the third-biggest U.S. securities firm after Goldman and Morgan Stanley, will finish its quarter at the end of September.
Worse than 1998
Two days ago, Merrill Lynch analyst Guy Moszkowski, cut his stock recommendation on Lehman, Bear Stearns and Citigroup Inc. to ``neutral'' from ``buy,'' citing a likely slowdown in revenue from investment banking. Standard & Poor's said yesterday that business conditions for securities firms are worse than in the second half of 1998, after Russia defaulted on its debt. S&P predicted that revenue from investment banking and trading could fall 47 percent in the last six months of the year.
``We believe 1998 is a relevant comparison period because it was also characterized by a liquidity crisis in an otherwise pretty favorable economic and corporate earnings environment,'' Lehman's Freeman wrote today.
The 12-member Amex Broker/Dealer Index had fallen 9.5 percent this year through yesterday. At 9:51 a.m. in New York Stock Exchange composite trading, Morgan Stanley was down 1.9 percent to $60.02, while Goldman declined 1.3 percent to $171.45. Merrill stock slipped 1.2 percent to $72.21 and Bear Stearns fell 0.6 percent to $106.47. Lehman dropped 1.1 percent.
Time to Buy
Analysts still expect the firms to earn more than they did last year. The average estimate of analysts surveyed by Bloomberg News is for earnings per share at Goldman, Morgan Stanley, Lehman Brothers and Bear Stearns to rise in the third-quarter from a year earlier.
For Douglas Ciocca, who helps manage about $1.4 billion at Renaissance Financial in Leawood, Kansas, the drop in stock prices and earnings estimates make the shares more attractive. He owns stock in Goldman, Morgan Stanley and is considering buying shares in Merrill Lynch, which he said could win customers as investors seek guidance amid declining markets.
``It makes sense to consider initiating positions in these companies with the appropriate time frame,'' he said in an interview today. ``Down markets are really good for our business -- Merrill is going to gather a lot of assets.''
`Wall of Worry'
Earnings from most divisions at the banks are likely to be little changed next year, with ``slight increases'' in equities and fixed-income trading and from faster-growing economies, Lehman's Freeman wrote. ``We admittedly have limited conviction about 2008 ourselves sitting here at the end of August with a wall of worry to climb between now and October,'' he wrote.
Freeman halved his third-quarter estimate for Bear Stearns to $1.45 a share from $3.28. He cut his estimate for Goldman to $4.26 from $4.47, for Merrill to $1.74 from $1.90 and for Morgan Stanley to $1.43 from $1.80.
Two Bear Stearns hedge funds collapsed in the past two months because of bad subprime-mortgage bets. Goldman, the world's second-largest hedge fund manager, was forced to put $2 billion of its own cash into one of its funds and waive some fees after it lost money.
Lehman Brothers and Bear Stearns are the fourth- and fifth- biggest U.S. securities firms.
Lehman analyst Roger Freeman trimmed his share price estimates for Goldman to $214, for Morgan Stanley to $81, for Merrill to $106 and for Bear Stearns to $142 in a note sent to clients today. He cut his third- and fourth-quarter and 2008 earnings estimates for the New York-based firms.
``Third-quarter earnings will be significantly impacted by the dislocation in the credit and asset-backed and mortgage markets,'' New York-based Freeman said in the note. He has an ``equal-weight'' rating on Goldman and Morgan Stanley, the two biggest U.S. securities firms by market value, and an ``overweight'' rating on Merrill and Bear Stearns.
Wall Street firms have posted three straight years of record earnings, fueled by fixed-income trading. Defaults on U.S. housing loans to subprime borrowers with poor credit histories have reached a 10-year high, driving down the value of bonds backed by mortgages and prompting a global slide in stocks.
Goldman, Morgan Stanley, Lehman and Bear Stearns end their fiscal third quarter tomorrow and are scheduled to report results next month. Merrill Lynch, the third-biggest U.S. securities firm after Goldman and Morgan Stanley, will finish its quarter at the end of September.
Worse than 1998
Two days ago, Merrill Lynch analyst Guy Moszkowski, cut his stock recommendation on Lehman, Bear Stearns and Citigroup Inc. to ``neutral'' from ``buy,'' citing a likely slowdown in revenue from investment banking. Standard & Poor's said yesterday that business conditions for securities firms are worse than in the second half of 1998, after Russia defaulted on its debt. S&P predicted that revenue from investment banking and trading could fall 47 percent in the last six months of the year.
``We believe 1998 is a relevant comparison period because it was also characterized by a liquidity crisis in an otherwise pretty favorable economic and corporate earnings environment,'' Lehman's Freeman wrote today.
The 12-member Amex Broker/Dealer Index had fallen 9.5 percent this year through yesterday. At 9:51 a.m. in New York Stock Exchange composite trading, Morgan Stanley was down 1.9 percent to $60.02, while Goldman declined 1.3 percent to $171.45. Merrill stock slipped 1.2 percent to $72.21 and Bear Stearns fell 0.6 percent to $106.47. Lehman dropped 1.1 percent.
Time to Buy
Analysts still expect the firms to earn more than they did last year. The average estimate of analysts surveyed by Bloomberg News is for earnings per share at Goldman, Morgan Stanley, Lehman Brothers and Bear Stearns to rise in the third-quarter from a year earlier.
For Douglas Ciocca, who helps manage about $1.4 billion at Renaissance Financial in Leawood, Kansas, the drop in stock prices and earnings estimates make the shares more attractive. He owns stock in Goldman, Morgan Stanley and is considering buying shares in Merrill Lynch, which he said could win customers as investors seek guidance amid declining markets.
``It makes sense to consider initiating positions in these companies with the appropriate time frame,'' he said in an interview today. ``Down markets are really good for our business -- Merrill is going to gather a lot of assets.''
`Wall of Worry'
Earnings from most divisions at the banks are likely to be little changed next year, with ``slight increases'' in equities and fixed-income trading and from faster-growing economies, Lehman's Freeman wrote. ``We admittedly have limited conviction about 2008 ourselves sitting here at the end of August with a wall of worry to climb between now and October,'' he wrote.
Freeman halved his third-quarter estimate for Bear Stearns to $1.45 a share from $3.28. He cut his estimate for Goldman to $4.26 from $4.47, for Merrill to $1.74 from $1.90 and for Morgan Stanley to $1.43 from $1.80.
Two Bear Stearns hedge funds collapsed in the past two months because of bad subprime-mortgage bets. Goldman, the world's second-largest hedge fund manager, was forced to put $2 billion of its own cash into one of its funds and waive some fees after it lost money.
Lehman Brothers and Bear Stearns are the fourth- and fifth- biggest U.S. securities firms.
Bank of England Loaned 1.6 Billion Pounds at 6.75%
The Bank of England, acting as the lender of last resort, extended 1.6 billion pounds ($3.2 billion) at its highest rate, suggesting commercial banks are reluctant to provide credit after the collapse of the U.S. subprime-mortgage market.
The money loaned at the 6.75 percent penalty rate yesterday was the most since July 2, when the central bank advanced 1.93 billion pounds under the standing facility. The facility was last tapped on Aug. 20, when Barclays Plc borrowed 314 million pounds after a loan from HSBC Holdings Plc was delayed. The central bank declined to identity the borrower or borrowers.
The pound fell after the announcement on concern U.K. lenders are finding it harder to borrow money. The Bank of England hasn't auctioned any additional money or changed any of its lending rates, unlike the Federal Reserve or the European Central Bank.
``When people tap into this facility, it can mean only one thing: liquidity is gone,'' said John Anderson, who manages the equivalent of $3 billion of assets denominated in pounds as head of fixed income at Rensburg Fund Management in London.
Euroclear's CrestCo, which settles trades in London, said in a statement there was a ``processing disruption'' with the Bank of England yesterday. Still, no client reported any ``settlement issues'' to the agency.
A Bank of England spokeswoman declined to comment, when asked whether the demand for funds was linked to the disruption.
Overnight Rates
The overnight interbank offered rate charged by banks for pounds rose to 6.13 percent from 5.90 percent yesterday and the three-month sterling rate increased to 6.63 percent from 6.61 percent. The pound fell to $2.0153 by 4:33 p.m. in London, from $2.0177 yesterday.
``Lending conditions are still very tight,'' said Jonathan Said, an economist at the Centre for Economics and Business Research in London. ``We will see this credit crunch unfold for a while longer. I wouldn't be surprised if we saw more emergency lending by the Bank of England.''
The loan ``is another sign that money markets remain dislocated,'' said Stuart Thomson, who helps oversee the equivalent of $46 billion in bonds at Resolution Investment Management Ltd. in Glasgow, Scotland. ``It is month-end, and there's bound to be a need'' for finance.
The Bank of England announced the loan in its daily report on money market operations in London today. Fifty-seven banks are eligible to tap the standing lending facility.
Standing Facility
Bradford & Bingley Plc spokeswoman Siobhan O'Shea said the Bingley, England-based bank didn't use it. Barclays spokesman Alistair Smith, HSBC spokesman Richard Lindsay, Deutsche Bank AG spokesman Ronald Weichert and Commerzbank AG spokesman Maximilian Bicker declined to comment.
Royal Bank of Scotland Group Plc spokeswoman Carolyn McAdam, HBOS Plc spokesman Mark Hemmingway, Lloyds TSB Group Plc spokeswoman Kirsty Clay, Northern Rock Plc spokesman Brian Giles and Alliance & Leicester Plc spokesman Stuart Dawkins declined to comment.
The standing facility allows banks to borrow unlimited funds from the central bank at 1 percentage point above the benchmark interest rate, currently at 5.75 percent. The bank repeated that its standing facilities are available every day.
The facility has been tapped 19 times since the middle of 2006, according to the Bank of England Web site. Only four of those loans were for more than 1 billion pounds.
The biggest use of the facility to date was when banks borrowed a total of 5.93 billion pounds over three consecutive business days June 28 through July 2.
Sign of Stress
``It's clearly more of a sign of stress than stability,'' said Andreas Meurer, head of global fixed-income strategy at Deka Investment GmbH, which oversees the equivalent of $260 billion in assets, in Frankfurt. ``Some banks needed cash and had to pay 100 basis points more for it, which is not a good sign.''
Losses in the U.S. subprime mortgage market have spurred a global credit crunch. Companies that depend on commercial paper, debt due in 270 days or less, face fund shortages as investors refuse to buy debt secured by assets.
The crisis has prompted the U.S. Federal Reserve and the European Central Bank to pump extra money into markets since Aug. 9 to avert a breakdown in lending. The Fed cut its discount rate on loans to banks by a half-point to 5.75 percent Aug. 17.
Investors have pared bets the Bank of England will add to its five interest-rate increase since August last year, as financial-market losses and tighter lending conditions threaten to hamper economic growth.
Economic Impact
The implied rate on the December U.K. interest-rate futures contract was 6.31 percent today, compared with 6.35 percent on July 17. The contract settles to the three-month London interbank offered rate for the pound, which for the past decade averaged about 15 basis points more than the benchmark rate.
``It's too soon to tell if these problems are going to be restricted to the financial markets,'' said Brian Hilliard, economist at Societe Generale in London. ``The Bank of England is going to be watching very carefully to see if they leak through to the real economy and start affecting growth.''
The Fed is due to announce how much it loaned U.S. banks in the past week, at 4:30 p.m. in Washington. Banks borrowed a daily average of $1.2 billion in the previous week, as the four biggest lenders sought to show support for the Fed's discount- rate cut.
The money loaned at the 6.75 percent penalty rate yesterday was the most since July 2, when the central bank advanced 1.93 billion pounds under the standing facility. The facility was last tapped on Aug. 20, when Barclays Plc borrowed 314 million pounds after a loan from HSBC Holdings Plc was delayed. The central bank declined to identity the borrower or borrowers.
The pound fell after the announcement on concern U.K. lenders are finding it harder to borrow money. The Bank of England hasn't auctioned any additional money or changed any of its lending rates, unlike the Federal Reserve or the European Central Bank.
``When people tap into this facility, it can mean only one thing: liquidity is gone,'' said John Anderson, who manages the equivalent of $3 billion of assets denominated in pounds as head of fixed income at Rensburg Fund Management in London.
Euroclear's CrestCo, which settles trades in London, said in a statement there was a ``processing disruption'' with the Bank of England yesterday. Still, no client reported any ``settlement issues'' to the agency.
A Bank of England spokeswoman declined to comment, when asked whether the demand for funds was linked to the disruption.
Overnight Rates
The overnight interbank offered rate charged by banks for pounds rose to 6.13 percent from 5.90 percent yesterday and the three-month sterling rate increased to 6.63 percent from 6.61 percent. The pound fell to $2.0153 by 4:33 p.m. in London, from $2.0177 yesterday.
``Lending conditions are still very tight,'' said Jonathan Said, an economist at the Centre for Economics and Business Research in London. ``We will see this credit crunch unfold for a while longer. I wouldn't be surprised if we saw more emergency lending by the Bank of England.''
The loan ``is another sign that money markets remain dislocated,'' said Stuart Thomson, who helps oversee the equivalent of $46 billion in bonds at Resolution Investment Management Ltd. in Glasgow, Scotland. ``It is month-end, and there's bound to be a need'' for finance.
The Bank of England announced the loan in its daily report on money market operations in London today. Fifty-seven banks are eligible to tap the standing lending facility.
Standing Facility
Bradford & Bingley Plc spokeswoman Siobhan O'Shea said the Bingley, England-based bank didn't use it. Barclays spokesman Alistair Smith, HSBC spokesman Richard Lindsay, Deutsche Bank AG spokesman Ronald Weichert and Commerzbank AG spokesman Maximilian Bicker declined to comment.
Royal Bank of Scotland Group Plc spokeswoman Carolyn McAdam, HBOS Plc spokesman Mark Hemmingway, Lloyds TSB Group Plc spokeswoman Kirsty Clay, Northern Rock Plc spokesman Brian Giles and Alliance & Leicester Plc spokesman Stuart Dawkins declined to comment.
The standing facility allows banks to borrow unlimited funds from the central bank at 1 percentage point above the benchmark interest rate, currently at 5.75 percent. The bank repeated that its standing facilities are available every day.
The facility has been tapped 19 times since the middle of 2006, according to the Bank of England Web site. Only four of those loans were for more than 1 billion pounds.
The biggest use of the facility to date was when banks borrowed a total of 5.93 billion pounds over three consecutive business days June 28 through July 2.
Sign of Stress
``It's clearly more of a sign of stress than stability,'' said Andreas Meurer, head of global fixed-income strategy at Deka Investment GmbH, which oversees the equivalent of $260 billion in assets, in Frankfurt. ``Some banks needed cash and had to pay 100 basis points more for it, which is not a good sign.''
Losses in the U.S. subprime mortgage market have spurred a global credit crunch. Companies that depend on commercial paper, debt due in 270 days or less, face fund shortages as investors refuse to buy debt secured by assets.
The crisis has prompted the U.S. Federal Reserve and the European Central Bank to pump extra money into markets since Aug. 9 to avert a breakdown in lending. The Fed cut its discount rate on loans to banks by a half-point to 5.75 percent Aug. 17.
Investors have pared bets the Bank of England will add to its five interest-rate increase since August last year, as financial-market losses and tighter lending conditions threaten to hamper economic growth.
Economic Impact
The implied rate on the December U.K. interest-rate futures contract was 6.31 percent today, compared with 6.35 percent on July 17. The contract settles to the three-month London interbank offered rate for the pound, which for the past decade averaged about 15 basis points more than the benchmark rate.
``It's too soon to tell if these problems are going to be restricted to the financial markets,'' said Brian Hilliard, economist at Societe Generale in London. ``The Bank of England is going to be watching very carefully to see if they leak through to the real economy and start affecting growth.''
The Fed is due to announce how much it loaned U.S. banks in the past week, at 4:30 p.m. in Washington. Banks borrowed a daily average of $1.2 billion in the previous week, as the four biggest lenders sought to show support for the Fed's discount- rate cut.
U.S. Economy: Expansion Was Faster Than Estimated
Surging exports and business spending propelled U.S. growth to the fastest pace in more than a year before turmoil in the credit markets forced the Federal Reserve to warn of a bleaker outlook.
Gross domestic product rose at a 4 percent annual rate in the second quarter, the Commerce Department said in Washington, up from an initial estimate of 3.4 percent. The median forecast of economists polled by Bloomberg News was 4.1 percent.
The figures may be the peak of the expansion for this year as the cost of borrowing increased in August and the Fed said that risks to growth ``increased appreciably.'' In a sign that the job market is weakening, the Labor Department said today showed claims for unemployment benefits climbed to the highest level since April. A further report showed house prices in the second quarter rose at the slowest pace in a decade.
``The underlying economy was growing in the first half,'' said Peter Kretzmer, a senior economist at Banc of America Securities LLC in New York. ``We expect it to slow modestly, but not in such a pronounced way. It will slow enough, though, that the Fed will find an excuse'' to reduce interest rates, he said.
Kretzmer accurately predicted the pace of expansion.
The Fed's preferred inflation measure, which is tied to consumer spending and strips out food and energy costs, rose at a 1.3 percent annual rate. The pace of increase was the slowest in four years.
Treasury notes remained higher after the reports. The yield on the benchmark 10-year note declined 4 basis points to about 4.53 percent at 11:51 a.m. in New York. A basis point is 0.01 percentage point.
Trade Deficit
A bigger jump in exports and smaller gain in imports contributed to a reduction in the trade deficit, the report on gross domestic product showed. Trade contributed 1.4 percentage points to growth, the most since 1996.
Spending on corporate construction projects and new equipment also boosted growth. Commercial construction jumped 28 percent, the most since 1981. Investment in equipment increased at a 4.3 percent pace, almost double the previous estimate.
Inventories, which were forecast to play a role in the projected increase in growth, were little changed from the initial GDP estimate published in July.
Jobless Claims
Initial unemployment claims climbed by 9,000 to 334,000 in the week that ended Aug. 25, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, increased to 324,500 from 318,250.
Help-wanted advertising in American newspapers fell in July to the lowest level since 1958, and online job postings also declined. The Conference Board's index dropped to 25 last month, matching analysts' forecasts, from 26 in June. The trend in the help-wanted measure has fallen since 2000 as print media have been losing advertising to the Internet.
The deepest housing slump in 16 years is prompting builders and mortgage-lending companies such as American Home Mortgage Investment Corp. to fire workers. That may weigh on consumer spending, which accounts for more than two-thirds of the economy.
``Business psyche is being more and more affected by what's been going on in the credit markets,'' said Zoltan Pozsar, a senior economist at Moody's Economy.com in West Chester, Pennsylvania. ``If this continues for the next few weeks, it'll definitely be a sign that hiring is being affected by the credit-market problems.''
Home Prices
Prices for previously owned single-family homes rose an average of 3.2 percent from a year earlier, the smallest gain since 1997, the Office of Federal Housing Enterprise, said today in Washington. Prices gained 0.08 percent from the first quarter, the slowest since a decline in the final three months of 1994.
About 14 percent of banks raised standards for mortgages to their most creditworthy borrowers and 56 percent made it more difficult for people with limited or tainted records to get loans, according to a Federal Reserve survey of senior loan officers in mid-July.
In highlighting risks to growth, policy makers reversed their stance from their last meeting on Aug. 7 that inflation was the biggest risk to the economic expansion.
Traders and economists expect the Fed to lower its benchmark overnight lending rate between banks at or before policy makers next meet on Sept. 18. Chairman Ben S. Bernanke will discuss housing and monetary policy tomorrow, when he addresses the Kansas City Fed's annual symposium in Jackson Hole, Wyoming.
Residential Construction
Declines in residential construction subtracted 0.6 percentage point from growth in the second quarter, more than previously estimated.
Housing will probably deduct about a percentage point from GDP at least through early 2008, according to economists at JPMorgan Chase & Co.
As a result, growth will average 2.25 percent in the six months starting in October, a percentage point less than previously projected, Bruce Kasman, JPMorgan's chief economist, said in a note to clients last week.
Lehman Lowers Forecast
Lehman Brothers Holdings Inc. lowered its forecast last week for the period covering October through June 2008 to 1.8 percent, almost a half percentage point less than previously thought.
In one of the earliest economic readings to cover August, consumer confidence dropped by the most in two years, the Conference Board said this week. The measure retreated to 105 this month and the share of people who said jobs are plentiful declined.
In today's report, consumer spending, which accounts for about 70 percent of the economy, was revised up to an annual rate of 1.4 percent from an initial estimate of 1.3 percent. The gain was still the smallest in a year.
``Our consumer is impacted obviously because they see the value of their homes go down, there's a sort of wealth effect,'' Farooq Kathwari, chief executive officer of Ethan Allen Interiors Inc., said in an interview on Aug. 28. ``Yet they're still interested in furnishing their homes, they're still buying.''
Today's GDP report included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, rose 6.4 percent, the most in more than a year, to an annual rate of $1.65 trillion. Compared with a year earlier, profits were up 4.5 percent.
Gross domestic product rose at a 4 percent annual rate in the second quarter, the Commerce Department said in Washington, up from an initial estimate of 3.4 percent. The median forecast of economists polled by Bloomberg News was 4.1 percent.
The figures may be the peak of the expansion for this year as the cost of borrowing increased in August and the Fed said that risks to growth ``increased appreciably.'' In a sign that the job market is weakening, the Labor Department said today showed claims for unemployment benefits climbed to the highest level since April. A further report showed house prices in the second quarter rose at the slowest pace in a decade.
``The underlying economy was growing in the first half,'' said Peter Kretzmer, a senior economist at Banc of America Securities LLC in New York. ``We expect it to slow modestly, but not in such a pronounced way. It will slow enough, though, that the Fed will find an excuse'' to reduce interest rates, he said.
Kretzmer accurately predicted the pace of expansion.
The Fed's preferred inflation measure, which is tied to consumer spending and strips out food and energy costs, rose at a 1.3 percent annual rate. The pace of increase was the slowest in four years.
Treasury notes remained higher after the reports. The yield on the benchmark 10-year note declined 4 basis points to about 4.53 percent at 11:51 a.m. in New York. A basis point is 0.01 percentage point.
Trade Deficit
A bigger jump in exports and smaller gain in imports contributed to a reduction in the trade deficit, the report on gross domestic product showed. Trade contributed 1.4 percentage points to growth, the most since 1996.
Spending on corporate construction projects and new equipment also boosted growth. Commercial construction jumped 28 percent, the most since 1981. Investment in equipment increased at a 4.3 percent pace, almost double the previous estimate.
Inventories, which were forecast to play a role in the projected increase in growth, were little changed from the initial GDP estimate published in July.
Jobless Claims
Initial unemployment claims climbed by 9,000 to 334,000 in the week that ended Aug. 25, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, increased to 324,500 from 318,250.
Help-wanted advertising in American newspapers fell in July to the lowest level since 1958, and online job postings also declined. The Conference Board's index dropped to 25 last month, matching analysts' forecasts, from 26 in June. The trend in the help-wanted measure has fallen since 2000 as print media have been losing advertising to the Internet.
The deepest housing slump in 16 years is prompting builders and mortgage-lending companies such as American Home Mortgage Investment Corp. to fire workers. That may weigh on consumer spending, which accounts for more than two-thirds of the economy.
``Business psyche is being more and more affected by what's been going on in the credit markets,'' said Zoltan Pozsar, a senior economist at Moody's Economy.com in West Chester, Pennsylvania. ``If this continues for the next few weeks, it'll definitely be a sign that hiring is being affected by the credit-market problems.''
Home Prices
Prices for previously owned single-family homes rose an average of 3.2 percent from a year earlier, the smallest gain since 1997, the Office of Federal Housing Enterprise, said today in Washington. Prices gained 0.08 percent from the first quarter, the slowest since a decline in the final three months of 1994.
About 14 percent of banks raised standards for mortgages to their most creditworthy borrowers and 56 percent made it more difficult for people with limited or tainted records to get loans, according to a Federal Reserve survey of senior loan officers in mid-July.
In highlighting risks to growth, policy makers reversed their stance from their last meeting on Aug. 7 that inflation was the biggest risk to the economic expansion.
Traders and economists expect the Fed to lower its benchmark overnight lending rate between banks at or before policy makers next meet on Sept. 18. Chairman Ben S. Bernanke will discuss housing and monetary policy tomorrow, when he addresses the Kansas City Fed's annual symposium in Jackson Hole, Wyoming.
Residential Construction
Declines in residential construction subtracted 0.6 percentage point from growth in the second quarter, more than previously estimated.
Housing will probably deduct about a percentage point from GDP at least through early 2008, according to economists at JPMorgan Chase & Co.
As a result, growth will average 2.25 percent in the six months starting in October, a percentage point less than previously projected, Bruce Kasman, JPMorgan's chief economist, said in a note to clients last week.
Lehman Lowers Forecast
Lehman Brothers Holdings Inc. lowered its forecast last week for the period covering October through June 2008 to 1.8 percent, almost a half percentage point less than previously thought.
In one of the earliest economic readings to cover August, consumer confidence dropped by the most in two years, the Conference Board said this week. The measure retreated to 105 this month and the share of people who said jobs are plentiful declined.
In today's report, consumer spending, which accounts for about 70 percent of the economy, was revised up to an annual rate of 1.4 percent from an initial estimate of 1.3 percent. The gain was still the smallest in a year.
``Our consumer is impacted obviously because they see the value of their homes go down, there's a sort of wealth effect,'' Farooq Kathwari, chief executive officer of Ethan Allen Interiors Inc., said in an interview on Aug. 28. ``Yet they're still interested in furnishing their homes, they're still buying.''
Today's GDP report included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, rose 6.4 percent, the most in more than a year, to an annual rate of $1.65 trillion. Compared with a year earlier, profits were up 4.5 percent.
Sunday, August 19, 2007
JPMorgan Faces $1.4 Billion Loss on LBO Loans, Citigroup Says
JPMorgan Chase & Co., the biggest lender in the leveraged buyout market, may lose about $1.4 billion on loans it can't sell because of the credit crunch, according to an analyst at Citigroup Inc.
Goldman Sachs Group Inc., Deutsche Bank AG and other underwriters of loans to finance leverage buyouts face similar shortfalls, based on the formula that Citigroup analyst Keith Horowitz in New York used to calculate JPMorgan's loss.
JPMorgan is stuck with $40.8 billion of LBO debt, according to Horowitz's estimates, while Goldman is holding $31.9 billion and Deutsche Bank has $27.3 billion. JPMorgan and Goldman were among banks that last month failed to sell $20 billion of loans for the LBOS of U.K. drugstore chain Alliance Boots Plc and carmaker Chrysler LLC.
``The backlog of unsold deals is going to take banks the rest of the year to clear, if not longer,'' said Robin Doumar, who oversees $3 billion of loan funds as managing partner at Park Square Capital LLP in London.
To calculate the mark-to-market losses, Citigroup assumed a 7 percent decline in the price of the high-yield, or leveraged, loans. The bank then assumed half of the loss was offset by hedge gains, underwriting fees and interest from the loans.
The estimates are ``conservative,'' Citigroup said, and assume an equal share to all arrangers in a loan, even though banks leading a deal typically agree to underwrite more than other managers. The estimates also assume prices of the debt remain the same or aren't resold at discounted prices.
Citigroup didn't include Barclays Capital, Royal Bank of Scotland Group Plc or itself in its calculations.
Arrangers of loans seek to reduce the amount they lend by syndicating the credit to a wider group of banks and money managers. The lenders must keep the debt they can't sell.
Citigroup spokesman Duncan Smith said the bank hasn't changed its estimates since the July 26 report, while Horowitz yesterday declined to elaborate on its conclusions.
JPMorgan spokesman Michael Golden in London declined to comment. Goldman Sachs' London-based spokesman Erlendas Grigorovic declined to comment. Deutsche Bank spokeswoman Oonagh Baerveldt in London couldn't immediately comment.
Citigroup's estimates of LBO loansJPMorgan (JPM) $40.76 billionGoldman Sachs (GS) $31.88 billionDeutsche Bank (DB) $27.27 billionCredit Suisse (CS) $27.16 billionLehman (LEH) $21.73 billionMorgan Stanley (MS) $20.08 billionBank America (BAC) $17.84 billionMerrill Lynch (MER) $16.12 billionSource: Citigroup, Loan Pricing Corp.Company Total Debt ArrangersAlliance Boots $13.5 billion DB, UniCredit, JPMAlliance Data $6.61 billion CSAlltel $23.2 billion Barclays, Citi, GS, RBSAvaya $6.05 billion Citi, JPM, MSBausch & Lomb $3.28 billion BAC, Citi, CS, JPMBCE $33.35 billion Citi, GS, JPM, LEH, MSBiomet $6.87 billion BAC, BS, GS, LEH, MER, WBCablevision $21.16 billion DB, JPMCDW Corp $4.88 billion DB, JPM, LEH, MSCeridian $2.3 billion CS, DBChrysler $20 billion BSC, Citi, GS, JPM, MSClear Channel $21.48 billion Citi, CS, DB, MS, RBS, WBDollar General $5.4 billion Citi, CIT, GS, LEH, WBFirst Data $24 billion Citi, CS, DB, GS, HSBC, LEH, MERHarman $8 billion BAC, CS, GS, LEHHarrahs $20.28 billion BAC, Citi, CS, DB, JPM, MERSallie Mae $16.5 billion BAC, JPMService Master $4.5 billion BAC, Blue Ridge, Citi, GS, JPM, MSStation Casinos $3.23 billion DB, German AmericanThomson $4.94 billion Citi, JPM, RBS and UBSTXU $37.15 billion Citi, CS, GS, JPM, LEH, MSUS Foodservice $4.92 billion Citi, DB, GS, JPM, MS, RBSTotal: $291.6 billion
Goldman Sachs Group Inc., Deutsche Bank AG and other underwriters of loans to finance leverage buyouts face similar shortfalls, based on the formula that Citigroup analyst Keith Horowitz in New York used to calculate JPMorgan's loss.
JPMorgan is stuck with $40.8 billion of LBO debt, according to Horowitz's estimates, while Goldman is holding $31.9 billion and Deutsche Bank has $27.3 billion. JPMorgan and Goldman were among banks that last month failed to sell $20 billion of loans for the LBOS of U.K. drugstore chain Alliance Boots Plc and carmaker Chrysler LLC.
``The backlog of unsold deals is going to take banks the rest of the year to clear, if not longer,'' said Robin Doumar, who oversees $3 billion of loan funds as managing partner at Park Square Capital LLP in London.
To calculate the mark-to-market losses, Citigroup assumed a 7 percent decline in the price of the high-yield, or leveraged, loans. The bank then assumed half of the loss was offset by hedge gains, underwriting fees and interest from the loans.
The estimates are ``conservative,'' Citigroup said, and assume an equal share to all arrangers in a loan, even though banks leading a deal typically agree to underwrite more than other managers. The estimates also assume prices of the debt remain the same or aren't resold at discounted prices.
Citigroup didn't include Barclays Capital, Royal Bank of Scotland Group Plc or itself in its calculations.
Arrangers of loans seek to reduce the amount they lend by syndicating the credit to a wider group of banks and money managers. The lenders must keep the debt they can't sell.
Citigroup spokesman Duncan Smith said the bank hasn't changed its estimates since the July 26 report, while Horowitz yesterday declined to elaborate on its conclusions.
JPMorgan spokesman Michael Golden in London declined to comment. Goldman Sachs' London-based spokesman Erlendas Grigorovic declined to comment. Deutsche Bank spokeswoman Oonagh Baerveldt in London couldn't immediately comment.
Citigroup's estimates of LBO loansJPMorgan (JPM) $40.76 billionGoldman Sachs (GS) $31.88 billionDeutsche Bank (DB) $27.27 billionCredit Suisse (CS) $27.16 billionLehman (LEH) $21.73 billionMorgan Stanley (MS) $20.08 billionBank America (BAC) $17.84 billionMerrill Lynch (MER) $16.12 billionSource: Citigroup, Loan Pricing Corp.Company Total Debt ArrangersAlliance Boots $13.5 billion DB, UniCredit, JPMAlliance Data $6.61 billion CSAlltel $23.2 billion Barclays, Citi, GS, RBSAvaya $6.05 billion Citi, JPM, MSBausch & Lomb $3.28 billion BAC, Citi, CS, JPMBCE $33.35 billion Citi, GS, JPM, LEH, MSBiomet $6.87 billion BAC, BS, GS, LEH, MER, WBCablevision $21.16 billion DB, JPMCDW Corp $4.88 billion DB, JPM, LEH, MSCeridian $2.3 billion CS, DBChrysler $20 billion BSC, Citi, GS, JPM, MSClear Channel $21.48 billion Citi, CS, DB, MS, RBS, WBDollar General $5.4 billion Citi, CIT, GS, LEH, WBFirst Data $24 billion Citi, CS, DB, GS, HSBC, LEH, MERHarman $8 billion BAC, CS, GS, LEHHarrahs $20.28 billion BAC, Citi, CS, DB, JPM, MERSallie Mae $16.5 billion BAC, JPMService Master $4.5 billion BAC, Blue Ridge, Citi, GS, JPM, MSStation Casinos $3.23 billion DB, German AmericanThomson $4.94 billion Citi, JPM, RBS and UBSTXU $37.15 billion Citi, CS, GS, JPM, LEH, MSUS Foodservice $4.92 billion Citi, DB, GS, JPM, MS, RBSTotal: $291.6 billion
Rimrock Energy Receives $250 Million Equity Commitment
Rimrock Energy, LLC (“Rimrock” or the “Company”), a private oil and gas company headquartered in Denver, Colorado, today announced equity commitments of $250 million from Bear Stearns Merchant Banking (“BSMB”) and Natural Gas Partners (“NGP”). Rimrock is a newly-formed natural gas exploration and production company focused on onshore unconventional resources in North America, including shale gas, tight gas and coalbed methane. Rimrock was founded in July 2007 by Terrell A. Dobkins, Sanford E. McCormick and Wallace G. Wilson, who have made equity commitments to the Company alongside the investor group. Terrell A. Dobkins will serve as Chief Executive Officer of Rimrock. With over 30 years of experience in the oil and gas industry, Mr. Dobkins previously served as Vice President of Production at Antero Resources Corporation, where he focused on resource plays in the Barnett Shale, Arkoma Basin and Piceance Basin. Sanford E. McCormick will serve as Chairman of Rimrock. Mr. McCormick has over 40 years of experience in the oil and gas industry, including CEO positions at private and publicly-traded companies. Wallace G. Wilson will serve as Chief Financial Officer of Rimrock. Mr. Wilson has served as Chief Financial Officer of several companies in addition to his 16 years of experience in public accounting. “We created Rimrock to capitalize on the growing opportunities in unconventional oil and gas in a well-capitalized venture with strong partners,” said Mr. Dobkins. “I feel very fortunate to have such a strong team of professionals, from top to bottom. In addition, BSMB and NGP both have established track records for working closely with management teams to help develop and grow companies, and we look forward to working with them.”
Pol/Econ: GS Fund Loses 30%, Wall Street Math Fails to Predict Future
Each era has its own delusions…its own magicians and its own mountebanks. If you had told an investor in the 19th century that he could make a lot of money by applying higher mathematics to market situations, he would have regarded you as a fool. The mathematics of investing was very simple back then. A company either made a profit or it didn’t. You didn’t need fancy arithmetic to figure that out. Besides, investors knew that the secret to making money was not mathematics; it was metallurgy. The whole world was getting hammered out in steel and iron - ships, engines, bridges, railroads…even the wires that brought the latest in telegraphic communications were made of metal.
Up until the 1980s…there was no particular use for mathematicians on Wall Street. The maths was basic. Besides, stock prices were quoted in fractions that still had an archaic, pre-digital air about them.But then came computers…and computer models…and decimals. And then came the mathematicians who knew how to use them. And then came an explosion of new math-based products - whose actual value had to be tracked by complicated computer formulae. Billions of dollars in speculative positions were no longer “marked to market”. They were now “marked to model”. “What are those things really worth?” asked the old coots who still ran Wall Street firms. “What is our real risk?” they wanted to know. “Don’t worry JB,” came the answers. “The geeks who run the models tell me that it would take a 25-sigma event to cause any real problem.” “What the f…” “You know, they talk this lingo…25-sigma means 25 standard deviations from the norm…which, as near as I can figure is about as likely as hell freezing over.” “Oh…” Well, dear reader. Last week, hell froze. Clients in Goldman Sachs’ (NYSE:GS ) global equity fund must be asking themselves what is going on, after hearing that the fund lost 30% of its value in the last week. It must be what shareholders of the building stocks are wondering too…and what a lot of homeowners want to know.
A few weeks ago, they had scarcely ever met a question mark. Now they’re finding it essential…taking it wherever they go…and keeping it next to the bedside in case they need it in the middle of the night. Goldman dropped the fees on its fund to 10% of profits. Still, an investor might want to ask questions: What if there aren’t any profits? What if there are more losses? Investors in the giant private equity firm Blackstone (NYSE:BX ) are probably asking themselves when the stock, now trading at US$26, will get back to where it was when they bought it - US$31. And the fellows who run rival takeover firm, KKR (AMS:KPE ), are probably asking themselves if they want to bother to go public at all. They already had to amend their offer documents, letting investors know that since the low-hanging fruit had been picked, they would have to skinny up a few trees to get the money they were looking for…and that might mean lower operating margins. The Financial Times reports: “In a rare unplanned investor call, the bank revealed that a flagship global equity fund had lost over 30 per cent of its value in a week because of problems with its trading strategies created by computer models. In particular, the computers had failed to foresee recent market movements to such a degree that they labelled them a ‘25-standard deviation event’ - something that only happens once every 100,000 years or more. “‘We are seeing things that were 25-standard deviation events, several days in a row,’ said David Viniar, Goldman’s chief financial officer.”
Losses in the Goldman fund could go over US$1.5 billion. But heck, everyone makes mistakes. And even a great mathematician such as James Simons, founder of Renaissance Technologies, takes a loss from time to time. Simons used to do maths for the Pentagon. Then, he discovered that he could make billions running a maths-based hedge fund. But last week, Simons was forced to write a letter to his investors. His fund lost about 9% in the first few days of August…and now Simons says, “we cannot predict the duration of the current environment”. Ah…question marks. Even the maths whizzes find they cannot live without them when the markets turn down. And no matter what kind of math you do, sometimes things take you by surprise. This is the premise of our friend Nassim Nicholas Taleb’s latest best seller, The Black Swan: The Impact of the Highly Improbable. As he told the attendees at the AF Investment Symposium in Vancouver last month, a ‘black swan’ event is an unexpected event that has grave consequences. Hmmm…sound familiar? The title of Taleb’s speech at the Symposium was “The Scandal of Prediction: How We Can’t Predict and Why We Don’t Know It.” “We don’t listen to negative advice – what doesn’t work – we listen to what works – but this means we ignore then the ‘silent evidence’ of what doesn’t work – which is often more instructive,” he told the crowd. “We are unable to look at data without trying to make a causative link – it’s human nature – but it doesn’t serve us…” “Models (ours including) are behaving in the opposite way we would predict and have seen and tested for over very long time periods,” said Lehman Brothers (NYSE:LEH) last week
Up until the 1980s…there was no particular use for mathematicians on Wall Street. The maths was basic. Besides, stock prices were quoted in fractions that still had an archaic, pre-digital air about them.But then came computers…and computer models…and decimals. And then came the mathematicians who knew how to use them. And then came an explosion of new math-based products - whose actual value had to be tracked by complicated computer formulae. Billions of dollars in speculative positions were no longer “marked to market”. They were now “marked to model”. “What are those things really worth?” asked the old coots who still ran Wall Street firms. “What is our real risk?” they wanted to know. “Don’t worry JB,” came the answers. “The geeks who run the models tell me that it would take a 25-sigma event to cause any real problem.” “What the f…” “You know, they talk this lingo…25-sigma means 25 standard deviations from the norm…which, as near as I can figure is about as likely as hell freezing over.” “Oh…” Well, dear reader. Last week, hell froze. Clients in Goldman Sachs’ (NYSE:GS ) global equity fund must be asking themselves what is going on, after hearing that the fund lost 30% of its value in the last week. It must be what shareholders of the building stocks are wondering too…and what a lot of homeowners want to know.
A few weeks ago, they had scarcely ever met a question mark. Now they’re finding it essential…taking it wherever they go…and keeping it next to the bedside in case they need it in the middle of the night. Goldman dropped the fees on its fund to 10% of profits. Still, an investor might want to ask questions: What if there aren’t any profits? What if there are more losses? Investors in the giant private equity firm Blackstone (NYSE:BX ) are probably asking themselves when the stock, now trading at US$26, will get back to where it was when they bought it - US$31. And the fellows who run rival takeover firm, KKR (AMS:KPE ), are probably asking themselves if they want to bother to go public at all. They already had to amend their offer documents, letting investors know that since the low-hanging fruit had been picked, they would have to skinny up a few trees to get the money they were looking for…and that might mean lower operating margins. The Financial Times reports: “In a rare unplanned investor call, the bank revealed that a flagship global equity fund had lost over 30 per cent of its value in a week because of problems with its trading strategies created by computer models. In particular, the computers had failed to foresee recent market movements to such a degree that they labelled them a ‘25-standard deviation event’ - something that only happens once every 100,000 years or more. “‘We are seeing things that were 25-standard deviation events, several days in a row,’ said David Viniar, Goldman’s chief financial officer.”
Losses in the Goldman fund could go over US$1.5 billion. But heck, everyone makes mistakes. And even a great mathematician such as James Simons, founder of Renaissance Technologies, takes a loss from time to time. Simons used to do maths for the Pentagon. Then, he discovered that he could make billions running a maths-based hedge fund. But last week, Simons was forced to write a letter to his investors. His fund lost about 9% in the first few days of August…and now Simons says, “we cannot predict the duration of the current environment”. Ah…question marks. Even the maths whizzes find they cannot live without them when the markets turn down. And no matter what kind of math you do, sometimes things take you by surprise. This is the premise of our friend Nassim Nicholas Taleb’s latest best seller, The Black Swan: The Impact of the Highly Improbable. As he told the attendees at the AF Investment Symposium in Vancouver last month, a ‘black swan’ event is an unexpected event that has grave consequences. Hmmm…sound familiar? The title of Taleb’s speech at the Symposium was “The Scandal of Prediction: How We Can’t Predict and Why We Don’t Know It.” “We don’t listen to negative advice – what doesn’t work – we listen to what works – but this means we ignore then the ‘silent evidence’ of what doesn’t work – which is often more instructive,” he told the crowd. “We are unable to look at data without trying to make a causative link – it’s human nature – but it doesn’t serve us…” “Models (ours including) are behaving in the opposite way we would predict and have seen and tested for over very long time periods,” said Lehman Brothers (NYSE:LEH) last week
Monday, August 13, 2007
Emerging-Market Stocks Grow Richer Than U.S., Europe
Brazil's annual inflation averaged more than 1,000 percent in the 1990s, South Korea needed a $57 billion bailout from the International Monetary Fund and Poland went through nine prime ministers.
Now, investors say emerging markets are just as stable as the U.S., Europe and Japan, and deserve a premium because their economies are growing three times as fast. Stocks in developing nations traded this month at 15.2 times estimated profit versus 14.9 times for equities in industrialized countries, data compiled by Bloomberg show. In 2005, the ratios were 8.45 and 17.3, respectively.
The shift has given Brazil's Banco Bradesco SA a higher valuation than Citigroup Inc., and made South Korean steelmaker Posco pricier than its German rival, ThyssenKrupp AG. Indian, Peruvian and Czech stocks all fell less than those in the U.S. and Western Europe in the latest global sell-off.
``We're in a different place,'' said Robert Weissenstein, the New York-based chief investment officer for private banking in the Americas at Credit Suisse Group, which oversees $1.33 trillion. Shares in emerging markets ``could and should trade at a premium as those markets develop. You pay up for growth.''
Developing countries account for more than half of the world's estimated 5.2 percent economic growth this year and $5.68 trillion of foreign-currency reserves, according to IMF and Bloomberg data. Inflation in Brazil has dropped to less than 4 percent and South Korea is now a net creditor.
The changes aren't enough to warrant the prices emerging- market stocks are commanding, said the Gloom, Boom & Doom Report's Marc Faber. Developing nations' shares have outperformed developed markets for six straight years.
Tom, Dick, Harry
``Every Tom, Dick and Harry in the world knows that China is growing at 9 to 11 percent, that India is expanding rapidly,'' Faber, who oversees $300 million at Hong Kong-based Marc Faber Ltd., said in Vancouver. ``But the valuations are not very compelling at the moment.''
The rise in emerging market valuations shows that investors believe there is less risk to their earnings, said Allan Conway of Schroders Plc. Governments have built up currency reserves and cut debt, insulating emerging-market companies from shocks that have depressed valuations in the past.
``This idea, `sell risky assets, sell emerging,' is complete nonsense,'' said Conway, the London-based head of emerging-market equities at Schroders, which oversees $276 billion. ``They are not risky assets. That's a sentiment view and it's a view of times gone by. It is not a view for today.''
Eventually Rebound
The Morgan Stanley Capital International Emerging Markets Index will eventually rebound from the 10 percent decline it has suffered after reaching a record July 23, and will beat developed markets in 2007, according to Conway. The index rose 0.8 percent to 1052.19 at 7:15 a.m in New York.
Since global stocks peaked on July 13, the Standard & Poor's 500 Index dropped 6.4 percent and the Dow Jones Stoxx 600 Index of European shares lost 9.8 percent in dollar terms. India, Peru and the Czech Republic fell between 3.1 percent and 6.3 percent.
Less-developed economies have a combined $484 billion in current-account surpluses, compared with deficits of $81 billion in 1997, IMF data showed.
Foreign-currency reserves ballooned almost 500 percent to $3.87 trillion in the last 10 years, according to Roubini Global Economics LLC, the research firm of Nouriel Roubini, a professor at New York University's Stern School of Business. Government debt totals 39 percent of the gross domestic product in emerging markets, compared with 89 percent for developed nations, according to Schroders.
Taking Down Risk
``Emerging countries, by and large, are stockpiling either trade dollars or petrodollars, in such a degree that they've taken the financial risk way down,'' said James Swanson, who helps oversee $200 billion as chief investment strategist at MFS Investment Management in Boston.
China, Russia and India will account for half of the world's economic growth this year, the IMF said last month. Developing countries are forecast to expand 8 percent this year, compared with 2.6 percent for advanced economies, the IMF said in July.
The Washington-based fund boosted its 2007 growth forecast for China the most of any country, raising it 1.2 percentage point to 11.2 percent. The Russian economy is also beating forecasts and is set to grow 7 percent this year, more than the 6.4 percent predicted in April. For the U.S., the IMF trimmed its 2007 growth forecast to 2 percent from 2.2 percent.
`Far More Attractive'
``In the past, you wanted a PE discount and needed a risk premium because the economic fundamentals were worse,'' said Conway. ``Because that's changed, there should be a switch around. The price you pay for the growth you're getting is far more attractive in emerging markets.''
Two years ago, the MSCI Emerging Markets Index traded at a 51 percent discount to the MSCI World Index of 23 developed markets. The discount has narrowed to 1.4 percent this month.
On the basis of estimated earnings for the next year, emerging markets traded at a 1.6 percent premium to developed countries this month. That would mark the first time emerging markets are more expensive than developed nations since March 2000, if analysts' earnings estimates prove correct.
For Brazilian stocks, the discount narrowed to 15 percent from 43 percent two years ago as their price-to-earnings ratio rose to 13.4 from 9.8. Investors are also paying as much for earnings of South Korean companies as they are for those in developed markets, after demanding a 47 percent discount in 2005.
Rising Valuations
Pohang, South Korea-based Posco, Asia's third-biggest steelmaker, trades at 11.6 times profit, up from 4.57 two years ago. The ratio for Dusseldorf-based ThyssenKrupp AG, Germany's largest steelmaker, rose to 8.94 from 7.1. Osasco, Brazil-based Bradesco, Brazil's second-biggest non-state bank, is valued at 16.8 times earnings, from 10.5 two years ago. Citigroup, the biggest U.S. bank and located in New York, trades at 10.4 times earnings.
Citigroup's price-to-earnings ratio has dropped from 13.2 at the start of the year on growing concern subprime mortgage losses would curb the earnings of banks and brokerages.
``Whenever the U.S. financial markets catch a cold, emerging markets essentially get a very serious case of pneumonia --that's one of the key assumptions that maybe we may need to reconsider,'' Mauro Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School in Philadelphia, said. ``If there's volatility right now, it's in U.S. and European markets.''
Now, investors say emerging markets are just as stable as the U.S., Europe and Japan, and deserve a premium because their economies are growing three times as fast. Stocks in developing nations traded this month at 15.2 times estimated profit versus 14.9 times for equities in industrialized countries, data compiled by Bloomberg show. In 2005, the ratios were 8.45 and 17.3, respectively.
The shift has given Brazil's Banco Bradesco SA a higher valuation than Citigroup Inc., and made South Korean steelmaker Posco pricier than its German rival, ThyssenKrupp AG. Indian, Peruvian and Czech stocks all fell less than those in the U.S. and Western Europe in the latest global sell-off.
``We're in a different place,'' said Robert Weissenstein, the New York-based chief investment officer for private banking in the Americas at Credit Suisse Group, which oversees $1.33 trillion. Shares in emerging markets ``could and should trade at a premium as those markets develop. You pay up for growth.''
Developing countries account for more than half of the world's estimated 5.2 percent economic growth this year and $5.68 trillion of foreign-currency reserves, according to IMF and Bloomberg data. Inflation in Brazil has dropped to less than 4 percent and South Korea is now a net creditor.
The changes aren't enough to warrant the prices emerging- market stocks are commanding, said the Gloom, Boom & Doom Report's Marc Faber. Developing nations' shares have outperformed developed markets for six straight years.
Tom, Dick, Harry
``Every Tom, Dick and Harry in the world knows that China is growing at 9 to 11 percent, that India is expanding rapidly,'' Faber, who oversees $300 million at Hong Kong-based Marc Faber Ltd., said in Vancouver. ``But the valuations are not very compelling at the moment.''
The rise in emerging market valuations shows that investors believe there is less risk to their earnings, said Allan Conway of Schroders Plc. Governments have built up currency reserves and cut debt, insulating emerging-market companies from shocks that have depressed valuations in the past.
``This idea, `sell risky assets, sell emerging,' is complete nonsense,'' said Conway, the London-based head of emerging-market equities at Schroders, which oversees $276 billion. ``They are not risky assets. That's a sentiment view and it's a view of times gone by. It is not a view for today.''
Eventually Rebound
The Morgan Stanley Capital International Emerging Markets Index will eventually rebound from the 10 percent decline it has suffered after reaching a record July 23, and will beat developed markets in 2007, according to Conway. The index rose 0.8 percent to 1052.19 at 7:15 a.m in New York.
Since global stocks peaked on July 13, the Standard & Poor's 500 Index dropped 6.4 percent and the Dow Jones Stoxx 600 Index of European shares lost 9.8 percent in dollar terms. India, Peru and the Czech Republic fell between 3.1 percent and 6.3 percent.
Less-developed economies have a combined $484 billion in current-account surpluses, compared with deficits of $81 billion in 1997, IMF data showed.
Foreign-currency reserves ballooned almost 500 percent to $3.87 trillion in the last 10 years, according to Roubini Global Economics LLC, the research firm of Nouriel Roubini, a professor at New York University's Stern School of Business. Government debt totals 39 percent of the gross domestic product in emerging markets, compared with 89 percent for developed nations, according to Schroders.
Taking Down Risk
``Emerging countries, by and large, are stockpiling either trade dollars or petrodollars, in such a degree that they've taken the financial risk way down,'' said James Swanson, who helps oversee $200 billion as chief investment strategist at MFS Investment Management in Boston.
China, Russia and India will account for half of the world's economic growth this year, the IMF said last month. Developing countries are forecast to expand 8 percent this year, compared with 2.6 percent for advanced economies, the IMF said in July.
The Washington-based fund boosted its 2007 growth forecast for China the most of any country, raising it 1.2 percentage point to 11.2 percent. The Russian economy is also beating forecasts and is set to grow 7 percent this year, more than the 6.4 percent predicted in April. For the U.S., the IMF trimmed its 2007 growth forecast to 2 percent from 2.2 percent.
`Far More Attractive'
``In the past, you wanted a PE discount and needed a risk premium because the economic fundamentals were worse,'' said Conway. ``Because that's changed, there should be a switch around. The price you pay for the growth you're getting is far more attractive in emerging markets.''
Two years ago, the MSCI Emerging Markets Index traded at a 51 percent discount to the MSCI World Index of 23 developed markets. The discount has narrowed to 1.4 percent this month.
On the basis of estimated earnings for the next year, emerging markets traded at a 1.6 percent premium to developed countries this month. That would mark the first time emerging markets are more expensive than developed nations since March 2000, if analysts' earnings estimates prove correct.
For Brazilian stocks, the discount narrowed to 15 percent from 43 percent two years ago as their price-to-earnings ratio rose to 13.4 from 9.8. Investors are also paying as much for earnings of South Korean companies as they are for those in developed markets, after demanding a 47 percent discount in 2005.
Rising Valuations
Pohang, South Korea-based Posco, Asia's third-biggest steelmaker, trades at 11.6 times profit, up from 4.57 two years ago. The ratio for Dusseldorf-based ThyssenKrupp AG, Germany's largest steelmaker, rose to 8.94 from 7.1. Osasco, Brazil-based Bradesco, Brazil's second-biggest non-state bank, is valued at 16.8 times earnings, from 10.5 two years ago. Citigroup, the biggest U.S. bank and located in New York, trades at 10.4 times earnings.
Citigroup's price-to-earnings ratio has dropped from 13.2 at the start of the year on growing concern subprime mortgage losses would curb the earnings of banks and brokerages.
``Whenever the U.S. financial markets catch a cold, emerging markets essentially get a very serious case of pneumonia --that's one of the key assumptions that maybe we may need to reconsider,'' Mauro Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School in Philadelphia, said. ``If there's volatility right now, it's in U.S. and European markets.''
U.S. Stocks Gain on Retail Sales, Goldman Hedge-Fund Infusion
U.S. stocks rose after retail sales exceeded economists' estimates and Goldman Sachs Group Inc. shored up one of its hedge funds with $3 billion in new capital.
Goldman, JPMorgan Chase & Co. and Bear Stearns Cos. helped lift the Standard & Poor's 500 Index for a second day. Target Corp., the second-largest U.S. discount chain, led consumer shares to their biggest gain in a week.
The advance followed a rebound in stock markets across Europe and Asia from a two-day slump as the European Central Bank said credit markets are returning to normal.
The S&P 500 added 7.46, or 0.5 percent, to 1461.1 as of 10:11 a.m. in New York. The Dow Jones Industrial Average gained 59.75, or 0.5 percent, to 13,299.29. The Nasdaq Composite Index increased 15.34, or 0.6 percent, to 2560.23.
``Retail sales is a building block number, it's a pretty good indication about where the consumer stands,'' said David Doll, who helps manage about $2 billion as chief executive officer of Kanaly Trust Co. in Houston. ``The market is going to get carried at least early on today by the Fed's actions last week and other central banks.''
U.S. retail sales rose 0.3 percent in July after a 0.7 percent drop in June that was smaller than previously estimated, the Commerce Department said. Economists expected an increase of 0.2 percent, according to a Bloomberg survey.
Retail Rally
Target increased $1.14 to $63.50, leading the S&P 500 Retailing Index to a 1 percent gain. Wal-Mart Stores Inc., the world's largest retailer, advanced 49 cents to $46.56.
Federal funds began trading at 5.25 percent, matching the Federal Reserve's target and suggesting the central bank's injection of $62 billion at the end of last week met banks' demand for cash.
Goldman climbed $2.70 to $183.20. Goldman and investors including C.V. Starr and Perry Capital LLC will invest $3 billion in the firm's Global Equity Opportunities Fund after it fell 28 percent in August.
``We believe the current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals,'' Goldman said.
JPMorgan gained 53 cents to $44.78. Deutsche Bank raised its recommendation on the shares to ``buy'' from ``hold.''
``We're increasing ratings on select banks given a combination of lower stock prices along with our belief that fundamental conditions remain favorable aside from subprime mortgage,'' Deutsche Bank analysts including Mike Mayo in New York wrote in a note to investors. ``Also, major financial firms, such as JPMorgan, are more diverse versus times past.''
Bear Stearns
Bear Stearns advanced $5.80 to $116. Shares of the underwriter of mortgage bonds may sell at double their current price should Bear Stearns consider merging with or being acquired by a larger company, Barron's reported, citing unidentified sources.
The S&P 500 Investment Banking & Brokerage Index has lost 18 percent in the last month as difficulties stemming from subprime mortgages spread through credit markets. That is almost three times the drop of the S&P 500 Index.
Blackstone Group LP, the private equity firm, added $1.64 to $26.92 after its second-quarter earnings more than tripled as revenue at its four main units increased during a record year for leveraged buyouts. Morgan Stanley began coverage of the stock with an ``overweight'' recommendation.
Corning, Novell
Corning Inc. climbed 55 cents to $24. Shares of the biggest maker of glass for liquid-crystal displays may gain 24 percent next year because of LCD product demand, Barron's reported, citing no one.
Novell Inc. added 27 cents to $6.69 in Germany. The software developer owns the copyrights covering the Unix computer operating system and not SCO Group Inc., a judge ruled in a lawsuit over royalties from users of the Linux computer operating system. The ruling by U.S. District Judge Dale Kimball in Salt Lake City on Aug. 10 is a setback for SCO in its lawsuits against Novell and International Business Machines Corp.
BEA Systems Inc. rose 62 cents to $12. The maker of software that helps Internet-based programs exchange information were upgraded at Bear Stearns & Co., Banc of America Securities LLC and UBS Investment Research. The company may be a ``strategic asset'' for a private equity firm, wrote UBS analyst Heather Bellini.
Europe's Dow Jones Stoxx 600 Index climbed 2.1 percent. Japan's Nikkei 225 Stock Average rose 0.2 percent.
ECB Infusion
The European Central Bank added an extra 47.7 billion euros ($65 billion) in emergency money and the Bank of Japan injected 600 billion yen ($5.1 billion) into its system. Last week, central banks in the U.S., Europe, Japan, Australia and Canada added about $136 billion to the banking system.
Axa SA, Europe's second-biggest insurer, climbed 4.1 percent to 29.16 euros. Credit Suisse, the second-largest Swiss bank, advanced 3.7 percent to 83.8 Swiss francs.
European financial stocks were raised to ``overweight'' from ``underweight'' at Morgan Stanley.
``We think that the current financial trouble is properly reflected in valuations and sentiment alike,'' Teun Draaisma, a strategist at Morgan Stanley, wrote in a note today. ``Fundamentals are solid with no recession in sight, and we welcome the fact that central banks globally are clearly stepping up to the plate.''
Draaisma also increased European equities to ``overweight'' from ``neutral.''
Goldman, JPMorgan Chase & Co. and Bear Stearns Cos. helped lift the Standard & Poor's 500 Index for a second day. Target Corp., the second-largest U.S. discount chain, led consumer shares to their biggest gain in a week.
The advance followed a rebound in stock markets across Europe and Asia from a two-day slump as the European Central Bank said credit markets are returning to normal.
The S&P 500 added 7.46, or 0.5 percent, to 1461.1 as of 10:11 a.m. in New York. The Dow Jones Industrial Average gained 59.75, or 0.5 percent, to 13,299.29. The Nasdaq Composite Index increased 15.34, or 0.6 percent, to 2560.23.
``Retail sales is a building block number, it's a pretty good indication about where the consumer stands,'' said David Doll, who helps manage about $2 billion as chief executive officer of Kanaly Trust Co. in Houston. ``The market is going to get carried at least early on today by the Fed's actions last week and other central banks.''
U.S. retail sales rose 0.3 percent in July after a 0.7 percent drop in June that was smaller than previously estimated, the Commerce Department said. Economists expected an increase of 0.2 percent, according to a Bloomberg survey.
Retail Rally
Target increased $1.14 to $63.50, leading the S&P 500 Retailing Index to a 1 percent gain. Wal-Mart Stores Inc., the world's largest retailer, advanced 49 cents to $46.56.
Federal funds began trading at 5.25 percent, matching the Federal Reserve's target and suggesting the central bank's injection of $62 billion at the end of last week met banks' demand for cash.
Goldman climbed $2.70 to $183.20. Goldman and investors including C.V. Starr and Perry Capital LLC will invest $3 billion in the firm's Global Equity Opportunities Fund after it fell 28 percent in August.
``We believe the current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals,'' Goldman said.
JPMorgan gained 53 cents to $44.78. Deutsche Bank raised its recommendation on the shares to ``buy'' from ``hold.''
``We're increasing ratings on select banks given a combination of lower stock prices along with our belief that fundamental conditions remain favorable aside from subprime mortgage,'' Deutsche Bank analysts including Mike Mayo in New York wrote in a note to investors. ``Also, major financial firms, such as JPMorgan, are more diverse versus times past.''
Bear Stearns
Bear Stearns advanced $5.80 to $116. Shares of the underwriter of mortgage bonds may sell at double their current price should Bear Stearns consider merging with or being acquired by a larger company, Barron's reported, citing unidentified sources.
The S&P 500 Investment Banking & Brokerage Index has lost 18 percent in the last month as difficulties stemming from subprime mortgages spread through credit markets. That is almost three times the drop of the S&P 500 Index.
Blackstone Group LP, the private equity firm, added $1.64 to $26.92 after its second-quarter earnings more than tripled as revenue at its four main units increased during a record year for leveraged buyouts. Morgan Stanley began coverage of the stock with an ``overweight'' recommendation.
Corning, Novell
Corning Inc. climbed 55 cents to $24. Shares of the biggest maker of glass for liquid-crystal displays may gain 24 percent next year because of LCD product demand, Barron's reported, citing no one.
Novell Inc. added 27 cents to $6.69 in Germany. The software developer owns the copyrights covering the Unix computer operating system and not SCO Group Inc., a judge ruled in a lawsuit over royalties from users of the Linux computer operating system. The ruling by U.S. District Judge Dale Kimball in Salt Lake City on Aug. 10 is a setback for SCO in its lawsuits against Novell and International Business Machines Corp.
BEA Systems Inc. rose 62 cents to $12. The maker of software that helps Internet-based programs exchange information were upgraded at Bear Stearns & Co., Banc of America Securities LLC and UBS Investment Research. The company may be a ``strategic asset'' for a private equity firm, wrote UBS analyst Heather Bellini.
Europe's Dow Jones Stoxx 600 Index climbed 2.1 percent. Japan's Nikkei 225 Stock Average rose 0.2 percent.
ECB Infusion
The European Central Bank added an extra 47.7 billion euros ($65 billion) in emergency money and the Bank of Japan injected 600 billion yen ($5.1 billion) into its system. Last week, central banks in the U.S., Europe, Japan, Australia and Canada added about $136 billion to the banking system.
Axa SA, Europe's second-biggest insurer, climbed 4.1 percent to 29.16 euros. Credit Suisse, the second-largest Swiss bank, advanced 3.7 percent to 83.8 Swiss francs.
European financial stocks were raised to ``overweight'' from ``underweight'' at Morgan Stanley.
``We think that the current financial trouble is properly reflected in valuations and sentiment alike,'' Teun Draaisma, a strategist at Morgan Stanley, wrote in a note today. ``Fundamentals are solid with no recession in sight, and we welcome the fact that central banks globally are clearly stepping up to the plate.''
Draaisma also increased European equities to ``overweight'' from ``neutral.''
U.S. Stocks Gain on Retail Sales, Goldman Hedge-Fund Infusion
U.S. stocks rose after retail sales exceeded economists' estimates and Goldman Sachs Group Inc. shored up one of its hedge funds with $3 billion in new capital.
Goldman, JPMorgan Chase & Co. and Bear Stearns Cos. helped lift the Standard & Poor's 500 Index for a second day. Target Corp., the second-largest U.S. discount chain, led consumer shares to their biggest gain in a week.
The advance followed a rebound in stock markets across Europe and Asia from a two-day slump as the European Central Bank said credit markets are returning to normal.
The S&P 500 added 7.46, or 0.5 percent, to 1461.1 as of 10:11 a.m. in New York. The Dow Jones Industrial Average gained 59.75, or 0.5 percent, to 13,299.29. The Nasdaq Composite Index increased 15.34, or 0.6 percent, to 2560.23.
``Retail sales is a building block number, it's a pretty good indication about where the consumer stands,'' said David Doll, who helps manage about $2 billion as chief executive officer of Kanaly Trust Co. in Houston. ``The market is going to get carried at least early on today by the Fed's actions last week and other central banks.''
U.S. retail sales rose 0.3 percent in July after a 0.7 percent drop in June that was smaller than previously estimated, the Commerce Department said. Economists expected an increase of 0.2 percent, according to a Bloomberg survey.
Retail Rally
Target increased $1.14 to $63.50, leading the S&P 500 Retailing Index to a 1 percent gain. Wal-Mart Stores Inc., the world's largest retailer, advanced 49 cents to $46.56.
Federal funds began trading at 5.25 percent, matching the Federal Reserve's target and suggesting the central bank's injection of $62 billion at the end of last week met banks' demand for cash.
Goldman climbed $2.70 to $183.20. Goldman and investors including C.V. Starr and Perry Capital LLC will invest $3 billion in the firm's Global Equity Opportunities Fund after it fell 28 percent in August.
``We believe the current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals,'' Goldman said.
JPMorgan gained 53 cents to $44.78. Deutsche Bank raised its recommendation on the shares to ``buy'' from ``hold.''
``We're increasing ratings on select banks given a combination of lower stock prices along with our belief that fundamental conditions remain favorable aside from subprime mortgage,'' Deutsche Bank analysts including Mike Mayo in New York wrote in a note to investors. ``Also, major financial firms, such as JPMorgan, are more diverse versus times past.''
Bear Stearns
Bear Stearns advanced $5.80 to $116. Shares of the underwriter of mortgage bonds may sell at double their current price should Bear Stearns consider merging with or being acquired by a larger company, Barron's reported, citing unidentified sources.
The S&P 500 Investment Banking & Brokerage Index has lost 18 percent in the last month as difficulties stemming from subprime mortgages spread through credit markets. That is almost three times the drop of the S&P 500 Index.
Blackstone Group LP, the private equity firm, added $1.64 to $26.92 after its second-quarter earnings more than tripled as revenue at its four main units increased during a record year for leveraged buyouts. Morgan Stanley began coverage of the stock with an ``overweight'' recommendation.
Corning, Novell
Corning Inc. climbed 55 cents to $24. Shares of the biggest maker of glass for liquid-crystal displays may gain 24 percent next year because of LCD product demand, Barron's reported, citing no one.
Novell Inc. added 27 cents to $6.69 in Germany. The software developer owns the copyrights covering the Unix computer operating system and not SCO Group Inc., a judge ruled in a lawsuit over royalties from users of the Linux computer operating system. The ruling by U.S. District Judge Dale Kimball in Salt Lake City on Aug. 10 is a setback for SCO in its lawsuits against Novell and International Business Machines Corp.
BEA Systems Inc. rose 62 cents to $12. The maker of software that helps Internet-based programs exchange information were upgraded at Bear Stearns & Co., Banc of America Securities LLC and UBS Investment Research. The company may be a ``strategic asset'' for a private equity firm, wrote UBS analyst Heather Bellini.
Europe's Dow Jones Stoxx 600 Index climbed 2.1 percent. Japan's Nikkei 225 Stock Average rose 0.2 percent.
ECB Infusion
The European Central Bank added an extra 47.7 billion euros ($65 billion) in emergency money and the Bank of Japan injected 600 billion yen ($5.1 billion) into its system. Last week, central banks in the U.S., Europe, Japan, Australia and Canada added about $136 billion to the banking system.
Axa SA, Europe's second-biggest insurer, climbed 4.1 percent to 29.16 euros. Credit Suisse, the second-largest Swiss bank, advanced 3.7 percent to 83.8 Swiss francs.
European financial stocks were raised to ``overweight'' from ``underweight'' at Morgan Stanley.
``We think that the current financial trouble is properly reflected in valuations and sentiment alike,'' Teun Draaisma, a strategist at Morgan Stanley, wrote in a note today. ``Fundamentals are solid with no recession in sight, and we welcome the fact that central banks globally are clearly stepping up to the plate.''
Draaisma also increased European equities to ``overweight'' from ``neutral.''
Goldman, JPMorgan Chase & Co. and Bear Stearns Cos. helped lift the Standard & Poor's 500 Index for a second day. Target Corp., the second-largest U.S. discount chain, led consumer shares to their biggest gain in a week.
The advance followed a rebound in stock markets across Europe and Asia from a two-day slump as the European Central Bank said credit markets are returning to normal.
The S&P 500 added 7.46, or 0.5 percent, to 1461.1 as of 10:11 a.m. in New York. The Dow Jones Industrial Average gained 59.75, or 0.5 percent, to 13,299.29. The Nasdaq Composite Index increased 15.34, or 0.6 percent, to 2560.23.
``Retail sales is a building block number, it's a pretty good indication about where the consumer stands,'' said David Doll, who helps manage about $2 billion as chief executive officer of Kanaly Trust Co. in Houston. ``The market is going to get carried at least early on today by the Fed's actions last week and other central banks.''
U.S. retail sales rose 0.3 percent in July after a 0.7 percent drop in June that was smaller than previously estimated, the Commerce Department said. Economists expected an increase of 0.2 percent, according to a Bloomberg survey.
Retail Rally
Target increased $1.14 to $63.50, leading the S&P 500 Retailing Index to a 1 percent gain. Wal-Mart Stores Inc., the world's largest retailer, advanced 49 cents to $46.56.
Federal funds began trading at 5.25 percent, matching the Federal Reserve's target and suggesting the central bank's injection of $62 billion at the end of last week met banks' demand for cash.
Goldman climbed $2.70 to $183.20. Goldman and investors including C.V. Starr and Perry Capital LLC will invest $3 billion in the firm's Global Equity Opportunities Fund after it fell 28 percent in August.
``We believe the current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals,'' Goldman said.
JPMorgan gained 53 cents to $44.78. Deutsche Bank raised its recommendation on the shares to ``buy'' from ``hold.''
``We're increasing ratings on select banks given a combination of lower stock prices along with our belief that fundamental conditions remain favorable aside from subprime mortgage,'' Deutsche Bank analysts including Mike Mayo in New York wrote in a note to investors. ``Also, major financial firms, such as JPMorgan, are more diverse versus times past.''
Bear Stearns
Bear Stearns advanced $5.80 to $116. Shares of the underwriter of mortgage bonds may sell at double their current price should Bear Stearns consider merging with or being acquired by a larger company, Barron's reported, citing unidentified sources.
The S&P 500 Investment Banking & Brokerage Index has lost 18 percent in the last month as difficulties stemming from subprime mortgages spread through credit markets. That is almost three times the drop of the S&P 500 Index.
Blackstone Group LP, the private equity firm, added $1.64 to $26.92 after its second-quarter earnings more than tripled as revenue at its four main units increased during a record year for leveraged buyouts. Morgan Stanley began coverage of the stock with an ``overweight'' recommendation.
Corning, Novell
Corning Inc. climbed 55 cents to $24. Shares of the biggest maker of glass for liquid-crystal displays may gain 24 percent next year because of LCD product demand, Barron's reported, citing no one.
Novell Inc. added 27 cents to $6.69 in Germany. The software developer owns the copyrights covering the Unix computer operating system and not SCO Group Inc., a judge ruled in a lawsuit over royalties from users of the Linux computer operating system. The ruling by U.S. District Judge Dale Kimball in Salt Lake City on Aug. 10 is a setback for SCO in its lawsuits against Novell and International Business Machines Corp.
BEA Systems Inc. rose 62 cents to $12. The maker of software that helps Internet-based programs exchange information were upgraded at Bear Stearns & Co., Banc of America Securities LLC and UBS Investment Research. The company may be a ``strategic asset'' for a private equity firm, wrote UBS analyst Heather Bellini.
Europe's Dow Jones Stoxx 600 Index climbed 2.1 percent. Japan's Nikkei 225 Stock Average rose 0.2 percent.
ECB Infusion
The European Central Bank added an extra 47.7 billion euros ($65 billion) in emergency money and the Bank of Japan injected 600 billion yen ($5.1 billion) into its system. Last week, central banks in the U.S., Europe, Japan, Australia and Canada added about $136 billion to the banking system.
Axa SA, Europe's second-biggest insurer, climbed 4.1 percent to 29.16 euros. Credit Suisse, the second-largest Swiss bank, advanced 3.7 percent to 83.8 Swiss francs.
European financial stocks were raised to ``overweight'' from ``underweight'' at Morgan Stanley.
``We think that the current financial trouble is properly reflected in valuations and sentiment alike,'' Teun Draaisma, a strategist at Morgan Stanley, wrote in a note today. ``Fundamentals are solid with no recession in sight, and we welcome the fact that central banks globally are clearly stepping up to the plate.''
Draaisma also increased European equities to ``overweight'' from ``neutral.''
Goldman Global Equity Fund Gets $3 Billion in Capital
Goldman Sachs Group Inc., the second- largest hedge-fund manager, will invest about $2 billion to bail out its Global Equity Opportunities Fund after a 28 percent decline this month.
Investors including Maurice ``Hank'' Greenberg, the former chairman of American International Group Inc., and billionaire Eli Broad will put about $1 billion into the hedge fund, New York-based Goldman said today in a statement. Assets dropped by $1.4 billion to $3.6 billion in the past two weeks as its computer-driven investment strategies were upended by turmoil in the financial markets.
``It looks better for them if others are willing to put money in alongside them,'' said Benjamin Wallace, who helps manage about $750 million at Grimes & Co. in Westborough, Massachussetts. ``Goldman spreads its risk out a bit but also demonstrates that other people want to be involved in this.''
Goldman said it wasn't rescuing the fund, which had fallen along with other so-called quant funds that use mathematical formulas to make trades. Instead, the infusion will give managers ``more flexibility to take advantage of the opportunities we believe exist in current market conditions,'' the world's second-largest securities firm said.
``Current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals,'' Goldman said in the statement.
Global Alpha
Global Alpha, another Goldman quant hedge fund, has lost 27 percent this year. The company isn't pumping more money into that fund.
Goldman shares rose $2.59, or 1.4 percent, to $183.09 at 10:19 a.m. in New York Stock Exchange composite trading. The Standard & Poor's 500 Index gained 0.6 percent to 462.51.
Hedge funds are largely unregistered pools of capital that cater to wealthy individuals and institutions and allow managers to participate substantially in profits from investments. They try to make money in rising as well as falling markets.
The $1.7 trillion industry has been roiled in July and August as credit spreads widened to the most in two years and U.S. stocks rose or fell by more than 1 percent on 13 days. Also posting losses in recent weeks are quant funds run by AQR Capital Management LLC and Highbridge Capital Management LLC.
The troubles as some large quant funds lost money in their fixed-income or credit positions on the back of a decline in the subprime mortgage market. The firms were forced to sell more liquid stock investments to raise cash and reduce debt, according to a report published by Lehman Brothers Holdings Inc. analyst Matthew Rothman.
Models Fail
The selling caused the models used by quantitative funds to short circuit. Stock positions that the models expected to fall in price rose, and shares they expected to rise, fell.
``The models (ours included) are behaving in the opposite way we would predict and have seen and tested for over very long time periods (45+ years),'' Rothman wrote.
One of AQR's Global Stock Selection funds, which uses borrowed money, lost 21 percent year to date, according to investors. The fund has less than $1 billion in assets.
The pool has ``come under severe pressure'' resulting in ``shockingly bad'' returns for the fund and others with similar strategies, according to an Aug. 10 letter to clients from Clifford Asness, the firm's founder and managing principal. Asness blamed the losses on the ``strategy getting too crowded,'' rather than the models not working.
AQR, Highbridge
AQR's larger asset-allocation fund was up about 3.5 percent in August, and the firm has received commitments for at least $700 million in new capital. AQR, based in Greenwich, Connecticut, manages about $10 billion in hedge funds.
Highbridge's $1.7 billion Highbridge Statistical Opportunities Fund, which invests in U.S., European and Asian equities, fell 18 percent in the month through Aug. 8, and 16 percent year to date, the New York-based firm said in a letter to investors. Highbridge is controlled by JPMorgan Chase & Co., the largest manager of hedge funds.
Executives at the firms declined to comment.
The difference in yields between the riskiest corporate bonds and U.S. Treasuries has expanded nearly 2 percentage points since June, according to Merrill Lynch & Co. index data. Volatility, as measured by the Chicago Board Options Exchange SPX Volatility Index, has averaged more than 23 since the beginning of August. Between June 2003 and the end of July 2007, it averaged 14.
Investors including Maurice ``Hank'' Greenberg, the former chairman of American International Group Inc., and billionaire Eli Broad will put about $1 billion into the hedge fund, New York-based Goldman said today in a statement. Assets dropped by $1.4 billion to $3.6 billion in the past two weeks as its computer-driven investment strategies were upended by turmoil in the financial markets.
``It looks better for them if others are willing to put money in alongside them,'' said Benjamin Wallace, who helps manage about $750 million at Grimes & Co. in Westborough, Massachussetts. ``Goldman spreads its risk out a bit but also demonstrates that other people want to be involved in this.''
Goldman said it wasn't rescuing the fund, which had fallen along with other so-called quant funds that use mathematical formulas to make trades. Instead, the infusion will give managers ``more flexibility to take advantage of the opportunities we believe exist in current market conditions,'' the world's second-largest securities firm said.
``Current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals,'' Goldman said in the statement.
Global Alpha
Global Alpha, another Goldman quant hedge fund, has lost 27 percent this year. The company isn't pumping more money into that fund.
Goldman shares rose $2.59, or 1.4 percent, to $183.09 at 10:19 a.m. in New York Stock Exchange composite trading. The Standard & Poor's 500 Index gained 0.6 percent to 462.51.
Hedge funds are largely unregistered pools of capital that cater to wealthy individuals and institutions and allow managers to participate substantially in profits from investments. They try to make money in rising as well as falling markets.
The $1.7 trillion industry has been roiled in July and August as credit spreads widened to the most in two years and U.S. stocks rose or fell by more than 1 percent on 13 days. Also posting losses in recent weeks are quant funds run by AQR Capital Management LLC and Highbridge Capital Management LLC.
The troubles as some large quant funds lost money in their fixed-income or credit positions on the back of a decline in the subprime mortgage market. The firms were forced to sell more liquid stock investments to raise cash and reduce debt, according to a report published by Lehman Brothers Holdings Inc. analyst Matthew Rothman.
Models Fail
The selling caused the models used by quantitative funds to short circuit. Stock positions that the models expected to fall in price rose, and shares they expected to rise, fell.
``The models (ours included) are behaving in the opposite way we would predict and have seen and tested for over very long time periods (45+ years),'' Rothman wrote.
One of AQR's Global Stock Selection funds, which uses borrowed money, lost 21 percent year to date, according to investors. The fund has less than $1 billion in assets.
The pool has ``come under severe pressure'' resulting in ``shockingly bad'' returns for the fund and others with similar strategies, according to an Aug. 10 letter to clients from Clifford Asness, the firm's founder and managing principal. Asness blamed the losses on the ``strategy getting too crowded,'' rather than the models not working.
AQR, Highbridge
AQR's larger asset-allocation fund was up about 3.5 percent in August, and the firm has received commitments for at least $700 million in new capital. AQR, based in Greenwich, Connecticut, manages about $10 billion in hedge funds.
Highbridge's $1.7 billion Highbridge Statistical Opportunities Fund, which invests in U.S., European and Asian equities, fell 18 percent in the month through Aug. 8, and 16 percent year to date, the New York-based firm said in a letter to investors. Highbridge is controlled by JPMorgan Chase & Co., the largest manager of hedge funds.
Executives at the firms declined to comment.
The difference in yields between the riskiest corporate bonds and U.S. Treasuries has expanded nearly 2 percentage points since June, according to Merrill Lynch & Co. index data. Volatility, as measured by the Chicago Board Options Exchange SPX Volatility Index, has averaged more than 23 since the beginning of August. Between June 2003 and the end of July 2007, it averaged 14.
No Ferraris? Goldman Traders Worry
The Dow's Freefall Has Hedge Fund Traders at Goldman Sachs Anxious About Their Future Bonuses
Share The sleek interior of one of the world's biggest investment banks reverberated with tension this morning. No business casual here. Suits and ties. It was not a day to take off early for the Hamptons.
The financial district office of the Goldman Sachs asset management group, which runs the bank's hedge funds, was busy Friday morning with anxious traders racing down the hallways and hush-hush meetings hashing out strategies to stem losses in their stock holdings.
At stake: $40 billion in assets. And more than likely talk about the government's decision to investigate whether the country's major financial institutions are losing more money than they're letting on.
It's been a tough week for the massively successful firm -- which earned a record $9.34 billion last year -- and its bonus-hungry employees, as the stock market began to reel from trouble in the home loan market and the ongoing credit crunch.
The anxious traders have plenty of reasons to sweat, 622,000 reasons, to be exact. That was the average bonus in dollars awarded to the firm's employees last year, from high-level executives to lowly mail-room employees.
Of course, most of the top traders' bonuses were in the seven figures, allowing them to pump money into the economy by snapping up penthouse apartments, luxury cars and fancy yachts. And that's just one niche where the market's woes could affect retail sales – if traders get smaller bonuses, they would have less to spend on costly goods
Share The sleek interior of one of the world's biggest investment banks reverberated with tension this morning. No business casual here. Suits and ties. It was not a day to take off early for the Hamptons.
The financial district office of the Goldman Sachs asset management group, which runs the bank's hedge funds, was busy Friday morning with anxious traders racing down the hallways and hush-hush meetings hashing out strategies to stem losses in their stock holdings.
At stake: $40 billion in assets. And more than likely talk about the government's decision to investigate whether the country's major financial institutions are losing more money than they're letting on.
It's been a tough week for the massively successful firm -- which earned a record $9.34 billion last year -- and its bonus-hungry employees, as the stock market began to reel from trouble in the home loan market and the ongoing credit crunch.
The anxious traders have plenty of reasons to sweat, 622,000 reasons, to be exact. That was the average bonus in dollars awarded to the firm's employees last year, from high-level executives to lowly mail-room employees.
Of course, most of the top traders' bonuses were in the seven figures, allowing them to pump money into the economy by snapping up penthouse apartments, luxury cars and fancy yachts. And that's just one niche where the market's woes could affect retail sales – if traders get smaller bonuses, they would have less to spend on costly goods
S&P May Lower Ratings on $914 Million of Alt A Bonds
Standard & Poor's may cut its ratings on $913.9 million of U.S. mortgage securities backed by Alt A loans because of rising delinquencies and losses that may ``exceed historical precedent.''
S&P placed 207 classes of bonds rated from October 2005 through December 2006 on CreditWatch with negative implications, adding to the 30 classes from that period placed on CreditWatch beginning in March. The most recent group makes up less than one percent of the $455.4 billion total value of such bonds.
Delinquencies are increasing because of a combination of declining house prices and lenders who financed home purchases to buyers with no down payment and limited proof of income. The step is a sign that defaults are spreading outside of subprime mortgages made to people with poor credit scores.
The bonds now have ``delinquency and default loss trends that are indicative of poor future performance and these trends will continue to exceed historic precedent and our original ratings assumptions,'' S&P analysts led by Robert Pollsen and Andrew Giudici said in a report.
Alt A mortgages are granted to borrowers with good credit scores who want more flexibility than traditional mortgages offer for the overall level of risk they pose. Non-agency bonds backed by first mortgages in the Alt-A category total more than $700 billion, trailing the more than $800 billion in subprime debt, according to a March report from analysts at Credit Suisse Group. Alt A is short for Alternative-A.
Seized Property
Alt A adjustable-rate mortgages with a few years of fixed rates in bonds issued by Bear Stearns Cos., Lehman Brothers Holdings Inc. and Morgan Stanley last year are going bad at the fastest rates because they have the riskiest attributes, according to a report today from Barclays Capital.
Late payments of at least 90 days, foreclosures and holdings of seized property among Alt-A mortgages in bonds rose in May to 2.69 percent, the highest on record, from 0.89 percent a year earlier, according to Michael Youngblood, an analyst at Arlington, Virginia-based Friedman Billings Ramsey Group Inc. They'll probably rise to 3.92 percent by next May, he said.
For new transactions, S&P said it will assume higher default and loss rates. For loans used to purchase homes with little money down, the firm will expect 5 percent to 50 percent more defaults, depending on borrowers' level of equity.
Layered Risks
S&P said it's also reducing its reliance on credit scores when assessing loans with ``layered risks,'' those which include features such as low down payments and income documentation granted at the same time.
``In late 2005 and 2006, mortgage origination underwriting guidelines expanded rapidly, which allowed the proliferation of layered risks within the Alt-A market,'' the firm said. ``This combination of multiple risk factors for a single loan is the principal driving force behind the deteriorating performance of the 2006 vintage.''
About $13 million of the bonds most recently placed on CreditWatch have been paid off, leaving about $901 million outstanding.
S&P placed 207 classes of bonds rated from October 2005 through December 2006 on CreditWatch with negative implications, adding to the 30 classes from that period placed on CreditWatch beginning in March. The most recent group makes up less than one percent of the $455.4 billion total value of such bonds.
Delinquencies are increasing because of a combination of declining house prices and lenders who financed home purchases to buyers with no down payment and limited proof of income. The step is a sign that defaults are spreading outside of subprime mortgages made to people with poor credit scores.
The bonds now have ``delinquency and default loss trends that are indicative of poor future performance and these trends will continue to exceed historic precedent and our original ratings assumptions,'' S&P analysts led by Robert Pollsen and Andrew Giudici said in a report.
Alt A mortgages are granted to borrowers with good credit scores who want more flexibility than traditional mortgages offer for the overall level of risk they pose. Non-agency bonds backed by first mortgages in the Alt-A category total more than $700 billion, trailing the more than $800 billion in subprime debt, according to a March report from analysts at Credit Suisse Group. Alt A is short for Alternative-A.
Seized Property
Alt A adjustable-rate mortgages with a few years of fixed rates in bonds issued by Bear Stearns Cos., Lehman Brothers Holdings Inc. and Morgan Stanley last year are going bad at the fastest rates because they have the riskiest attributes, according to a report today from Barclays Capital.
Late payments of at least 90 days, foreclosures and holdings of seized property among Alt-A mortgages in bonds rose in May to 2.69 percent, the highest on record, from 0.89 percent a year earlier, according to Michael Youngblood, an analyst at Arlington, Virginia-based Friedman Billings Ramsey Group Inc. They'll probably rise to 3.92 percent by next May, he said.
For new transactions, S&P said it will assume higher default and loss rates. For loans used to purchase homes with little money down, the firm will expect 5 percent to 50 percent more defaults, depending on borrowers' level of equity.
Layered Risks
S&P said it's also reducing its reliance on credit scores when assessing loans with ``layered risks,'' those which include features such as low down payments and income documentation granted at the same time.
``In late 2005 and 2006, mortgage origination underwriting guidelines expanded rapidly, which allowed the proliferation of layered risks within the Alt-A market,'' the firm said. ``This combination of multiple risk factors for a single loan is the principal driving force behind the deteriorating performance of the 2006 vintage.''
About $13 million of the bonds most recently placed on CreditWatch have been paid off, leaving about $901 million outstanding.
Expedia evokes bullish sentiments over future performance
According to an AP report, Banc of America Securities analyst Brian Fitzgerald acknowledged that the company’s US bookings accelerated in the second quarter and should continue to accelerate in the third and fourth quarters. “Looking abroad, Fitzgerald expects growth in online European travel to greatly help the online travel company and pegged that opportunity at $63 billion. Fitzgerald noted that Europeans typically have more vacation time per year than Americans, and expects the European online travel market to expand at a quick pace,” according to the report.
As per the same report: “A low stock price, international opportunities and strong growth in domestic bookings are some reasons”, which resulted in “Buy” rating from Fitzgerald for Expedia.
“We believe the current share price represents an attractive entry point, given the inflection point in domestic gross bookings growth, the improving gross margin and the increasing contribution from faster growing Europe and higher margin advertising revenue,” Fitzgerald wrote in a client note.
Fitzgerald’s $35 price target implies nearly 26 percent upside to the stock’s $27.79 closing price Wednesday.
Online travel agency Expedia’s second-quarter net income rose to $96.1 million, or 30 cents a share, from $95.5 million, or 27 cents per share a year earlier. Gross bookings increased 14 percent for the second quarter of 2007 compared with the second quarter of 2006.
Revenue increased 15 percent for the second quarter, primarily driven by increased worldwide merchant hotel revenue and advertising and media revenue, partially offset by a decline in North America air revenue. North America revenue increased 11 percent, Europe revenue increased 30 percent (23 percent excluding the impact of foreign exchange) and other revenue increased 28 percent.
Saturday, August 11, 2007
U.S. Stocks Recover as Fed Assuages Lending Concern
U.S. stocks gained for the first time in four weeks on speculation the government will take steps to avert a lending crisis, helping the market overcome increasing home-loan and hedge fund losses.
The Standard & Poor's 500 Index began the week with the steepest two-day advance in four years, buoyed by a bullish economic outlook from the Federal Reserve. The benchmark was little changed yesterday after the Fed pumped the most money into the banking system since the September 2001 terror attacks and pledged more ``as necessary'' to bolster investor confidence.
``Someone needs to step in and create some stability, and we're seeing the Fed do that,'' said Jason Graybill, who helps manage $750 million at Abner Herrman & Brock Inc. in Jersey City, New Jersey.
The S&P 500 advanced 1.4 percent to 1453.64, recovering from the biggest three-week loss since February 2003. The Dow Jones Industrial Average rose 0.4 percent to 13,239.54. The Nasdaq Composite Index climbed 1.3 percent to 2544.89.
The yield on the benchmark 10-year U.S. Treasury note rose 0.11 percentage point to 4.80 percent this week as the Fed joined central banks in Europe, Japan, Australia and Canada in attempting to prevent a credit crunch.
Stocks tumbled on Aug. 9, with the S&P 500 slumping the most since February, as subprime mortgage contagion and hedge fund losses halted a three-day rally.
Manic, Depressive, Manic
Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc. gained for the week, even after brokerage shares suffered the biggest one-day decline of the almost five-year bull market. Citigroup rose 2.8 percent to $47, JPMorgan climbed 1.4 percent to $44.25 and Goldman advanced 0.5 percent to $180.50.
After the close of trading yesterday, people familiar with Goldman's $8 billion Global Alpha hedge fund said it has lost 26 percent so far this year.
Quantitative hedge funds, including those run by Goldman, Highbridge Capital Management LLC and Tykhe Capital LLC, have lost money as credit spreads widen and volatility jumps, rendering useless their statistical investment models.
``Our market is rapidly swinging from manic to depressive and back to manic in nanosecond moves with each headline acting as a trigger,'' said Frederic Dickson, who manages $17 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.
Fannie Mae Advances
The Chicago Board Options Exchange Volatility Index gained 12 percent to 28.30, the highest since April 2003. Higher readings in the VIX, derived from prices paid for S&P 500 options, indicate traders expect stocks to have bigger price swings. The VIX has risen five straight weeks.
Shares of financial companies in the S&P 500 gained 3.7 percent, the most among 10 industries.
Fannie Mae rose 17 percent to $66.46 for the steepest weekly gain in the S&P 500. Freddie Mac added 11 percent to $61.95. Investors speculated that the regulator for the two largest U.S. home-loan companies would lift a cap on the home loan assets they can own, helping pour more money into the mortgage market.
After the close of trading yesterday, the Office of Federal Housing Enterprise Oversight rejected requests by the government-chartered companies. ``We are not authorizing any significant changes at this time,'' the regulator said.
Home Depot Inc. fell for the fourth consecutive week, losing 0.8 percent to $35.92. The world's largest home- improvement retailer may have to accept a lower price for the contractor-supply unit it agreed to sell to buyout firms for $10.3 billion, forcing it to scale back a stock repurchase plan.
Merrill Lynch Gains
Merrill Lynch & Co. added 5.8 percent to $74.12. UBS AG raised its recommendation for the stock to ``buy'' from ``neutral'' and said any possible losses in Merrill's credit business have already been priced into the stock.
Polo Ralph Lauren Corp. fell 11 percent to $77.40, the biggest drop among S&P 500 members. The designer of Chaps and Club Monaco clothing cut its annual forecast for the second time this year. The stock is unchanged for the year.
Investors will get clues next week on the health of the U.S. economy. Retail sales rose last month, signaling that a deepening real-estate slump and elevated food and fuel costs are slowing rather than stopping consumers, economists said before a government report.
Purchases rose 0.2 percent after dropping 0.9 percent in May, according to the median estimate in a Bloomberg News survey before a Commerce Department report on Aug. 13. Other reports may show prices increased in July, according to the survey.
The Standard & Poor's 500 Index began the week with the steepest two-day advance in four years, buoyed by a bullish economic outlook from the Federal Reserve. The benchmark was little changed yesterday after the Fed pumped the most money into the banking system since the September 2001 terror attacks and pledged more ``as necessary'' to bolster investor confidence.
``Someone needs to step in and create some stability, and we're seeing the Fed do that,'' said Jason Graybill, who helps manage $750 million at Abner Herrman & Brock Inc. in Jersey City, New Jersey.
The S&P 500 advanced 1.4 percent to 1453.64, recovering from the biggest three-week loss since February 2003. The Dow Jones Industrial Average rose 0.4 percent to 13,239.54. The Nasdaq Composite Index climbed 1.3 percent to 2544.89.
The yield on the benchmark 10-year U.S. Treasury note rose 0.11 percentage point to 4.80 percent this week as the Fed joined central banks in Europe, Japan, Australia and Canada in attempting to prevent a credit crunch.
Stocks tumbled on Aug. 9, with the S&P 500 slumping the most since February, as subprime mortgage contagion and hedge fund losses halted a three-day rally.
Manic, Depressive, Manic
Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc. gained for the week, even after brokerage shares suffered the biggest one-day decline of the almost five-year bull market. Citigroup rose 2.8 percent to $47, JPMorgan climbed 1.4 percent to $44.25 and Goldman advanced 0.5 percent to $180.50.
After the close of trading yesterday, people familiar with Goldman's $8 billion Global Alpha hedge fund said it has lost 26 percent so far this year.
Quantitative hedge funds, including those run by Goldman, Highbridge Capital Management LLC and Tykhe Capital LLC, have lost money as credit spreads widen and volatility jumps, rendering useless their statistical investment models.
``Our market is rapidly swinging from manic to depressive and back to manic in nanosecond moves with each headline acting as a trigger,'' said Frederic Dickson, who manages $17 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.
Fannie Mae Advances
The Chicago Board Options Exchange Volatility Index gained 12 percent to 28.30, the highest since April 2003. Higher readings in the VIX, derived from prices paid for S&P 500 options, indicate traders expect stocks to have bigger price swings. The VIX has risen five straight weeks.
Shares of financial companies in the S&P 500 gained 3.7 percent, the most among 10 industries.
Fannie Mae rose 17 percent to $66.46 for the steepest weekly gain in the S&P 500. Freddie Mac added 11 percent to $61.95. Investors speculated that the regulator for the two largest U.S. home-loan companies would lift a cap on the home loan assets they can own, helping pour more money into the mortgage market.
After the close of trading yesterday, the Office of Federal Housing Enterprise Oversight rejected requests by the government-chartered companies. ``We are not authorizing any significant changes at this time,'' the regulator said.
Home Depot Inc. fell for the fourth consecutive week, losing 0.8 percent to $35.92. The world's largest home- improvement retailer may have to accept a lower price for the contractor-supply unit it agreed to sell to buyout firms for $10.3 billion, forcing it to scale back a stock repurchase plan.
Merrill Lynch Gains
Merrill Lynch & Co. added 5.8 percent to $74.12. UBS AG raised its recommendation for the stock to ``buy'' from ``neutral'' and said any possible losses in Merrill's credit business have already been priced into the stock.
Polo Ralph Lauren Corp. fell 11 percent to $77.40, the biggest drop among S&P 500 members. The designer of Chaps and Club Monaco clothing cut its annual forecast for the second time this year. The stock is unchanged for the year.
Investors will get clues next week on the health of the U.S. economy. Retail sales rose last month, signaling that a deepening real-estate slump and elevated food and fuel costs are slowing rather than stopping consumers, economists said before a government report.
Purchases rose 0.2 percent after dropping 0.9 percent in May, according to the median estimate in a Bloomberg News survey before a Commerce Department report on Aug. 13. Other reports may show prices increased in July, according to the survey.
Friday, August 10, 2007
Investors Trim Bets on ECB, BOE Rate Increases
Investors reduced bets on interest rate increases by the European Central Bank and the Bank of England after a credit crunch forced central banks to provide emergency cash.
Investors see a 65 percent chance the ECB will raise interest rates in September, down from 90 percent on Aug. 8, futures trading shows. In the U.K., traders see an 88 percent chance of another rate increase this year after betting on the possibility of two more moves on Aug. 8.
The ECB and its counterparts around the world injected extra money into markets for a second day to assuage losses stemming from a U.S. real-estate slump. Traders' bets may reflect predictions that policy makers, who have downplayed the credit crunch in public by saying their focus is on inflation, will scale back plans to raise borrowing costs.
``It looks as if we have now reached the top of the interest rate cycle,'' said Eunan King, an economist at NCB Stockbrokers in Dublin. ``The ECB and the Bank of England may have to find a way to backtrack on their signaled rate hikes, unless the current turmoil in financial markets calms.''
The Frankfurt-based ECB today loaned 61 billion euros ($83.3 billion) after yesterday's 94.8 billion euros, which was the largest amount in a single so-called ``fine-tuning'' operation in the bank's nine-year history, exceeding the 69.3 billion euros given on Sept. 12, 2001, the day after the terror attacks on New York.
BOJ, Fed Follow
Other central banks followed. The BOJ added 1 trillion yen ($8.5 billion) today and the Reserve Bank of Australia lent $4.2 billion, the most in more than three years. The Fed added $24 billion in temporary reserves yesterday, the most since April. Central banks in Canada, Norway and Switzerland also injected money into the financial system and countries including Denmark, Indonesia and South Korea said they're ready to provide cash.
The Bank of England has yet to take any unusual measure to add liquidity to markets. The so-called London interbank offered rate banks charge each other for dollars climbed to 5.96 percent, the highest since January 2001, from 5.86 percent yesterday.
``People are more and more reluctant to lend money,'' said Gilles Moec, a senior economist at Bank of America in London. ``What we've seen shows that there was a liquidity squeeze in the system.''
BNP Paribas
BNP Paribas yesterday stopped investors withdrawing from funds with assets totaling 2 billion euros because it couldn't find prices to value their holdings after the sell-off in credit markets. Default rates on home loans to people with poor credit, known as subprime mortgages, are at a 10-year high and American Home Mortgage Investment Corp. this week became the second-biggest U.S. home lender to file for bankruptcy.
For now, policy makers around the world have refused to shift their emphasis from fighting inflation. Bank of England Governor Mervyn King said Aug. 8 he's optimistic turmoil in credit markets won't derail the economy or financial markets. ECB President Jean- Claude Trichet on Aug. 2 called it a ``period of nervousness'' with a process of ``normalization of the appreciation of risks.''
Australia's central bank on Aug. 8 raised its benchmark rate a quarter point to 6.25 percent, the highest in almost 11 years, and Governor Glenn Stevens said world financial ructions haven't ``significantly'' changed the economic outlook.
``I don't think this will change central bankers' views on where they want to take rates,'' said Gavin Redknap, an economist at Standard Chartered Bank in London.
Faster Growth
Faster economic growth in Europe, Japan and emerging markets including China may help offset a U.S. slowdown, the International Monetary Fund said July 25. The Washington-based fund expects the global economy to expand 5.2 percent this year and next instead of the 4.9 percent projected in April.
``Granted, we don't know what the long-term implications for the economy are,'' said Kenneth Wattret, chief euro-region economist at BNP Paribas in London. ``But I would argue that in the short term they are quite limited.''
Trichet has already signaled the bank will raise rates further next month, calling for ``strong vigilance'' on inflation, language he used to flag all eight increases in the benchmark to a six-year high of 4 percent since late 2005.
Investors expect the ECB to keep its key rate unchanged beyond September, futures trading shows. The implied rate on the three-month Euribor contract for December settlement dropped to 4.33 percent today from 4.46 percent yesterday. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999.
U.K., Japan
In the U.K., the implied rate on the December interest-rate futures contract fell 10 basis points today to 6.09 percent, down from 6.23 percent two days ago. The Bank of England has raised its benchmark bank rate five times in the past year to 5.75 percent.
In Japan, policy makers may delay raising the 0.5 percent overnight rate, the lowest among major economies. Investors today saw a 36 percent chance of an increase at the Aug. 23 board meeting, according to Credit Suisse Group calculations based on the exchange of interest payments. That's down from 65 percent yesterday.
``For now, we need to stay calm and that's what central banks will do,'' said Standard Chartered's Redknap. ``At the most, they will delay their moves.''
Investors see a 65 percent chance the ECB will raise interest rates in September, down from 90 percent on Aug. 8, futures trading shows. In the U.K., traders see an 88 percent chance of another rate increase this year after betting on the possibility of two more moves on Aug. 8.
The ECB and its counterparts around the world injected extra money into markets for a second day to assuage losses stemming from a U.S. real-estate slump. Traders' bets may reflect predictions that policy makers, who have downplayed the credit crunch in public by saying their focus is on inflation, will scale back plans to raise borrowing costs.
``It looks as if we have now reached the top of the interest rate cycle,'' said Eunan King, an economist at NCB Stockbrokers in Dublin. ``The ECB and the Bank of England may have to find a way to backtrack on their signaled rate hikes, unless the current turmoil in financial markets calms.''
The Frankfurt-based ECB today loaned 61 billion euros ($83.3 billion) after yesterday's 94.8 billion euros, which was the largest amount in a single so-called ``fine-tuning'' operation in the bank's nine-year history, exceeding the 69.3 billion euros given on Sept. 12, 2001, the day after the terror attacks on New York.
BOJ, Fed Follow
Other central banks followed. The BOJ added 1 trillion yen ($8.5 billion) today and the Reserve Bank of Australia lent $4.2 billion, the most in more than three years. The Fed added $24 billion in temporary reserves yesterday, the most since April. Central banks in Canada, Norway and Switzerland also injected money into the financial system and countries including Denmark, Indonesia and South Korea said they're ready to provide cash.
The Bank of England has yet to take any unusual measure to add liquidity to markets. The so-called London interbank offered rate banks charge each other for dollars climbed to 5.96 percent, the highest since January 2001, from 5.86 percent yesterday.
``People are more and more reluctant to lend money,'' said Gilles Moec, a senior economist at Bank of America in London. ``What we've seen shows that there was a liquidity squeeze in the system.''
BNP Paribas
BNP Paribas yesterday stopped investors withdrawing from funds with assets totaling 2 billion euros because it couldn't find prices to value their holdings after the sell-off in credit markets. Default rates on home loans to people with poor credit, known as subprime mortgages, are at a 10-year high and American Home Mortgage Investment Corp. this week became the second-biggest U.S. home lender to file for bankruptcy.
For now, policy makers around the world have refused to shift their emphasis from fighting inflation. Bank of England Governor Mervyn King said Aug. 8 he's optimistic turmoil in credit markets won't derail the economy or financial markets. ECB President Jean- Claude Trichet on Aug. 2 called it a ``period of nervousness'' with a process of ``normalization of the appreciation of risks.''
Australia's central bank on Aug. 8 raised its benchmark rate a quarter point to 6.25 percent, the highest in almost 11 years, and Governor Glenn Stevens said world financial ructions haven't ``significantly'' changed the economic outlook.
``I don't think this will change central bankers' views on where they want to take rates,'' said Gavin Redknap, an economist at Standard Chartered Bank in London.
Faster Growth
Faster economic growth in Europe, Japan and emerging markets including China may help offset a U.S. slowdown, the International Monetary Fund said July 25. The Washington-based fund expects the global economy to expand 5.2 percent this year and next instead of the 4.9 percent projected in April.
``Granted, we don't know what the long-term implications for the economy are,'' said Kenneth Wattret, chief euro-region economist at BNP Paribas in London. ``But I would argue that in the short term they are quite limited.''
Trichet has already signaled the bank will raise rates further next month, calling for ``strong vigilance'' on inflation, language he used to flag all eight increases in the benchmark to a six-year high of 4 percent since late 2005.
Investors expect the ECB to keep its key rate unchanged beyond September, futures trading shows. The implied rate on the three-month Euribor contract for December settlement dropped to 4.33 percent today from 4.46 percent yesterday. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999.
U.K., Japan
In the U.K., the implied rate on the December interest-rate futures contract fell 10 basis points today to 6.09 percent, down from 6.23 percent two days ago. The Bank of England has raised its benchmark bank rate five times in the past year to 5.75 percent.
In Japan, policy makers may delay raising the 0.5 percent overnight rate, the lowest among major economies. Investors today saw a 36 percent chance of an increase at the Aug. 23 board meeting, according to Credit Suisse Group calculations based on the exchange of interest payments. That's down from 65 percent yesterday.
``For now, we need to stay calm and that's what central banks will do,'' said Standard Chartered's Redknap. ``At the most, they will delay their moves.''
Bernanke Was Wrong: Subprime Contagion Is Spreading
Federal Reserve Chairman Ben S. Bernanke was wrong.
So were U.S. Treasury Secretary Henry Paulson and Merrill Lynch & Co. Chief Executive Officer Stanley O'Neal.
The subprime mortgage industry's problems were contained, they all said. It turns out that the turmoil was contagious.
The $2 trillion market for mortgages not backed by government- sponsored agencies is at a standstill. That's just the beginning. Other types of mortgages are suffering. So are firms and banks that package the debt for investors. The ripples were felt in Europe and Asia, where central banks offered cash to banks amid a credit crunch. And some corporations, from countertop makers to railroads, are blaming the mortgage meltdown and housing slump for earnings that fell short of analysts' estimates.
Even a mobile-phone company, Dallas-based MetroPCS Communications Inc., says it's feeling the pinch from customers facing foreclosure. And experts such as William Ford, former president of the Federal Reserve Bank of Atlanta, say the chance of a recession is growing.
``Housing created a lot of ancillary economic activity and jobs, and now we are in the reverse process,'' says Paul Kasriel, chief economist at Northern Trust Corp. in Chicago and a former Fed economist.
The European Central Bank today made a second loan to banks to alleviate a money shortage sparked by concerns over investments in U.S. mortgages. Today's loan of 61.05 billion euros ($83.4 billion) brings the two-day total of money lent to 155.85 billion euros ($212.9 billion).
The ECB's unprecedented move followed the freezing of three funds managed by BNP Paribas, France's largest bank, because the bank couldn't calculate how much the funds' holdings were worth due to a lack of buyers.
Today, the Bank of Japan made similar moves to supply cash.
`Spreading to Banks'
``The subprime mess is now spreading to banks,'' says Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. ``A lot of international banks, especially those in Europe, did invest a lot in the collateralized debt markets, especially the subprime situation here in the U.S., so they're suffering.''
Peter Lynch, chairman of private equity fund Prime Active Capital Plc in Dublin, said the ECB was ``treating this like an emergency.''
Bernanke told Congress on March 28 that subprime defaults were ``likely to be contained.'' The Fed chief, who declined to comment for this story, changed his assessment last month.
On July 18, he told Congress that ``rising delinquencies and foreclosures are creating personal, economic and social distress for many homeowners and communities -- problems that likely will get worse before they get better.''
Paulson Comment
Paulson said June 20 that subprime fallout ``will not affect the economy overall.''
This week on CNBC, he provided a less definitive assessment, saying that markets have been ``unsettled largely because of disruption in the subprime space.''
``We've had a major correction in that housing sector,'' Paulson said. ``It will take a while for the impact of that to ripple through the economy as mortgages reset.''
O'Neal on June 27 called subprime defaults ``reasonably well contained.'' Merrill spokeswoman Jessica Oppenheim said this week that the company is confident his words accurately reflected the market at the time. O'Neal declined to comment.
Among the other executives joining the chorus was Bank of America Corp. CEO Kenneth Lewis, who said June 20 that the housing slump was just about over.
``We're seeing the worst of it,'' Lewis said.
`Broader Fallout'
Within the week, he was contradicted by a team of Bank of America analysts, who called losses in the mortgage market the ``tip of the iceberg'' and predicted ``broader fallout'' from adjustable-rate loans resetting at higher interest rates.
David Olson, president of Wholesale Access Mortgage Research & Consulting Inc. in Columbia, Maryland, is blunt about his current outlook. He says a third of the U.S. home-loan industry will disappear.
With last week's collapse of American Home Mortgage Investment Corp., which sold $58.9 billion of loans to borrowers in 2006, the subprime contagion spread to so-called Alt-A mortgages, which are available to borrowers with good credit who don't want to verify their income with tax forms or pay stubs.
American Home couldn't find Wall Street firms willing to buy these mortgages and package them into securities because of rising defaults. The Melville, New York-based company filed for bankruptcy Aug. 6.
``This is just the first, because all the Alt-A guys are going to go,'' Olson says. ``This is the most difficult mortgage environment I've seen in my 40 years in the business.''
This grade of loan made up 13 percent of all mortgages last year, according to Inside Mortgage Finance. Combined with subprime, they account for a third of the market. Both types of loan are rapidly disappearing.
Housing Prices
U.S. housing prices will fall this year, the first annual decline since the Great Depression of the 1930s, according to the National Association of Realtors, based in Chicago.
The inventory of unsold U.S. homes in May was the largest since the realtors group started counting them in 1999. Defaults and foreclosures may increase because about $1 trillion of payments on adjustable-rate mortgages are scheduled to rise this year, hitting a peak in October, according to Credit Suisse.
Housing and related industries generate almost a quarter of U.S. gross domestic product, according to the Joint Center for Housing Studies at Harvard University in Cambridge, Massachusetts.
The mortgage fallout ``ensures the economy will grow well below its potential through the remainder of the year and next,'' says Mark Zandi, chief economist for Moody's Economy.com in West Chester, Pennsylvania, who predicts GDP growth of 2.5 percent this quarter and next. Second-quarter growth was 3.4 percent.
Lowered Forecast
Demand for loans to bundle into mortgage-backed securities came to a halt, crippling the subprime and Alt-A lending businesses. The exception was prime loans conforming to rules set by the biggest government-chartered agencies, Fannie Mae in Washington and Freddie Mac in McLean, Virginia.
Doug Duncan, the Mortgage Bankers Association's chief economist, says he's lowering the group's forecast on the total dollar value of new U.S. mortgages.
The association said July 12 that the value of mortgages sold would decline 7 percent this year to $2.6 trillion and 18 percent in 2008 to $2.3 trillion, from $2.8 trillion last year.
``Most of the market has shut down,'' Duncan says. ``This is not a normal event.''
Peter Hebert, a broker with Houston-based Allied Home Mortgage Capital Corp. in Ellicott City, Maryland, says it's getting tougher to find mortgages for his clients.
`Use a Credit Card'
For one self-employed borrower in Pennsylvania, with a 626 credit score, just above what's considered subprime, Hebert says he contacted three lenders. Last year, the borrower would have qualified for a 7.99 percent loan, Hebert says. This week, he received one offer for a 10.5 percent loan with a three-year prepayment penalty, meaning that if the borrower refinanced during that time he would be required to make six months of payments to the original lender.
``It would have been cheaper to use a credit card to pay for his house,'' Hebert says.
When it came time to lock in the rate, the lender pulled out, Hebert says.
``It was a hard thing to do, an emotional thing, to tell my borrower he was turned down for a rate that was high to begin with,'' he says.
Margin Calls
The market is shifting, too, for firms that package loans into securities and sell them to investors. About $11.2 billion of private-label, or ``non-agency'' mortgage bonds -- those not guaranteed by Fannie Mae, Freddie Mac or Washington-based Ginnie Mae -- were sold in July, according to Michael D. Youngblood, portfolio manager and analyst at Friedman Billings Ramsey Group Inc. in Arlington, Virginia. That's down from $41.6 billion in June and from a monthly average of $86.6 billion this year.
Luminent Mortgage Capital Inc., a San Francisco-based firm that packages mortgages for investors, cited ``a significant increase in margin calls'' for canceling its dividend.
Such firms borrowed money from banks to buy loans to create securities. When investors stopped buying the securities, the banks that made the original loan demanded their money back.
Many such firms that package securities will leave the business this year, says Guy Cecala, publisher of Inside Mortgage Finance.
``If you're an investment bank and you're losing stock value every week because of your connection to the mortgage industry, isn't it easier to cut ties?'' Cecala says.
Bank Stocks
Shares of the top 12 U.S. banks have declined 17 percent since June 1.
Yesterday, Countrywide Financial Corp., the biggest U.S. mortgage lender, said in a filing that ``unprecedented disruptions'' in the U.S. home-loan market may crimp its ability to lend. The company said it may be forced to retain more of the loans it makes to homeowners rather than selling them to investors and that it may have difficulty obtaining financing from its creditors.
Corporations outside the mortgage industry are taking a hit, too, as housing slumps. Burlington Northern Santa Fe Corp., the second-biggest U.S. railroad, said it shipped less lumber for homebuilding in the second quarter. DuPont Chief Executive Officer Charles O. Holliday Jr. said July 24 that the housing recession eroded demand for Tyvek weather barriers, used in 40 percent of new homes, and Corian countertops.
Steak n Shake
Steak n Shake Co., an Indianapolis-based fast-food chain, blamed a 4.3 percent decline in same-store sales in the third quarter partly on credit markets. ``Some segments of Steak n Shake consumers continue to be sensitive to high gasoline prices and mortgage interest rates,'' the company said in a statement yesterday.
Shares of MetroPCS, a prepaid mobile-phone service, fell 20 percent Aug. 3 after second-quarter sales missed analyst estimates. Chief Financial Officer J. Braxton Carter blamed customers' ``short-term economic disruptions,'' such as defaulting on their subprime loans.
As for the faulty initial predictions by Bernanke and others, go easy on them, says Josh Rosner, managing director at the New York investment research firm Graham Fisher & Co.
``There's no model for what's happening now in the housing and mortgage industries,'' Rosner says. ``We have to give Bernanke a chance. He is a reasoned and traditional central banker. He knows how to manage crazies.''
So were U.S. Treasury Secretary Henry Paulson and Merrill Lynch & Co. Chief Executive Officer Stanley O'Neal.
The subprime mortgage industry's problems were contained, they all said. It turns out that the turmoil was contagious.
The $2 trillion market for mortgages not backed by government- sponsored agencies is at a standstill. That's just the beginning. Other types of mortgages are suffering. So are firms and banks that package the debt for investors. The ripples were felt in Europe and Asia, where central banks offered cash to banks amid a credit crunch. And some corporations, from countertop makers to railroads, are blaming the mortgage meltdown and housing slump for earnings that fell short of analysts' estimates.
Even a mobile-phone company, Dallas-based MetroPCS Communications Inc., says it's feeling the pinch from customers facing foreclosure. And experts such as William Ford, former president of the Federal Reserve Bank of Atlanta, say the chance of a recession is growing.
``Housing created a lot of ancillary economic activity and jobs, and now we are in the reverse process,'' says Paul Kasriel, chief economist at Northern Trust Corp. in Chicago and a former Fed economist.
The European Central Bank today made a second loan to banks to alleviate a money shortage sparked by concerns over investments in U.S. mortgages. Today's loan of 61.05 billion euros ($83.4 billion) brings the two-day total of money lent to 155.85 billion euros ($212.9 billion).
The ECB's unprecedented move followed the freezing of three funds managed by BNP Paribas, France's largest bank, because the bank couldn't calculate how much the funds' holdings were worth due to a lack of buyers.
Today, the Bank of Japan made similar moves to supply cash.
`Spreading to Banks'
``The subprime mess is now spreading to banks,'' says Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. ``A lot of international banks, especially those in Europe, did invest a lot in the collateralized debt markets, especially the subprime situation here in the U.S., so they're suffering.''
Peter Lynch, chairman of private equity fund Prime Active Capital Plc in Dublin, said the ECB was ``treating this like an emergency.''
Bernanke told Congress on March 28 that subprime defaults were ``likely to be contained.'' The Fed chief, who declined to comment for this story, changed his assessment last month.
On July 18, he told Congress that ``rising delinquencies and foreclosures are creating personal, economic and social distress for many homeowners and communities -- problems that likely will get worse before they get better.''
Paulson Comment
Paulson said June 20 that subprime fallout ``will not affect the economy overall.''
This week on CNBC, he provided a less definitive assessment, saying that markets have been ``unsettled largely because of disruption in the subprime space.''
``We've had a major correction in that housing sector,'' Paulson said. ``It will take a while for the impact of that to ripple through the economy as mortgages reset.''
O'Neal on June 27 called subprime defaults ``reasonably well contained.'' Merrill spokeswoman Jessica Oppenheim said this week that the company is confident his words accurately reflected the market at the time. O'Neal declined to comment.
Among the other executives joining the chorus was Bank of America Corp. CEO Kenneth Lewis, who said June 20 that the housing slump was just about over.
``We're seeing the worst of it,'' Lewis said.
`Broader Fallout'
Within the week, he was contradicted by a team of Bank of America analysts, who called losses in the mortgage market the ``tip of the iceberg'' and predicted ``broader fallout'' from adjustable-rate loans resetting at higher interest rates.
David Olson, president of Wholesale Access Mortgage Research & Consulting Inc. in Columbia, Maryland, is blunt about his current outlook. He says a third of the U.S. home-loan industry will disappear.
With last week's collapse of American Home Mortgage Investment Corp., which sold $58.9 billion of loans to borrowers in 2006, the subprime contagion spread to so-called Alt-A mortgages, which are available to borrowers with good credit who don't want to verify their income with tax forms or pay stubs.
American Home couldn't find Wall Street firms willing to buy these mortgages and package them into securities because of rising defaults. The Melville, New York-based company filed for bankruptcy Aug. 6.
``This is just the first, because all the Alt-A guys are going to go,'' Olson says. ``This is the most difficult mortgage environment I've seen in my 40 years in the business.''
This grade of loan made up 13 percent of all mortgages last year, according to Inside Mortgage Finance. Combined with subprime, they account for a third of the market. Both types of loan are rapidly disappearing.
Housing Prices
U.S. housing prices will fall this year, the first annual decline since the Great Depression of the 1930s, according to the National Association of Realtors, based in Chicago.
The inventory of unsold U.S. homes in May was the largest since the realtors group started counting them in 1999. Defaults and foreclosures may increase because about $1 trillion of payments on adjustable-rate mortgages are scheduled to rise this year, hitting a peak in October, according to Credit Suisse.
Housing and related industries generate almost a quarter of U.S. gross domestic product, according to the Joint Center for Housing Studies at Harvard University in Cambridge, Massachusetts.
The mortgage fallout ``ensures the economy will grow well below its potential through the remainder of the year and next,'' says Mark Zandi, chief economist for Moody's Economy.com in West Chester, Pennsylvania, who predicts GDP growth of 2.5 percent this quarter and next. Second-quarter growth was 3.4 percent.
Lowered Forecast
Demand for loans to bundle into mortgage-backed securities came to a halt, crippling the subprime and Alt-A lending businesses. The exception was prime loans conforming to rules set by the biggest government-chartered agencies, Fannie Mae in Washington and Freddie Mac in McLean, Virginia.
Doug Duncan, the Mortgage Bankers Association's chief economist, says he's lowering the group's forecast on the total dollar value of new U.S. mortgages.
The association said July 12 that the value of mortgages sold would decline 7 percent this year to $2.6 trillion and 18 percent in 2008 to $2.3 trillion, from $2.8 trillion last year.
``Most of the market has shut down,'' Duncan says. ``This is not a normal event.''
Peter Hebert, a broker with Houston-based Allied Home Mortgage Capital Corp. in Ellicott City, Maryland, says it's getting tougher to find mortgages for his clients.
`Use a Credit Card'
For one self-employed borrower in Pennsylvania, with a 626 credit score, just above what's considered subprime, Hebert says he contacted three lenders. Last year, the borrower would have qualified for a 7.99 percent loan, Hebert says. This week, he received one offer for a 10.5 percent loan with a three-year prepayment penalty, meaning that if the borrower refinanced during that time he would be required to make six months of payments to the original lender.
``It would have been cheaper to use a credit card to pay for his house,'' Hebert says.
When it came time to lock in the rate, the lender pulled out, Hebert says.
``It was a hard thing to do, an emotional thing, to tell my borrower he was turned down for a rate that was high to begin with,'' he says.
Margin Calls
The market is shifting, too, for firms that package loans into securities and sell them to investors. About $11.2 billion of private-label, or ``non-agency'' mortgage bonds -- those not guaranteed by Fannie Mae, Freddie Mac or Washington-based Ginnie Mae -- were sold in July, according to Michael D. Youngblood, portfolio manager and analyst at Friedman Billings Ramsey Group Inc. in Arlington, Virginia. That's down from $41.6 billion in June and from a monthly average of $86.6 billion this year.
Luminent Mortgage Capital Inc., a San Francisco-based firm that packages mortgages for investors, cited ``a significant increase in margin calls'' for canceling its dividend.
Such firms borrowed money from banks to buy loans to create securities. When investors stopped buying the securities, the banks that made the original loan demanded their money back.
Many such firms that package securities will leave the business this year, says Guy Cecala, publisher of Inside Mortgage Finance.
``If you're an investment bank and you're losing stock value every week because of your connection to the mortgage industry, isn't it easier to cut ties?'' Cecala says.
Bank Stocks
Shares of the top 12 U.S. banks have declined 17 percent since June 1.
Yesterday, Countrywide Financial Corp., the biggest U.S. mortgage lender, said in a filing that ``unprecedented disruptions'' in the U.S. home-loan market may crimp its ability to lend. The company said it may be forced to retain more of the loans it makes to homeowners rather than selling them to investors and that it may have difficulty obtaining financing from its creditors.
Corporations outside the mortgage industry are taking a hit, too, as housing slumps. Burlington Northern Santa Fe Corp., the second-biggest U.S. railroad, said it shipped less lumber for homebuilding in the second quarter. DuPont Chief Executive Officer Charles O. Holliday Jr. said July 24 that the housing recession eroded demand for Tyvek weather barriers, used in 40 percent of new homes, and Corian countertops.
Steak n Shake
Steak n Shake Co., an Indianapolis-based fast-food chain, blamed a 4.3 percent decline in same-store sales in the third quarter partly on credit markets. ``Some segments of Steak n Shake consumers continue to be sensitive to high gasoline prices and mortgage interest rates,'' the company said in a statement yesterday.
Shares of MetroPCS, a prepaid mobile-phone service, fell 20 percent Aug. 3 after second-quarter sales missed analyst estimates. Chief Financial Officer J. Braxton Carter blamed customers' ``short-term economic disruptions,'' such as defaulting on their subprime loans.
As for the faulty initial predictions by Bernanke and others, go easy on them, says Josh Rosner, managing director at the New York investment research firm Graham Fisher & Co.
``There's no model for what's happening now in the housing and mortgage industries,'' Rosner says. ``We have to give Bernanke a chance. He is a reasoned and traditional central banker. He knows how to manage crazies.''
Deutsche Bank's DWS Says Fund's Assets Declined 30%
Deutsche Bank AG's DWS unit, Germany's biggest mutual fund company, said the assets in one of its investment funds have fallen by 30 percent since the end of July as subprime mortgage losses roiled credit markets.
Assets in the DWS ABS Fund fell to 2.1 billion euros ($2.9 billion) from 3 billion euros, mostly as a result of client redemptions, DWS spokeswoman Anke Hallmann said today. The fund, registered in Luxembourg, has no investments in U.S. subprime- related debt and hasn't halted withdrawals, she said.
Investors are shunning bonds backed by home loans after late mortgage payments by U.S. borrowers with poor credit histories rose to the highest since 2002. BNP Paribas SA, France's biggest bank, contributed to financial market turmoil yesterday by halting withdrawals from three investment funds because it couldn't value their holdings.
``This could get worse before it gets better,'' said Ben Yearsley, a financial adviser at Hargreaves Lansdown in Bristol, England. ``There could be many more problems yet to come for bond funds.''
Cominvest, Commerzbank AG's fund unit, isn't limiting redemptions from any funds in the face of withdrawals from three asset-backed security investments, Chief Investment Officer Ingo Mainert said today in a statement. Cominvest isn't directly invested in the U.S. subprime market, he said.
Deutsche Bank's shares fell 3.28 euros, or 3.3 percent, to 95.32 euros by 3:22 p.m. in Frankfurt, after falling as much as 7 percent. The 65-member Bloomberg Europe Banks and Financial Services Index declined 3.5 percent.
Deutsche Bank last year was criticized by politicians and competitors for freezing its German open real-estate fund rather than allowing investors to make withdrawals. The bank froze the fund in December 2005, citing the need to revalue properties, and later devalued it by 2.4 percent before reopening and selling real estate to make up for the lost returns.
Dutch investment bank NIBC Holding NV said yesterday that it lost at least 137 million euros on U.S. subprime investments this year.
Assets in the DWS ABS Fund fell to 2.1 billion euros ($2.9 billion) from 3 billion euros, mostly as a result of client redemptions, DWS spokeswoman Anke Hallmann said today. The fund, registered in Luxembourg, has no investments in U.S. subprime- related debt and hasn't halted withdrawals, she said.
Investors are shunning bonds backed by home loans after late mortgage payments by U.S. borrowers with poor credit histories rose to the highest since 2002. BNP Paribas SA, France's biggest bank, contributed to financial market turmoil yesterday by halting withdrawals from three investment funds because it couldn't value their holdings.
``This could get worse before it gets better,'' said Ben Yearsley, a financial adviser at Hargreaves Lansdown in Bristol, England. ``There could be many more problems yet to come for bond funds.''
Cominvest, Commerzbank AG's fund unit, isn't limiting redemptions from any funds in the face of withdrawals from three asset-backed security investments, Chief Investment Officer Ingo Mainert said today in a statement. Cominvest isn't directly invested in the U.S. subprime market, he said.
Deutsche Bank's shares fell 3.28 euros, or 3.3 percent, to 95.32 euros by 3:22 p.m. in Frankfurt, after falling as much as 7 percent. The 65-member Bloomberg Europe Banks and Financial Services Index declined 3.5 percent.
Deutsche Bank last year was criticized by politicians and competitors for freezing its German open real-estate fund rather than allowing investors to make withdrawals. The bank froze the fund in December 2005, citing the need to revalue properties, and later devalued it by 2.4 percent before reopening and selling real estate to make up for the lost returns.
Dutch investment bank NIBC Holding NV said yesterday that it lost at least 137 million euros on U.S. subprime investments this year.
Investment funds hit by volatility
Investment funds on both sides of the Atlantic were affected by recent market turmoil on Thursday. BNP Paribas shocked European markets by freezing three funds exposed to the stumbling US subprime mortgage market.
Goldman Sachs and Renaissance Technologies were also affected as performance at quantitative hedge funds reflected volatile markets.
Goldman Sachs and Renaissance Technologies were also affected as performance at quantitative hedge funds reflected volatile markets.
Dow bounces back in big way
Wall Street surged higher in a volatile session Monday, offsetting the losses it incurred Friday but showing more fractiousness than conviction in an advance that lifted the Dow Jones industrials 286 points, its biggest gain in nearly five years.
Investors tried to balance their concerns about the availability of credit with hopes that Tuesday's today's Federal Reserve meeting will be a calming influence after two weeks of frenetic trading on Wall Street. In a day devoid of economic news and with few earnings reports, investors early in the session seemed to avoid making big bets, though stocks gained steam after midday and made their biggest advance in the final two hours.
Fed policy makers are widely expected to hold the nation's benchmark rate steady at 5.25 percent; as usual, the greater concern is with the Fed's economic assessment statement. This time, investors will be looking to see what the Fed says about credit.
The Dow's biggest single-session point gain since October 2002 and its largest percentage gain since June 2003 follows a number of choppy sessions in which investor sentiment has vacillated between fear about lending to occasional bursts of optimism.sessions have seen swings greater than 100 points in the Dow. The erratic activity has followed the stock market's high seen July 19, when the Dow closed above 14,000 for the first time and the Standard & Poor's 500 index also had a record close.
"I really wouldn't read too much into it," said Charles Norton, principal and portfolio manager at GNI Capital Inc., referring to Monday's rally. "You'd like to see it be led by the market leaders, not the sort of stuff bouncing off the bottom that's been beaten up," he said referring to financial stocks and regional banks.
The Dow soared 286.87, or 2.18 percent, to 13,468.78. The blue chips closed near their highs after zigzagging throughout much of the session. On Friday, the Dow fell 281 points. Broader stock indicators also rebounded. The S&P 500 index rose 34.61, or 2.42 percent, to 1,467.67. The Nasdaq composite index rose 36.08, or 1.44 percent, to 2,547.33.
The rally was not as widespread as the rise in the major indexes suggested, though. Advancing issues outnumbered decliners by about 6-to-5 on the New York Stock Exchange, where consolidated volume came to a very heavy 5.09 billion shares, compared with 4.54 billion shares traded Friday.
Norton noted that the session's volume had been about 20 percent to 25 percent ahead of that of Friday's in the early going, but volume ended up only 8.5 percent ahead of Friday by the close. He noted that investors typically like to see volume accelerate through the day in a rising market, as such moves can suggest widespread confidence in the advance.
"I think a lot of it has to do with people sort of squaring up before the Fed on the short side," Norton said, referring to the market's move higher and investors who sell stocks "short," betting that they will fall. Such investors can be forced to buy stock to cover their positions if they believe the market is poised to move higher.
Falling oil also gave a boost to stocks. Light, sweet crude futures tumbled by $3.42 to $72.06 per barrel on the New York Mercantile Exchange. Gold prices fell, while the dollar moved in a mixed range against other major currencies.
Stocks have endured a volatile couple of weeks as troubles in the global credit markets - rooted in the rise of subprime loan defaults in the U.S. - have unfolded. Some investors are concerned that bad subprime loans, those made to borrowers with poor credit, remain on the books of some financial companies and have yet to be disclosed.
Aaron Gurwitz, co-head of portfolio strategy at Lehman Brothers Investment Management, said that while he would be surprised if the Fed were to adjust short-term interest rates, the central bank could indicate it stands ready to provide liquidity should credit markets seize up. He noted, however, that the repricing of credit that's occurring in the markets isn't something the Fed would likely want to stand in the way of.
"I think it's a short-term problem," he said. "I think that the uncertainty in the credit markets, the worries about a liquidity crisis that has to be dealt with, is a risk to the financial markets - but I think it's a long way from being a risk to the macro economy or the ability of most companies to make money."
Bond prices fell after rising during Friday's stock market pullback. The yield on the benchmark 10-year Treasury note rose to 4.74 percent from 4.68 percent late Friday. Bond prices move opposite yields.
Some of the session's major corporate news related to subprime loans and credit concerns. Bear Stearns Cos. co-President and co-Chief Operating Officer Warren Spector resigned after the collapse of two hedge funds that invested in risky mortgage-backed securities. Spector was in charge of the investment bank's asset management business. Bear Stearns fell sharply on the news but then recovered after a Standard & Poor's managing director said the market overreacted when the agency lowered its long-term outlook on the financial company.
Bear Stearns rose $5.46, or 5 percent, to $113.81, after falling below $100 briefly.
Merrill Lynch & Co. rose $4.50, or 6.4 percent, to $74.55 after a UBS analyst upgraded the nation's largest brokerage. Analyst Glenn Schorr contends the problems in the subprime mortgage and credit businesses and the potential ripple effects are now baked into the share price, which had been down nearly 25 percent for the year.
Financial stocks that gained included, Dow component Citigroup Inc., which finished up $2.63, or 5.8 percent, at $48.35 after trading as low as $45.02 - below its 52-week low of $45.63. Meanwhile, SunTrust Banks Inc. rose $4.55, or 6 percent, to $80.
In other corporate news, Cooper Tire & Rubber Co. on Monday said it swung to a second-quarter profit after sales jumped 17 percent, driven by higher prices in North America and strong growth in Europe and Asia. The tire maker's results beat Wall Street's expectations. Cooper advanced $1.07, or 5.1 percent, to $22.25.
The Russell 2000 index of smaller companies rose 10.97, or 1.45 percent, to 766.39.
In trading abroad, London's FTSE 100 fell 0.57 percent, Germany's DAX index rose 0.12 percent and France's CAC-40 fell 1.16 percent.
The often volatile Shanghai Composite Index rose 1.5 percent to a record 4628.11. Japan's Nikkei stock average dropped 0.39 percent.
Investors tried to balance their concerns about the availability of credit with hopes that Tuesday's today's Federal Reserve meeting will be a calming influence after two weeks of frenetic trading on Wall Street. In a day devoid of economic news and with few earnings reports, investors early in the session seemed to avoid making big bets, though stocks gained steam after midday and made their biggest advance in the final two hours.
Fed policy makers are widely expected to hold the nation's benchmark rate steady at 5.25 percent; as usual, the greater concern is with the Fed's economic assessment statement. This time, investors will be looking to see what the Fed says about credit.
The Dow's biggest single-session point gain since October 2002 and its largest percentage gain since June 2003 follows a number of choppy sessions in which investor sentiment has vacillated between fear about lending to occasional bursts of optimism.sessions have seen swings greater than 100 points in the Dow. The erratic activity has followed the stock market's high seen July 19, when the Dow closed above 14,000 for the first time and the Standard & Poor's 500 index also had a record close.
"I really wouldn't read too much into it," said Charles Norton, principal and portfolio manager at GNI Capital Inc., referring to Monday's rally. "You'd like to see it be led by the market leaders, not the sort of stuff bouncing off the bottom that's been beaten up," he said referring to financial stocks and regional banks.
The Dow soared 286.87, or 2.18 percent, to 13,468.78. The blue chips closed near their highs after zigzagging throughout much of the session. On Friday, the Dow fell 281 points. Broader stock indicators also rebounded. The S&P 500 index rose 34.61, or 2.42 percent, to 1,467.67. The Nasdaq composite index rose 36.08, or 1.44 percent, to 2,547.33.
The rally was not as widespread as the rise in the major indexes suggested, though. Advancing issues outnumbered decliners by about 6-to-5 on the New York Stock Exchange, where consolidated volume came to a very heavy 5.09 billion shares, compared with 4.54 billion shares traded Friday.
Norton noted that the session's volume had been about 20 percent to 25 percent ahead of that of Friday's in the early going, but volume ended up only 8.5 percent ahead of Friday by the close. He noted that investors typically like to see volume accelerate through the day in a rising market, as such moves can suggest widespread confidence in the advance.
"I think a lot of it has to do with people sort of squaring up before the Fed on the short side," Norton said, referring to the market's move higher and investors who sell stocks "short," betting that they will fall. Such investors can be forced to buy stock to cover their positions if they believe the market is poised to move higher.
Falling oil also gave a boost to stocks. Light, sweet crude futures tumbled by $3.42 to $72.06 per barrel on the New York Mercantile Exchange. Gold prices fell, while the dollar moved in a mixed range against other major currencies.
Stocks have endured a volatile couple of weeks as troubles in the global credit markets - rooted in the rise of subprime loan defaults in the U.S. - have unfolded. Some investors are concerned that bad subprime loans, those made to borrowers with poor credit, remain on the books of some financial companies and have yet to be disclosed.
Aaron Gurwitz, co-head of portfolio strategy at Lehman Brothers Investment Management, said that while he would be surprised if the Fed were to adjust short-term interest rates, the central bank could indicate it stands ready to provide liquidity should credit markets seize up. He noted, however, that the repricing of credit that's occurring in the markets isn't something the Fed would likely want to stand in the way of.
"I think it's a short-term problem," he said. "I think that the uncertainty in the credit markets, the worries about a liquidity crisis that has to be dealt with, is a risk to the financial markets - but I think it's a long way from being a risk to the macro economy or the ability of most companies to make money."
Bond prices fell after rising during Friday's stock market pullback. The yield on the benchmark 10-year Treasury note rose to 4.74 percent from 4.68 percent late Friday. Bond prices move opposite yields.
Some of the session's major corporate news related to subprime loans and credit concerns. Bear Stearns Cos. co-President and co-Chief Operating Officer Warren Spector resigned after the collapse of two hedge funds that invested in risky mortgage-backed securities. Spector was in charge of the investment bank's asset management business. Bear Stearns fell sharply on the news but then recovered after a Standard & Poor's managing director said the market overreacted when the agency lowered its long-term outlook on the financial company.
Bear Stearns rose $5.46, or 5 percent, to $113.81, after falling below $100 briefly.
Merrill Lynch & Co. rose $4.50, or 6.4 percent, to $74.55 after a UBS analyst upgraded the nation's largest brokerage. Analyst Glenn Schorr contends the problems in the subprime mortgage and credit businesses and the potential ripple effects are now baked into the share price, which had been down nearly 25 percent for the year.
Financial stocks that gained included, Dow component Citigroup Inc., which finished up $2.63, or 5.8 percent, at $48.35 after trading as low as $45.02 - below its 52-week low of $45.63. Meanwhile, SunTrust Banks Inc. rose $4.55, or 6 percent, to $80.
In other corporate news, Cooper Tire & Rubber Co. on Monday said it swung to a second-quarter profit after sales jumped 17 percent, driven by higher prices in North America and strong growth in Europe and Asia. The tire maker's results beat Wall Street's expectations. Cooper advanced $1.07, or 5.1 percent, to $22.25.
The Russell 2000 index of smaller companies rose 10.97, or 1.45 percent, to 766.39.
In trading abroad, London's FTSE 100 fell 0.57 percent, Germany's DAX index rose 0.12 percent and France's CAC-40 fell 1.16 percent.
The often volatile Shanghai Composite Index rose 1.5 percent to a record 4628.11. Japan's Nikkei stock average dropped 0.39 percent.
Thursday, August 2, 2007
Boyd Gaming's Stock Declines
Shares of Boyd Gaming Corp. declined Wednesday after the casino operator's second-quarter adjusted earnings results missed Wall Street expectations.
The company's income from continuing operations rose to $22.9 million, or 26 cents per share, from $12.4 million, or 14 cents per share.
Excluding various costs, charges and adjustments, adjusted earnings from continuing operations fell to $39.9 million, or 45 cents per share, versus $44.5 million, or 49 cents per share.
Analysts polled by Thomson Financial forecast a profit of 47 cents per share.
Goldman Sachs analyst Steven Kent said in a note to clients that investors might be modestly disappointed by the performance. While Boyd's Las Vegas locals and Midwest/South properties are potentially stabilizing, Borgata in Atlantic City, N.J. was hurt by higher costs and a competitive promotional environment, he said.
Similarly, Jake Fuller of Thomas Weisel Partners LLC said Boyd's results are still being squeezed by Las Vegas and Atlantic City competition.
"Although comparisons get easier in the third through fourth quarters, competition should continue to hurt results in Atlantic City," he wrote in a note.
Shares of Boyd Gaming shed $2.27, or 5.2 percent, to $41.83 in afternoon trading. The stock has traded between $33.10 and $54.22 over the past year.
The company's income from continuing operations rose to $22.9 million, or 26 cents per share, from $12.4 million, or 14 cents per share.
Excluding various costs, charges and adjustments, adjusted earnings from continuing operations fell to $39.9 million, or 45 cents per share, versus $44.5 million, or 49 cents per share.
Analysts polled by Thomson Financial forecast a profit of 47 cents per share.
Goldman Sachs analyst Steven Kent said in a note to clients that investors might be modestly disappointed by the performance. While Boyd's Las Vegas locals and Midwest/South properties are potentially stabilizing, Borgata in Atlantic City, N.J. was hurt by higher costs and a competitive promotional environment, he said.
Similarly, Jake Fuller of Thomas Weisel Partners LLC said Boyd's results are still being squeezed by Las Vegas and Atlantic City competition.
"Although comparisons get easier in the third through fourth quarters, competition should continue to hurt results in Atlantic City," he wrote in a note.
Shares of Boyd Gaming shed $2.27, or 5.2 percent, to $41.83 in afternoon trading. The stock has traded between $33.10 and $54.22 over the past year.
Lehman Buys Brazil Advisory Team
Lehman Brothers has hired Rio Bravo's Brazil advisory team to continue its expansion into the biggest South American economy. Winston Fritsch, formerly the head of Rio Bravo’s corporate origination and corporate finance team, has been appointed md and head of Lehman Brothers Investment Banking, Brazil. Eduardo Langoni and Peter Tilley also joined Lehman as senior vice presidents, reporting to Fritsch. "We looked at a variety of options, from recruiting specific individuals or hiring full teams from competing firms, to buying local advisory boutiques," Udi Margulies, head of LatAm M&A for Lehman tells LatinFinance. Fritsch has been at Rio Bravo since 2003. Previously, he set up Kleinwort Benson’s Brazilian operations as a partner of Kleinwort Benson in 1995, and was president of Dresdner Bank Brazil and Dresdner Kleinwort Brazil from 1996 to 2003. Fritsch was secretary for economic policy at Brazil's finance ministry from 1993 to 1994. Langoni and Tilley were also previously in Dresdner’s Brazil M&A group. The hires come at a time when salaries in dollar terms, especially in equities, are quickly exceeding those of established centers like New York. "It's a very tight market with limited top talent, and several of our competitors and buyside firms are looking to recruit from the same pool," says Margulies. The Rio Bravo deal has been in the works since February.
Wednesday, August 1, 2007
Investors Still Wary Of Wall Street's Credit Risk
Investors are still on guard when it comes to the credit risk of Wall Street, seen by many to be at the epicenter of the collective storm created by faulty home loans and tepid demand for risky corporate debt.
Though the cost of credit protection for such banks as Bear Stearns Cos. (BSC), Lehman Brothers Holding Inc. (LEH), Merrill Lynch & Co. (MER) and Goldman Sachs Group Inc. (GS) has fallen from unprecedented heights last week, levels indicate that investors are still wary.
In fact, derivatives traders have been consistently viewing Bear Stearns as a junk-rated credit for over a week. Earlier this month, Bear told clients in two of its hedge funds that their investments are virtually worthless. The bank is still rated investment-grade by major rating companies.
News that mortgage lender American Home Investment Corp. (AMH) confirmed it is facing serious liquidity issues amid a flood of margin calls from lenders renewed jitters in credit markets Tuesday afternoon, causing some of the banks' implied credit risk to rise again.
The annual cost of protecting a notional amount of $10 million of Bear bonds against a possible default for five years was at $93,000 Tuesday afternoon, according to GFI Group, a New York-based inter-dealer broker, citing credit default swaps levels. At the end of last week, it went as high as $120,000.
Bear's current cost of credit protection is about 350% higher than the $21,000 it cost to buy the same protection at the beginning of the year, according to data from London-based data provider Markit Group.
The costs still imply a credit rating of six notches below the A1 rating that Bear enjoys from Moody's Investors Service, according to Moody's Market Implied Ratings. The trading levels are also indicative of a Ba1 rating, Moody's highest ranking for junk debt. Last week, Lehman Brothers' cost of credit protection also reflected a Ba1 junk rating even though it is rated A1 by Moody's.
Lehman's cost of five-year credit protection for $10 million of bonds was quoted Tuesday afternoon at $86,000 a year, according to GFI. It reached as high as $100,000 last week. The cost of protection for Merrill bonds was recently quoted at $77,000, lower than the $80,000 a year last week, according to GFI. Goldman Sachs Group Inc. (GS) saw its cost of credit protection decline to $73,000 Tuesday, from $80,000 last week.
The surge last week in the cost of credit protection for Wall Street banks was in part driven concerns of further losses due to subprime mortgages gone sour.
Wall Street's role as a debt underwriter is also a source of concern as there is an increasing likelihood that banks will be forced to step up to the plate with funding for debt-laden private buyouts as investors shy away from risky buys.
With over $300 billion in loans and bonds waiting in the wings to be sold in the junk debt market, banks may have to carry at least a portion of that debt on their books, potentially denting profits.
Though the cost of credit protection for such banks as Bear Stearns Cos. (BSC), Lehman Brothers Holding Inc. (LEH), Merrill Lynch & Co. (MER) and Goldman Sachs Group Inc. (GS) has fallen from unprecedented heights last week, levels indicate that investors are still wary.
In fact, derivatives traders have been consistently viewing Bear Stearns as a junk-rated credit for over a week. Earlier this month, Bear told clients in two of its hedge funds that their investments are virtually worthless. The bank is still rated investment-grade by major rating companies.
News that mortgage lender American Home Investment Corp. (AMH) confirmed it is facing serious liquidity issues amid a flood of margin calls from lenders renewed jitters in credit markets Tuesday afternoon, causing some of the banks' implied credit risk to rise again.
The annual cost of protecting a notional amount of $10 million of Bear bonds against a possible default for five years was at $93,000 Tuesday afternoon, according to GFI Group, a New York-based inter-dealer broker, citing credit default swaps levels. At the end of last week, it went as high as $120,000.
Bear's current cost of credit protection is about 350% higher than the $21,000 it cost to buy the same protection at the beginning of the year, according to data from London-based data provider Markit Group.
The costs still imply a credit rating of six notches below the A1 rating that Bear enjoys from Moody's Investors Service, according to Moody's Market Implied Ratings. The trading levels are also indicative of a Ba1 rating, Moody's highest ranking for junk debt. Last week, Lehman Brothers' cost of credit protection also reflected a Ba1 junk rating even though it is rated A1 by Moody's.
Lehman's cost of five-year credit protection for $10 million of bonds was quoted Tuesday afternoon at $86,000 a year, according to GFI. It reached as high as $100,000 last week. The cost of protection for Merrill bonds was recently quoted at $77,000, lower than the $80,000 a year last week, according to GFI. Goldman Sachs Group Inc. (GS) saw its cost of credit protection decline to $73,000 Tuesday, from $80,000 last week.
The surge last week in the cost of credit protection for Wall Street banks was in part driven concerns of further losses due to subprime mortgages gone sour.
Wall Street's role as a debt underwriter is also a source of concern as there is an increasing likelihood that banks will be forced to step up to the plate with funding for debt-laden private buyouts as investors shy away from risky buys.
With over $300 billion in loans and bonds waiting in the wings to be sold in the junk debt market, banks may have to carry at least a portion of that debt on their books, potentially denting profits.
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