History > 2008 > USA > Economy (II)

Iraq Vet Wins $1M in Scratch

- Off Lottery

February 29, 2008
Filed at 6:18 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

SPOKANE, Wash. (AP) -- A 26-year-old Iraq war veteran bought four scratch-off lottery tickets at a convenience store after an evening workout and wound up winning $1 million.

Wayne Leyde, who served two tours in Iraq with the Army, bought his winning Millionaire II ticket Tuesday night at a Zip Trip in Mead, about 10 miles northeast of Spokane.

Leyde said he had trouble sleeping after scraping away the gray metallic cover on one of his tickets to reveal the winning numbers.

The former active-duty soldier said he's thought of 50 people he should give money to and about 10,000 ways to spend it -- but that if anyone should benefit from his windfall, it's his parents, with whom he lives in the Mount Spokane area.

Leyde is currently enlisted in the National Guard and works as a personal banker for Wells Fargo.

Iraq Vet Wins $1M in Scratch - Off Lottery, NYT, 29.2.2008,
http://www.nytimes.com/aponline/us/AP-BRF-Iraq-Vet-Lottery.html

Facing Default,

Some Walk Out on New Homes

February 29, 2008
The New York Times
By JOHN LELAND

When Raymond Zulueta went into default on his mortgage last year, he did what a lot of people do. He worried.

In a declining housing market, he owed more than the house was worth, and his mortgage payments, even on an interest-only loan, had shot up to $2,600, more than he could afford. “I was terrified,” said Mr. Zulueta, who services automated teller machines for an armored car company in the San Francisco area.

Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure.

Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender’s problem. “They took the negativity out of my life,” Mr. Zulueta said of You Walk Away. “I was stressing over nothing.”

You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say.

Last year the median down payment on home purchases was 9 percent, down from 20 percent in 1989, according to a survey by the National Association of Realtors. Twenty-nine percent of buyers put no money down. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home in order to cover closing costs.

“I think I could make a case that some borrowers were ‘renting’ (with risk), rather than owning,” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said in an e-mail message.

For some people, then, foreclosure becomes something akin to eviction — a traumatic event, and a blow to one’s credit record, but not one that involves loss of life savings or of years spent scrimping to buy the home.

“There certainly appears to be more willingness on the part of borrowers to walk away from mortgages,” said John Mechem, spokesman for the Mortgage Bankers Association, who noted that in the past, many would try to save their homes.

In recent months top executives from Bank of America, JPMorgan Chase and Wachovia have all described a new willingness by borrowers to walk away from mortgages.

Carrie Newhouse, a real estate agent who also works as a loss mitigation consultant for mortgage lenders in Minneapolis-St. Paul, said she saw many homeowners who looked at foreclosure as a first option, preferable to dealing with their lender. “I’ve had people say to me, ‘My house isn’t worth what I owe, why should I continue to make payments on it?’ ” Mrs. Newhouse said.

“You bought an adjustable rate mortgage and you’re mad the bank is adjusting the rate,” she said. “And sometimes the bank people who call these consumers aren’t really nice. Not that the bank has the responsibility to be your friend, but a lot are just so uncooperative.”

The same sorts of loans that drove the real estate boom now change the nature of foreclosure, giving borrowers incentives to walk away, said Todd Sinai, an associate professor of real estate at the Wharton School of Business at the University of Pennsylvania.

“There’s a whole lot of people who would’ve been stuck as renters without these exotic loan products,” Professor Sinai said. “Now it’s like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren’t any worse off than renting, and you got a chance to do extremely well. If it’s heads I win, tails the bank loses, it’s worth the gamble.”

In the boom market, homeowners took their winnings, withdrawing $800 billion in equity from their homes in 2005 alone, according to RGE Monitor, an online financial research firm.

Since the Depression, American government policy has encouraged homeownership as an absolute good. It protects people from increases in rent and allows them to build equity as they pay off their mortgages. And it creates stability in communities, because owners are invested in their neighbors.

But new types of loans like interest-only mortgages and cash-out refinance loans mean buyers do not pay down their mortgages. And adjustable rate mortgages, which accounted for 39 percent of mortgages written in 2006, expose owners to rent-like rises in their housing costs.

The value of homeownership, then, has increasingly shifted to the home’s likelihood to rise in value, like any other investment. And when investments go bad, people tend to walk away.

“When people don’t have skin in the game, they behave like they don’t have skin in the game,” said Karl E. Case, a professor of economics at Wellesley College, who conducts regular surveys of borrowers as a founding partner of Fiserv Case Shiller Weiss, a real estate research firm.

Though many states give banks recourse to sue borrowers for their losses, Mr. Case said, in practice it’s not often done “It’s tough to do recourse,” he said. “It’s costly, and the amount of people’s nonhousing wealth tends to be pretty slim.”

Christian Menegatti, lead analyst at RGE Monitor, said the firm predicted more homeowners would walk away from their homes if prices continued to drop, regardless of their financial circumstances. If home prices drop an additional 10 percent, Mr. Menegatti said, 20 million households will owe more than the value of their homes.

“Will everyone walk out?” he said. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.”

When homeowners see houses identical to their own selling for much less than they owe, Mr. Menegatti said, “I wouldn’t be surprised to see five or six million homeowners walk away.”

For Raymond Zulueta, the decision to go into foreclosure, and to hire You Walk Away, brought him peace of mind. The company assured him that in California he was not liable for his debt, and provided sessions with a lawyer and an accountant, as well as enrollment with a credit repair agency. He stopped paying his mortgage and used the money to pay down other debts.

Consumer advocates and others question the value of You Walk Away’s service.

“We are more interested in servicers and borrowers coming to mutual resolutions through loan remediation,” said Kevin Stein, associate director of the nonprofit California Reinvestment Coalition. “Even though we are not seeing good outcomes, we’re not willing to throw up our hands and say people should walk away from their homes based on the advice of a company that stands to profit from foreclosure.”

Jon Maddux, a founder of You Walk Away, said the company’s services were not for everybody and were meant as a last resort. The company opened for business in January and says it has just over 200 clients in six states.

“It’s not a moral decision,” Mr. Maddux said of foreclosure. “The moral decision is, ‘I need to pay my kids’ health insurance or my car payment so I can get to work.’ They made a bad decision, but they shouldn’t make more bad ones just because they have this loan.”

Mr. Zulueta said he felt he had let down the lender, himself, and his family.

“But you got to move on,” he said. “I know in a few years my credit’s going to be fine. If I want to get another house, it’s going to be there. I’m not the only one who went through this. I know I’m working the system, but you got to do what you got to do. There’s always loopholes.”

    Facing Default, Some Walk Out on New Homes, NYT, 29.2.2008, http://www.nytimes.com/2008/02/29/us/29walks.html

New Day, New Low for Dollar

February 28, 2008
Filed at 11:29 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

BERLIN (AP) -- The dollar dipped to another record low Thursday as the Commerce Department reported that the economy braked to a near halt in the final quarter of 2007.

Gross domestic product increased at a scant 0.6 percent pace in the October-to-December quarter, according to the report.

The reading on gross domestic product underscored just how much momentum the economy lost in the final quarter, dragged down by a scarcity of credit and a plunging housing market.

Gross domestic product (GDP) measures the value of all goods and services produced in the United States.

That finding pushed the 15-nation euro to a record $1.5188 in late afternoon European trading -- up from $1.5120 in New York the previous night and above its previous record of $1.5143 reached earlier Wednesday.

The British pound rose to $1.9897 from $1.9842. The dollar dipped to 105.55 Japanese yen from 106.45 yen.

''With sentiment becoming increasingly pessimistic as to the outlook for the U.S. economy, it seems as if it will take a notable shift in sentiment if we're to see any real recovery,'' said Gary Thomson, head of sales trading at CMC Markets.

On the heels of the Commerce Department report, the Labor Department reported Thursday that new applications for unemployment insurance benefits rose by 19,000 to 373,000 last week, more evidence that the general economic sluggishness is spilling over into the job market.

Despite reassurances from President Bush on Thursday that the U.S. was not headed into recession, the latest batch of economic news rattled investors, sending the Dow Jones industrials down more than 128 points in morning trading.

The euro topped $1.50 for the first time since its 1999 introduction early Wednesday, then surged above $1.51 after markets took comments from the Federal Reserve chairman as a sign that yet more U.S. rate cuts are on the way.

Fed Chairman Ben Bernanke said that ''the economic situation has become distinctly less favorable'' since last summer.

    New Day, New Low for Dollar, NYT, 28.2.2008, http://www.nytimes.com/aponline/business/AP-Dollar.html

Oil Back Above $100 As Dollar Weakens

February 28, 2008
Filed at 11:32 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Crude prices rebounded Thursday as a falling dollar and the prospect of lower interest rates attracted fresh investment capital to the oil market. Retail gas prices, meanwhile, rose closer to records above $3 a gallon.

A pair of dismal economic reports Thursday drew more money into the oil market. The Commerce Department said gross domestic product grew at only a 0.6 percent rate in the fourth quarter, below estimates and at only a fraction of the previous quarter's growth rate, while the Labor Department said applications for unemployment benefits rose by 19,000 last week, more than expected.

Rather than viewing such news as bad for future oil demand, investors chose to see it as confirmation of their beliefs that the Federal Reserve will continue cutting interest rates to try to shore up the economy. Interest rate cuts tend to weaken the dollar, and crude futures offer a hedge against a falling dollar. Also, oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.

''I really think that this is oil being viewed as ... a financial instrument,'' said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

Light, sweet crude for April delivery rose $1.13 to $100.77 a barrel on the New York Mercantile Exchange.

Oil's rally is pulling gas prices higher. At the pump, retail gasoline prices rose 0.9 cent overnight to a national average of $3.161 a gallon, according to AAA and the Oil Price Information Service. Prices are within 7 cents of May's record of $3.227 a gallon. The Energy Department expects prices to peak near $3.40 a gallon this spring; many analysts think prices will rise much higher than that.

Oil prices fell $1.24 a barrel Wednesday after the Energy Department reported crude inventories rose more than expected last week.

But that reflected a rare reaction by oil investors to supply and demand fundamentals. Oil prices have been far more affected in recent months by dollar- and interest rate-driven investment decisions, analysts say.

''(Fundamentals) have no relationship to price right now,'' Flynn said. If prices were responding to supply and demand, fundamentals, they would be falling, he said. Several recent forecasters have lowered oil demand growth predictions for this year due to the slowing economy, and domestic oil inventories have been growing.

Oil prices have received some support in recent days from word of a technical glitch that temporarily disrupted the flow of a small amount of crude out of Nigeria and from Turkey's recent invasion of Northern Iraq in search of Kurdish rebels. But those stories are not enough in and of themselves to explain why oil continues to trade above $100, Flynn said.

Many analysts believe it's just a matter of time until the fundamentals reassert themselves on the market.

''We wonder how long this particular run will last given the uncertain (economic) outlook and the fact that prices ... have divorced themselves from underlying fundamentals due to the massive infusion of fund money seeking diversification,'' said Edward Meir, an analyst at MF Global UK Ltd., in a research note.

Other energy futures were mixed Thursday. March gasoline futures fell 1.37 cents to $2.464 a gallon on the Nymex, while March heating oil futures rose 3.68 cents to $2.8079 a gallon.

April natural gas futures jumped 23.5 cents to $9.295 per 1,000 cubic feet. The Energy Department said inventories fell by 151 billion cubic feet last week, slightly less than expected.

In London, April Brent crude rose 98 cents to $99.25 a barrel on the ICE Futures exchange.

    Oil Back Above $100 As Dollar Weakens, NYT, 28.2.2008, http://www.nytimes.com/aponline/business/AP-Oil-Prices.html

Stocks Fall on Weak Economic Data

February 28, 2008
Filed at 10:37 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Wall Street fell Thursday after a pair of reports showed that the economy nearly stalled in late 2007 and that unemployment claims rose last week.

Investors were disappointed to see the Commerce Department report saying fourth-quarter gross domestic product rose by a smaller-than-expected annual rate of 0.6 percent. And separately, the Labor Department reported that first-time unemployment claims rose last week by 19,000 to 373,000, the highest level since late January.

The data bolstered investors' concern that the economy is weakening sharply -- and those worries escalated further Thursday when the dollar dipped to a new low against the 15-nation euro.

Meanwhile, corporate news was similarly downbeat. Sprint Nextel Corp. posted a $29.5 billion loss in the fourth quarter after writing down the remaining value of its Nextel Communications buy and losing customers. It also slashed its dividend, and shares tumbled 70 cents, or 7.8 percent, to $8.25.

In midmorning trading, the Dow Jones industrial average dropped 94.51, or 0.74 percent, to 12,599.77.

Broader stock indicators also lost ground. The Standard & Poor's 500 index declined 8.59, or 0.62 percent, to 1,371.43, and the Nasdaq composite index lost 11.75, or 0.50 percent, to 2,342.03.

Government bonds rose as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, sank to 3.75 percent from 3.85 percent late Wednesday.

The stock market this week has been hit by a series of complex developments, including regulatory changes that should enable mortgage companies Fannie Mae and Freddie Mac to put badly needed liquidity into the housing sector. There have also been indications that funding may be found for ailing bond insurers.

Fannie Mae rose $1.37, or 5 percent, to $28.64, and Freddie Mac rose $1.44, or 5.7 percent, to $26.53.

Bond insurer MBIA Inc. fell 65 cents, or 4.4 percent, to $14.20, while another large bond insurer, Ambac Financial, fell 22 cents to $11.85.

Housing market news was dim. Thornburg Mortgage Inc. plunged after the mortgage lender said it has received margin calls -- calls for immediate repayment of debt -- on a portfolio of securities backed by alt-A mortgages. Alt-A mortgages are those given to customers with little credit history or minor credit problems.

Thornburg fell $2.29, or 20 percent, to $9.25.

Crude oil jumped $1.25 to $100.89 a barrel on the New York Mercantile Exchange. Gold prices also advanced.

The Russell 2000 index of smaller companies was down 8.58, or 1.20 percent, at 707.86.

Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 236.0 million shares.

Overseas, Japan's Nikkei stock average fell 0.75 percent. In afternoon trading, Britain's FTSE 100 was down 1.38 percent, Germany's DAX index was down 1.51 percent, and France's CAC-40 was down 1.98 percent.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Stocks Fall on Weak Economic Data, NYT, 28.2.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Bush Sees No Recession Yet

February 28, 2008
Filed at 10:30 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- President Bush said Thursday that the country is not headed into a recession and, despite expressing concern about slowing economic growth, rejected for now any additional stimulus efforts.

''We've acted robustly,'' he said.

''We'll see the effects of this pro-growth package,'' Bush told reporters at a White House news conference. ''I know there's a lot of, here in Washington people are trying to -- stimulus package two -- and all that stuff. Why don't we let stimulus package one, which seemed like a good idea at the time, have a chance to kick in?''

Bush's view of the economy was decidely rosier than that of many economists, who say the country is nearing recession territory or may already be there.

The centerpiece of government efforts to brace the wobbly economy is a package Congress passed and Bush signed last month. It will rush rebates ranging from $300 to $1,200 to millions of people and give tax incentives to businesses.

Bush also used his news conference to press Congress to give telecommunications companies legal immunity for helping the government eavesdrop after the Sept. 11 terrorist attacks.

He continued a near-daily effort to prod lawmakers into passing his version of a law to make it easier for the government to conduct domestic eavesdropping on suspected terrorists' phone calls and e-mails. He says the country is in more danger now that a temporary surveillance law has expired.

The president and Congress are in a showdown over Bush's demand on the immunity issue.

Bush said the companies helped the government after being told ''that their assistance was legal and vital to national security.'' ''Allowing these lawsuits to proceed would be unfair,'' he said.

More important, Bush added, ''the litigation process could lead to the disclosure of information about how we conduct surveillance and it would give al Qaida and others a roadmap as to how to avoid the surveillance.''

On another issue, Bush said that Turkey's offensive against Kurdish rebels in northern Iraq should be limited -- and should end as soon as possible. The ongoing fighting has put the United States in a touchy position, as it is close allies with both Iraq and Turkey, and a long offensive along the border could jeopardize security in Iraq just as the U.S. is trying to stabilize the war-wracked country.

''It should not be long-lasting,'' Bush said. ''The Turks need to move, move quickly, achieve their objective and get out.''

He also said, though, that it is in no one's interest for the PKK to have safe havens.

    Bush Sees No Recession Yet, NYT, 28.2.2008, http://www.nytimes.com/aponline/us/AP-Bush.html?hp

Sprint Nextel Posts $29.5 Billion Loss

February 28, 2008
Filed at 10:48 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

KANSAS CITY, Mo. (AP) -- Sprint Nextel Corp. swung to a fourth-quarter loss of $29.5 billion on Thursday as it wrote down most of the remaining value of its 2005 purchase of Nextel Communications Inc. and continued to lose customers to competitors. It said it would quit paying dividends for the foreseeable future and was tapping a revolving credit line.

Shares of the nation's third largest wireless carrier tumbled more than 7 percent in morning trading.

Chief Executive Officer Dan Hesse, who was hired in December to turn Sprint Nextel around, said the quarter was more difficult than he had expected and it could be some time before proposed operational changes have any effect.

On top of losing almost 700,000 valuable customers who have annual contracts during the fourth quarter, the company predicted it would lose another 1.2 million during the first quarter and would see additional losses in the second quarter.

''Our business is not performing well right now,'' Hesse told analysts during a conference call, blaming poor customer service in recent years. ''We are working aggressively to turn this around but our financial performance will not improve overnight.''

To counteract customer losses, Sprint Nextel said it would begin offering unlimited voice and data service usage for $99.99 per month. Unlimited voice only would cost $89.99 per month, undercutting $99.99 unlimited calling plans announced last week by rivals Verizon Wireless and AT&T.

Sprint Nextel also said that due to instability in the capital credit markets the company was borrowing $2.5 billion from a revolving credit facility and was not declaring dividends for the ''foreseeable future.''

Its shares fell 64 cents, or 7.2 percent, to $8.31 in morning trading trading after sinking to a new 52-week low of $7.75 earlier in the esession.

Sprint, based in Overland Park, Kan., reported losing $29.5 billion, or $10.36 per share, during the quarter ending Dec. 31. By comparison, Sprint Nextel earned $261 million, or 9 cents per share, during the same period a year ago.

The company said last month it would likely have to write off most of the remaining $30.7 billion in goodwill value from the acquisition of Nextel and a number of affiliates. Sprint Nextel has struggled since the purchase, plagued by technical problems, unfocused marketing and a difficulty in merging the two companies' work forces into a cohesive whole.

Not including the write-down and other one-time charges, the company said it would have earned 21 cents per share before amortization, which was higher than the 18 cents per share expected by analysts surveyed by Thomson Financial.

Revenue during the quarter slipped 6 percent to $9.8 billion from $10.4 billion a year earlier, just missing analysts' expectations of $9.9 billion.

The company reported a net loss of 108,000 subscribers for the quarter as an increase in customers through its Boost prepaid brand and wholesale channels partially offset the loss of 683,000 postpaid subscribers, who typically spend more on data services like texting and Web surfing.

Sprint Nextel reported quarterly postpaid churn, or the measure of these monthly customers dropping service, remained level at 2.3 percent and the average revenue per user declined about 4 percent from a year ago to $58.

Sprint Nextel said overall wireless revenues declined about 6 percent to $8.5 billion.

Hesse told analysts that the company would continue focusing on improving customer service and making its price plans and services easier for customers to understand.

''When I look at the company I see great assets ... I also see a once strong brand which lacks relevance and a clear message,'' he said. ''This will change.''

Among those changes is the ''Simply Everything'' unlimited plan, which would include unlimited texting and Web surfing and will even include offerings for which customers typically have paid a premium, such as video and navigational services.

Hesse said that while Sprint Nextel's price is lower than that of competitors, he views the company's move more as a way to increase usage of data services and help the company regain some of the dominance it once had in the data market.

''We're really setting the stage for differentiating the company around our greatest strength going forward,'' he said.

He also warned that the unlimited plan was only one piece of the puzzle to reviving the company.

''Will this offer be enough to move the needle around the kinds of large subscriber numbers that we were talking about earlier? The answer is no (but) it begins to make a difference, it begins to establish who we are,'' he said.

Hesse, who replaced ousted CEO Gary Forsee, already announced last month that the company would lay off about 4,000 employees, or 6.7 percent of its work force, and close 125 retail locations. Earlier this month, he moved the company's corporate headquarters from Reston, Va., back to Kansas, which he said should improve efficiency and management oversight.

The company's shares have fallen more than 51 percent in value in the past year.

For the year, the company said it lost $29.6 billion, or $10.31 per share, compared with a profit of $1.3 billion, or 45 cents per share, in 2006.

Not including the goodwill writedown, the company said it earned 88 cents per share compared with $1.18 a year ago.

Annual revenue declined 2 percent to $40.15 billion.

    Sprint Nextel Posts $29.5 Billion Loss, NYT, 28.2.2008, http://www.nytimes.com/aponline/business/AP-Earns-Sprint-Nextel.html?hp

Stocks Rebound on Bernanke Comments

February 27, 2008
Filed at 2:12 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Wall Street held on to gains Wednesday after regulators allowed Fannie Mae and Freddie Mac to buy more mortgages and Federal Reserve Chairman Ben Bernanke said the central bank will remain vigilant about the weakened economy.

Both developments helped shore up investor confidence amid increasing signs of a slowing economy and the continuing housing slump. Wall Street has in recent months grappled with concerns about rising prices, a weaker dollar and continued turmoil in the credit markets.

Investors were pleased after Bernanke indicated the Fed is more concerned about the sagging economy then the immediate risks of inflation. In testimony on Capitol Hill, he told lawmakers the Fed will ''act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.''

Bernanke's remarks came as the dollar plunged to a record low against the 15-nation euro. That sent already inflated oil and gold prices further into record high territory, and raised the prospect of accelerating inflation.

Meanwhile, Fannie Mae and Freddie Mac -- the biggest sources of financing for U.S. home loans -- helped prop up the market after the government removed restrictions on the size of their portfolios. That offered a chance for an easing of the extremely tight mortgage market that has been battered by the subprime loan crisis.

''The government is trying to do their part, and anytime there is positive news on any of these financials, it moves the market higher as a whole,'' said Todd Leone, managing director of equity trading at Cowen & Co. ''Together, this helps put a little more faith in the economy.''

Investors responded by turning losses earlier in the session into gains. In early afternoon trading, the Dow Jones industrial average -- now up for the fourth straight day -- rose 10.83, or 0.09 percent, to 12,695.75.

Broader indexes also moved higher. The Standard & Poor's 500 index edged up 0.13, or 0.01 percent, to 1,381.42, and the Nasdaq composite index rose 1.87, or 0.08 percent, to 2,346.86.

Bond prices fell. The yield on the benchmark 10-year note, which moves opposite to its price, rose to 3.87 percent from 3.86 percent late Tuesday.

The moves followed a government report showing business investment in durable goods weakened more than forecast at the start of the year, playing into the nervousness about economic slowing. The Commerce Department reported durable goods orders dropped 5.3 percent in January, exceeding forecasts.

There was more bad news about the housing slump. The Commerce Department reported that new home sales fell in January for a third straight month, pushing activity down to the slowest pace in nearly 13 years.

Investors have been monitoring economic data to get a better idea about inflation, which could cause the Fed to stop lowering rates. The Fed, widely expected to make a further half-point cut in interest rates, will meet again March 18.

Harry Clark, president of Clark Capital Management in Philadelphia, said a slowdown in the economy that avoids recession could create a moderate drop in demand and help ease pressure from rising prices.

''If the economy goes down the drain with rising prices, that's stagflation,'' he said. ''Rising prices aren't a big deal if everyone is employed and the economy is growing.''

The notion of some easing in the weakened mortgage sector pleased investors. Fannie Mae shares rose 83 cents, or 3.1 percent, to $27.80, while Freddie Mac shares advanced 35 cents to $25.56.

The Russell 2000 index of smaller companies fell 1.16, or 0.16 percent, to 716.16.

Overseas, Japan's Nikkei stock average closed 1.49 percent higher. Britain's FTSE 100 fell 0.18 percent, Germany's DAX index rose 0.17 percent, and France's CAC-40 fell 0.09 percent.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Stocks Rebound on Bernanke Comments, NYT, 27.2.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Fannie Mae posts $3.6 billion loss

Wed Feb 27, 2008
8:44am EST
Reuters

NEW YORK (Reuters) - Fannie Mae (FNM.N: Quote, Profile, Research), the largest provider of financing for U.S. home loans, on Wednesday reported a $3.6 billion quarterly loss as the housing slump deepened, sending its shares to a 12-year low.

The government-chartered company posted a $3.80 per share net loss for the fourth quarter. That compares with a profit of $604 million in the year-earlier period and a $1.52 billion loss in the third quarter.

Analysts expected the company would post a fourth-quarter loss of $1.39 per share, according to Reuters Estimates.

A sharper-than-expected drop in home prices that first sparked a crisis in subprime lending has since tainted the entire U.S. housing market, hurting Fannie Mae and rival Freddie Mac (FRE.N: Quote, Profile, Research).

Rising delinquencies and foreclosures have led the companies to write down values of mortgage securities they own and increase reserves to cover their guarantees of payment on bonds held by investors.

Credit-related expenses soared to $3 billion last quarter from $326 million in the same period for 2006. Revenue rose 8.6 percent to $3.1 billion, driven by a 26.4 percent increase in guaranty fee income.

The report drove Fannie Mae shares to a 12-year low in pre-market trading near $25.70. The dismal results also pushed U.S. stock index futures lower and lifted U.S. Treasury debt prices.

Improvements in the guaranty business have "been far outweighed by the negative financial impacts of rising mortgage defaults, falling home prices, and extraordinary disruptions in the credit markets," Chief Executive Officer Daniel Mudd said in a statement.

Fannie Mae, which was created during the Great Depression to boost homeownership, is now struggling to strike a balance between enlarging its business while tightening underwriting guidelines to protect itself from further losses.

Regulators and lawmakers have also leaned harder on Fannie Mae and Freddie Mac in recent months to bolster the housing market, most recently by increasing the size of loans eligible for their businesses. However, losses at the companies have squeezed their profits and reduced capital that is needed to expand.

Fannie Mae shares have fallen 33 percent this year through the market close on Tuesday, compared with a 3.8 percent drop in the KBW Mortgage Finance index .MFX over the same period.

(Reporting by Al Yoon; Editing by Tom Hals)

    Fannie Mae posts $3.6 billion loss, R, 27.2.2008, http://www.reuters.com/article/gc03/idUSWNAS262220080227

Dollar Weakens to $1.50 to the Euro

February 27, 2008
The New York Times
By CARTER DOUGHERTY

The dollar breached the level of $1.50 to the euro on Wednesday for the first time as fears of weakness in the United States economy mixed with evidence of resilience in Europe.

In Asian trading, the euro hit $1.5047 after flirting with the $1.50 level in New York Tuesday. That was the dollar’s weakest position since the euro, now the currency of 15 countries, was introduced in 1999. In New York, the dollar continued to weaken and was trading at $1.5126 at 12:30 p.m.

“Psychologically and symbolically, this is a significant move,” said Tony Morriss, senior currency strategist with Australia & New Zealand Banking Group in Sydney. “The economic numbers out of the U.S. have been uniformly terrible, and we are entering a new phase of dollar weakness.”

The dollar has weakened steadily in recent weeks after recovering from similar levels in November on the emerging realization that the Federal Reserve, despite worries about inflation in the United States, will keep cutting interest rates to protect economic growth at the same time that the European Central Bank is holding rates steady.

Interest rate differentials drive currency movements by decreasing the appeal of dollar-denominated assets. Donald L. Kohn, vice chairman of the Fed, played down the risks of inflation in the United States on Tuesday, focusing instead on the risks to economic growth — a clear sign the Fed has not finished the rate-cutting cycle it began after the start of financial market turmoil late last summer.

“The Fed’s stance is really aggressive,” said Stephen Jen, chief currency economist at Morgan Stanley in London. “Every time we think the Fed is eyeing inflation, they turn around and cut rates.”

Another round of weakness has the potential to increase political tensions in Europe, though so far France is the only country that has consistently complained about the strong euro. Though it has acknowledged the potential costs of a stronger euro, Germany has remained upbeat, saying it is not worried.

Volker Trier, the chief economist of the German Chambers of Industry and Commerce, largely echoed this view on Wednesday.

“The euro’s strength is hurting here and there,” Mr. Trier said, according to Reuters. “Over all, though, the economy can still cope with it well.”

Asian currencies have also risen against the dollar, but exporters there can take comfort in the fact that any pain is being broadly shared.

“Asian currencies are uniformly appreciating against the U.S. currency due to dollar weakness, rather than any single Asian currency rapidly firming against the others,” said Cem Karacadag, director in the emerging markets economics group at Credit Suisse in Singapore. “So, no single country is going to lose export share to its competitors in the region.”

    Dollar Weakens to $1.50 to the Euro, NYT, 27.2.2008, http://www.nytimes.com/2008/02/27/business/27cnd-dollar.html

New-Home Sales and Prices Continue to Drop

February 27, 2008
The New York Times
By MICHAEL M. GRYNBAUM

Sharply lower prices failed to perk up sales of new homes in January, a government report showed on Wednesday, as a closely watched index fell to its lowest point in 13 years.

Sales of newly constructed homes dropped 2.8 percent from December, to an annual rate of 588,000. It was the third consecutive monthly decline. The median price of a new home sold in January fell to $216,000, down 15 percent from a year ago, according to the Commerce Department.

“Another month, another disastrous U.S. new home sales report,” wrote Dimitry Fleming, an economist at ING Bank. “New home prices have not dropped this fast in over 35 years.”

In an ominous sign for builders, inventories of unsold homes continued to rise. At the current sales rate, it would take nearly 10 months to sell off the backlog.

The housing market is struggling to shake off a wave of foreclosures and more stringent lending standards for mortgages. Would-be buyers are waiting for prices to fall even further, economists say, and many predict sales to stay light through at least the summer. A general slowdown in the economy is also expected to keep demand weak.

The number of new homes on the market dropped as well, suggesting that some builders, exasperated by the lack of demand, have simply given up on selling some of their homes.

Toll Brothers, a leading builder, said on Wednesday that its fiscal first-quarter sales tumbled 23 percent, leading to a $96 million loss. The Pennsylvania-based company was forced to write down $245 million in unsold properties, doubling its charges from a year ago.

Still, its shares rose 4.2 percent in early trading Wednesday; shares of rival builders D. R. Horton and Lennar were also up.

“We look at the rally in home builders’ stocks in utter bewilderment,” Ian Shepherdson, an economist at High Frequency Economics, wrote in a research note.

The latest readings on home sales coincided with more evidence of economic trouble on other fronts. A Commerce Department report showed that businesses were spending less on durable goods, a sign that companies may be hesitant to make large purchases as the economy slows.

Over all, new orders of durable goods — products meant to last at least three years — fell 5.3 percent in January, as orders of transportation goods dropped sharply. Sales of computers and electronics fell as well.

A barometer of business spending, which excludes purchases of aircraft and defense-related products, dropped 1.4 percent.

    New-Home Sales and Prices Continue to Drop, NYT, 27.2.2008, http://www.nytimes.com/2008/02/27/business/27cnd-econ.html

Foreclosure Aid Rising Locally, as Is Dissent

February 26, 2008
The New York Times
By WILLIAM YARDLEY

SEATTLE — As the Bush administration and Congress consider proposals to ease the home foreclosure crisis, local governments across the country have been lending money to imperiled homeowners and confronting some opposition.

Some of these municipal and state efforts have met resistance from people who consider the assistance undeserved and adamantly oppose anything that resembles a taxpayer bailout.

Seattle, which has nowhere near the kind of foreclosure problem other cities have, began a modest program last month offering loans of up to $5,000 to help a few dozen homeowners avoid losing their homes.

Not only are people in Seattle relatively prosperous, but they have a reputation for being nice, too. Yet no sooner had Mayor Greg Nickels announced the program than opposition surfaced.

“Just can’t agree with using taxpayer dollars to bail out private homeowners, no matter how the mayor tries to justify it,” read a complaint posted on the “Soundoff” section of The Seattle Post-Intelligencer’s Web site.

Mark Ellerbrook, who manages Seattle’s homeownership program, said that, aside from residents hoping to apply, few people were enthusiastic about the program. He said he understood that reaction, given the local housing market.

“People struggle to buy homes in this city, for sure,” Mr. Ellerbrook said. “And then you have what looks, on the face of it, like the city giving money to people who made bad decisions.”

In Massachusetts, MassHousing, a quasi-state agency, began a loan refinance program last summer that relies on bond revenue. After its initial public relations effort, the agency had to make clear “that this is not taxpayer-funded,” said Tom Farmer, an agency spokesman.

“The talk radio was all up in arms: ‘Why should we be helping these people out?’ ” Mr. Farmer said. “ ‘They should have known what they were doing.’ ”

The goal of these programs is not just to keep people from losing their homes, but also to limit broader economic fallout, including plummeting property tax revenues and widespread declines in home values. Still, they pit what some government officials say are practical economic solutions for the common good against individual ideals of fairness and personal responsibility.

The opposition may be rooted in “this ancient notion of deserving versus undeserving, and you’re undeserving if you made a bad decision,” said Nicolas P. Retsinas, the director of the Joint Center for Housing Studies at Harvard University.

While the negative reactions have not stopped the assistance efforts, it has put some local officials on the defensive and forced them to try to sell the programs to the general public, not just to the intended recipients.

“This is not a bailout,” Joseph Smith, the commissioner of banks in North Carolina, said this month in announcing a program to direct $300,000 in taxpayer money to mortgage counselors who could help homeowners refinance. “We’re not paying off anybody’s mortgage.”

Small, government-supported “rescue loan” programs have been used in many places before. Those efforts, as well as the current ones, typically have been cast as having broader benefits, similar to the way public health programs are portrayed, Mr. Retsinas said.

“Much of the rationale,” he said, “is less the notion of keeping an individual from getting sick than it is, ‘If we vaccinate this person, their illness won’t cause other people to get sick.’ ”

The program in Seattle is intended to help about 40 homeowners threatened with foreclosure. In Ohio, two government-sponsored programs offer similar assistance. Massachusetts, Maryland and other states also have loan or refinancing programs.

Some of these programs tap into into taxpayer money directly, while others use revenue from the sale of bonds or other sources. Most require borrowers to pay back the loan eventually, though some forgive them altogether.

Some programs, like Maryland’s, are designed for people caught in subprime mortgages, and these can have more generous terms. Several of the programs, including Seattle’s, aim to help low- or moderate-income borrowers facing an unexpected financial hardship, like loss of a job or illness. Many have strict requirements that often prevent people from qualifying, sometimes leading to charges that they do not go far enough.

Government has a history of getting involved in foreclosure crises. During the Great Depression, the federal government created the Home Owners’ Loan Corporation, which helped refinance about a million loans — and made a profit in the process. In December, Alan Greenspan, the former Federal Reserve chairman, suggested that government provide assistance to homeowners facing foreclosure.

Until recently, the Bush administration has focused on getting banks and lenders to restructure or refinance home loans, but critics say it is unclear how many people will be helped.

Bruce Marks, the chief executive of the Neighborhood Assistance Corporation of America, which works with lenders to restructure loans under terms that homeowners can afford, said giving loans to homeowners improperly focused public frustration on borrowers instead of banks and lenders.

“Before you criticize other people, ask your family members, ask your neighbor, ask your co-workers whether their home is at risk of foreclosure, and you will find that the people closest to you are about to lose their homes but they’re too embarrassed to tell you and to reach out for help,” Mr. Marks said. “That’s how pervasive this crisis is.”

Alex J. Pollock, a resident fellow at the conservative American Enterprise Institute who has written about the foreclosure prevention programs of the Great Depression, echoed concerns that, in some cases, government intervention could reward irresponsibility and make markets unpredictable. “The problem on the other side,” he said, “is if you have a general problem that threatens to cause a general downward spiral, then everybody’s going to suffer.”

Ryan Ellis, the tax policy director for Americans for Tax Reform, a conservative antitax group, said his group opposed efforts by the Bush administration to nudge banks and lenders into restructuring some loans, much less direct government loans to homeowners facing foreclosure.

“You can call it community reinvestment, neighborhood protection, whatever you want,” Mr. Ellis said, “but if you’re taking away the downside risk of a loan, you’re bailing them out.”

Foreclosures have increased as the national real estate market continues to decline. On Monday, the National Realtors Association reported that the sales of existing homes declined in January, the sixth consecutive month that sales have dropped. The median home price in January was $201,100, down 4.6 percent from a year earlier.

Prevention programs and the way they are received can vary depending on the region. In Ohio, foreclosure rates are among the highest in the nation because of fallout in the mortgage industry but also because of the widespread loss of manufacturing jobs. Two state programs there are offering nearly $5 million in loans to homeowners.

Lou Tisler, executive director of Neighborhood Housing Services of Greater Cleveland, which administers funds for the programs statewide, said political opposition had been little more than background noise. “We’re all suffering together through the whole economy,” he said. “It’s not just the housing bust. It’s not just people losing their jobs. It’s not just medical costs. It’s everything together. It allows for a stretch of innovation.”

In Maryland last month, the Department of Housing and Community Development started its “Bridge to Hope” loan program, which caps loans at $15,000 and focuses on keeping low- to moderate-income homeowners in their homes. The program has an initial budget of $400,000.

Clarence Snuggs, the deputy secretary of the department, said Maryland was ranked fifth nationally for its rate of so-called subprime loans.

“There are good people out there who are in bad loans that put them in tough situations,” Mr. Snuggs said. “We need to find ways to help them to help us all.”

In California, the notion of a government loan program seems remote to some state leaders, given how big such a fund would have to be and that California’s budget deficit is larger than most state budgets.

State Senator Michael Machado, a Democrat who is chairman of the Senate Committee on Banking, Finance and Insurance, is from Stockton, where the foreclosure rate increased 271 percent in 2007.

“If they got into a situation that got bad for them, they need to live through that and they shouldn’t expect government to bail them out,” he said, summarizing what he says is a commonly held view. “And when you’re dealing with a $14.5 billion deficit like we are here in California, it’s difficult to do that anyway.”

    Foreclosure Aid Rising Locally, as Is Dissent, NYT, 26.2.2008, http://www.nytimes.com/2008/02/26/us/26backlash.html?hp

January foreclosures up 57 percent in year: report

Tue Feb 26, 2008
10:41am EST
Reuters

NEW YORK (Reuters) - U.S. home foreclosures for January increased 57 percent from a year earlier, but the pace at least temporarily subsided in response to private and government efforts to help homeowners, RealtyTrac said.

Mortgage companies and counselors, endorsed by the Treasury, are modifying many high-risk mortgages, aiming to improve affordability and keep borrowers in their houses.

Foreclosure filings in January rose 8 percent from the prior month after jumping 19 percent a year earlier, the real estate marketing company said on Tuesday.

"January's foreclosure numbers demonstrate that foreclosure activity is continuing on its upward trend, substantially increasing from a year ago in many states," James J. Saccacio, chief executive officer of RealtyTrac, said in a statement.

For the month of January, foreclosure activity fell in several states that have been worst plagued, though it still remained substantial and sharply higher than a year ago.

"It could be that some of the efforts on the part of lenders and the government -- both at the state and federal level -- are beginning to take effect," Saccacio said.

"The big question is whether those efforts are truly helping homeowners avoid foreclosure in the long term or if they are just temporarily forestalling the inevitable for many beleaguered borrowers."

Nevada, California and Florida posted the highest foreclosure rates in January.

Nevada maintained its top spot with foreclosure filings on 6,087 properties. While that was 45 percent less than in December, it was 95 percent higher than in January 2007, RealtyTrac said

Falling home prices have compounded the problems spawned by lax mortgage lending practices, pushing many homeowners to default.

RealtyTrac reported default notices, auction sales notices or bank repossessions on about 233,000 houses in January.

Many borrowers owe more on their mortgage than their house is worth, or face much higher costs as adjustable-rate loans reset. Owners are often unable to access credit to refinance.

Some are said to be walking away from their mortgages.

Bank repossessions have jumped 90 percent over the past year, RealtyTrac said.

Arizona, Colorado, Massachusetts, Georgia, Connecticut, Ohio and Michigan rounded out the 10 states with the fastest rates of foreclosure in January.

The number of filings was the greatest in California, Florida and Texas. Filings numbered 57,158 in California last month, the most of any state, rising 7 percent from December and 120 percent from a year earlier.

Cape Coral-Fort Myers, Florida had the highest January foreclosure rate of 229 metro areas in the report, edging out the Stockton, California area.

For all of 2007, more than 1 percent of all U.S. households faced foreclosure, almost double the prior year's rate, RealtyTrac reported last month.
 

(Reporting by Lynn Adler, Editing by Chizu Nomiyama)

    January foreclosures up 57 percent in year: report, R, 26.2.2008, http://www.reuters.com/article/ousiv/idUSN2525564920080226

Producer Prices Soar in January

February 26, 2008
Filed at 10:35 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Battered by bad economic news, consumer confidence plunged while wholesale food, energy and medicine costs soared, pushing inflation up at the fastest pace in a quarter century.

The Labor Department said Tuesday that wholesale inflation jumped by 1 percent in January, more than double the increase that analysts had been expecting.

Meanwhile, the New York-based Conference Board reported that its confidence index fell to 75.0 in February, down from a revised January reading of 87.3. The drop was far below the 83 reading that analysts had forecast and put the index at its lowest level since February 2003, a period that reflected anxiety in the leadup to the Iraq war.

Consumers have been shaken by a prolonged slump in housing that has pushed the country close to a recession.

A third report Tuesday showed that home prices, measured by the S&P/Case-Shiller Index, dropped by 8.9 percent in the fourth quarter of last year, the steepest drop in the 20-year history of the index.

''Home prices across the nation and in most metro areas are significantly lower than where they were a year ago,'' said Robert Shiller, one of the index's creators. ''Wherever you look, things look bleak.''

The January inflation surge left wholesale prices rising by 7.5 percent over the past 12 months, the fastest pace in more than 26 years.

The worse-than-expected performance was certain to capture attention at the Federal Reserve, which has chosen to combat a threatened recession by aggressively cutting interest rates in the belief that weaker economic growth will keep a lid on prices.

But the combination of rising inflation and weaker growth raises the threat of ''stagflation,'' the economic malady that plagued the country through the 1970s, when a series of oil shocks left households battered by the twin problems of stagnant growth and rising inflation.

The 1 percent jump in wholesale prices followed a 0.3 percent decline in December and was the biggest one-month increase since a 2.6 percent increase in November. That gain had been driven by sharply higher energy costs.

The big jump in wholesale prices followed a report last week that consumer prices had risen by a worse-than-expected 0.4 percent, reflecting higher costs for food, energy and health care.

The wholesale report said that energy prices jumped 1.5 percent, as gasoline prices rose by 2.9 percent and the cost of home heating oil jumped by 8.5 percent.

Food prices, which have been surging because of increased demand stemming from ethanol production, rose by 1.7 percent last month, the biggest monthly increase in three years. Prices for beef, bakery products and eggs were all up sharply.

Core wholesale inflation, which excludes food and energy, posted a 0.4 percent increase, the biggest increase in 11 months. This gain was led by a 1.5 percent spike in the cost of prescription and non-prescription drugs.

The cost of book publishing was up 1.7 percent while the price of light trucks and passenger cars both rose by 0.3 percent.

Prices excluding food and energy are up 2.5 percent over the past 12 months, the fastest 12-month gain since a 2.5 percent rise in the 12 months ending in October.

    Producer Prices Soar in January, NYT, 26.2.2008, http://www.nytimes.com/aponline/us/AP-Economy.html

Feb consumer confidence slumps to 5-year low

Tue Feb 26, 2008
10:33am EST
Reuters

NEW YORK (Reuters) - Consumer confidence fell to a five-year low in February and expectations slumped to a 17-year trough in a tightening jobs market, a new survey showed, fueling fears the economy was already in recession.

The Conference Board said on Tuesday its index of consumer sentiment fell to 75.0 in February from a downwardly revised 87.3 in January, originally reported as 87.9.

The median forecast of 67 economists polled by Reuters was for a reading of 82.0.

The present situation index fell to 100.6 from a downwardly revised 114.3 in January, while the expectations index fell to 57.9 -- its lowest in 17 years -- from a downwardly revised 69.3.

The deterioration in sentiment was pronounced.

It was the biggest monthly drop in the consumer confidence and expectations indexes since September 2005, following Hurricane Katrina. The present situation index saw its biggest tumble since October 2001, the last time the United States was in recession.

Sentiment was hurt by a worsening view of the jobs market. The measure of "jobs hard to get" rose to 23.8 in February -- its highest since October 2005 -- from 20.6 in January.

The measure of "jobs plentiful" fell to 20.6 -- its lowest since April 2005 -- from 23.8.

Financial markets reacted to the grim tone of the data. Stocks .DJI extended their losses and the dollar weakened versus the Japanese yen.

Government bonds, which usually benefit from signs of economic weakness, extended earlier price gains.

(Reporting by Burton Frierson; Editing by James Dalgleish)

    Feb consumer confidence slumps to 5-year low, R, 26.2.2008, http://www.reuters.com/article/ousiv/idUSN2624349720080226

Inflation Soars as Confidence Plunges

February 26, 2008
Filed at 10:17 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- No good news today on the economic front. Consumer confidence plunged, the wholesale inflation rate soared, the number of homes being foreclosed jumped, home prices fell sharply and a report predicts big increases in health care costs.

Consumer confidence weakened significantly as Americans worry about less-favorable business conditions and job prospects. The New York-based Conference Board says in a report released on Tuesday that its Consumer Confidence Index plunged in February to 75.0 from a revised 87.3 in January.

The reading -- the lowest since the index registered 64.8 in February 2003 -- is far below the 83.0 analysts expected.

The index measures how consumers feel now about the economy. It has been weakening since July, suggesting that wary consumers may retrench financially, which could fatigue the economy further.

Inflation at the wholesale level soared in January, pushed higher by rising costs for food, energy and medicine. The monthly increase carried the annual inflation rate to its fastest jump in a quarter century.

The Labor Department said Tuesday that wholesale prices rose 1 percent last month, more than double the 0.4 percent increase that economists had been expecting.

The January surge left wholesale prices rising by 7.5 percent over the past 12 months, the fastest pace in more than 26 years, since prices had risen at a 7.5 percent pace in the 12 months ending in October 1981.

The number of homes facing foreclosure jumped 57 percent in January compared to a year ago, with lenders increasingly forced to take possession of homes they couldn't unload at auctions, a mortgage research firm said Monday.

Nationwide, some 233,001 homes received at least one notice from lenders last month related to overdue payments, compared with 148,425 a year earlier, according to Irvine, Calif.-based RealtyTrac Inc. Nearly half of the total involved first-time default notices.

The worsening situation came despite ongoing efforts by lenders to help borrowers manage their payments by modifying loan terms, working out long-term repayment plans and other actions

U.S. home prices lost 8.9 percent in the final quarter of 2007, Standard & Poor's said Tuesday, marking a full year of declining values and the steepest drop in the 20-year history of its housing index.

''We reached a somber year-end for the housing market in 2007,'' said one of the index's creators Robert Shiller. ''Home prices across the nation and in most metro areas are significantly lower than where they were a year ago. Wherever you look things look bleak.''

The S&P/Case-Shiller home price indices, which include a quarterly index, a 20-city index and a 10-city index, reflect year-over-year declines in 17 metropolitan areas with double-digit declines in eight of them.

By 2017, total health care spending will double to more than $4 trillion a year, accounting for one of every $5 the nation spends, the federal government projects.

The 6.7 percent annual increase in spending -- nearly three times the rate of inflation-- will be largely driven by higher prices and an increased demand for care, the Centers for Medicare and Medicaid Services said Monday. Other factors in the mix include a growing and aging population. The first wave of baby boomers become eligible for Medicare beginning in 2011.

With the aging population, the federal government will be picking up the tab for a growing share of the nation's medical expenses. Overall, federal and state governments accounted for about 46 percent of health expenditures in 2006. That percentage will increase to 49 percent over the next decade.

    Inflation Soars as Confidence Plunges, NYT, 26.2.2008, http://www.nytimes.com/aponline/business/AP-Economy-Rdp.html?hp

S&P: US Home Prices Down Sharply

February 26, 2008
Filed at 9:54 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- U.S. home prices lost 8.9 percent in the final quarter of 2007, Standard & Poor's said Tuesday, marking a full year of declining values and the steepest drop in the 20-year history of its housing index.

''We reached a somber year-end for the housing market in 2007,'' said one of the index's creators Robert Shiller. ''Home prices across the nation and in most metro areas are significantly lower than where they were a year ago. Wherever you look things look bleak.''

The S&P/Case-Shiller home price indices, which include a quarterly index, a 20-city index and a 10-city index, reflect year-over-year declines in 17 metropolitan areas with double-digit declines in eight of them.

The 10-city index also set a record annual decline of 9.8 percent in December, while the 20-city index dropped 9.1 percent.

Home prices also plunged 5.4 percent from the previous three-month period, by far the largest quarter-to-quarter decline in the index's history. The previous record was the revised 1.8 percent drop in the third quarter of 2007.

The quarterly index tracks prices of existing-family homes nationwide compared with a year earlier.

Miami continues to lead the weakest markets, posting a 17.5 percent annual decline. Las Vegas and Phoenix followed with a 15.3 percent drop each. Los Angeles, San Diego, San Francisco, Detroit and Washington, D.C. all recorded double-digit annual declines.

Only three metro areas -- Charlotte, N.C., Portland, Ore., and Seattle -- showed year-over-year increases in prices, but Seattle's growth was up a slim 0.5 percent.

    S&P: US Home Prices Down Sharply, NYT, 26.2.2008, http://www.nytimes.com/aponline/us/AP-Home-Prices.html

Lowe's Posts Lower 4Q Profit

February 25, 2008
Filed at 8:04 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

CHARLOTTE, N.C. (AP) -- Lowe's Cos., the nation's second biggest home improvement retailer, said Monday that a softer U.S. housing market helped drive its fourth-quarter earnings down 33.4 percent.

The company also said it expects sales in established stores to drop at least 5 percent in the current quarter and for the year, sending its shares down 2.5 percent in premarket trading.

Mooresville, N.C.-based Lowe's said its profit in the period ending Feb. 1 fell to $408 million, or 28 cents a share, from $613 million, or 40 cents per share, in the prior-year period.

Sales remained virtually steady at just under $10.4 billion.

Analysts surveyed by Thomson Financial had been looking for net income of 25 cents a share on revenue of $10.85 billion. Estimates usually exclude one-time items.

Same-store sales -- which counts sales at stores open at least a year -- declined 7.6 percent for the fourth quarter. Same-store sales are considered a good gauge of retail health.

Lowe's CEO Robert A. Niblock said the company will ''remain focused on what we can control.''

''The next several quarters will be challenging on many fronts as industry sales are likely to remain soft,'' he said.

The company expects first quarter total sales to rise about 2 percent on earnings of about 38 cents to 42 cents a share. Analysts have forecast earnings of 43 cents per share.

Its shares fell 59 cents, or 2.5 percent, to $23 in premarket trading.

Lowe's and bigger rival Home Depot Inc., which is expected to post fourth-quarter numbers Tuesday morning, have seen profits slide over the past year as a slump in the housing industry continues.

For the year, Lowe's reported earnings of $2.8 billion, or $1.86 per share, compared with $3.1 billion, or $1.99 per share, in 2007. Revenue rose to $48.3 billion from $46.9 billion a year ago.

    Lowe's Posts Lower 4Q Profit, NYT, 25.2.2008, http://www.nytimes.com/aponline/business/AP-Earns-Lowes.html

Georgia Couple Win $270 Million Lottery

February 24, 2008
By THE ASSOCIATED PRESS
Filed at 1:39 a.m. ET
The New York Times

PORTAL, Ga. (AP) -- All those lottery players holding crumpled, worthless Mega Millions tickets can take some consolation: The couple who won the $270 million jackpot are just too nice to resent.

Robert and Tonya Harris matched all five numbers plus the Mega Ball in Friday night's drawing, the only such ticket in the multistate game.

Robert Harris, wearing a pink shirt and dark sunglasses as he talked about his good fortune in front of his home with his family Saturday, said he and his wife don't normally play the lottery. But they made an exception this time. For their numbers, they used the birthdays of their grandchildren.

''They're my life,'' he told Savannah TV station WSAV. ''Them grandkids are everything I work for -- strive for -- to make sure they have a good life. And now they're going to have a good life.''

By early Saturday, this town of 584 residents located about 50 miles northwest of Savannah was buzzing. The Georgia Lottery had announced that the winning ticket had been sold at a convenience store called Clyde's.

At that time, no one yet knew it was the Harrises. Store manager Billy Hodges could say only that a middle-aged woman had purchased the ticket for her family Friday.

''It happened to a nice lady; I think this lady really deserves it,'' Hodges said.

Robert Harris said that at 8:10 a.m. Saturday, one of his daughters called him and said someone in town was holding the winning ticket. The Harrises checked, and one by one the numbers came up right: 7, 12, 13, 19 and 22, plus the Mega Ball of 10.

What are the odds of that? About 1 in 176 million.

Sometime during the family celebration, Robert said he called in to his employer, Quinlain Enterprise, and told them he was retired.

''It really hasn't sunk in, but I know that I won't have to get out there and work,'' he said.

''As hard as he's been working for 21 years ... if anyone deserves it, he does,'' his wife said.

In addition to the grand prize winner, 36 players -- including six Californians -- matched all five numbers but not the Mega Ball number. They will receive second prizes of $250,000 each.

Another 207 players matched four numbers, plus the Mega Ball number. Those are good for third prizes of $10,000 each.

The jackpot slips back to $12 million for Tuesday's drawing.

    Georgia Couple Win $270 Million Lottery, NYT, 24.2.2008, http://www.nytimes.com/aponline/us/AP-Mega-Millions-Winner.html

Once Immune, Utah Is Feeling Economic Dip

February 24, 2008
The New York Times
By KIRK JOHNSON

SALT LAKE CITY — In the economic boom that thundered through Utah over the last few years, many people saw a kind of perfect chemistry at work.

What demographers call Utah’s special story — its population is the youngest in the nation by far and one of the fastest growing, mainly from large Mormon families — was paying off, melding with a surging engine of growth in Utah’s backyard and throughout the world.

Between November 2006 and November 2007, Utah created more jobs than Pennsylvania, a state five times the population. Construction spiked at the same time as a giant wave of 20-somethings — another wrinkle unique to Utah, a baby boom echo long after the rest of the country’s — entered the worlds of work, housing and family.

But economists, employers and residents now say the very forces that made Utah roar — in the types of jobs that grew, especially construction and manufacturing — also pulled the state more firmly into the national and global economic web. And some of the distinctive traits that looked like strengths, like the low numbers of retirees, now seem like chinks in the armor. Retirees, who have flocked to places like Montana and Idaho, are likely to have interest and investment income to spend no matter what happens, while wage earners, who dominate Utah’s economy, could suffer in a downturn.

Utah’s unexpectedly sharp knock is a reminder of how global and local are intertwined and how delicate the balance can be.

“We’re no longer insulated,” said Pamela S. Perlich, a senior research economist at the University of Utah. “Utah still has a special story, but it got blurred by the engine of economic growth.”

Even as the rest of the nation’s economy began stumbling last year, Utah’s immunity seemed secure. The global shocks to housing, credit and the stock market would remain distant echoes, many economists said. The dismal picture of boarded-up, foreclosed houses that can be seen in places like Las Vegas or Riverside, Calif., would not happen here, business leaders said with a touch of smugness, because Utah, marching to its own fiscally prudent drummer, had not overbuilt.

But in December, the number of single-family housing permits issued here fell 32 percent, the steepest one-month decline since 1980, and sales of existing homes plummeted, off nearly 34 percent in the fourth quarter of last year — the sixth worst record in the nation, according to the National Association of Realtors.

Job growth projections for 2008 were recently cut by a third, in the state’s own analysis, to 2 percent from 3 percent or more only a month ago. New housing starts are expected to fall nearly 60 percent in Utah in 2008, a worse hit than Nevada or Arizona, which have become national symbols of the housing mess, according to a recent national forecast by Moody’s Economy.com.

Utah does not have the same magnitude of problems that other states are facing, and if history is a measure it will weather a recession better than many other regions. Only twice since the early 1960s, even as the nation endured numerous recessions, has Utah had fewer jobs at year’s end than it did the year before.

People like Dawn Updyke and Rick Draper, who helped bring Utah to its new place, are feeling the effects.

Ms. Updyke relocated from Ohio last year when her employer, the packing materials company Third Dimension, opened its first Western outpost in the southern Salt Lake City suburbs. Mr. Draper was local, with roots deep in Utah pioneer history, and took a job as Third Dimensions’ plant coordinator. She adjusted to Utah life as the production control manager; he adjusted to having bosses in the Midwest.

But after 11 months, the company is still at only 30 percent capacity. Finding and keeping employees was a problem in the beginning, Mr. Draper said. Now the bigger problem is demand. The company’s biggest customer, the Ohio cabinet manufacturer KraftMaid Cabinetry, which broke ground for a big factory in the Salt Lake Valley in 2005, has struggled to gear up its production and is not buying as many polyfoam and fiberboard shipping boxes as projected.

“I don’t foresee any large growth as of now,” Mr. Draper said.

A spokeswoman for KraftMaid, Kim Craig, declined to comment on the company’s projected hiring or production. She said in an e-mail message that the Utah plant, which serves the Western states and Canada, could employ up to 1,300 people, “when manufacturing reaches full capacity.”

Historically, the West has moved to a different beat. Manufacturing was never much of a factor to consider, but commodity prices for things like copper and gold were. Government spending on the military — a huge force through the cold war as cloistered desert bases and depots expanded — was usually a better economic indicator than the Dow Jones Industrials.

But the Rocky Mountain region has evolved since the last national recession in the early 2000s. Real estate and construction has increasingly supplanted mining and military. Recreation, with foreign visitors increasingly important, dwarfs ranching.

And the wave of affluent retirees, except for Utah’s southwest corner in St. George, has mostly gone elsewhere, remaking towns like Grand Junction, Colo., and Coeur d’Alene, Idaho. In the five states that are Utah’s immediate neighbors — Nevada, Idaho, Wyoming, Colorado and Arizona — Utah’s economy is least dependent on — or in a downturn, least helped by — the “nonwage” income that retirees have to spend from annuities and investments, according to Headwaters Economics, a nonprofit research group in Bozeman, Mont.

And in what is perhaps the cruelest paradox of all, Utah spends less on health care than its neighbors, according to Headwaters, with healthy habits, fewer old people and abstention from alcohol and tobacco by practicing Mormons the biggest factors. Health care spending is usually one of the most stable sectors of all in a downturn.

Economists say the nation’s economic turmoil is hitting differently around the country. Parts of the Midwest connected to the auto industry are getting smacked by continued troubles in Detroit, but are expected to be hurt least in the decline of new housing starts in 2008, according to Moody’s Economy.com.

The Rocky Mountain West, partly led downward by Utah, is expected to have the biggest percentage decline in construction jobs and housing starts this year, while the Southeast is likely to suffer least in total job growth. The Northeastern states, the company’s 2008 projections say, will take the biggest hit in total value of goods produced, called gross state product.

But some important old differences remain in Utah, too. The Church of Jesus Christ of Latter-day Saints will spend more than $1.5 billion in Salt Lake City over the next few years on a complete renovation of several downtown blocks. That is going to happen no matter what, said Mark Knold, the senior economist for the Utah Department of Workforce Services. “The Mormon Church is recession-proof,” he said.

And so, it would seem, is Ari Bishop. Mr. Bishop, a 27-year-old sales executive, has ridden the wave of economic life. He went into real estate when Salt Lake City was exploding with growth. He bought and sold a house and had two children with his wife, Bene.

Now he sells training packages to people learning to work a new growth sector: foreclosures and bank-owned properties. It was boom times here before, Mr. Bishop said, and now boom times again, sort of.

“It’s a little different angle,” he said. “But we’re just going with the market.”

    Once Immune, Utah Is Feeling Economic Dip, NYT, 24.2.2008, http://www.nytimes.com/2008/02/24/us/24utah.html?hp

News Analysis

That ’70s Look: Stagflation

February 21, 2008
The New York Times
By GRAHAM BOWLEY

Lately, many people are hearing an echo — faintly perhaps but distinctly audible — of the stagflation of the 1970s.

Even as economic growth sags, oil and gasoline prices are surging to new heights. Gold is on the rise, along with the prices of such basic commodities as wheat and steel. And on Wednesday, with the latest government report on consumer prices, there are signs that overall inflation, after years of only modest increases, may be breaking out of its box.

For the Federal Reserve and its chairman, Ben S. Bernanke, all this could not come at a worse time. With the credit markets in disarray from the collapse of the housing bubble, Mr. Bernanke is cutting rates in a headlong rush to blunt the risks of recession.

But in putting its emphasis above all on reviving growth, America’s central bank, according to some economists and even a few Fed officials, may face a bigger inflation problem down the road.

“They are cutting rates with a bill to be paid later," said John Ryding, chief United States economist at Bear Stearns. “The question is not, will we get inflation, but how much will it cost to stuff the genie back in the bottle. This has the feel of 1970s stagflation.”

Over the last 12 months, consumer prices are up 4.3 percent on average, according to the Labor Department. The core index of consumer price inflation, which excludes food and oil, was 2.5 percent higher in January than a year earlier, significantly above the Fed’s unofficial comfort zone of a 1 to 2 percent underlying inflation rate. That’s a far cry from the double-digit inflation rates that battered the economy at times in the 1970s, but still worrisome.

Analysts like Mr. Ryding say that by tolerating such price rises and maybe even allowing them to escalate, the Federal Reserve is risking its hard-won credibility as an inflation fighter, which will ultimately require it to push up interest rates higher than otherwise to contain the damage.

Most economists still expect the Fed’s policy-making committee to cut interest rates again when it meets on March 18, engineering its sixth reduction since September. But the fears of a revival of inflation underline the difficult decisions it now faces.

Like the Fed, economists generally remain more concerned about the immediate threat of recession than the more distant fear of higher inflation. Recent data suggests an economy that may be in a downturn or close to it. The consensus view is that the expected slowdown is likely to create enough spare capacity to suck inflationary pressures out of the economy.

Moreover, even if some additional inflation is a side effect of the Fed’s prescription, many economists say, it sure beats the alternative. Once the interest rate cuts have nursed the economy through the next few difficult quarters, they say, the Fed can easily raise rates again to respond to any pickup in inflation.

“They are going to fix the wound now,” said David Durst, chief investment strategist of the Global Wealth Management Group of Morgan Stanley. “They are going to take care of the growth situation and then fight inflation when the economy gets stronger.”

Reinforcing this view, there are few signs that inflation is seeping into the labor market and pushing up wages in anticipation of higher prices to come.

That may be comforting to the Fed, but keeping inflation contained still may not be easy. In recent days some officials at the central bank have gone out of their way to warn that they are not prepared to let down their guard — even if it means that the Fed has to be less aggressive about cutting interest rates.

In a speech this month, Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said “the Fed has to be very careful now to add just the right amount of stimulus to the punch bowl without mixing in the potential to juice up inflation once the effect of the new punch kicks in.”

Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, echoed that view, saying in a speech that “we cannot be confident that a slow-growing economy in early 2008 will by itself reduce inflation.”

“As we learned from the experience of the 1970s,” Mr. Plosser added, “once the public loses confidence in the Fed’s commitment to price stability, it is very costly to the economy for the Fed to regain that confidence.”

In a telephone interview, Mr. Plosser explained that the Fed seemed to be making progress against inflation in the first half of 2007 but he started to become more worried during the second half.

“Since the summer almost all of the measures of inflation that we look at have begun to accelerate again, and in some cases pretty sharply,” Mr. Plosser said. “Perhaps the inflationary pressures are more broad-based than just energy.”

While Mr. Plosser said he hoped that inflation was about to moderate on its own, “we do have a dual mandate after all — one is price stability and the other is growth.”

“We can’t just throw one out of the window when it is convenient.”

To Bernard Baumohl, managing director of the Economic Outlook Group, such talk is seen on Wall Street as a clever tactic intended to help jawbone inflationary expectations downward while the Fed continues to cut rates for at least a while longer.

“We expect Fed officials will ramp up their rhetoric in speeches and in testimony that they will work diligently to keep inflation expectations under control,” Mr. Baumohl wrote to clients after the latest consumer price figures were released Wednesday. “Mere words, to be sure. But it would be a mistake to construe them as hollow.”

Zach Pandl, an economist at Lehman Brothers, said that the statements so far have been by less important Fed officials and that the Fed’s real views should be measured by its actions, which are to cut rates aggressively with less concern about inflation.

Those actions have led a number of economists to warn that the Fed’s aggressive easing moves, combined with the strong demand for industrial and agricultural commodities from emerging global economic powers like China and India, may be laying the groundwork for a new era of rising inflation.

“The period of falling inflation that we have been in for all the ‘80s and ‘90s and early 2000s has come to an end,” said Michael Darda, chief economist at MKM Partners, a research and trading firm in Greenwich, Conn. “That is over.”

Mr. Darda points to the surge in commodity prices, including food and oil. Long-term rates are rising in the bond market, reflecting the view that both growth and inflation may pick up later this year and into 2009, as well as fears about bad debt.

And, according to Mr. Pandl, a measure of investors’ inflation expectations provided by the difference between the yield on normal Treasury securities and Treasury inflation-protected securities “spiked quite a bit higher” after the Fed cut rates in January even though it “has been trading lower since then.”

Then there is gold, which has historically been a refuge for investors seeking protection from eroding currencies.

Gold “has risen a lot since the Fed began lowering rates,” Mr. Darda said. “That’s an ominous sign. Once we are in 2009 and 2010, we are going to figure out that inflation is far less benign.”

    That ’70s Look: Stagflation, NYT, 21.2.2008, http://www.nytimes.com/2008/02/21/business/21stagflation.html?hp

Inflation Continues to Edge Up

February 20, 2008
The New York Times
By MICHAEL M. GRYNBAUM

Inflation rose more than expected last month, the government reported on Wednesday, adding to worries about the economy and sending a reminder to central bankers that rising prices remain a threat.

Meanwhile, the housing crisis continued to take a toll on residential home construction. Groundbreakings for homes rose slightly but remained near their lowest levels since the early 1990s, and permits for new home projects fell again.

The inflation report raised concerns among some investors that the Federal Reserve will back away from cutting interest rates again at its next meeting, on March 18, and stocks declined at the opening bell.

Lower interest rates help stimulate growth but can cause prices to rise. Still, Fed officials have signaled they are more concerned about staving off a recession than tempering price pressures.

The inflation report “should not provide too much of a headache for the Federal Reserve, which seems to be largely indifferent to near-term inflation movements at the moment,” wrote economists at ING Bank.

The Consumer Price Index rose 0.4 percent in January, a bigger gain than economists had predicted. Over the last 12 months, the index has surged by 4.3 percent, one of the highest year-over-year rates in decades, the Labor Department said.

The rise was led by increases in the costs of food, gasoline, shelter, and transportation. The so-called core inflation rate, which excludes food and gasoline prices, ticked up 0.3 percent last month.

The core rate is 2.5 percent above its level in January 2007, above the Fed’s recognized comfort zone ceiling of 2 percent.

Economists predict that inflation will taper off by the second half of this year. The economic downturn is expected to reduce consumer demand, which in turns tends to keep prices down. Oil, however, closed above $100 a barrel on Tuesday for the first time, meaning consumers will still face pocketbook pressures from the price of gasoline.

Consumer spending is also affected by the housing crisis, which shows no sign of abating. Builders are rushing to reduce inventories in the face of plunging demand, as potential buyers stay on the sidelines in the hope that prices will continue to drop.

Groundbreakings for new homes edged up 0.8 percent in January, to a 1.012 million annual rate. But the increase comes after a 14 percent plunge in December that sent housing starts to their lowest level in more than 16 years. And construction of new single-family homes dropped again last month.

“There is no sign whatever of any easing in the rate of decline,” wrote Ian Shepherdson, chief United States economist at High Frequency Economics. “Eventually, such a huge drop in production will reduce inventory and allow the market to stabilize, but for now it’s just pain, pain, pain.”

Permits for new home projects fell 3 percent, to a 1.048 million annual rate, seasonally adjusted, their lowest level since November 1991.

    Inflation Continues to Edge Up, NYT, 20.2.2008, http://www.nytimes.com/2008/02/20/business/20cnd-econ.html?hp

Fed Foresees Slower Economic Growth

February 20, 2008
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) — The Federal Reserve on Wednesday lowered its projection for economic growth this year, citing damage from the double blows of a housing slump and credit crunch. It said it also expects higher unemployment and inflation.

The updated forecasts come amid worry by the Federal Reserve chairman, Ben S. Bernanke, and his colleagues that the economy could continue to weaken, even after their aggressive interest rate cuts in January, according to minutes of those private deliberations released Wednesday.

“With no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the committee agreed that downside risks to growth would remain even after this action,” minutes of the Fed’s Jan. 29-30 closed-door meeting showed.

The Fed at that session voted to cut a key interest rate by one-half percentage point to 3 percent at that meeting. Just eight day earlier, the Fed, in an emergency session, slashed its rate by a rare three-quarters percentage point. The two rate cuts together marked the most dramatic rate reductions in a single month by the Fed in a quarter century.

Under its new economic forecast, the Fed said it believes that the gross domestic product will grow between 1.3 percent and 2 percent this year. That’s lower than a previous Fed forecast for growth — which was estimated then to be between 1.8 percent and 2.5 percent.

Gross domestic product is the value of all goods and services produced within the United States and is the best barometer of the country’s economic fitness.

With economic growth slowing, the Fed projected that the national jobless rate will rise to 5.2 percent to 5.3 percent this year. That is higher than the central bank’s old forecast for the rate to climb to as high as 4.9 percent. Last year, the unemployment rate averaged 4.6 percent.

And with energy prices marching upward, the Fed also raised its projection for inflation. The Fed now expects inflation to be between 2.1 percent and 2.4 percent this year. That is higher than its old forecast for inflation, which was estimated to come in around 1.8 percent to 2.1 percent.

The Fed said its revised forecasts reflected a number of factors including “a further intensification of the housing market correction, tighter credit conditions ... ongoing turmoil in financial markets and higher oil prices.”

The combination of slower economic growth and increasing inflation could complicate the Fed’s work. The central bank is trying to keep the economy growing, while ensuring that inflation stays under control. The Fed’s remedy for a weakening economy is interest rate cuts. To combat inflation, the Fed usually increases rates.

Oil prices on Tuesday jumped to more than $100 a barrel. Consumer prices, meanwhile, rose by a bigger-than-expected 0.4 percent in January, according to new government figures released Wednesday.

Fed policy makers were mindful that they needed to keep a close eye on inflation, minutes of the Jan. 29-30 meeting said.

And some policy makers noted that when prospects for economic growth improved, “a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate,” according to the documents.

Still, all but one of the Fed’s members agreed to lower rates by a half-point at that time.

Richard Fisher, president of the Federal Reserve Bank of Dallas, was the sole dissenter. He preferred no change. The minutes showed that Mr. Fisher felt that the level of interest rates were already “quite stimulative, while headline inflation was too high.”

The minutes also revealed that the Fed conducted a conference call on Jan. 9, where policy makers reviewed economic data and financial market developments, which were worsening. It did not lower interest rates at that time, although most policy makers were of the view that “substantial additional policy easing in the near term might well be necessary” to help brace the wobbly economy.

As the financial situation continued to deteriorate, worldwide stock markets plunged and recession fears intensified, Mr. Bernanke convened an emergency conference call on Jan. 21. Fed policy makers believed “the outlook for economic activity was weakening,” details of that conference call showed. The Fed decided to slash rates by a dramatic three-quarters of a percentage point and make the announcement on the following morning, Jan. 22.

Demonstrating the Fed’s “commitment to act decisively” to support the economy might reduce concerns about the weakening economy that seemed to be contributing to the worsening state of financial markets, according to the minutes. But there was some concern expressed that such a bold move “could be misinterpreted as directed at recent declines in stock prices, rather than the broader economic outlook,” the documents showed.

William Poole, president of the Federal Reserve Bank of St. Louis, was the lone dissenter on the Fed rate cut announced on Jan. 22. He did not believe conditions justified a rate cut before the Fed’s regularly scheduled meeting on Jan. 29-30, the minutes said.

    Fed Foresees Slower Economic Growth, NYT, 20.2.2008, http://www.nytimes.com/2008/02/20/business/apee-fed.html?ref=business

Majority of Americans expect a recession: poll

Wed Feb 20, 2008 7:48am EST
Reuters
By Emily Kaiser
 

WASHINGTON (Reuters) - A majority of Americans expect a recession in the next year as the housing downturn deepens, inflation rises and credit conditions tighten, a Reuters/Zogby poll released on Wednesday showed.

The survey of 1,105 likely voters found that 54 percent thought a recession was looming. It was the first time since the recession question was added to the monthly poll in September that more than half predicted such a downturn.

As economic anxiety grows, nearly half of those surveyed said they planned to use their government rebate checks to pay down debt or pad savings. That would blunt the impact of the $168 billion stimulus plan that President George W. Bush signed into law last week in a bid to stave off a recession.

"There are hard times ahead. It's a good time to get out of debt if you've got a freebie coming," pollster John Zogby said.

When asked about how they would use rebate checks worth up to $600 per individual and $1,200 per couple, just 16 percent said they would spend it all, and a similar number intended to save it all. Nearly one in three said they would pay down debt, while 27 percent said they would spend some and save some.

The stimulus plan was aimed at bumping up consumer spending to bolster the economy. If households instead save the money or use it to reduce debt, the economic boost will be limited.

Economic worries have supplanted the Iraq War as the top issue in this year's U.S. presidential election as the housing market fallout takes its toll. Less than one in four gave the Bush administration high marks for U.S. economic policy.

Americans remained downbeat about housing, with three out of four expecting home prices to hold steady or fall in the next year. That was little changed from a month ago.

The poll, conducted January 13-16, found that less than 40 percent thought the U.S. economy would sidestep a recession. A month ago, 47.5 percent said they expected a recession, while 44.6 percent did not.

Those nearing retirement age were particularly concerned about recession. Among those ages 50 to 64, 61.2 percent expected a recession, making them the most pessimistic group.

That group includes a large portion of the Baby Boomer generation born in the nearly two decades after the Second World War. Much of their savings is tied up in home equity and stock-based retirement plans, both of which have been under pressure in the past year.

Zogby, who at age 59 counts himself among that group, said older boomers were increasingly putting off retirement or cutting back on spending for fear of outliving their savings, so worries of a recession hit them particularly hard.

"We began as an anxiety-ridden generation and that's how we're going to punch the time clock, too," he said.

The poll had a margin of error of plus or minus 3 percentage points.

    Majority of Americans expect a recession: poll, R, 20.2.2008, http://www.reuters.com/article/ousiv/idUSN1925158420080220

Lending laws unenforced in housing crisis: Jackson

Wed Feb 20, 2008
5:37pm EST
Reuters
By Michele Gershberg

NEW YORK (Reuters) - A U.S. mortgage meltdown has its roots in lending discrimination against African-American and Hispanic communities and requires federal intervention to prevent it from crippling municipal services, civil rights activist Rev. Jesse Jackson said on Wednesday.

Jackson told the Reuters Housing Summit in New York that nearly 40 percent of subprime loans went to black and Hispanic families, many of them in districts once shunned by discriminatory "redlining" lenders who later devised a way to profit there by selling a flawed financial product.

"They began to stereotype and target and cluster whole communities. It's kind of like reverse redlining," Jackson said.

Jackson estimates that nearly half of those borrowers could have been eligible for regular loan packages, but instead were locked into mortgages that threaten to balloon out of their ability to pay when the adjustable interest rates reset.

"It suggests that if fair lending laws had been enforced ... we would not have had this global economic crisis," Jackson said. "But while it started by unenforced civil rights laws, the bleeding has not stopped there. It's now engulfing the budgets of cities and counties and states."

Jackson also said that the U.S. Department of Justice was slow to respond, if at all, to concerns of lending discrimination.

An estimated 1.5 million subprime mortgages, traditionally targeted at borrowers with poor credit histories, will reset to higher interest rates this year, putting many owners at risk of losing their homes. Another 500,000 will reset in 2009, according to Federal Reserve estimates.

Jackson said the federal government should institute a halt to foreclosure proceedings and authorize the Federal Housing Administration or another body to start a major restructuring of subprime loans, with lower interest rates and payments spread out over a longer period.

He also called on state attorneys general to subpoena the major lenders on their loan practices and impose penalties on those who have violated the law.

He described President George W. Bush's plan to offer $152 billion in tax rebates this year to fend off a possible recession as irrelevant to the needs of home owners facing foreclosure and ignoring the cause of the crisis.

(Editing by Gary Hill)

    Lending laws unenforced in housing crisis: Jackson, R, 20.2.2008, http://www.reuters.com/article/Housing08/idUSN2039245920080220

Slowdown Hits Towns at Outskirts of Texas Boom

February 20, 2008
The New York Times
By LESLIE EATON

LAVON, Tex. — Once little more than a speed trap 25 miles northeast of Dallas, this town started to boom about a year ago, as turreted stone castlettes and modest brick bungalows began springing up in what had been wheat fields.

Big Dallas seemed to be knocking on little Lavon’s door. Thousands of lots were laid out and hundreds of houses built, as developers tried to meet what seemed to be an insatiable appetite for inexpensive single-family homes. Land values soared, the population hit 2,500, and by November, the city was finally flush enough to afford a full-time police department.

But that was when the knocking stopped. Banks were no longer giving mortgages to anyone who could fog a mirror. “For sale” signs went up and stayed up. Weeds, not houses, sprouted on the scraped-earth plots.

And now the city government, which had counted on years of growth, is short of money. Plans for a new City Hall have been suspended, street paving jobs have been postponed, and there is even the prospect that programs and personnel will be cut, said J. Michael Jones, the city marshal and chief administrator.

“I say that very quietly,” Mr. Jones added, “because I don’t want to panic our citizens or our employees.”

Unlike many other states with housing troubles, Texas as a whole is booming, continuing to attract new residents and create jobs. But across the state’s outermost exurbs, formed by waves of new housing, building has ground almost to a halt.

These were not towns built on the speculation that soaring home prices would continue forever, like many developments in Florida and on the West Coast. These bedroom communities of bedroom communities were built because land was cheap, jobs were plentiful and mortgage rates were low. But now, in some of the fastest-growing counties in the country, home to places with names like Venus, Ponder and Fate, building permits dropped by as much as 40 percent last year, often on top of declines in late 2006.

“It’s slowed down pretty much everywhere,” said Jimmie C. Honea, chief appraiser for Collin County, which in addition to Lavon includes much bigger towns and cities like McKinney, Plano and Wylie.

There are other signs of trouble. Home sales, which had been holding up well across the state last year, started to fall sharply in the fall, and by December they were down almost 20 percent in Austin, Houston and San Antonio, and about 25 percent in Dallas and Fort Worth.

And foreclosures, generally high in North Texas, hit record levels this month, according to Foreclosure Listing Service in Addison, a suburb of Dallas. When the federal Department of Housing and Urban Development sent out letters on Feb. 8 offering help to homeowners in areas “experiencing a disturbing home foreclosure rate,” Texas was third on the list after California and Florida.

This weakness is all the more striking because of the state’s continuing growth. Texas has been attracting far more new residents than any other state, according to the Census Bureau, which reports that the state’s population increased by half a million in the year that ended July 1. Dallas added 65,800 jobs last year, more than any other city in the nation except New York; Houston was No. 3.

But even Texas cannot escape the consequences of a housing boom that has gone bust.

It is faring better than other states with deep economic woes, like Michigan, or those where housing prices soared to speculative levels, like Florida. So far, the price of houses here has remained relatively firm, and is increasing in well-established (and expensive) areas like Highland Park, which abuts Dallas, said James P. Gaines, a research economist at the Real Estate Center at Texas A&M University.

Outside those older areas, however, builders have responded quickly to the slowdown, cutting new construction to the lowest level in a decade and selling their inventories, said Edward L. Wilson Jr., a partner at Residential Strategies Inc., a consulting firm in Dallas. While that may make good business sense, it is bad news for the communities that were banking on growth.

The Rev. Clinton R. Bratcher, pastor of the First Baptist Church of Lavon, said that his congregation was providing more emergency financial aid for workers who used to build houses in town. And financial stress is causing more families to seek his help, Mr. Bratcher said. “Preachers are free and available,” he said, “so we do a lot of counseling.”

Those financial stresses extend to the city government. Building permits, which were projected to provide almost a third of the city’s $1.7 million in revenues, recently plunged from 25 to 30 a month to zero or one, said Mr. Jones, the city marshal.

Slower growth also affects how much money the city makes on things like trash collection, Mr. Jones said, not to mention property and sales taxes. (Lavon only recently got its first chain store, an everything-for-a-dollar place.) City officials are bracing for a revenue shortfall of several hundred thousand dollars, but if it reaches $500,000, “it would be devastating,” Mr. Jones said.

Driving around Lavon, he described how far the city had come from just a few years ago, when it could not afford to hire anyone to fix its mostly gravel roads and had to hold volunteer “patching parties.”

Now most roads are paved. Thanks to developers, Lavon has a police station and trucks for the volunteer fire department, and the first new public school in decades is under construction behind a new subdivision. And Mr. Jones has big dreams — for a gazebo, for more green space, even for a grocery store to save residents the five-mile drive to the Wal-Mart in Wylie.

He also would like to rescue the old City Hall, once a school built by the W.P.A. in 1939; it was closed to the public last year after he fell through the floor. And he wants to get more people hooked up to the sewer system, which now serves only the biggest development, Grand Heritage.

All that will take more money, and therefore more new residents. Optimism is part of every developer’s DNA, of course, but builders express confidence in the future of Grand Heritage. Bowen Family Homes plans to start building again “real soon,” said William Hoot, comptroller of the company’s Texas operations and a resident of Grand Heritage.

And Paul S. Cheng, whose World Land Developers created Grand Heritage, is sticking by his long-term forecast of 5,000 or more new houses, filled with residents attracted by the subdivision’s baronial “amenities center,” complete with several pools and a splash park.

But even those who most appreciate Lavon’s charms may find it hard to buy there right now, especially if they have to sell a home first. Mr. Jones, the city marshal, said he needed to sell his house in Wylie if he was to achieve another dream, that of living in Grand Heritage.

“The slowdown in the housing market,” he said, “impacts my ability to move back to Lavon.”

    Slowdown Hits Towns at Outskirts of Texas Boom, NYT, 20.2.2008, http://www.nytimes.com/2008/02/20/us/20exurb.html?hp

Wall St. Banks Confront a String of Write-Downs

February 19, 2008
The New York Times
By JENNY ANDERSON

Wall Street banks are bracing for another wave of multibillion-dollar losses as the crisis that began with subprime mortgages spreads through the credit markets.

In recent weeks one part of the debt market after another has buckled. High-risk loans used to finance corporate buyouts have plummeted in value. Securities backed by commercial real estate mortgages and student loans have fallen sharply. Even auction-rate securities, arcane investments usually considered as safe as cash, have stumbled.

The breadth and scale of the declines mean more pain for major banks, which have already written off more than $120 billion of losses stemming from bad mortgage-related investments.

The deepening losses might make banks even more reluctant to make the loans needed to prod the slowing American economy. They also could force some banks to raise more capital to bolster their weakened finances.

The losses keep piling up. Leading brokerage firms are likely to write down the value of $200 billion of loans they have made to corporate clients by $10 billion to $14 billion during the first quarter of this year, Meredith Whitney, an analyst at Oppenheimer, wrote in a research report last week.

Those institutions and global banks could suffer an additional $20 billion in losses this year on commercial mortgage-backed securities and other debt instruments tied to commercial mortgages, according to Goldman Sachs, which predicts commercial property prices will decline by as much as 26 percent.

Analysts at UBS go further, predicting the world’s largest banks could ultimately take $123 billion to $203 billion of additional write-downs on subprime-related securities, structured investment vehicles, leveraged loans and commercial mortgage lending. The higher estimate assumes that the troubled bond insurance companies fail, a possibility that, for now, is relatively remote.

Such dire predictions underscore how the turmoil in the credit markets is hurting Wall Street even as the Federal Reserve reduces interest rates. Already, once-proud institutions like Merrill Lynch, Citigroup and UBS have gone hat in hand to Middle Eastern and Asian investors to raise capital. “You don’t have a recovery until you have the financial system stabilized,” Ms. Whitney said. “As the banks are trying to recover they will not lend. They are all about self-preservation at this time.”

One of the latest areas to come under pressure is the leveraged loan market. In recent weeks the market for these corporate loans plummeted, driven by fear that banks have too many loans to manage. Prices have fallen as low as 88 cents on the dollar, levels not seen since 2002, when default rates were more than 8 percent. Loans to some companies, like Univision Communications and Claire’s Stores, are trading in the high 70s, analysts say.

“Price declines of this magnitude — over 10 points — were not supposed to happen in the leveraged loan market,” Bank of America credit analysts wrote in a report on Feb. 11.

When banks make loans, they hold them until they can sell the debt to institutional investors like hedge funds and mutual funds. But lately the market for this debt has seized up and many banks have been unable to unload the loans. As the value of this debt declines, lenders must recognize as a loss the difference in the value at which they made loans and the prices of similar debt in the secondary, or resale, market.

“This correction feels a lot deeper and wider and more prolonged than what we have seen historically,” said one senior Wall Street executive who was not authorized to speak to the media.

Many analysts say the financial health of many companies has not deteriorated as much as loan prices suggest.

“People don’t know what’s out there, they haven’t sorted out what’s good and what’s bad, so they are throwing all credit assets out,” said Meredith Coffey, director of analysis at the Reuters Loan Pricing Corporation. Median loan prices were lower than those in 2002 when defaults peaked, even though very few defaults have actually occurred.

There has also been a marked deterioration in the market for commercial mortgage-backed securities, which are commercial mortgages packaged into bonds.

To some, the troubles plaguing commercial mortgage securities seem a logical extension of the turmoil in the residential real estate market. But some strategists argue that the commercial real estate market is not as vulnerable as the housing market. The pressure to package loans that was so evident in the residential market never materialized in the commercial market, these analysts say.

Also, commercial loans tend to be made at fixed, rather than adjustable, rates, and are not usually refinanced for long periods of time.

Nevertheless, the cost of insuring a basket of commercial mortgage-backed securities has soared. Last October, for example, it cost $39,000 to insure a $10 million basket of top rated 2007 commercial mortgages (super senior AAA, in Wall Street language) against default.

Today that price has increased to $214,000. For triple-B-rated commercial mortgage backed securities, those which are riskier, the cost of protection during the same time has soared from $672,000 to $1.5 million.

The deterioration of the CMBX, the benchmark index that tracks the cost of such credit protection, “started off as a fundamental repricing and then it escalated into something much more than that,” said Neil Barve, a research analyst at Lehman Brothers. “We think there is some downside in a challenging macroeconomic environment, but not nearly what has been priced in.”

Goldman Sachs seems to disagree, with analysts predicting commercial real estate loan losses to total $180 billion, with banks and brokers bearing $80 billion of that in total and about $20 billion this year.

Current index figures suggest that the banks will face significant pain. Brad Hintz, an analyst at Sanford C. Bernstein & Company, calculated that Lehman Brothers has the highest exposure to commercial real estate-backed securities, with $39.5 billion, followed by Morgan Stanley, with $31.5 billion. (These numbers do not include hedges that the banks may have but do not disclose).

To be sure, a crisis on Wall Street also spells opportunities for patient bargain hunters. After all, markets that were trading at all-time highs have been reduced to rubble, suggesting that those willing to search for value will find it.

And last week, some hedge funds began to wade into the troubled loan market. But prices do not yet reflect any widespread rallies, and Wall Street still has to absorb losses reflected in these markets.

“The fourth quarter was terrible, but you had strong investment banking revenues,” Mr. Hintz said. “Now you’ve had a bad December, a worse January and an even worse February.”

    Wall St. Banks Confront a String of Write-Downs, NYT, 19.2.2008, http://www.nytimes.com/2008/02/19/business/19banks.html?hp

FACTBOX: Presidential candidates' economic policy views

Mon Feb 18, 2008
11:37am EST
Reuters

(Reuters) - The following are highlights from recent comments on economic policy from the top U.S. presidential candidates.

 

DEMOCRATS

New York Sen. Hillary Clinton

Clinton unveiled a plan she said would save $55 billion by taking on corporate interests such as drug companies, oil firms and Wall Street. The plan included a proposal to overhaul credit-card regulations to shield consumers from high fees and sudden rate hikes.

Clinton has proposed a retirement savings plan for lower- and middle-class families that would include tax credits as incentives for savings.

Her health-care plan would require all Americans to get health insurance. Under a public-private partnership, they would keep existing coverage or choose from private insurance options available to members of Congress. Individuals could also choose a public plan similar to Medicare.

On China, Clinton has said tougher import standards are necessary to keep consumers safe. "We also have to deal with their currency manipulation," she said.

Illinois Sen. Barack Obama

Obama offered a plan that he said would create 5 million new jobs in the green energy sector and establish a infrastructure bank to spend $60 billion over a decade to repair deteriorating roads, bridges and waterways. He said he would pay for the plan by ending the Iraq war and raising taxes on corporations and wealthy Americans.

Obama has called for a refundable tax credit worth $4,000 for college tuition every year, and wants to automatically enroll workers in retirement plans to boost savings.

He has proposed a national public insurance program to allow individuals and small businesses to buy affordable health care similar to that available to federal employees.

He said if trade partners are manipulating their currency, "we take them to the mat on this issue. It means that we are also not running up deficits and asking China to bail us out and finance it, because it's pretty hard to have a tough negotiation when the Chinese are our bankers."

REPUBLICANS
 

Arizona Sen. John McCain

McCain has said opening new trade markets "is a key to U.S. economic success," but also advocates education and retraining for workers displaced by global trade.

Excessive government borrowing and deficit spending should be stopped, McCain has said. He has maintained that too much federal money is siphoned off "to satisfy special interests."

On health care, besides offering a refundable $2,500 tax credit, $5,000 for families, his plan would promote open health care markets by letting providers practice nationwide, rather than restricting them regionally.

McCain says taxes should be low, simple and fair and he advocates lower tax rates and spending cuts.

Former Arkansas governor Mike Huckabee

Huckabee has said the "greatest source of short-term stimulus is the Federal Reserve" but that the Fed also must be mindful of inflation.

Huckabee vowed to increase spending on both defense and public infrastructure.

He has promised to "preserve and expand" the Bush tax cuts and touts his "Fair Tax" plan, which would replace the income tax with a national sales tax.

Huckabee says the United States must fight unfair foreign competition that is costing American jobs, but globalization can be a "blessing" because it lowers prices of consumer goods. He criticizes China for manipulating its currency to boost exports and discourage imports.

(Compiled by JoAnne Allen; Editing by Alan Elsner)

    FACTBOX: Presidential candidates' economic policy views, R, 18.2.2008, http://www.reuters.com/article/politicsNews/idUKN1451512820080218

Wall Street Eyes Inflation, Housing Data

February 18, 2008
By THE ASSOCIATED PRESS
Filed at 12:01 p.m. ET
The New York Times

NEW YORK (AP) -- February's stock market so far has displayed more stability than January's, but Wall Street wants to see a stronger economy on the horizon before it trades confidently again.

Investors are not counting on this week's readings on housing, inflation and manufacturing to give them that assurance. As a result, they are bracing for more volatility.

The market has been swinging higher and lower as traders sell off when disappointing economic data rolls in and then drive the market up when they snap up stocks that look like bargains. The pattern is indicative of a market that has underlying demand holding it up, but one that could have a bit further to fall if more bad news comes along.

After rallying early last week and then losing steam toward the end, the Dow rose 1.36 percent for the week, the Standard & Poor's 500 index gained 1.40 percent, and the Nasdaq composite index advanced 0.74 percent. All three indexes remain down sharply for the year, particularly the Nasdaq, which is 12.5 percent lower than it was at the end of 2007.

''We may not have hit the bottom, but people seem to be looking for things to buy rather than things to dump,'' said Alexander Paris, economist and market analyst for Barrington Research in Chicago. ''Things might get worse before they get better, but you've got to buy stock when things look worst.''

The question is whether there's any data coming in the near future that will have the power to reinvigorate the stock market back -- or whether the market is doomed to a holding pattern until the economy starts to recover.

One overriding concern is the weak housing market. Though investors have come to terms with falling prices, there's uncertainty over how long the downturn will last and how much it will affect homeowners' spending patterns. And there are worries about the financial well-being of companies with investments in mortgage-backed assets.

All U.S. financial markets are closed Monday for the Presidents Day holiday.

On Tuesday, the National Association of Home Builders releases its housing industry index, which economists surveyed by Thomson Financial/IFR expect to show a decline for February. Then Wednesday, the Commerce Department reports on housing starts and building permits -- both are expected to be weak.

Because of the housing market's deterioration, many businesses are suffering. The Institute for Supply Management's January manufacturing report showed modest growth, but economists predict that the Philadelphia Fed's regional manufacturing index will register another contraction. The decline is not expected to be as dismal as the December report, which caused the Dow to tumble more than 300 points a month ago, but if it is, it could send stocks reeling again.

Another worry is the inflation that is occurring alongside the economic slowdown. The dollar's recent tumble appears to have plateaued, but it is still weak, while food and energy costs are staying high. Consumers are finding themselves unable to spend money on discretionary items because the bulk of their wages is going toward necessities like meals, transportation and health care.

The Labor Department reports Wednesday on consumer prices, which economists predict ticked up 0.3 percent in January, the same rate as in December. Core consumer prices, which exclude food and energy costs, are anticipated to have risen by 0.2 percent.

Also Wednesday, the Federal Reserve releases the minutes from its Jan. 29-30 meeting. At that meeting, the central bank lowered the key interest rate by a half point to 3.00 percent and stated that the financial markets are still under considerable stress. The Fed also said credit is tightening for businesses and households alike, the housing contraction appears to be deepening, and the job market seems to be weakening.

''It seems to be, as the data unfolds, they'll have no choice but to cut further,'' said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. He added, though, that given how much policy makers have already slashed rates and their persistent worries about inflation, ''they don't have much more to go.''

The Jan. 30 move followed an emergency three-quarter-point reduction a week earlier, and three cuts in the latter part of 2007. Rate changes tend to take at least six months to affect the economy. The Fed meets next on March 18.

For clues about how the Fed is feeling about the economy and its monetary policy going forward, investors will listen to speeches by Minneapolis Fed President Gary Stern, who is scheduled to speak Tuesday in Golden Valley, Minn., on the economy, and by St. Louis Fed President William Poole, who is speaking Wednesday in Kirksville, Mo., on inflation dynamics.

    Wall Street Eyes Inflation, Housing Data, NYT, 18.2.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street-Week-Ahead.html

Letters

Being Poor in a ‘Charge It’ Society

February 17, 2008
The New York Times

To the Editor:

“You Are What You Spend,” by W. Michael Cox and Richard Alm (Op-Ed, Feb. 10), argues that growing income disparities in this country don’t mean very much. Consumption offers a better “measurement of financial well-being,” the writers say, and it “indicates that the gap between rich and poor is far less than most assume.”

Equating consumer spending with well-being, however, ignores elements of long-term well-being like investing for retirement, saving for college education, or building wealth through home ownership.

Over the long term, you cannot spend more than you earn, unless the assets you own have appreciated. The rich have more assets, and they have appreciated in recent decades. The poor do not; they have more debt, and have been harder hit by the subprime crisis.

It’s still not easy living on a low income in this country, and the disparities between rich and poor are significant and increasing.

Michael Kiparsky
Eric Hallstein
Berkeley, Calif., Feb. 10, 2008

•

To the Editor:

What a disappointment it was to read two members of our economic elite telling us: Don’t worry. Be happy. The poor are like us, just with less money.

Prosperity is not a color television, a cellphone and a VCR, and for many of us prosperity is not its own end but a means toward well-being.

Well-being is the certainty that you can provide your children with a quality education, which W. Michael Cox and Richard Alm’s chart shows many can’t purchase. Well-being is the security of having a good roof over your head in a safe, clean neighborhood. And it is knowing that if your children become ill, you have the income to help them pull through.

I am so tired of our economists (and often, our newspapers) saying that the good life and the good society are defined by consumption (or its flip side, G.D.P.) and that the path to happiness is simply more of it.

Keith M. Wilson
Charleston, Ill., Feb. 10, 2008

•

To the Editor:

W. Michael Cox and Richard Alm seems to equate having a lot of stuff — refrigerators, stoves, cellphones, cars, color TVs, DVD players and the like — with a “lifting” of the standard of living.

I disagree. The advantages of an increase in household consumption are far outweighed by the disadvantages. Does owning a car really shorten our workday, giving us more time to read, exercise or sleep?

As for globalization as currently practiced, it has undermined the financial autonomy and social cohesiveness of communities both here and abroad.

And you call this the good life?

Karin J. Lauria
Marlborough, Mass., Feb. 10, 2008

•

To the Editor:

W. Michael Cox and Richard Alm say Americans in the lowest fifth for income are able to spend almost double their income because they have other sources of money — like bank accounts and proceeds from home sales. The major reason that poor Americans are able to outspend their income is that they borrow heavily.

Credit-card, loan and other debt is enormous among those who cannot afford to buy everything our consumerist society convinces them they need (or even what they really need).

This debt burden clearly calls into question the writers’ assertion that “consumption is a better measure of financial health than income.”

Rosalyn Benjamin Darling
Indiana, Pa., Feb. 10, 2008

The writer is a professor of sociology at Indiana University of Pennsylvania.

•

To the Editor:

I agree that United States income inequality is not as problematic as many claim it to be. However, homes form the core of Americans’ assets. Higher-income individuals are more likely to be homeowners. Those making less either rent and give money away every month, or pay high mortgages resulting from modest down payments.

Overall purchasing power matters, but it is also important to analyze the relative burden of a major regular expenditure on a household’s budget. Then it becomes clear that America’s free market turns out to be freer for those who are fortunate to benefit from higher incomes.

Sebastian Wisniewski
Redwood City, Calif., Feb. 11, 2008

•

To the Editor:

Decades of social science research make it clear that spending is not the whole story. Assets and debts also matter a great deal for family well-being and intergenerational mobility. They are the resources families draw on to send children to college, to help with the down payment on a first home, and to make ends meet when times are tough.

Without assets, poor families may be able to get by, but they will have real trouble ever getting ahead. Instead of dismissing inequality, we ought to focus on helping poor families to acquire assets and open up opportunities.

Equality isn’t a DVD player in every household; it’s an equal shot for all American children.

Daniel Schneider
Princeton, N.J., Feb. 11, 2008

    Being Poor in a ‘Charge It’ Society, NYT, 17.2.2008, http://www.nytimes.com/2008/02/17/opinion/l17spend.html

Hard Times Heighten Long - Felt Unease

February 17, 2008
Filed at 12:21 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

Even when experts were declaring the economy healthy, many Americans voiced a vague, but persistent dissatisfaction.

True, jobs were relatively plentiful over the last few years. It was easy to borrow and very cheap. The sharp rise in the value of homes and plentiful credit cards encouraged a nation of consumers to get out and buy. But to many people, something didn't feel right, even if they couldn't quite explain why.

Now the economic tide is receding, and the undertow that was there all along is getting stronger.

Take away the easy credit and consumers are left with paychecks that, for most, haven't nearly kept pace with their need and propensity to spend.

The frustration of $3 gas and $4 milk, the worries about health care costs that have risen four times the rate of pay, become much more real. The retirement security that is only as good as the increasingly volatile stock market seems much less certain.

Americans' declining confidence in their economy is triggered by a storm of very recent pressures, including plunging home prices, tightening credit, and heavy debt. But it is compounded by anxiety that was there all along, the result of a long, slow drip of worries and vulnerabilities.

''The economy is currently in recession or arguably close to recession and that's certainly weighing on the collective psyche,'' says Mark Zandi, chief economist of forecaster Moody's Economy.com. ''But ... I do think there is an increasing level of angst that is more fundamental and is not going to go away even when the economy improves.''

Much of that anxiety is the uncomfortable, but expected jolt of the economic roller coaster. During a downturn, people become less confident about keeping their jobs or being able to find new ones, meeting household expenses and about the prospects for the future.

But there may be more to it than just cyclical ups and downs.

What does the economic future hold? Many Americans feel increasingly unable to answer that question with assurance, and they appraise it with a sense that they are less in control of the outcome.

In Westminster, Colo., a Denver suburb, George Apodaca hears that uncertainty from the maintenance workers, drivers and others enrolled in the home budgeting class he teaches. Most have steady jobs, but are just getting by. They talk about challenges like the rising cost of getting to work or medical bills, not as new problems but as a continuing struggle.

''People in my class, they don't know what a recession means or what a boom means,'' says Apodaca, a counselor for Colorado Housing Enterprises. ''They're worried about buying the groceries, buying the gas.''

A year ago -- months before economic alarms went off -- nearly two of three Americans polled by The Rockefeller Foundation said that they felt somewhat or a lot less economically secure then they did a decade ago. Half said they expected their children to face an economy even more shaky.

Other polls have registered similar unease in the past few years, showing large numbers of Americans dissatisfied with the economy, and worried about retirement security, health care costs, and a declining standard of living.

The surprising thing about many of these readings isn't that they've recently skyrocketed. It's that in recent years they've registered consistently high levels of worry without ever seeming to ease.

''This has just been a period of great disconnect between what the aggregate economic statistics show and what leading politicians talk about and what ordinary Americans are feeling,'' said Jacob Hacker, a Yale University professor and author of ''The Great Risk Shift,'' which charts increased economic insecurity. ''I think people are saying, where did the gains go? Where did the boom go? And now that it's gone, what are we going to do?''

Those uncertainties have been submerged for the past few years. The war in Iraq and the threat of terrorism dominated, drawing attention away from day-to-day economic concerns. With employers adding workers, people's appraisal of the economy focused less on jobs, the long-standing measure of financial security.

Many people gauged their well-being in wealth -- looking at the stock market, and much more broadly, the rise of real estate prices, said Susan Sterne, president of Economic Analysis Associates.

Americans borrowed freely against the value of their homes. But now there is nothing left to shield them from the insecurities rooted in the old measures of economic prosperity.

Except for the late 1990s, pay has been stagnant for more than a generation, barely keeping pace with inflation. In 1973, the median male worker earned $16.88 an hour, adjusted for inflation. In 2007, he earned $16.85.

For many families, the stagnation has been moderated by the addition of a second paycheck as more women went to work, and their pay rose over the same period.

But the largest gains went to workers at the top of the pay scale. Now, economic worries are rising fastest in households with smaller paychecks, and that chasm is widening.

''Over the past decades, whether inflation was much higher or lower, or incomes grew faster or more slowly, there has never been such a wide divergence in the experiences'' separating richer households from poorer ones, Richard Curtin, the director of the University of Michigan's consumer survey said in summing up the most recent figures.

That insecurity shows in small, but telling ways. Shoppers at drug store chain Walgreens Inc. are increasingly bypassing name-brand cough syrups and pain relievers and choosing cheaper store brands. Wal-Mart Stores Inc noticed that many people who received its gift cards for the holidays used them in January to buy food and other necessities instead of extras.

The pullback by consumers contrasts with years of continued spending that long seemed to contradict mounting worries.

Worker optimism, which soared in the late 1990s, never fully rebounded after the last, brief recession. Although jobs again were plentiful, it became clear the new economy's opportunities came with few of the old assurances.

Rennie Sawade, the son of a Michigan auto worker, majored in computer science because he saw no future on the assembly line. He was rewarded with a job at Oracle Corp., but lost it in late 2005 when the company shifted his department's work to India. Sawade, who lives in Woodinville, Wash. near Seattle, has been unable to find a full-time replacement, instead jumping from contract job to contract job.

The contractor offers a 401(k), but contributions are entirely up to workers. When Sawade's wife was diagnosed with thyroid cancer last year he missed the equivalent of two weeks work -- and pay -- to take care of her. The job has health insurance but still left the family with a bill for more than $2,000. Contractors call to offer other jobs, but the pay is frequently disappointing, he says.

''It was pretty well known when I was working on my bachelor's degree that the auto industry was going to move overseas,'' he says. ''Everybody said get into technology because you'll have a career. Now it looks like the same thing is happening to technology.''

Cutbacks and changes by employers also have pushed heavy responsibilities on to workers, many who find themselves unprepared.

In the past decade, scores of companies have frozen or eliminated benefit plans providing a guaranteed pension. Many have replaced them with 401(k) plans whose future worth depends on workers' investment skill. Almost half of all households are at risk of coming up short in retirement, according to the Center for Retirement Research at Boston College.

Worry also grew about the cost of health care, with good reason. Since 2001, the cost of health insurance has gone up 78 percent -- about $1,500 more per year for the average family, according to the Kaiser Family Foundation. Over the same period, wages rose about 19 percent, and inflation about 17 percent. About four in 10 people polled by the group say they are worried about paying more for health care or insurance.

Even the consumption made possible by easy credit has helped turn up the financial pressure. The number of products -- from air conditioners to cell phones -- that Americans say they can't live without has grown substantially in recent years, according to the Pew Research Center. About 6 in 10 working Americans polled by the group say they don't earn enough to lead the life they want.

Economic confidence is, largely, a self-fulfilling prophecy. The more consumers believe the economy is heading downhill, the more likely they'll rein in spending that will contribute to a downturn.

''I think if people were generally more satisfied and less anxious perhaps they would be more resistant to thinking things were deteriorating rapidly,'' says Andrew Kohut, president of the Pew Research Center.

Maybe the downturn in optimism is temporary. Americans are voracious consumers and persistent optimists.

But some believe a fundamental change in behavior and mind-set is taking place. Since the early 1980s, consumers' contribution to the economy has risen from 63 percent, near where it had long hovered, to 70 percent. Baby boomers spent generously on growing families. Interest rates and inflation dropped, making homes and other assets worth more and cutting borrowing costs. The spread of easy credit promoted spending.

Now, those are drying up and the population is aging. Older households don't spend as much, and often assess the economy more conservatively. Over the next generation, that could drive consumers' contribution to the economy back down to the low-60 percent range, Zandi said.

''There were tail winds behind'' the growth in consumer spending over the last 25 years, he says. ''Now there are headwinds.''

    Hard Times Heighten Long - Felt Unease, NYT, 17.2.2008, http://www.nytimes.com/aponline/us/AP-The-Uneasy-Economy.html

Sidelined home buyers frozen by fears

Sun Feb 17, 2008
3:25am EST
Reuters
By Julie Haviv

NEW YORK (Reuters) - Home prices have plunged by 10 percent or more in some parts of the United States and interest rates on mortgages are at enticing levels, but many potential buyers are waiting for prices to fall further.

This psychology is helping prevent the hard-hit home market -- suffering one of its worst downturns in history -- from recovering, just as the spring, the peak home buying season, gets underway.

Rochelle Getzler, a housewife in Nassau County, outside New York city, and her husband, Abraham, have been on the fence for nearly a year, waiting for an opportune time to buy.

"I think it is too risky to buy right now," she said. "Yes, prices have come down, but they have come down from extremely high levels."

As is the case with a growing number of Americans, the Getzlers are also feeling the pinch of a weak U.S. economy: Abraham lost his job of over 20 years as a computer technician due to his company's efforts to cut costs.

Sharply higher gas and oil prices are also taking a toll on their monthly expenses.

"We have little wiggle room right now," she said.

But for the Getzlers, patience is a virtue.

"I think home prices are going to continue falling, so I see no compelling reason to buy a home right now when we can hold off and buy at a lower price later this year or early next year," she said.

Economists tend to agree. Housing markets in some parts of the country will suffer drops of more than 30 percent before the housing crisis is over, according to a report in December by Moody's Economy.com.

In Nassau county, where the Getzlers reside, and neighboring Suffolk county, prices peaked in February, 2006, should reach a trough in February, 2009, according to the report. In that time, they are expected to have fallen by 16.4 percent.

Punta Gorda in Florida and Stockton in California are the hardest-hit markets, with declines from peak-to-trough forecast at 35.3 percent and 31.6 percent, respectively, according to the report.

In 2008 alone, prices are forecast to drop from 1.2 percent to 7.7 percent, according to a report by Deutsche Bank.

The report forecast peak-to-trough declines of at least 9.8 percent, and perhaps as much as 29.5 percent, on average for 100 metropolitan areas in the United States.

Many regions succumbing to lower home prices were the biggest gainers during the housing market's heyday. Home builders overbuilt in these regions and speculators went on a buying frenzy, with lax lending standards stoking the flames.

HOUSING HEADACHE

Fast-forward to 2008 and the U.S. housing market is now in the midst of one of the worst slumps since World War II.

New home sales have fallen just over 50 percent from their peak in mid-2005. While that is above the 1987-to-1991 housing cycle downturn of 40 percent, it is slightly below the 1978-to-1981 drop of 56 percent, according to Citigroup.

The supply of new homes has grown to 9.6 months compared with a peak of 9.4 months in 1991 and 11.3 months in 1981. Existing home sales are currently at 1998 levels, down 30 percent from their peak, but the housing downturn lasting from 1978 to 1981 saw existing home sales fall just over 50 percent, Citigroup said recently.

"The economic fundamentals in housing are weak and I see no sign of a bottom," said Chris Mayer, director of the Paul Milstein Center for Real Estate at Columbia Business School in New York.

"People are also worried about their jobs and the economy, so there is also a psychological factor in play that has them in no rush to buy," he said.

Another major factor is that potential home buyers are finding it increasingly difficult to get a loan, he said.

Norman Glickman, a retiree and avid golfer who resides near Miami, Florida, is a fence-sitter. He and his new wife, Rhoda, planned to move to another condominium closer to Norman's favorite golf course, but are unsure if they can sell their current home.

The region peaked in April, 2006 and won't reach its trough in April, 2009, according to Moody's Economy.com. During this time home prices are predicted to drop by 26.7 percent.

"There are so many signs up in my neighborhood advertising homes for sale, but they never seem to come down," he said. "When I purchase a home I want it to be a hole-in-one transaction."

(Reporting by Julie Haviv; Editing by Eddie Evans)

    Sidelined home buyers frozen by fears, R, 17.2.2008, http://www.reuters.com/article/newsOne/idUSN3019391920080217

Arcane Market Is Next to Face Big Credit Test

February 17, 2008
The New York Times
By GRETCHEN MORGENSON

Few Americans have heard of credit default swaps, arcane financial instruments invented by Wall Street about a decade ago. But if the economy keeps slowing, credit default swaps, like subprime mortgages, may become a household term.

Credit default swaps form a large but obscure market that will be put to its first big test as a looming economic downturn strains companies’ finances. Like a homeowner’s policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.

The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.

No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity.

It is entirely possible that this market can withstand a big jump in corporate defaults, if it comes. But an inkling of trouble emerged in a recent report from the Office of the Comptroller of the Currency, a federal banking regulator. It warned that a significant increase in trading in swaps during the third quarter of last year “put a strain on processing systems” used by banks to handle these trades and make sure they match up.

And last week, the American International Group said that it had incorrectly valued some of the swaps it had written and that sharp declines in some of these instruments had translated to $3.6 billion more in losses than the company had previously estimated. Its stock dropped 12 percent on the news but edged up in the days after.

A.I.G. says it expects to file its year-end financial statements on time by the end of this month with appropriate valuations.

Placing accurate values on these contracts is just one of the uncertainties facing the big banks, insurance companies and hedge funds that create and trade these instruments.

In a credit default swap, two parties enter a private contract in which the buyer of protection agrees to pay the seller premiums over a set period of time; the seller pays only if a particular credit crisis occurs, like a default. These instruments can be sold, on either end of the contract, by the insurer or the insured.

But during the credit market upheaval in August, 14 percent of trades in these contracts were unconfirmed, meaning one of the parties in the resale transaction was unidentified in trade documents and remained unknown 30 days later. In December, that number stood at 13 percent. Because these trades are unregulated, there is no requirement that all parties to a contract be told when it is sold.

As investors who have purchased such swaps try to cash them in, they may have trouble tracking down who is supposed to pay their claims.

“This is just a giant insurance industry that is underregulated and not very well reserved for and does not have very good standards as a result,” said Michael A. J. Farrell, chief executive of Annaly Capital Management in New York. “I think unregulated markets that overshadow, in terms of size, the regulated ones are a real question mark.”

Because these contracts are sold and resold among financial institutions, an original buyer may not know that a new, potentially weaker entity has taken over the obligation to pay a claim.

In late 2005, at the urging of the Federal Reserve Bank of New York, market participants agreed to advise their trading partners in a swap when they assigned contracts to others. But it is unclear how closely participants adhere to this practice.

It would be as if homeowners, facing losses after a hurricane, could not identify the insurance companies to pay on their claims. Or, if they could, they discovered that their insurer had transferred the policy to another company that could not cover the claim.

Credit default swaps were invented by major banks in the mid-1990s as a way to offset risk in their lending or bond portfolios. At the outset, each contract was different, volume in the market was small and participants knew whom they were dealing with.

Years of a healthy economy and few corporate defaults led many banks to write more credit insurance, finding it a low-risk way to earn income because failures were few. Speculators have also flooded into the credit insurance market recently because these securities make it easier to bet on the health of a company than using corporate bonds.

Both factors have resulted in a market of credit swaps that now far exceeds the face value of corporate bonds underlying it. Commercial banks are among the biggest participants — at the end of the third quarter of 2007, the top 25 banks held credit default swaps, both as insurers and insured, worth $14 trillion, the currency office said, up $2 trillion from the previous quarter.

JPMorgan Chase, with $7.8 trillion, is the largest player; Citibank and Bank of America are behind it with $3 trillion and $1.6 trillion respectively.

But many speculators, particularly hedge funds, have flocked to these instruments to bet on a company failure easily. Before the insurance was developed, such a bet would require selling short a corporation’s bond and going into the market to borrow it to supply to the buyer.

The market’s popularity raises the possibility that undercapitalized participants could have trouble paying their obligations.

“The theme had been that derivatives are an instrument that helps diversify risk and stabilize risk-taking,” said Henry Kaufman, the economist at Henry Kaufman & Company in New York and an authority on the ways of Wall Street. “My own view of that has always been highly questionable — those instruments also encourage significant risk-taking and looking at risk modestly rather than incisively.”

Officials at the International Swaps and Derivatives Association, a trade group, say they are confident that the market will stand up, even under stress.

“During the volatility we have seen in the last eight months, credit default swaps continue to trade, unlike other parts of the credit market that have shut down,” said Robert G. Pickel, chief executive of the association. “Even if we have a series of credit events at the same time, we have the processes in place to enable the market to deliver.”

Such credit problems have been rare recently. The default rate among high-yield junk bonds fell to 0.9 percent in December, a record low.

But financial history is rife with examples of market breakdowns that followed the creation of complex securities. Financial innovation often gets ahead of the mechanics necessary to track trades or regulators’ ability to monitor the market for safety and soundness.

The market for default insurance, like the subprime mortgage securities market, is a product of good economic times and has boomed in recent years. In 2000, $900 billion of credit insurance contracts changed hands. Since then, the face value of the contracts outstanding has doubled every year as new contracts have been written. In the first six months of 2007, the figure rose 75 percent; the market now dwarfs the value of United States Treasuries outstanding.

Roughly one-third of the credit default swaps provided insurance against a default by a specific corporate debt issuer in 2006, according to the British Bankers’ Association. Around 30 percent of the contracts were written against indexes representing baskets of debt from numerous issuers.

But 16 percent were created to protect holders of collateralized debt obligations, complex pools of bonds that have recently experienced problems because of mortgage holdings.

There is no exchange where these insurance contracts trade, and their prices are not reported to the public. Because of this, institutions typically value them based on computer models rather than prices set by the market.

Neither are the participants overseen by regulators verifying that the parties to the transactions can meet their obligations.

The potential for problems in sizing up the financial health of buyers of these securities leads to questions about how these insurance contracts are being valued on banks’ books. A bank that has bought protection to cover its corporate bond exposure thinks it is hedged and therefore does not write off paper losses it may incur on those bond holdings. If the party who sold the insurance cannot pay on its claim in the event of a default, however, the bank’s losses would have to be reflected on its books.

Investors are already reeling from the recognition that major banks inaccurately estimated losses from the mortgage debacle. If further write-downs emerge as a result of hedges that did not work, investor confidence could take another dive.

To be sure, the $45 trillion in credit default swaps is not an exact reflection of what would be lost or won if all the underlying securities defaulted. That figure is impossible to pinpoint since the amounts that are recovered in default situations vary.

But one of the challenges facing participants in the credit default swap market is that the market value amount of the contracts outstanding far exceeds the $5.7 trillion of the corporate bonds whose defaults the swaps were created to protect against.

To the uninitiated trying to understand this complex market, its size might initially seem a comfort, as if there were far more insurance covering the bonds than could ever be needed. But because each contract must be settled between buyer and seller if a default occurs, this imbalance can present a problem.

Typically, settling the agreements has required the delivery of defaulted bonds if the insurance buyer wants to be fully covered. If the insurance contracts exceed the bonds that are available for delivery, problems arise.

For example, when Delphi, the auto parts maker, filed for bankruptcy in October 2005, the credit default swaps on the company’s debt exceeded the value of underlying bonds tenfold. Buyers of credit insurance scrambled to buy the bonds, driving up their price to around 70 cents on the dollar, a startlingly high value for defaulted debt.

Market participants worked out an auction system where settlements of Delphi contracts could be made even if the bonds could not be physically delivered. This arrangement was done at just over 36 cents on the dollar; so buyers of protection on Delphi who did not have the bonds received $366.25 for every $1,000 in coverage they had bought. Had they been valuing their Delphi insurance coverage at $1,000 per bond, they would have had to write off that position by $633.75 per $1,000 bond.

That is why the valuation of these contracts is of such concern to some participants.

As with other securities that trade privately and by appointment, assigning values to credit default swaps is highly subjective. So some on Wall Street wonder how much of the paper gains generated in these instruments by firms and hedge funds last year will turn out to be illusory when they try to cash them in.

“The insurance business is very difficult to quantify risk in,” said Mr. Farrell of Annaly Capital Management. “You have to really read the contract to make sure you are covered. That is going to be the test of the market this year. As defaults kick in and as these events unfold, you are going to find out who has managed this well.”

And who hasn’t.

    Arcane Market Is Next to Face Big Credit Test, NYT, 17.2.2008, http://www.nytimes.com/2008/02/17/business/17swap.html?hp

Stocks Decline on Economic Readings

February 15, 2008
Filed at 1:24 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Stocks fell for second day Friday after lackluster economic reports offered investors little incentive to put down big bets ahead of a long weekend.

Concerns about the economy continued to simmer after readings on manufacturing, consumer confidence and import prices rendered fresh images of a struggling economy.

A New York Federal Reserve survey on regional manufacturing indicated that conditions have deteriorated this month, while the preliminary Reuters/University of Michigan survey on consumer sentiment for February showed a marked decline from the prior month. A Labor Department's report found that import prices have jumped amid higher oil prices.

Friday's market declines, while not severe, occurred a day after investors' revealed their skittishness about the economy and sent stocks down more than 1 percent. The pullback, which came after strong gains earlier in the week, followed somewhat downcast remarks about the economy from Federal Reserve Chairman Ben Bernanke.

With stock markets closed Monday for the President's Day holiday and fresh economic concerns, investors appeared uninterested in making any sizable moves.

''The fear factor still sits in the minds of investors,'' said Bill Schultz, chief investment officer at McQueen, Ball & Associates in Pittsburgh. ''We just can't get over that hurdle.''

In midday trading, the Dow Jones industrial average fell 89.74, or 0.73 percent, to 12,287.24.

Broader stock indicators also lost ground. The Standard & Poor's 500 index fell 8.55, or 0.63 percent, to 1,340.31, and the Nasdaq composite index fell 22.57, or 0.97 percent, to 2,309.97.

Government bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.78 percent from 3.82 percent late Thursday. The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude oil fell 39 cents to $95.07 on the New York Mercantile Exchange.

Not all economic findings that arrived Friday portended further weakness but over all, investors seemed unimpressed. The nation's central bank said that industrial output showed a modest increase last month, as expected, largely because of strength from utilities.

But investors remain worried that consumers who are uneasy will be reluctant to open their wallets -- an alarming prospect as consumer spending accounts for more than two-thirds of economic activity.

Comments from Bernanke on Thursday outlined the concerns. The Fed chief issued a sobering but not entirely unexpected prediction that economic growth in much of 2008 is likely to be ''sluggish'' before gathering strength later in the year. He told the Senate Banking Committee that further losses were likely at banks from soured mortgages.

Schultz predicts that volatility will remain on Wall Street as investors try to sort through their concerns about the financial sector. The uncertainty lapping at Wall Street is in part due to the opaque nature of subprime mortgage debt. Many of these loans, which are now going bad, were sold off in exotic debt packages whose worth is difficult to determine. The concerns about faltering debt have stoked worries about the solvency of bond insurers and sent some borrowing costs higher, disturbing normally staid parts of the financial sector that help pedal the economy.

In corporate news, Priceline.com Inc. said its fourth-quarter earnings more than doubled amid a 62 percent increase in gross travel bookings. The online travel company jumped $17.44, or 17 percent, to $119.67.

Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 821.1 million shares.

The Russell 2000 index of smaller companies fell 9.34, or 1.32 percent, to 695.98.

Overseas, Japan's Nikkei stock average finished down 0.03 percent. Britain's FTSE 100 closed down 1.56 percent, Germany's DAX index fell 1.87 percent, and France's CAC-40 fell 1.79 percent.

------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Stocks Decline on Economic Readings, NYT, 15.2.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Bleak New Batch of Data on Economy

February 15, 2008
The New York Times
By MICHAEL M. GRYNBAUM

A fresh batch of data on Friday presented a bleak picture of the economy, with rising prices of imported goods, struggling manufacturing and an erosion in consumer confidence.

With the price of oil near record levels, import costs grew in January at the highest annual rate in a quarter century, the Labor Department said. In New York, manufacturing activity fell to its lowest level in five years. And consumers, responding to a national survey, said they felt worse about the economy than any time since the recession era of the early 1990s.

“This is just horrible,” wrote Ian Shepherdson, the chief United States economist for High Frequency Economics, a research firm. “The sustained volatility in the markets, the rise in energy and food prices and, of course, the catastrophe in the housing market, is making consumers extraordinarily miserable.”

The price of imports rose 1.7 percent in January and was up 13.7 year over year, the highest annual rate since the Labor Department records began in 1983. Fuel costs led the rise, ballooning by 5.5 percent last month. Imported food and beverages also cost more in January, and the price of Chinese goods ticked up by 0.8 percent. Export prices rose 1.2 percent, and American companies are also charging more for food, industrial supplies, and agricultural products.

Sales of imports are lagging even as export sales surge. The trade deficit narrowed in 2007 for the first time in five years, the Commerce Department said on Thursday.

Manufacturers’ woes were reflected in the Empire State Manufacturing survey, a measure of business conditions in New York State. The index fell in February to -11.7, its lowest reading since April 2003 and the first negative reading in three years. A sharp drop in orders and payrolls led the decline, according to the Federal Reserve Bank of New York.

Meanwhile, a closely watched measure of consumer confidence, the Reuters/University of Michigan survey, fell to 69.6 in February, the lowest reading since February 1992. It had stood at 78.4 in January.

Consumers are likely cowed by a softening labor market — the Labor Department said employers cut 17,000 jobs last month — and rising inflation, which is forcing Americans to cut back on spending.

There was a sliver of good news for the economy. The Federal Reserve reported that industrial production grew 0.1 percent last month, keeping pace with December. Cold weather pushed up activity at electric and natural gas utilities, which offset a decline in output at auto manufacturers.

Capacity utilization, which measures the proportion of plants in use, held steady in January at 81.5 percent.

Manufacturers have benefited from a sharp rise in export sales, as foreign customers take advantage of the cheap American dollar. But analysts see headwinds ahead.

“An increasingly constrained consumer, deepening woes for the housing sector, and no desire to build inventories will all weigh on manufacturing output, which we expect to remain weak for some time,” wrote Joshua Shapiro, chief United States economist at MFR, a research firm.

    Bleak New Batch of Data on Economy, NYT, 15.2.2008, http://www.nytimes.com/2008/02/15/business/15cnd-econ.html?hp

Treasurys Higher on Weak Manufacturing

February 15, 2008
Filed at 11:01 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Treasury prices rose Friday after the New York Federal Reserve reported that manufacturing in its region contracted this month.

The New York Fed's Empire State index of factory activity plunged almost 21 points to a negative 11.7 reading, the weakest level in almost three years. Readings below zero show shrinkage. February also marked the fourth straight decline for the index. Economists had expected a much healthier reading of 5.75, according to Thomson/IFR.

The report helps build a case that the economy is on the brink of recession, although a recession requires two consecutive quarters of contraction and can only be declared in hindsight.

Although the data has negative portents for the economy, it is helpful to the Treasury market, as investors generally turn to government-backed bonds when they are worried about the economy.

In addition, the report puts extra pressure on the Fed to continue cutting interest rates. The central bank cut the overnight Fed funds rate by 1.25 percentage points in January. Fixed-income investors want to see more rate cuts to rejuvenate ailing debt markets.

The benchmark 10-year Treasury note rose 11/32 to 97-26/32 with a yield of 3.76 percent, down from 3.82 percent late Thursday, according to BGCantor Market Data. Prices and yields move in opposite directions.

The 30-year long bond gained 20/32 to 96 19/32 with a yield of 4.58 percent, down from 4.65 percent the day before.

The 2-year note ticked up 1/32 to 100 16/32 with a 1.87 percent yield, down from 1.90 percent late Thursday.

In other data news, the Fed said industrial output rose modestly last month, due to strength in the utility sector. Industrial production increased 0.1 percent in January, in line with December's rise and analysts' expectations.

Separately, the Labor Department reported that U.S. import prices rose 1.7 percent in January, as oil prices jumped. In December, prices slipped 0.2 percent.

Demand for Treasurys Thursday also was stoked by a complex barrage of negative developments elsewhere in the credit markets. Since the subprime issue first surfaced last summer, Treasurys have been the asset of choice for investors spooked by the unraveling of normally stalwart forms of debt assets.

This week saw turmoil in the market for short-term auction-rate munis when bidders could not be found for weekly notes offered by a number of top-rated local government issuers. There also are mounting problems in the leveraged loan market, as well as some ongoing weakness in corporate short-term commercial paper.

''In 25 years of working in this business, I don't believe I have seen more market disruption from so many different sources,'' said Kevin Giddis, managing director of fixed-income trading at Morgan Keegan.

The unusual degree of queasiness about debt issued by highly reliable companies and municipalities is linked to worries about bond insurers that unwisely backed subprime debt. There are concerns that they may not be able to shore up enough capital to withstand an expected avalanche of defaults.

One of the wobbly bond insurers, FGIC Co., agreed to be split into two separate entities. One would house its structured finance business where its troubled subprime assets are sheltered. The other would contain the municipal bonds that FGIC backs which normally are considered desirable.

New York State Insurance Superintendent Eric Dinallo lobbied for the rupture of FGIC and would like other insurers to follow suit. On Thursday FGIC lost its stellar ''AAA'' rating when Moody's Investors Service downgraded it by two notches.

New York Governor Eliot Spitzer Thursday warned that the bond insurers are facing a potential break-up by state regulators and gave them just a few working days to line up necessary capital.

    Treasurys Higher on Weak Manufacturing, NYT, 15.2.2008, http://www.nytimes.com/aponline/business/AP-Bonds.html

Top Officials See Bleaker Outlook for the Economy

February 15, 2008
The New York Times
By EDMUND L. ANDREWS

WASHINGTON — With the credit markets once again deteriorating, the nation’s two top economic policy makers acknowledged Thursday that the outlook for the economy had worsened, as both came under criticism for being overtaken by events and failing to act boldly enough.

In testimony to Congress, Ben S. Bernanke, the chairman of the Federal Reserve, signaled that the Fed was ready to reduce interest rates yet again, pointing out that problems in housing and mortgage-related markets had spread more widely and proved more intractable than he predicted three months ago.

His sobering assessment was echoed by Treasury Secretary Henry M. Paulson Jr., who appeared with him. Both continued to avoid predicting a recession but said they were scaling back the more optimistic forecasts they had issued in November.

Ethan S. Harris, chief United States economist for Lehman Brothers, said that both policy makers had “come clean” about the economy’s problems but that investors were not impressed.

Stock prices, which normally rally when the Fed hints it will lower borrowing costs, tumbled instead. The Dow Jones industrial average dropped 175 points, or 1.4 percent; broader stock indexes dropped by similar amounts.

Anxiety is escalating among institutional lenders and major borrowers, as the panic over soaring default rates on subprime mortgages that began last summer continues to spread, freezing up credit for municipalities, hospitals, student loans and even investment funds holding the most conservative bonds.

On Capitol Hill, the economic policy makers found themselves in the line of fire. Senator Robert Menendez, Democrat of New Jersey, accused both Mr. Bernanke and Mr. Paulson of having “hit the snooze button.”

Senator Christopher J. Dodd of Connecticut, chairman of the Banking Committee, told reporters after the hearing that “it just seems as if they aren’t as concerned about the magnitude of the problem.”

Testifying before the committee, Mr. Bernanke said he still expected the economy to grow at a “sluggish” pace over the next few months and to pick up speed later in the year. But he said “the downside risks to growth have increased,” noting that spiraling losses in home mortgages have dragged down the credit markets and shaken the broader economy.

While trying to be optimistic, Mr. Paulson said that the administration’s forecast “would be less, but I do believe we’ll keep growing.”

Many Wall Street economic forecasters, however, are already estimating that the risks of a recession are at least 50-50, and a growing number of analysts contend that an economic contraction may have already begun.

Fed policy makers will release their newest forecasts on Wednesday, and Mr. Bernanke said they would be more in line with those of private-sector economists.

The Fed has reduced its benchmark interest rate, called the federal funds rate, five times since September, including two cuts within eight days last month. The rate has fallen to 3 percent; as recently as late summer of last year it was 5.25 percent.

Mr. Bernanke assured lawmakers that the Fed would “provide adequate insurance” against a downturn in the form of cheaper money.

But neither investors nor politicians have responded particularly favorably to Washington’s moves. Yields on asset-backed securities that hold mortgages and other debt have risen to levels almost as high as they were last August, when financial markets first seized up in response to soaring default rates on subprime mortgages.

The Fed’s rate cuts have led to a more modest decline in mortgage rates for borrowers with good credit, but they have done little to ease the broader credit squeeze.

Mr. Bernanke agreed that banks and other lenders have been pulling back, both because of increased aversion to risk and because they have been forced to book huge losses from soured loans and to repurchase troubled mortgages and loans they had sold to investors.

The unexpected losses and growing pressures, he continued, have prompted banks to become more restrictive in their lending and more “protective of their liquidity.”

Mr. Bernanke said the economy would grow slowly but pick up speed later in response to both the Fed’s lower interest rates and the $168 billion economic stimulus package that President Bush signed Wednesday.

“At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year,” he told lawmakers. But in cautioning that his outlook could turn out to be wrong, the Fed chairman left the door open to additional rate reductions.

Mr. Paulson tried to sound less downbeat. “I believe we are going to continue to grow, albeit at a slower rate,” he told the Banking Committee, insisting that the plunge in housing and credit markets was a correction rather than a crisis.

Mr. Bernanke said a wide variety of economic indicators had declined in recent months, as the meltdown in the housing and mortgage markets rippled through the broader economy.

The Fed chairman said the job market had worsened, noting employment fell by 17,000 jobs in January, according to the Labor Department. That was down from an average rise of 95,000 jobs a month in the final three months of 2007. Unemployment, though still comparatively low, at 4.9 percent, has edged up from 4.7 percent a few months ago.

Nationwide, housing prices have declined and show no signs of having hit bottom, while the stock markets have fallen sharply from their highs late last year.

Mr. Dodd has proposed legislation to create an agency to bail out many homeowners by buying up and restructuring troubled mortgages. He painted a particularly bleak picture.

“The current economic situation is more than merely a ‘slowdown’ or a ’downturn,’ ” he said. “It is a crisis of confidence among consumers and investors.”

Mr. Paulson and other administration officials staunchly oppose a government buyout program, arguing that the tax rebates and business tax cuts in the new stimulus package should keep the nation out of a recession.

But Senator Richard C. Shelby of Alabama, ranking Republican on the Banking Committee, predicted the bill’s tax rebates and temporary tax cuts for business would have a negligible impact.

“I have equated it to pouring a glass of water in the ocean and expecting it to make a difference,” Mr. Shelby said.

Though lawmakers welcomed the Fed’s willingness to lower interest rates, investors had already been assuming that events would force the Fed’s hand.

Prices in the federal funds futures market, which allows investors to bet on the coming course of rates, indicate investors expect the central bank to reduce its benchmark overnight rate another full percentage point, to 2 percent, by the end of June.

    Top Officials See Bleaker Outlook for the Economy, NYT, 15.2.2008, http://www.nytimes.com/2008/02/15/business/15econ.html?hp

Some Cities Are Spared the Slide in Housing

February 15, 2008
The New York Times
By CLIFFORD KRAUSS and RON NIXON

AUSTIN, Tex. — The real estate market these days is a tale of two Americas, and one of them is not doing too badly.

In the America of big-city housing markets, especially on the coasts and in the struggling industrial Midwest, the huge run-up in values in recent years has given way to big drops in prices and sales volume. Millions of people owe more than their houses are worth.

But in the other America, specifically in small cities like Austin; Grand Forks, N.D.; Yakima, Wash.; and Salem, Mass., the available evidence suggests the real estate market is holding up. Prices there never boomed as crazily as they did in the big cities, and now, even though volume is down almost everywhere, prices in many of these towns are firm or rising.

Consider the experience of one Austin resident, Dan Clark. Forced by a job change to put his house here on the market, he wondered whether he would get anything like the $385,000 he paid for it a year ago. He was floored when the second potential buyer to look at the place snapped it up for $429,000. “Manna from heaven,” he said.

Many people are aware that a handful of big-city markets, like Manhattan and San Francisco, have largely resisted the real estate slide. It is less widely known that the same thing is true in scores of smaller markets.

“I would call them backcountry cities,” said Robert J. Shiller, an economist at Yale University and an expert on real estate markets who predicted the bursting of both the housing and stock market bubbles of recent years. “They are just going through normal growth, and they are out of the bubble picture.”

In figures released on Thursday covering 150 metropolitan areas, the National Association of Realtors said that median home prices were falling in 77 markets — but rising in 73.

Real estate statistics must be interpreted with caution, especially when sales volumes are declining, as they are all over the country. But an analysis by The New York Times of three distinct data sets — mortgage data from the government, sales figures from the Realtors’ group and courthouse records from a company called DataQuick — produced a list of 17 metropolitan areas where all three sources of information agree that prices were still rising as of late last year, the most recent figures available.

For another 43 cities, two data sets, from the Realtors and the government, suggested that prices were still rising late in the year. DataQuick could provide no information on those cities.

How long the situation will last is anyone’s guess. One possibility is that the smaller cities are just lagging behind the big ones in seeing prices fall. And if the economy weakens drastically, all bets are off. But for now, buyers in these towns seem to feel they are getting a lot of house for the money; sellers and brokers are realizing that they have, so far, dodged a bullet.

“When I read about the national real estate market, I feel fortunate I am in Austin,” said Shara Parker, a real estate agent who is happy she turned down a chance four years ago to relocate to Las Vegas, which was booming then and is sinking now. “Our highs are not as high and our lows are not as low.”

Economists say small and medium cities, especially those where land availability is not a constraint on growth, have done better than the nation as a whole because they have followed more traditional economic patterns. New-home prices in most of these places still reflect, more or less, the cost of the labor and materials used to build the houses, in addition to a profit margin.

“There are a lot of places where you didn’t have flipping of real estate,” said Steve Dennis, a business professor at the University of North Dakota. “Since you didn’t have the price appreciation, you don’t have the price correction.”

Generally, the markets that are showing strength do not have the bulging housing inventories of larger cities, because there was relatively little speculative building during the early part of this decade. Most of the towns have only modest exposure to the subprime loan crisis. And falling mortgage rates are buoying these markets.

Typically, their local economies are still producing new jobs and healthy income growth because of factors like rising crop prices (as in Bismarck, N.D.) or local oil booms (Midland, Tex.) or an influx of second-home buyers (Sun Valley, Idaho).

“In 2008, I see momentum growing in Middle America for prices to stabilize and increase, given the historic mortgage rates,” said Lawrence Yun, chief economist for the Realtors. But he added, “If we go into a recession, it’s possible some markets will reverse themselves.”

Austin is a good example of a real estate market that was slow and steady for years and now appears to be taking off. Austin’s high-tech industries are attracting well-heeled buyers from cities where real estate is far more expensive.

Sales prices for existing homes barely moved from 2001 to 2005, when the markets in a handful of superstar cities were on fire. But last year, the median price for a single family home rose 6.4 percent, to $185,000. It was the second consecutive strong year.

“I have to calm my buyer clients down,” said Mark Minchew, an Austin Realtor, “so they don’t pay too much.”

The fly in the ointment for these cities is declining sales volumes, which prompt some experts to argue that median prices are presenting an unduly rosy picture. If fewer houses sell, but the ones that do sell are at the high end of the range, that can skew median prices.

“In the markets that are doing better, lots of people are not selling their houses, so you don’t see the prices going down because they are not selling for a lower price,” said Todd Sinai, a real estate professor at the University of Pennsylvania. “The market is doing a lot worse than what the median prices would show.”

Still, in many of the cities where prices are strongest, local Realtors contend that volume drop-offs have been modest, just a few percentage points.

Mr. Clark is one Austin home seller with a happy tale. When a recruiter called him late last year with an enticing executive health care job in Fort Worth, Mr. Clark thought twice about trying to sell a house he had bought only a year before.

“I was concerned after my relocation package ran out I would have to carry either two mortgages or a mortgage and apartment rent,” he recalled. Instead he sold the house for a profit, and only $10,000 below his asking price. “A weight was taken off our shoulders,” he said.

Mike Colpitts, the editor of Housing Predictor, an online housing forecaster, says that the market is still slowing and that some smaller cities will be hit. He projects that only 60 of the 251 markets in the United States that he monitors will show price appreciation in 2008. “The housing market is real sad, and getting sadder,” he said.

Realtors in medium and small cities contend the median price figures may actually underestimate market sentiment, because the issuance of large mortgages has frozen up in recent weeks because of problems on Wall Street. In the view of these Realtors, it is the high-end sales that are stalled in smaller cities, skewing the median price data downward.

“Call me back next year, and we’ll probably have a 3 percent to 5 percent price increase in 2008,” said Rob Higgins, executive vice president for the Spokane Association of Realtors. The median price for a home sold in Spokane was up 2.6 percent in 2007.

In Salem, Ore, “everything is going up, even the lower-income homes,” said Marlene Scully, executive vice president of the Salem Association of Realtors. Realtor data for the metro area that includes Salem showed a 3.6 percent increase for the year.

Ms. Scully noted that of the houses that were listed in 2007, 97.6 percent sold for the listed price, “which tells me there is a strong market because if there weren’t, the sellers would have to negotiate down.”

Clifford Krauss reported from Austin in late January and later added updated information. Ron Nixon reported from New York.

    Some Cities Are Spared the Slide in Housing, NYT, 15.2.2008, http://www.nytimes.com/2008/02/15/business/15homes.html

Falling home sales problem spreads to 45 states

14 February 2008
USA Today
By Noelle Knox

Underscoring the breadth of the real estate recession, sales of existing homes fell in 45 states and Washington, D.C., in the last quarter of 2007, and prices dropped in more than half the metro areas it tracks, the National Association of Realtors said Thursday.

The slide in sales is projected to persist through the first half of this year, and prices will likely fall throughout 2008, according to a majority of economists surveyed last month by USA TODAY. The figures reflect job losses in the Rust Belt states, sinking affordability in the Sunshine states and stricter lending rules nationwide.

Nationally, home sales fell nearly 21% from October through December, compared with the same period the year before. At the same time, the median price plunged by a record 5.8%, to $206,200.

South Dakota was the only state where sales rose — at an impressive 8.9%. Sales were flat in North Dakota, and no figures were available for Idaho, Indiana and New Hampshire. John Gustafson of the South Dakota Association of Realtors credits that state's strong industrial base, low crime rate and affordable home prices.

The state with the sharpest quarterly sales drop — a stunning 44% — was Nevada, which was one of the most overheated markets during the real estate boom. In Las Vegas, the median single-family home dropped about 13% in price. That means thousands of people who bought homes during the past couple of years with little or no money down now owe more than their homes are worth.

Luxury condos on the Las Vegas Strip are still faring well, but the single-family home market is "definitely treading water," says Bruce Hiatt, owner of Luxury Realty Group, and he projects it will take up to 18 months to recover.

"Bargain hunters are out there, but the foreclosure issue is presenting its challenges," he says. "Buyers are reluctant to buy in neighborhoods that have high foreclosures. They don't want empty houses next to them."

The median price — at which point half the homes cost more, half less — fell in 77 of the metro areas the NAR surveys, with at least 15 areas suffering double-digit drops. They included Sacramento, Jackson, Miss., and the Riverside-San Bernardino area of Southern California.

Rich Cosner of Prudential California Realty, which has offices in Riverside, San Bernardino and Orange counties, says foreclosures are driving down prices.

"The lenders have so many foreclosures, they need to get them sold and will take a much lower price than a normal home seller," Cosner explains, adding, "I don't see any change in the market happening in 2008."

But all real estate is local, and prices rose in 73 other metro areas, including 11 that enjoyed double-digit gains. Atop the list: the Cumberland area of Maryland and West Virginia, followed by Yakima, Wash., and Binghamton, N.Y.

Explaining buyers' attraction to Cumberland, Melanie Prattdimaio, a local real estate agent, says: "People are relocating here. We have a very low crime rate. We don't have rush-hour traffic."

    Falling home sales problem spreads to 45 states, UT, 14.2.2008, http://www.usatoday.com/money/economy/housing/2008-02-14-housing-q4-nar_N.htm

Greenspan says U.S. "on the edge" of recession

Thu Feb 14, 2008
10:08pm EST
Reuters
By Anna Driver and Eileen O'Grady

HOUSTON (Reuters) - Former U.S. Federal Reserve Chairman Alan Greenspan on Thursday said the U.S. economy is "clearly on the edge" of a recession.

Greenspan said the economy will continue to erode until there is a stabilization of U.S. housing prices.

"We have a long way to go" before housing prices hit a bottom, Greenspan told energy executives at the CERA conference.

High oil prices are dragging on the economy, but the fact that they haven't done more damage shows its resiliency.

"It's a burden now," Greenspan said. He added that it's "quite remarkable" that the U.S. economy is "able to do reasonably well" with oil prices near historic highs.

Crude oil futures hit above $95 a barrel on Thursday and went above $100 in early January.

Greenspan again -- as he had last month -- said that the likelihood of the U.S. economy going into recession was "50 percent or better."

He said the U.S. economy was growing at "stall speed."

"Stagflation is too strong a term for what we are on the edge of," Greenspan said.

The subprime mortgage crisis would already have put the United States into recession if U.S. businesses weren't healthy in part as the result of years of low interest rates, Greenspan said.

"If businesses weren't in extraordinarily good shape, I have no doubt we wouldn't be asking if we're in a recession, but how long and how deep," Greenspan said.

"Obviously, they (businesses) are not pushed for credit," said Greenspan.

Banks have cut back lending and will continue tight controls on borrowing until housing prices backed by subprime mortgages stabilize, said Greenspan.

Greenspan made his comments in response to questions by Daniel Yergin, chairman of CERA.

Greenspan said he would like to see additional use of electric cars.

Nuclear power makes the "most sense" to increase U.S. power generation when all trade-offs are weighed, he said. "We have to use nuclear," Greenspan said.

He said more discussion is needed before any "cap" is created as part of a U.S. cap-and-trade carbon program.

A carbon cap would likely lead to lower economic activity and higher unemployment if one were set before emissions-cutting technology is widespread, Greenspan said.

Greenspan said he doubted that technological advances will solve the problem of growing carbon dioxide emissions.

"If you don't have a significant amount to trade, a lot of people won't be able to trade and won't have the energy they need," Greenspan said.

Stagflation is a period when economic growth is stagnant but when prices rise. Recession is at least two quarters of negative economic growth.
 

(Additional reporting by Erwin Seba in Houston; writing by Bernie Woodall; Editing by Gary Hill)

    Greenspan says U.S. "on the edge" of recession, R, 14.2.2008, http://www.reuters.com/article/newsOne/idUSN1450696720080215

Coca-Cola Profit Surges on Sales

February 13, 2008
Filed at 2:08 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

ATLANTA (AP) -- The Coca-Cola Co. reported Wednesday a 79 percent jump in fourth-quarter profit and maintained its growth targets despite a slowing U.S. economy, but has no plans to be more aggressive with its stock buybacks.

The results posted by the world's largest beverage maker beat Wall Street expectations, but company shares slipped.

The Atlanta-based company said it earned $1.21 billion, or 52 cents a share, for the three months ending Dec. 31, compared to a profit of $678 million, or 29 cents a share, a year earlier, when the company took a big impairment charge at its largest bottler.

Excluding one-time items, Coca-Cola said it earned $1.36 billion, or 58 cents a share, in the quarter, ahead of the 55 cents a share analysts surveyed by Thomson Financial were expecting.

Revenue in the quarter rose 24 percent to $7.33 billion, compared to $5.93 billion recorded a year earlier.

Looking ahead, Coca-Cola executives said the company is mindful of the slowing U.S. economy.

Chief Financial Officer Gary Fayard said the company is confident about its overall volume and growth targets. But, he said Coca-Cola only plans to buy back $1 billion to $2 billion in company stock in 2008, about the same amount as in 2007.

Fayard said the company wants to be conservative because of uncertainty in the credit markets.

Chief Executive Neville Isdell told analysts during a conference call that the fourth quarter was ''a very positive finish to 2007'' that ''capped an excellent year for The Coca-Cola Co.''

He said the company is doing well based on its growth goals.

''We realize the journey is long, and we are by no means declaring victory,'' Isdell said, adding that Coca-Cola will respond to future ''opportunities and challenges.''

Worldwide unit case volume was up 5 percent in the fourth quarter and 6 percent for all of 2007.

Growth in several international markets was strong in the fourth quarter. Unit case volume in Coca-Cola's Africa group increased 7 percent in the quarter. It increased 18 percent in the quarter in India and 10 percent in Latin America.

However, unit case volume in the company's key North America unit increased only 1 percent in the quarter. Unit case volume in the company's European Union group increased 2 percent in the quarter. That group's results for the fourth quarter were weighed down by a volume decline in Germany.

President and Chief Operating Officer Muhtar Kent said Coca-Cola remains committed to creating strong, consistent growth in its home market, though he acknowledged that ''international operations continue to be the primary driver of growth for the company.''

Kent has been named to succeed Isdell as CEO on July 1. Isdell remains as chairman until Coke's annual meeting in April 2009.

For all of 2007, Coca-Cola said it earned $5.98 billion, or $2.57 a share, compared to a profit of $5.08 billion, or $2.16 a share, for all of 2006. Full-year revenue rose 20 percent to $28.86 billion, compared to $24.09 billion recorded in 2006.

Coca-Cola completed its $4.1 billion purchase of Vitaminwater maker Glaceau last June. Kent said Wednesday that Glaceau will be moving beyond the U.S. market. ''You will certainly see Glaceau in international markets in the very near future,'' Kent said.

Coca-Cola shares fell 33 cents to $59.58 in afternoon trading Wednesday.

------

On the Net:

The Coca-Cola Co.: http://www.coca-cola.com 

    Coca-Cola Profit Surges on Sales, NYT, 13.2.2008, http://www.nytimes.com/aponline/business/AP-Earns-Coca-Cola.html

Morgan Stanley Cuts 1, 000 Jobs

February 13, 2008
Filed at 2:04 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Morgan Stanley on Wednesday said it will cut 1,000 jobs as the nation's second-largest investment bank trims its residential mortgage operations amid the continued deterioration of the mortgage markets.

The New York-based company said it will shutter its U.K. business that issues home loans and significantly scale back its mortgage business in the United States. Morgan Stanley joins hundreds of lenders in scaling back operations as the worst U.S. housing market in 26 years slows economic growth.

''Given the continued dislocation in the mortgage markets, we have restructured our residential mortgage business to ensure we are appropriately positioned for the environment going forward,'' said Anthony Meola, chief operating officer of the U.S. residential business, in a statement.

Morgan Stanley said it will continue to service loans in the U.S. through its Saxon Mortgage Services units. It will also offer residential mortgages to brokerage clients through Morgan Stanley Credit Corp.

It couldn't immediately be determined how many people are employed in Morgan Stanley's residential mortgage business.

Banks and brokers have eliminated more than 25,000 jobs in the past six months as they racked up $150 billion of write-downs and credit losses tied to mortgage securities. Morgan Stanley last month announced it was cutting 1,000 jobs in operations, technology and other areas because of the market downturn.

A spokesman for Morgan Stanley was unable to provide a breakdown on how many jobs would be lost in the U.S. and U.K. The company had about 48,000 employees overall as of November.

In December, Morgan Stanley took a $9.4 billion write-down because of losses on mortgage-related securities -- and quickly raised $5 billion from Chinese investors to rebuild its capital base. Zoe Cruz, the company's co-president who was considered to be an heir to Chief Executive John Mack, was forced out of her job.

Wall Street investment banks spent the past few years beefing up their residential mortgage businesses to take advantage of the once-booming market. However, increasing defaults among subprime borrowers caused mortgage-backed securities to plummet since the summer.

This has caused job cuts among the big Wall Street firms scrambling to scale back their mortgage operations. Lehman Brothers Holdings Inc. and Credit Suisse Group have announced since late January they are eliminating about 1,600 jobs.

Morgan Stanley shares edged up 20 cents at $42.91 in afternoon trading.

----------

AP Business Writer Jeremy Herron contributed to this report from New York.

--------

On the Web: http://www.ms.com

    Morgan Stanley Cuts 1, 000 Jobs, NYT, 13.2.2008, http://www.nytimes.com/aponline/business/AP-Morgan-Stanley-Jobs.html

Op-Ed Contributor

Totally Spent

February 13, 2008
By ROBERT B. REICH
The New York Times

Berkeley, Calif.

WE’RE sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn.

The problem lies deeper. It is the culmination of three decades during which American consumers have spent beyond their means. That era is now coming to an end. Consumers have run out of ways to keep the spending binge going.

The only lasting remedy, other than for Americans to accept a lower standard of living and for businesses to adjust to a smaller economy, is to give middle- and lower-income Americans more buying power — and not just temporarily.

Much of the current debate is irrelevant. Even with more tax breaks for business like accelerated depreciation, companies won’t invest in more factories or equipment when demand is dropping for products and services across the board, as it is now. And temporary fixes like a stimulus package that would give households a one-time cash infusion won’t get consumers back to the malls, because consumers know the assistance is temporary. The problems most consumers face are permanent, so they are likely to pocket the extra money instead of spending it.

Another Fed rate cut might unfreeze credit markets and give consumers access to somewhat cheaper loans, but there’s no going back to the easy money of a few years ago. Lenders and borrowers have been badly burned, and the values of houses and other assets are dropping faster than interest rates can be lowered.

The underlying problem has been building for decades. America’s median hourly wage is barely higher than it was 35 years ago, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Most of what’s been earned in America since then has gone to the richest 5 percent.

Yet the rich devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they’re rich. They already have most of what they want. Instead of buying, and thus stimulating the American economy, the rich are more likely to invest their earnings wherever around the world they can get the highest return.

The problem has been masked for years as middle- and lower-income Americans found ways to live beyond their paychecks. But now they have run out of ways.

The first way was to send more women into paid work. Most women streamed into the work force in the 1970s less because new professional opportunities opened up to them than because they had to prop up family incomes. The percentage of American working mothers with school-age children has almost doubled since 1970 — to more than 70 percent. But there’s a limit to how many mothers can maintain paying jobs.

So Americans turned to a second way of spending beyond their hourly wages. They worked more hours. The typical American now works more each year than he or she did three decades ago. Americans became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.

But there’s also a limit to how many hours Americans can put into work, so Americans turned to a third way of spending beyond their wages. They began to borrow. With housing prices rising briskly through the 1990s and even faster from 2002 to 2006, they turned their homes into piggy banks by refinancing home mortgages and taking out home-equity loans. But this third strategy also had a built-in limit. With the bursting of the housing bubble, the piggy banks are closing.

The binge seems to be over. We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth.

The only way to keep the economy going over the long run is to increase the wages of the bottom two-thirds of Americans. The answer is not to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway.

A larger earned-income tax credit, financed by a higher marginal income tax on top earners, is required. The tax credit functions like a reverse income tax. Enlarging it would mean giving workers at the bottom a bigger wage supplement, as well as phasing it out at a higher wage. The current supplement for a worker with two children who earns up to $16,000 a year is about $5,000. That amount declines as earnings increase and is eliminated at about $38,000. It should be increased to, say, $8,000 at the low end and phased out at an income of $46,000.

We also need stronger unions, especially in the local service sector that’s sheltered from global competition. Employees should be able to form a union without the current protracted certification process that gives employers too much opportunity to intimidate or coerce them. Workers should be able to decide whether to form a union with a simple majority vote.

And employers who fire workers for trying to organize should have to pay substantial fines. Right now, the typical penalty is back pay for the worker, plus interest — a slap on the wrist.

Over the longer term, inequality can be reversed only through better schools for children in lower- and moderate-income communities. This will require, at the least, good preschools, fewer students per classroom and better pay for teachers in such schools, in order to attract the teaching talent these students need.

These measures are necessary to give Americans enough buying power to keep the American economy going. They are also needed to overcome widening inequality, and thereby keep America in one piece.


Robert B. Reich, a professor of public policy at the University of California, Berkeley, is the author, most recently, of “Supercapitalism.”

    Totally Spent, NYT, 13.2.2008, http://www.nytimes.com/2008/02/13/opinion/13reich.html

Retail Sales Report Lifts Stocks

February 13, 2008
The New York Times
By MICHAEL M. GRYNBAUM

Retail sales came in stronger than expected in January, offering investors the first positive economic news in weeks and setting off a rally Wednesday on Wall Street. But economists said the report was far from an all-clear on the recession front.

Sales of food and retail items rose 0.3 percent last month after falling 0.4 percent in December, according to a survey by the Commerce Department. The report, while volatile from month to month, is considered an important bellwether of consumer spending, which accounts for more than two-thirds of the nation’s economic activity.

Many financial forecasters, troubled by the grim economic environment of late, had predicted a decline in retail sales as consumers struggle with expensive gasoline, a softer job market and the continuing housing slump. Holiday sales in 2007 were worse than retailers had expected, and other reports seemed to point to a continued slowdown in spending.

Instead, consumers pushed up sales of gasoline, clothing and automobiles, all of which had declined in December. Sales of health care items also increased from the previous month.

The Dow Jones industrials jumped more than 100 points at the opening bell as investors welcomed a rare positive sign about the economy. The rally gathered momentum through the afternoon, and at 2:50 p.m., the Dow was up 128.52 points at 12,501.93, a gain of 1 percent.

Shares of telecommunications and information technology companies took the day’s biggest gains, nudging the Nasdaq composite index up about 2 percent. The broader Standard & Poor’s 500-stock index rose about 1 percent.

While the retail report came in ahead of expectations, it was far from glowing. Excluding automobile and gasoline, sales were flat for the month, and purchases of sporting goods, electronics, and restaurant food all declined.

“The underlying details of the January retail sales report paint a picture of consumers cutting back on discretionary spending,” wrote Richard Moody, chief economist at Mission Residential in Austin, Tex. “January’s retail sales could well mark the high point for consumer spending during 2008’s first quarter.”

Department store sales fell by 1.1 percent and building materials dropped 1.7 percent, a likely symptom of slowing demand for new homes. “Household spending is starting to shut down,” wrote Bernard Baumohl of the Economic Outlook Group in Princeton, N.J.

A private-sector survey released last week showed a soft sales pace at retail stores that have been open for more than a year. The UBS-International Council of Shopping Centers index rose 0.5 percent in January, far short of a consensus forecast of 1.5 percent.

In a separate report, the Commerce Department said that overall business sales fell 0.5 percent in December, with retail purchases declining 0.6 percent after several months of growth. Inventories continued to grow, rising 0.6 percent in December, suggesting that businesses are struggling to clear their shelves as consumers cut back on discretionary spending.

    Retail Sales Report Lifts Stocks, NYT, 13.2.2008, http://www.nytimes.com/2008/02/13/business/13cnd-econ.html?hp

Budget Deficit Running at Faster Pace

February 12, 2008
Filed at 2:12 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- The federal budget deficit is running at a pace that is more than double last year's imbalance through the first four months of the budget year.

In its monthly review of the government's finances, the Treasury Department said Tuesday that the budget was in surplus in January, but totals $87.7 billion so far this budget year, double the $42.2 billion imbalance recorded during the same period in 2007. The new budget year started last Oct. 1.

The Bush administration sent its final budget request to Congress last week, projecting that the deficit for all of 2008 will total $410 billion, very close to the all-time high in dollar terms of $413 billion in 2004.

So far this year, federal spending is 8.3 percent ahead of last year's pace, at $949.1 billion. That is far ahead of the 3.2 percent increase in revenues, which have totaled $861.4 billion in the current budget year.

For 2007, the budget deficit totaled $162 billion, a five-year low. However, the slowing economy is expected to stunt the growth of tax revenues while the $168 billion economic stimulus plan passed by Congress last week will swell the deficit.

It is hoped the stimulus plan will keep the economy out of a recession or at least make the downturn milder and shorter than it otherwise would have been. The rebate checks are expected to start being mailed out in May with most Americans getting checks of $600 for individuals and $1,200 for couples filing their tax returns jointly. In addition, families with children will get an extra $300 per child.

    Budget Deficit Running at Faster Pace, NYT, 12.2.2008, http://www.nytimes.com/aponline/us/AP-Monthly-Budget.html

Lenders Offer Plan to Head Off Foreclosures

February 12, 2008
The New York Times
By MICHAEL M. GRYNBAUM

After prodding from the Bush administration, a group of major mortgage lenders will allow some homeowners facing foreclosure to delay losing their homes for 30 days.

The plan, announced by the Treasury Department on Tuesday, was described by officials as an incremental step toward alleviating the broader problems currently roiling the housing and mortgage markets. And the scope and actual impact of the plan remained unclear.

The plan, called Project Lifeline, applies only to borrowers who have missed more than three months of mortgage payments, and officials said they did not know how many homeowners would be helped by the plan.

During the 30-day window, participating lenders would try to work out a more affordable mortgage for the delinquent borrowers, although there is no actual requirement them to do so.

Bankrupt homeowners, those who face foreclosure within 30 days, and borrowers who bought investment or vacant properties will not qualify for the assistance.

“None of these efforts are a silver bullet that will undo the excesses of the past years, nor are they designed to bail out real estate speculators or those who committed fraud,” Henry M. Paulson Jr., the Treasury secretary, said at a news conference in Washington on Tuesday. “These efforts are to help American families who both want to and can, through a loan modification or refinancing, stay in their homes.”

Unlike previous government-led efforts, the plan will apply to all borrowers, not just those with subprime mortgages. The participants — Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo — pledged to contact qualifying borrowers with further information through the mail.New loan arrangements would be worked out on an individual basis, officials said. Floyd Robinson, who oversees consumer real estate services at Bank of America, said his bank would “certainly be willing” to consider writing off substantial portions of some mortgages.

Approximately 575,000 homeowners could potentially benefit from Project Lifeline, according to a Moody’s Economy.com analysis of consumer credit files. More than 1.6 million mortgage holders defaulted on home loans in 2007, and at least that many are expected to default this year.

“If they reached all 575,000, they could have a measurable impact,” said Mark Zandi, the chief economist and co-founder of Economy.com. Projects like Project Lifeline are steps “in the right direction, but they are all very small steps. They are likely to be overwhelmed by the eroding housing and job markets. I am very skeptical these efforts will be successful in stopping what will be a record year.”

Politicians and investors who follow the financial industry appeared equally skeptical about the plan’s prospects.

“This is like giving six students a homework assignment but not requiring that they turn in the assignment or even report on its progress,” wrote Ted W. Lieu, a Democrat who is chairman of the banking and finance committee of the California State Assembly. “The banking industry’s track record of following through on their public commitments to help homeowners has been — to put it charitably — sorely lacking.”

On Wall Street, stock markets fell back slightly after the plan was announced, though the Dow remains up nearly 200 points for the day.

“It didn’t look like any of it had teeth,” James W. Paulsen, chief investment officer at Wells Capital Management, said of the plan. “I didn’t see where there was anything new.”

The plan follows a program announced in December by the Bush administration that would freeze interest rates on certain subprime loans.
 

Eric Dash contributed reporting.

    Lenders Offer Plan to Head Off Foreclosures, NYT, 12.2.2008, http://www.nytimes.com/2008/02/12/business/13lend-web.html?hp

New Program Aims to Forestall Foreclosures

February 12, 2008
Filed at 12:44 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Homeowners threatened with foreclosure would in some instances get a 30-day reprieve under a new initiative the Bush administration announced Tuesday.

Dubbed ''Project Lifeline,'' the new program will be available to people who have taken out all types of mortgages, not just the high-cost subprime loans that have been the focus on previous relief efforts.

The program was put together by six of the nation's largest financial institutions, which service almost 50 percent of the nation's mortgages.

These lenders say they will contact homeowners who are 90 or more days overdue on their monthly mortgage payments. They will be given the opportunity to put the foreclosure process on pause for 30 days while the lenders try to work out a way to make the mortgage more affordable to the homeowner.

''Project Lifeline is a valuable response, literally a lifeline, for people on the brink of the final steps in foreclosure,'' Housing and Urban Development Secretary Alphonso Jackson, said at a joint news conference with Treasury Secretary Henry Paulson.

He said the goal was to provide a temporary pause in the foreclosure process ''long enough to find a way out'' by allowing homeowners and lenders to negotiate a more affordable mortgage.

Paulson said that the new effort was just one of a number of approaches the administration was pursuing with the mortgage industry to deal with the country's worst housing slump in more than two decades.

In December, President Bush announced a deal brokered with the mortgage industry that will freeze certain subprime loans, those offered to borrowers with weak credit histories, for five years if the borrowers are unable to afford the higher monthly payments as those mortgages reset after being at lower introductory rates.

''As our economy works through this difficult period, we will look for additional opportunities to try to avoid preventable foreclosures,'' Paulson said. ''However, none of these efforts are a silver bullet that will undo the excesses of the past years, nor are they designed to bail out real estate speculators or those who committed fraud during the mortgage process.''

    New Program Aims to Forestall Foreclosures, NYT, 12.2.2008, http://www.nytimes.com/aponline/business/AP-Mortgage-Mess-Rescue.html?hp

Mortgage Crisis Spreads Past Subprime Loans

February 12, 2008
The New York Times
By VIKAS BAJAJ and LOUISE STORY

The credit crisis is no longer just a subprime mortgage problem.

As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.

The rise in prime delinquencies, while less severe than the one in the subprime market, nonetheless poses a threat to the battered housing market and weakening economy, which some specialists say is in a recession or headed for one.

Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit.

“This collapse in housing value is sucking in all borrowers,” said Mark Zandi, chief economist at Moody’s Economy.com.

Like subprime mortgages, many prime loans made in recent years allowed borrowers to pay less initially and face higher adjustable payments a few years later. As long as home prices were rising, these borrowers could refinance their loans or sell their properties to pay off their mortgages. But now, with prices falling and lenders clamping down, homeowners with solid credit are starting to come under the same financial stress as those with subprime credit.

“Subprime was a symptom of the problem,” said James F. Keegan, a bond portfolio manager at American Century Investments, a mutual fund company. “The problem was we had a debt or credit bubble.”

The bursting of that bubble has led to steep losses across the financial industry. American International Group said on Monday that auditors found it may have understated losses on complex financial instruments linked to mortgages and corporate loans.

The running turmoil is also stirring fears that some hedge funds may run into trouble. At the end of September, nearly 4 percent of prime mortgages were past due or in foreclosure, according to the Mortgage Bankers Association.

That was the highest rate since the group started tracking prime and subprime mortgages separately in 1998. The delinquency and foreclosure rate for all mortgages, 7.3 percent, is higher than at any time since the group started tracking that data in 1979, largely as a result of the surge in subprime lending during the last few years.

An example of the spreading credit crisis is seen in Don Doyle, a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter’s college tuition.

Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot afford to make the higher variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.

“The whole plan was to get out” before his rate reset, he said. “Now I am caught. I can’t sell my house. I’m having a hard time refinancing. I’ve avoided bankruptcy for months trying to pull this out of my savings.”

The default rate for prime mortgages is still far lower than for subprime loans, about 24 percent of which are delinquent or in foreclosure. Some economists note that slightly more than a third of American homeowners have paid off their mortgages completely. This group is generally more affluent and contributes more to consumer spending and the economy relative to its size.

Unlike subprime borrowers, who tend to have lower incomes and fewer assets, prime borrowers have greater means to restructure their debt if they lose jobs or encounter other financial challenges. The recent reductions in short term interest rates by the Federal Reserve should also help by reducing the reset rate for adjustable loans.

Still, economists say the rate cuts and the $168 billion fiscal stimulus package are unlikely to make a significant dent in the large debts weighing on many Americans, because banks have tightened lending standards and expected rebates from the government will not cover most house payments.

The problems are most acute in areas that experienced a big boom in housing — California, the Southwest, Florida and other coastal markets — and in the Midwest, which is suffering from job losses in the manufacturing sector.

And it is not just first-mortgage default rates that are rising. About 5.7 percent of home equity lines of credit were delinquent or in default at the end of last year, up from 4.5 percent a year earlier, according to Moody’s Economy.com and Equifax, the credit bureau.

About 7.1 percent of auto loans were in trouble, up from 6.1 percent. Personal bankruptcy filings, which fell significantly after a 2005 federal law made it harder to wipe out debts in bankruptcy, are starting to inch up.

On Monday, Fitch Ratings, the debt rating firm, reported that credit card companies wrote off 5.4 percent of their prime card balances in January, up from 4.3 percent a year ago. The so-called charge-off rate is still lower than before the 2005 law went into effect.

Banks are responding to the rise in delinquencies by capping home equity lines of credit in areas with falling real estate prices. A few credit card companies have also moved to reduce the credit limits of customers they deem more risky.

Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo are expected to announce on Tuesday at the Treasury Department that they will offer both prime and subprime borrowers who are more than three months behind a chance to halt foreclosure proceedings for 30 days and work out new loan terms.

In a conference call with analysts in December, Kenneth Lewis, the chief executive of Bank of America, said more borrowers appear to be giving up on their homes as prices fall, noting a “change in social attitudes toward default.”

“You don’t mind making a $2,000 payment when the house is going up” in value, said Steve Walsh, a mortgage broker in Scottsdale, Arizona, who has seen several clients walk away from their homes because they couldn’t refinance or sell. “When it’s going down, it becomes a weight around your neck, it becomes an anchor.”

Home prices in the North Las Vegas neighborhood of Brenda Harris, a technology analyst at a casino company, have fallen 20 percent to 30 percent. The builder who sold her a new three-bedroom home on Pink Flamingos Place for about $392,000 in 2006 is now listing similar properties for $314,000. A larger house a block down from Ms. Harris was recently listed online for $310,000.

But Ms. Harris does not want to leave her home. She estimates that she has spent close to $40,000 on her property, about half for a down payment and much of the rest on a deck and landscaping.

“I’m not behind in my payments, but I’m trying to prevent getting behind,” Ms. Harris said. “I don’t want to ruin my credit.”

In addition to the declining value of her home, Ms. Harris, 53, will soon be hit with a sharply higher house payment. She has an option adjustable-rate mortgage, a loan that allows borrowers to pay less than the interest and principal due every month. The unpaid interest gets added to the principal balance. She is making the minimum monthly payments due on her loan, about $2,400.

But she knows she will not be able to pay the $3,400 needed to cover her interest and principal, which she will be required to pay once her loan balance reaches 115 percent of her starting balance. And under the terms of her loan, which was made by Countrywide Financial, she would have to pay a prepayment penalty of about $40,000 if she chose to refinance or sell her home before May 2009.

She said that she now wishes she had taken a traditional fixed-rate loan when she bought the home. At the time, she asked for a loan that could be refinanced after one year without penalty. She said her broker had told her a week before the closing that the penalty would extend until May 2009 and that she reluctantly agreed because she had already started moving.

A nonprofit community group, Acorn Housing, is trying to broker a modification of Ms. Harris’s loan. In a statement Friday, Countrywide said the company had been in touch with Ms. Harris and would work with her.

Credit counselors say many borrowers like Ms. Harris were cajoled or pushed into risky mortgages that they never had the ability to repay.

Others disregarded warnings about complex loans because they wanted to be a part of the housing boom, which like the technology stock bubble lured people in with seemingly instant and risk-free profits, said Mory Brenner, vice president of Financial Firebird Corporation, a company based in Pittsfield, Mass., that publishes consumer debt information and refers borrowers to credit counselors.

“I’d say, Let me tell you something, this is crazy,” Mr. Brenner said. “You cannot afford this house, even if nothing happens and rates stay as low as they are today. And the response would be: I don’t care.”

Lenders extended credit to people without verifying their incomes and allowing them to make little or no down payments.

But borrowers like Mr. Doyle, the engineer in Northern California, say they are victims of their circumstances — housing prices collapsed and lending standards tightened just as they needed to sell or refinance.

In refinancing their home in 2004, Mr. Doyle and his wife were doing what millions of other homeowners did in the last decade — tapping into the rising value of their homes for home improvements, paying off credit card debt, college tuition and for other spending.

The Doyles took advantage of the housing boom by refinancing their home nearly every year since they bought it in 1995 for $275,000. Until their most recent loan they never had a problem making their payments. They invested much of the money in shares of companies that subsequently went bankrupt.

Still, Mr. Doyle does not regret refinancing in 2004. “My goal was clear: I wanted to help my daughter go through college,” he said. “It wasn’t like it was for us.”

    Mortgage Crisis Spreads Past Subprime Loans, NYT, 12.2.2008, http://www.nytimes.com/2008/02/12/business/12credit.html?ref=business

G.M. Reports Quarterly Loss of $722 Million

February 12, 2008
The New York Times
By NICK BUNKLEY

DETROIT — General Motors reported a $722 million fourth-quarter loss on Tuesday and offered more buyouts to all 74,000 of its unionized employees in another bid to keep its turnaround from stalling.

The loss translated into $1.28 a share, compared with a profit of $950 million, or $1.68 a share, in the period a year earlier. The swing was attributed to a drastically slowing vehicle market and big losses at its finance arm, the General Motors Acceptance Corporation.

Fourth-quarter revenue was $47.1 billion, down from $50.8 billion in 2006, because the company has since sold 51 percent of G.M.A.C. and now only counts revenue from its remaining stake. Automotive revenue was $46.7 billion in the quarter, up $3 billion from a year ago.

Excluding what G.M. said were one-time items, profit was $46 million, or 8 cents a share, compared with an adjusted profit of $180 million, or 32 cents a share, in the period a year earlier.

“Clearly, G.M. isn’t standing idle,” Peter Nesvold, an analyst with Bear Stearns, wrote to clients Tuesday. “However, we believe something’s happening that continues to erode G.M.’s earnings power faster than the restructurings can offset.”

For all of 2007, G.M. lost $38.7 billion, the biggest loss ever for an automaker. The loss, equal to $68.45 a share, is about the same amount as a noncash charge of $38.3 billion that the company took in the third quarter to write down deferred tax assets, meaning that G.M. almost broke even otherwise after losing $2 billion in 2006. Excluding special items, the company lost $23 million, or 4 cents a share.

Shares of the company were up 37 cents, to $27.49, in morning trading Tuesday on the New York Stock Exchange.

“We’re pleased with the positive improvement trend in our automotive results, especially given the challenging conditions in important markets like the U.S. and Germany, but we have more work to do to achieve acceptable profitability and positive cash flow,” G.M.’s chief executive, Rick Wagoner, said in a statement.

Worldwide, G.M.’s automotive operations lost $1.6 billion in 2007, including $1.3 billion in the fourth quarter, down from $6.1 billion a year earlier. Sales grew 3 percent in 2007, to almost 9.4 million, barely enough to retain its title as the world’s largest automaker over its surging Japanese rival Toyota.

In North America, the company cut its losses by more than half, to $3.3 billion from $7.5 billion in 2006. But the worsening economy in the United States led to higher fourth-quarter losses in the region: $1.1 billion, compared to $30 million in 2006.

“Despite progress and buoyant markets outside the U.S., falling volumes and competitive pressures in the U.S. will continue to pressure G.M. North America and hence overall G.M. operational results,” Brian A. Johnson, an analyst with Lehman Brothers, wrote in a note to clients Tuesday.

Still, G.M. executives maintained that the company’s North American turnaround plan, which calls for reducing annual expenses by another $4 billion to $5 billion by 2010, remains on track. The company has refused to say when it expects to earn a profit in North America.

“In order to get North America sustainably profitable and generating cash,” said G.M.’s chief financial officer, Frederick A. Henderson, “we must get the job done on both sides — revenue as well as cost.”

To cut costs further in the United States, G.M. said employees represented by the United Automobile Workers union can elect to take buyouts of up to $140,000.

Those eligible to retire can do so with full benefits and a payout of $45,000 for production workers or $62,500 for skilled tradespeople. Those amounts are $10,000 and $27,500 higher than what the company offered in 2006, when 30,000 U.A.W. workers agreed to leave their jobs.

Other options include an early retirement program for workers with slightly less than 30 years of seniority or a cash buyout of either $70,000 or $140,000 in exchange for giving up health care and other post-retirement benefits.

Some of the amounts are less than similar offers recently made available to workers at the Ford Motor Company and Chrysler, although G.M. is giving its workers the option to roll their buyout into a retirement account to reduce taxes.

The Detroit automakers are each hoping to persuade more workers to leave so that they can replace some with new hires earning half as much money, as permitted by two-tier wage provisions in the four-year contracts that they signed with the union last fall. None of the three has said how many workers it wants to leave under the new program.

    G.M. Reports Quarterly Loss of $722 Million, NYT, 12.2.2008,  http://www.nytimes.com/2008/02/12/business/12cnd-auto.html?hp

Yahoo Officially Rejects Offer

February 11, 2008
The New York Times
By ANDREW ROSS SORKIN

Yahoo officially rejected Microsoft’s $44.6 billion takeover offer on Monday, calling the bid too low.

“After careful evaluation, the board believes that Microsoft’s proposal substantially undervalues Yahoo including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments,” the company said in a statement.

The company said it would continue to evaluate all its options.

Yahoo shares rose in morning trading Monday, apparently on anticipation that Microsoft might sweeten its offer. They were trading at $29.44, up 24 cents. Microsoft’s shares were at $28.08, down 48 cents.

Analysts have suggested the company could afford to pay as much as $35 a share for Yahoo, up from its current offer of $31.

The next move is now up to Microsoft and a largely unknown executive on the company’s sprawling campus, Christopher P. Liddell.

Mr. Liddell, a former banker from New Zealand, is the behind-the-scenes architect of Microsoft’s hostile takeover, the company’s first unsolicited bid and perhaps the most audacious effort by a technology company to wrestle control of a competitor.

With Yahoo’s board rejecting Microsoft’s advances, it will fall to Mr. Liddell, an outsider to the software industry who joined Microsoft as its chief financial officer just two years ago, to plot the company’s next steps in this bitter battle — and in the process, reshape Microsoft’s not-invented-here culture toward making aggressive acquisitions.

“You have to be disciplined and ruthless,” Mr. Liddell said by telephone last week, before Yahoo’s board decided to rebuff the offer. “We should see acquisitions as a way of growth. We should not be embarrassed at all.”

Microsoft has made acquisitions over the years, but mainly smaller ones to jump-start a fledgling business or pick up a needed technology. Its media player, voice recognition, health search and business software, among others, are technologies Microsoft bought along with the companies that created them.

However, when it has come to making big deals, it has balked until recently. In late 2003, Microsoft talked to the big German business software maker, SAP, about buying it. The deal, had it been pursued, would have cost Microsoft more than $50 billion.

The talks, made public in a court case in 2004, were abandoned, Microsoft said, because of the “complexity of the potential transaction,” especially the management headaches of trying to put the two big software companies together.

Mr. Liddell, who calls himself Microsoft’s “gatekeeper of funding,” spent the weekend devising ways to raise the stakes in the fight for Yahoo now that the company’s original proposal has been rejected, holding a series of marathon conference calls with his cadre of Wall Street advisers.

More an accountant than a technologist, Mr. Liddell, who joined Microsoft after serving as chief financial officer at International Paper, the giant forest products company, clearly has no compunction about ruffling any digital feathers. Among his alternatives is a series of bare-knuckle Wall Street tactics: First, Microsoft is planning to crisscross the nation to meet with Yahoo’s largest shareholders in an election-style campaign, hoping they can put pressure on Yahoo’s board, people briefed on the company’s plans said.

Microsoft may have an easier time than it could have had two weeks ago: since then, millions of Yahoo’s shares have traded hands to short-term-oriented hedge funds that typically favor a quick sale, as opposed to value investors who hold shares for the long term.

Microsoft could also decide to make an offer directly to shareholders, called a tender offer, which would put more pressure on Yahoo’s board to negotiate. At the same time, Microsoft could also set a deadline for its bid, known as an “exploding offer.”

And if Microsoft decides to make this a nasty battle, it could start a proxy contest to oust Yahoo’s board at its next election; it would have until March 13 to nominate a new slate of directors.

Microsoft’s advisers in the takeover effort are Morgan Stanley and the Blackstone Group. Its lawyers are Simpson Thacher & Bartlett and Cadwalader Wickersham & Taft.

They are facing Yahoo’s team of bankers at Goldman Sachs, Lehman Brothers and Moelis & Company, and its lawyers at Skadden, Arps, Slate, Meagher & Flom.

Microsoft also hired outside public relations advisers, Joele Frank, Wilkinson Brimmer Katcher and Waggener Edstrom Worldwide. Yahoo has Abernathy-McGregor and Robinson, Lehrer, Montgomery.

Microsoft may simply raise its offer to clinch a deal. But Mr. Liddell, speaking generally about negotiations, seemed to suggest he was willing to play hardball. “You have to be willing to walk away,” said Mr. Liddell, who plays rugby regularly and has completed several triathlons.

For Mr. Liddell, who sends e-mail messages to colleagues at all hours and is a PowerPoint whiz, the prospect of joining Microsoft as an outsider and trying to transform it into a financially oriented acquisition machine was daunting. “I knew there had been a history of people coming in here and it not working,” he said.

Mr. Liddell was one of several high-profile outside hires at Microsoft in recent years including Ray Ozzie, the creator of Lotus Notes, as the company’s chief software architect; and B. Kevin Turner, a former Wal-Mart executive, as chief operating officer.

Mr. Liddell, who has a master’s degree in philosophy from Oxford, found that with Bill Gates and the president, Steven A. Ballmer, “If you do a good job, you fit in. They don’t suffer people very well who don’t come prepared.”

He has a background as an investment banker at Credit Suisse First Boston in Auckland. Since he joined the company, Microsoft has made 50 acquisitions.

He has pushed the company to use its cash — it has spent $54 billion on stock buybacks and dividends since his arrival. And it has even taken on, dare it be said aloud at Microsoft, debt for the first time in the company’s history. If the company’s bid for Yahoo is successful, Microsoft will be doing both.

Steve Lohr contributed reporting.

    Yahoo Officially Rejects Offer, NYT, 11.2.2008, http://www.nytimes.com/2008/02/11/technology/11cnd-yahoo.html?hp

You Are What You Spend        NYT        0.2.2008
http://www.nytimes.com/2008/02/10/opinion/10cox.html 

Op-Ed Contributors

You Are What You Spend

February 10, 2008
The New York Times
By W. MICHAEL COX and RICHARD ALM

Dallas

WITH markets swinging widely, the Federal Reserve slashing interest rates and the word “recession” on everybody’s lips, renewed attention is being given to the gap between the haves and have-nots in America. Most of this debate, however, is focused on the wrong measurement of financial well-being.

It’s true that the share of national income going to the richest 20 percent of households rose from 43.6 percent in 1975 to 49.6 percent in 2006, the most recent year for which the Bureau of Labor Statistics has complete data. Meanwhile, families in the lowest fifth saw their piece of the pie fall from 4.3 percent to 3.3 percent.

Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.

The top fifth of American households earned an average of $149,963 a year in 2006. As shown in the first accompanying chart, they spent $69,863 on food, clothing, shelter, utilities, transportation, health care and other categories of consumption. The rest of their income went largely to taxes and savings.

The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? A look at the far right-hand column of the consumption chart, labeled “financial flows,” shows why: those lower-income families have access to various sources of spending money that doesn’t fall under taxable income. These sources include portions of sales of property like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts. While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status.

So, bearing this in mind, if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.

Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1. The average person in the middle fifth consumes just 29 percent more than someone living in a bottom-fifth household.

To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households.

As the second chart, on the spread of consumption, shows, this wasn’t always so. The conveniences we take for granted today usually began as niche products only a few wealthy families could afford. In time, ownership spread through the levels of income distribution as rising wages and falling prices made them affordable in the currency that matters most — the amount of time one had to put in at work to gain the necessary purchasing power.

At the average wage, a VCR fell from 365 hours in 1972 to a mere two hours today. A cellphone dropped from 456 hours in 1984 to four hours. A personal computer, jazzed up with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours to 25 hours. Even cars are taking a smaller toll on our bank accounts: in the past decade, the work-time price of a mid-size Ford sedan declined by 6 percent.

There are several reasons that the costs of goods have dropped so drastically, but perhaps the biggest is increased international trade. Imports lower prices directly. Cheaper inputs cut domestic companies’ costs. International competition forces producers everywhere to become more efficient and hold down prices. Nations do what they do best and trade for the rest.

Thus there is a certain perversity to suggestions that the proper reaction to a potential recession is to enact protectionist measures. While foreign competition may have eroded some American workers’ incomes, looking at consumption broadens our perspective. Simply put, the poor are less poor. Globalization extends and deepens a capitalist system that has for generations been lifting American living standards — for high-income households, of course, but for low-income ones as well.
 

W. Michael Cox is the senior vice president and chief economist and Richard Alm is the senior economics writer at the Federal Reserve Bank of Dallas.

    You Are What You Spend, NYT, 10.2.2008, http://www.nytimes.com/2008/02/10/opinion/10cox.html

Recession to be longer than usual: UMich

Fri Feb 8, 2008
10:23am EST
Reuters

NEW YORK (Reuters) - The U.S. economy has entered a recession that will be more painful and drawn out than the usual downturn, the director of the Reuters/University of Michigan consumer sentiment survey said on Friday.

Inflation pressures will linger despite the retrenchment in consumer spending, complicating the task of policy-makers, the University's Richard Curtin said in a report, citing data from industry group The Conference Board.

"This is no ordinary recession," he said. "The aftereffects will last much longer than the typical downturn."

He said the Conference Board's expectations index is a strong predictor of economic contractions, and that it is currently flashing red.

With Americans getting hit with everything from a housing downturn to excess borrowing, things will get worse before they get better.

"Consumers must take more drastic steps to stabilize their finances in the midst of high fuel and food prices, stagnant incomes, and record debt," Curtin said.

TWO AMERICAS

The new report adds that a rising wealth gap will, even more than usual, lead to disproportionate pain for middle- and lower-income Americans.

"Growing income inequality has insulated higher income groups to a greater extent than ever before," the report said.

Yet the rich will not go unscathed, with the stock market's recent slide likely taking a bite out of many an investment portfolio.

Paradoxically, worsening economic conditions will induce families to save money, reinforcing the drag on an economy that has become largely reliant on consumer spending.

"The negative impact will grow as home prices continue to fall in the year ahead," he said.

(Reporting by Pedro Nicolaci da Costa, Editing by Chizu Nomiyama)

    Recession to be longer than usual: UMich, R, 8.2.2008, http://www.reuters.com/article/domesticNews/idUSN0826726720080208

Wall Street Gives Up Gains

February 8, 2008
Filed at 2:38 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Wall Street turned lower Friday as investors surrendered to their persistent fears about the insurers of distressed mortgage-backed bonds and their anxiety about the broader economy. The Dow Jones industrial average, which had risen in earlier trading, slumped more than 100 points.

For several weeks, the market has been shaken by the uncertainty surrounding bond insurers and whether they'll be able to handle huge losses in the value of mortgage-backed bonds. On Thursday, Moody's Investors Service lowered its rating on the bond insurer Security Capital Assurance Ltd. And at midday Friday, Fitch Ratings, another credit rating agency, put a series of mortgage-backed securities insured by MBIA Inc. on negative watch.

''The bond insurers are really on peoples' minds,'' said Kim Caughey, equity research analyst at Fort Pitt Capital Group. ''This is a horribly complex issue.''

If the ratings agencies downgrade more bonds and bond insurers, the moves could hurt the banks who own the bonds -- which ''would just drive the credit markets into a downward spiral,'' Caughey said. ''It's things happening further upstream that's making people nervous.''

Financial stocks fell due to heavy selling in the corporate bond and leveraged loan markets, while soaring commodities prices hit retailers, said Miller Tabak equity strategist Peter Boockvar.

Crude oil prices jumped more than $3 to over $91 a barrel on the New York Mercantile Exchange. Retailers have said that consumer spending is not only slowing because of problems in the housing market, but also because of high gasoline and food prices.

The Dow dropped 106.89, or 0.87 percent, at 12,140.11 after rising in earlier trading. The biggest losers among the 30 Dow companies were the banks Citigroup Inc. and JPMorgan Chase & Co., and the credit card company American Express Co.

Broader stock indicators also turned lower. The Standard & Poor's 500 index fell 10.35, or 1.02 percent, to 1,326.56, while the Nasdaq composite index fell 0.71, or 0.03 percent, to 2,292.32.

The technology-heavy Nasdaq fared better than the other indexes, thanks in part to Amazon.com Inc., which authorized a $1 billion share buyback program. The online retailer rose $2.13, or 3 percent, to $73.03.

Government bonds rose. The yield on the benchmark 10-year Treasury note fell to 3.66 percent from 3.73 percent late Thursday.

SCA plunged 45 cents, or 17 percent, to $2.14.

MBIA rose 8 cents to $14.26. Though its bonds were downgraded by Fitch, the market was please because late Thursday it boosted the size of a share offering to $1 billion from $750 million because it was oversubscribed by investors.

A motley batch of corporate earnings failed to provide much reassurance to investors. Some companies such as software maker McAfee Inc. and jewelry maker Tiffany & Co. seem to be faring well despite the U.S. economic slowdown, but others, including paper and wood product maker Weyerhaueser Co., are struggling.

McAfee posted a better-than-expected fourth-quarter profit late Thursday and rose $3.19, or 10.1 percent, to $34.92. Tiffany rose $2.61, or 6.8 percent, to $40.79 after predicting fiscal 2008 earnings would beat its fiscal 2007 profit forecast, based on an expected 10 percent rise in global sales.

Weyerhaeuser said it swung to a fourth-quarter loss as the housing market slowdown dampened demand for lumber, in a downturn the paper and wood products company expects will extend through the year. Weyerhaeuser fell $2.04, or 3.2 percent, to $62.67.

And meanwhile, Alcatel-Lucent reported a $3.8 billion loss in the fourth quarter, eliminated its 2007 dividend, and predicted that 2008 would be a difficult year. Shares of the Franco-American company, which makes telecommunications equipment, fell 30 cents, or 4.8 percent, to $5.95.

The mix in corporate success has made it hard to determine how weak the economy is getting.

Data on Friday showing a higher-than-expected rise in U.S. wholesalers' inventories provided Wall Street with little new evidence about the economy's health. A rise can be positive, suggesting that companies are betting that demand will rise, but it can also serve as a worrisome sign that inventories are building up unintentionally because demand is waning.

The dollar fell against other major currencies, while gold prices rose.

Advancing issues outnumbered decliners by about 5 to 3 on the New York Stock Exchange, where volume came to 893.0 million shares.

The Russell 2000 index of smaller companies fell 5.94, or 0.85 percent, to 696.84.

Overseas, Japan's Nikkei average closed down 1.44 percent. In Europe, Britain's FTSE 100 rose 1.05 percent, Germany's DAX index rose 0.50 percent, and France's CAC-40 fell 0.30 percent.

------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Wall Street Gives Up Gains, NYT, 8.2.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Creators of Credit Crisis Revel in Las Vegas

February 8, 2008
The New York Times
By VIKAS BAJAJ

LAS VEGAS — It was Monday night on the Strip, and John Devaney was giving a party for himself and fellow connoisseurs of risk who have seen their hot hands go cold.

In a gilded ballroom at the Venetian, the revelers sipped cabernet, dined on surf and turf and crowed as the Blue Man Group put on a private show.

The partygoers had traveled to Sin City this week — Mr. Devaney by chartered jet — for an event that before the current credit squeeze might have been called the Predators’ Ball of this era.

This time, with mortgage securities replacing the junk bonds of the 1980s, the gathering felt more like group therapy.

The occasion was, officially, the 5th annual conference of the American Securitization Forum, a celebration of the financial wizardry that supposedly turns risky mortgages and other loans into gilt-edged securities but, as Mr. Devaney belatedly discovered, does not always make them safe. Mr. Devaney, a 37-year-old money manager, lost big on bond investments last year. This week, in Las Vegas fashion, he said he was doubling down.

The four-day event at the Venetian drew more than 6,500 financial professionals from across the country. Many came in search of ways to ride out — or better yet, to profit from — the mortgage mess their industry helped to create.

Wall Street banks played a crucial role in the mortgage crisis by buying home loans and bundling them into securities. Regulators are examining whether investment banks and mortgage lenders hid the risks of subprime debt from investors.

While the mood was more somber than in years past, when home prices were soaring and mortgage lending boomed, there was plenty of fun and games. Countrywide Financial, the troubled lender that has come to symbolize some of the excesses of the mortgage business, was the host of a party on Sunday night where people cheered while watching the Super Bowl on big-screen televisions. On Monday came the gala dinner sponsored by Mr. Devaney. On Tuesday the conference organized an outing on a golf course near the California border.

Between such revels, attendees spent their time in meeting rooms with golden trim, listening to panel discussions with titles like “Transparency, Valuation and Rebuilding Investor Confidence” and “Legislation, Regulation and Market Oversight — A Global Review.”

At the conference last year, Mr. Devaney grabbed headlines — and was proved prophetic — when he said he hated subprime mortgage securities and was “hoping the whole thing explodes.” In March, before he incurred his big losses, he told The New York Times he was hoping to expand and diversify his trading business.

This year, Mr. Devaney, a brash bond trader, said he had grown cocky during the mortgage boom and paid the price. A hedge fund run by his company, United Capital Markets, plummeted last year, and he lost $100 million. The rout prompted him to sell a mansion on Key Biscayne, near Miami, his private jet and his yacht, Positive Carry, named after a financial maneuver in which the cost of financing an investment is less than the return obtained from it.

Mr. Devaney has, however, profited from turbulent markets in the past, and made his name earlier this decade trading troubled bonds backed by trailer home loans and business-franchise loans.

“In a funny way I want to thank the market for dealing me a direct hit,” Mr. Devaney said during one panel discussion, drawing laughter from the crowd. “As a trader, if you make money for too many years you lose sight of risk unless you get sucker- punched.”

Mr. Devaney said he was now buying beaten-down bonds for pennies on the dollar, betting their prices would revive.

But his financial troubles are small compared with losses in the housing market and broader economy. Many people are struggling to pay their mortgages and hold on to their homes. Nearly a quarter of home loans made to people with blemished, or subprime, credit are delinquent or in foreclosure, and defaults now are rising even on loans made to people with good credit. Some of the people who attended the Las Vegas gathering had recently lost their jobs and came hoping to find new ones.

At times, the unease here was palpable. During one panel discussion, a money manager stood up and denounced credit ratings agencies, which many investors have criticized for underestimating the risks posed by securities backed by subprime loans. In the last 12 months, the ratings firms have downgraded many securities they had awarded high marks to only a year or two earlier.

“In my 38 years this has been the worst capital destruction and the worst rating decline in history,” Robert L. Rodriguez, the chief executive of First Pacific Advisors, a mutual fund company based in Los Angeles, said to a panel of four executives from ratings firms. “All of you should be ashamed of yourself.”

The lashing elicited scattered applause. The panelists listened, their lips pursed. Some then admitted making some mistakes but said most investors in top-rated triple-A securities would get their money back.

“We all have heard a lot of criticism over the last several months, and some of that criticism is certainly justified,” said Glenn Costello, co-head of the residential mortgage-backed securities group at Fitch Ratings. But he added that a frequent criticism of ratings firms — that they are beholden to the investment banks and mortgage companies whose securities they rate — reflected “a real lack of understanding of how we as ratings agencies go about doing what we do.”

During another discussion, managers of much-maligned collateralized debt obligations — packages of bonds that are packages of other debt — criticized the media for what they said was negative coverage of the securities. Most of the speakers on that panel asked that reporters be allowed in the session only if they did not directly quote their remarks or did so with their permission.

But other managers and bankers said investors and journalists were right to question why so much wealth was destroyed so quickly. As for the view that some securities are trading at far lower prices than they deserved to be, Len Blum, a managing director at Westwood Capital, a boutique investment bank based in New York, said investors always overreacted to bad news, just as they overreacted to good news.

“The market always paints with a broad brush,” he said.

Another banker, Joseph M. Donovan, said the hand-wringing was overdone. He said what ailed the market was clear, but added that solutions would take time.

In his estimation, defaults are highest in cases where lenders take too many risks because neither they nor borrowers have much to lose. Mortgage companies sold the loans to Wall Street banks, and homeowners did not put any money down. Mr. Donovan, a retired Credit Suisse executive, said the packagers of the securities and investors took false comfort from the diversity of loans backing their securities.

“We need to step back and take a breather,” he said. “I don’t think there is anything fundamentally wrong.” Mr. Devaney, the bond trader, generally agrees with Mr. Donovan, whom he regards as a mentor.

Standing near a conference booth for Standard & Poor’s, the ratings firm, Mr. Devaney said to a fellow trader that he should buy bonds backed by second mortgages trading at deep discounts.

“I am buying things at 10 to 15 cents” on the dollar, Mr. Devaney boasted. The other trader, who did not consent to being identified, said he was worried that the bond prices might fall more.

Later, Mr. Devaney himself seemed to have second thoughts.

“I’m worried I won’t be able to call the bottom,” he said. But he quickly regained his old confidence. “Most of the stuff I have has limited downside,” he said.

    Creators of Credit Crisis Revel in Las Vegas, NYT, 8.2.2008, http://www.nytimes.com/2008/02/08/business/08trader.html

Stocks Jump on Bargain-Hunting

February 7, 2008
Filed at 2:44 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Wall Street struggled to rebound Thursday as investors, though still nervous about the economy, bought up stocks that have been pummeled by three straight days of losses.

With market having largely priced in the possibility of a recession, many believe there are many valuable stocks at cheap prices. The stock market had tumbled this week, slicing 543 points, or 4.26 percent, off the Dow Jones industrial average.

''The market is coming to the conclusion that it overreacted over the past few days,'' said Brian Gendreau, investment strategist for ING Investment Management, noting that it's unsurprising that bargain hunters would enter the market after three straight days of sharp losses.

Trading was fickle, though, given Thursday's gloomy data -- which included declines in retailers' sales figures, a drop in sales of pending homes and a disappointing outlook from Internet networking supplier Cisco Systems Inc.

''We're kind of trying to create a silk purse out of a sow's ear here,'' said Hugh Johnson, chief investment officer of Johnson Illington Advisors. ''The earnings are lousy, the economic numbers are lousy.''

The Dow rose 30.65, or 0.25 percent, to 12,230.75 in midafternoon trading after trading down about 80 points and up about 130.

Broader stock indicators were also higher. The Standard & Poor's 500 index rose 7.39, or 0.56 percent, to 1,333.84. The technology-heavy Nasdaq composite index rose 13.78, or 0.60 percent, to 2,292.53.

Government bonds fell. The 10-year Treasury note's yield, which moves opposite its price, rose to 3.73 percent from 3.60 percent late Wednesday.

Investors may have been encouraged to buy back into stocks due to a rise in the dollar, whose decline over the past several months has contributed to worries about inflation and a possible drop in foreign interest in U.S. investments.

Peter Cardillo, chief market economist at Avalon Partners, said the dollar's advance followed remarks by European Central Bank chief Jean-Claude Trichet that the United States and Europe remain economically intertwined. This suggested to investors that strength in other countries can help stabilize the United States during its rough patch. Fears of a global economic slowdown have been weighing on stocks around the world.

As expected on Thursday, the Bank of England lowered its key interest rate by a quarter percentage point to 5.25 percent, its second cut in three months, while the European Central Bank left its key rate unchanged at 4 percent.

Another argument for bargain hunting Thursday was that the recent spate of negative economic data raises the likelihood of the Federal Reserve lowering interest rates further to spur growth. Atlanta Fed President Dennis Lockhart said Thursday the Fed's ''focus, religiously, is on the general economy, the real economy,'' and that the financial sector's performance ''can affect the strength of overall economic output.''

Moreover, the stock market often portends economic declines, rather than the other way around.

''Stocks do worse during times of slow growth than they do during recession,'' Gendreau said. ''If we're in a shallow and short recession, for all anyone knows, we might be halfway through.''

With the market having already changed directions several times during the session, though, it is unlikely investors have moved past their many worries about personal spending, the crumpling housing market and deteriorating conditions in consumer credit.

Late Wednesday, Internet networking supplier Cisco Systems Inc. issued a 10 percent sales growth forecast for its current quarter that fell well below the 15 percent Wall Street projected. Then on Thursday, Wal-Mart Stores Inc. reported a 0.5 percent rise in January same-store sales, or sales at stores open for at least a year, while other chain stores such as Target Corp., Gap Inc., Limited Brands Inc. and AnnTaylor Stores Corp. said their sales fell.

Not all news about retailing was bad -- J.C. Penney Co. raised its earnings forecast for the last three months of 2007 and its stock jumped 10 percent. Several other retailers saw their stocks rebound, too.

But on top of the weak retail reports, the Labor Department reported that jobless claims fell last week by 22,000, a smaller decline than many economists predicted, and the National Association of Realtors said pending sales of existing homes fell 1.5 percent in December.

Light, sweet crude oil rose 69 cents to $87.83 a barrel on the New York Mercantile Exchange. Gold prices rose.

Oil prices appear to be on a gradual decline, so it's possible a slower economy is keeping inflation from accelerating. Still, many market participants are anxious about how much longer the Fed can continue to lower interest rates given relatively high food and energy costs.

The Russell 2000 index of smaller companies rose 7.52, or 1.09 percent, to 700.01.

Advancing issues outnumbered declining shares by nearly 2 to 1 on the New York Stock Exchange, where volume came to 1.20 billion shares.

Overseas, many Asian markets were closed for a holiday, but Japan's stock market was open and its Nikkei average rose 0.82 percent. In Europe, Britain's FTSE 100 fell 2.58 percent, Germany's DAX index fell 1.66 percent, and France's CAC-40 fell 1.92 percent.

------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Stocks Jump on Bargain-Hunting, NYT, 7.2.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Retailers Report Weak January Sales

February 7, 2008
Filed at 12:31 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- The nation's retailers delivered more evidence of a stumbling economy Thursday, as merchants reported their weakest January performance in nearly four decades, extending a malaise that has deepened since the holiday shopping season.

The sales figures made it clear that consumers wrestling with high gas and food prices, a slumping housing market, an escalating credit crisis and a weakening job market retrenched further, buying mostly necessities even when redeeming their holiday gift cards. The disappointments cut across all sectors including discounters like Wal-Mart Stores Inc., teen retailers including Pacific Sunwear of California Inc. and mall-based apparel chain Limited Brands Inc. Even affluent shoppers are pulling back, hurting stores like Nordstrom Inc.

''Clearly, this is a reflection of a very difficult environment for the consumer,'' said Ken Perkins, president of RetailMetrics LLC, a research company in Swampscott, Mass. ''It looks like consumer spending is stalling.''

Nonetheless, shares of a number of retailers rose as many either backed their earnings forecast or even raised guidance, signaling that they were able to control their inventories. Hot Topic Inc. and Wal-Mart stuck with their earnings forecast, while Pacific Sunwear, Wet Seal and Gap Inc. raised their profit outlooks despite sales drops.

The UBS-International Council of Shopping Centers preliminary sales tally of 43 retailers rose 0.5 percent in January, well below the original 1.5 percent forecast. The results followed an anemic 0.7 pace in December and were below last year's same-store sales average gain of 2.1 percent. Michael P. Niemira, chief economist, said January's performance was the weakest ever, according to records that go back to 1970. It is based on same-store sales, or sales at stores open at least a year.

Thursday's results extended a streak of news that showed more signs of consumer strain. Consumers' spending accounts for two-thirds of economic activity, and their outlays appear to have stalled from an already slowing pace seen over the past year. Wal-Mart noted in its release Thursday that gift card redemptions were below expectations and that customers appear to be holding gift cards longer and ''using them more often for food and consumables rather than discretionary purchases.''

While consumers have had to contend with rising gas and food prices and a slumping housing market, there are signs that the job market is becoming a concern as well. On Friday, the Labor Department reported that U.S. employers sliced payrolls by 17,000, the first decline in more than four years. And on Thursday, the department said jobless claims fell last week by 22,000, but the decline was smaller than expected.

And while investors are hoping the Federal Reserve can avert a recession with a series of rate cuts, some economists say the moves may be too little, too late. Analysts also say that while the government's proposed economic stimulus package, which offers rebate checks for more than 100 million Americans, could help reignite spending, the lift would only be temporary.

As Perkins said, if the job market continues to deteriorate, ''all bets are off.''

Janet Hoffman, managing partner of the North American retail division of the consulting firm Accenture, agreed, noting she expects ''some relief'' but nothing ''radical.''

''Consumers have exhausted all the avenues to get access to credit,'' she added.

Retailers are expected to offer a better picture of the impact of slower sales when they report fourth-quarter earnings over the next few weeks. The retail fiscal year ends in late January.

What might salvage earnings for some retailers is their efforts to control inventories; they're also expected to pare merchandise offerings further in the coming months to respond to slowing demand. Still, Wall Street profit expectations have been lowered in recent weeks -- Perkins noted that fourth-quarter earnings growth for the 130 retailers he tracks is expected to be down 5.4 percent, compared to a 1.2 percent growth expected at the beginning of December.

Wal-Mart, the world's largest retailer, reported a 0.5 percent gain in same-store sales. Analysts surveyed by Thomson Financial had expected a 2.0 percent increase. The company said it continues to do well with staples like groceries but that home furnishings remain weak. Wal-Mart noted in its news release that gift card redemptions were below expectations and that customers appear to be holding gift cards longer and ''using them more often for food and consumables rather than discretionary purchases.''

Rival Target Corp. reported a 1.1 percent decline in same-store sales in January, worse than the 0.6 percent analysts expected.

Costco Wholesale Corp., however, reported a 7 percent gain in same-store sales, surpassing the 6.6 percent estimate.

Within the department store sector, J.C. Penney Co. had a 1.9 percent decline in same-store sales at its department stores, though the results were better than the 6.3 percent Wall Street expected.

Upscale Nordstrom suffered a 6.6 percent same-store sales decline, much worse than the 0.7 percent decrease expected. Saks Inc., which operates Saks Fifth Avenue, said same-store sales rose 4.1 percent, better than the 2.2 percent estimate. But in a release, the luxury retailer said shoppers continue to shift more of their spending to sale merchandise amid a challenging economic environment.

Macy's Inc. on Wednesday reported a 7.1 percent decline in same-store sales, worse than the 5.9 percent decrease. The company also said it was cutting about 2,300 management jobs as the department store operator consolidates three regional divisions and decentralizes buying to reduce costs and boost sales.

Limited Brands reported an 8 percent drop in same-store sales in January, worse than the 6.9 percent forecast.

Gap Inc. posted a 2 percent decline in same-store sales, better than the 6.5 percent decline projected by analysts.

Among teen retailers, Abercrombie & Fitch Co. had flat same-store sales, matching Wall Street expectations. Pacific Sunwear suffered a 7.4 percent drop in same-store sales; analysts expected a 1.2 percent rise.

Wet Seal's January same-store sales fell 5.7 percent as its Arden B chain continued to slump. The results were worse than the 1.5 percent decline expected by analysts.

    Retailers Report Weak January Sales, NYT, 7.2.2008, http://www.nytimes.com/aponline/business/AP-Retail-Sales.html?hp

Productivity Slowed in 4th Quarter

February 6, 2008
Filed at 9:49 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Worker productivity, the key factor in rising living standards, slowed sharply in the final three months of the year while wage pressures increased.

The Labor Department reported Wednesday that productivity, the amount of output per hour of work, increased at an annual rate of 1.8 percent in the October-December quarter, down from a 6 percent performance in the July-September period. The slowdown reflected the fact that overall economic activity weakened considerably in the final three months of last year.

Labor costs rose by 2.1 percent in the final three months of the year, after having fallen by 1.9 percent in the third quarter and 1.1 percent in the second quarter.

The increase in productivity in the fourth quarter was nearly double what economists had been expecting while the rise in labor costs was slightly lower than had been expected.

Ian Shepherdson, chief U.S. economist at at High Frequency Economics, said he looked for productivity to slow further in 2008, reflecting an extremely weak economy in the first half of the year.

For the year, productivity rose by 1.6 percent, a slight rebound from a 1 percent gain in 2006 but both years were well below the average annual increases of 3.2 percent turned in from 2000 through 2004.

Productivity determines whether living standards can rise because it allows businesses to pay their workers more because of their increased output without having to raise the cost of their products, which increases inflation.

The country went through a two-decade period of stagnant increases in productivity following the oil shocks of the early 1970s. However, starting in 1995, productivity began showing bigger improvements, reflecting all of the investments that had been made in computers and other efficiency-enhancing equipment.

Economists are currently debating whether that substantial gain in productivity is now waning or whether the slowdown is just a temporary reflection of the deterioration of the overall economy.

The Federal Reserve closely monitors changes in productivity and labor costs for clues on underlying inflation pressures.

Analysts do not believe the fourth-quarter slump in productivity and rise in labor costs will alarm Fed policymakers who are focused at the moment on fighting the sharp slowdown in overall economic activity rather than worrying about inflation.

The Fed cut a key interest rate by a half-point last week, a reduction which followed a rare three-quarter-point cut delivered following an emergency meeting eight days earlier. The two cuts represented the most aggressive easing on the part of the Fed in more than two decades.

The central bank hopes the rate cuts will bolster sagging consumer and business confidence and keep a prolonged housing downturn and severe credit squeeze from pushing the country into a recession.

Congress and President Bush are also working to keep the current six-year-old expansion from faltering. The president included in the $3.1 trillion budget he unveiled on Monday a $145 billion economic stimulus plan. The House has passed a version of the measure and it is currently being debated in the Senate.

The 1.6 percent rise in productivity for all of last year was a slight improvement from a 1 percent increase in 2006 but was still well below the gains of 4.1 percent in 2002 and 3.7 percent in 2003.

For all of 2007, labor costs rose by 3.1 percent, a slight increase from a 2.9 percent rise in 2006.

    Productivity Slowed in 4th Quarter, NYT, 6.2.2008, http://www.nytimes.com/aponline/us/AP-Economy.html?hp

Stocks Pull Back After Fed Comments

February 6, 2008
Filed at 2:27 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Stocks turned lower Wednesday as many investors, still uneasy about the economy, cashed in earlier gains after a Federal Reserve official suggested that rising inflation could prevent the central bank from making further interest rate cuts.

Although the weakening economy is a big concern, ''we must not lose sight of the other part of the Fed's dual mandate -- which is price stability,'' Federal Reserve Bank of Philadelphia President Charles Plosser said, according to Dow Jones Newswires.

The comments were not surprising, particularly since Plosser is known for being more apt to argue against a rate cut than other Fed members. Nonetheless, they appeared to sap some of Wall Street's relief Wednesday over better-than-expected fourth-quarter productivity and labor cost data and profit results from Walt Disney Co.

''There's no smoking gun here; we get one bad number, one good number .... We're probably going to chop around here until investors get a better feel on this recession-or-no-recession question,'' said Phil Orlando, chief equity market strategist at Federated Investors.

After climbing until early afternoon Wednesday, stocks began extending the losses they made Tuesday, when the Dow suffered its biggest percentage drop since Feb. 27, 2007. The trigger that day was the Institute for Supply Management's report of a surprising January contraction in the U.S. service sector -- news that bolstered the argument that the nation is in recession.

''You'll find pockets of differentiation in the economy, but the overarching theme is that things are slowing down,'' said John O'Donoghue, co-head of equities at Cowen & Co.

The Dow Jones industrial average slipped 18.21, at 0.15 percent, to 12,246.92, after rising more than 100 points in earlier trading. On Tuesday, the blue-chip index fell 370 points, or 2.93 percent.

Broader stock indicators also gave up gains. The Standard & Poor's 500 index fell 2.43, or 0.18 percent, to 1,334.21, and the Nasdaq composite index fell 9.83, or 0.43 percent, to 2,299.74.

Government bond prices remained lower, but pared their losses. The yield on the 10-year Treasury note, which moves opposite its price, rose to 3.60 percent from 3.56 percent late Tuesday.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com 

    Stocks Pull Back After Fed Comments, NYT, 6.2.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Stocks Rebound After Tuesday's Plunge

February 6, 2008
Filed at 11:34 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Stocks regained some ground Wednesday as many investors, though still uneasy about the economy, decided to buy back into a market battered a day earlier by recession worries. The Dow Jones industrials rose more than 100 points after falling 370 on Tuesday.

Better-than-expected profit results from Walt Disney Co. handed Wall Street some good news. Disney posted a 26 percent decline in profit late Tuesday, but the results beat expectations. The company -- one of the 30 companies that make up the Dow Jones industrials -- reported a 9 percent rise in revenue, thanks in part to the success of brands such as ESPN, ''High School Musical'' and ''Hannah Montana.''

Disney shares rose more than 5 percent.

Investors also received some positive economic data Wednesday -- fourth-quarter productivity climbed by 1.8 percent and labor costs rose by a fairly low 2.1 percent. The results were worse than they were in the third quarter, when productivity shot up 6 percent and costs fell by 1.9 percent, but better than economists predicted.

The report alleviated some of Wall Street's anxiety about the shaky economy, at least for the time being. The stock market had plummeted Tuesday, giving the Dow on its biggest percentage drop since Feb. 27, 2007, after the Institute for Supply Management reported a surprising January contraction in the U.S. service sector -- news that bolstered the argument that the nation is in recession.

''The market got a bit oversold. It was just one number -- the market was acting viscerally,'' said Phil Orlando, chief equity market strategist at Federated Investors, noting that low trading volumes may have exaggerated the drop Tuesday. ''There's no smoking gun here; there's one bad number, one good number .... We're probably going to chop around here until investors get a better feel on this recession-or-no-recession question.''

The Dow rose 101.12, or 0.82 percent, to 12,366.25, after slipped into negative territory briefly during early trading.

Broader stock indicators also rose after some fluctuation. The Standard & Poor's 500 index rose 12.72, or 0.95 percent, to 1,349.36, and the Nasdaq composite index rose 24.15, or 1.05 percent, to 2,333.72.

Government bond prices declined as investors gave stocks another try. The yield on the 10-year Treasury note, which moves opposite its price, rose to 3.62 percent from 3.56 percent late Tuesday.

In other earnings, Time Warner Inc. posted a profit decline in its fourth quarter. But excluding the effect of a year-ago gain from the sale of AOL's online access business in Europe, profit rose due to better results at the media conglomerate's cable TV and movie operations. Time Warner rose 15 cents to $15.55.

Toll Brothers Inc. said revenues fell 22 percent during its fiscal first quarter, and that is not ''seeing much light at the end of the tunnel.'' Toll fell 42 cents, or 2 percent, to $21.45.

And late Tuesday, the fiscal second-quarter earnings of JDS Uniphase Corp., which makes communications test and fiber-optic network equipment, fell slightly year-over-year but widely surpassed Wall Street estimates. JDS Uniphase shot up $2.76, or 27 percent, to $12.92.

Though politics are not a priority on Wall Street right now, they could soon come into play. Investors have been trying to determine who the presidential nominees will be, and while Republican John McCain and Democrat Hillary Clinton are leading the delegate counts after Tuesday's primaries, nothing is certain yet.

The dollar was mixed against other major currencies, while gold prices rose.

Light, sweet crude oil dropped $1.10 to $87.31 a barrel on the New York Mercantile Exchange.

The Russell 2000 index of smaller companies rose 7.68, or 1.09 percent, to 709.26.

Advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange, where volume came to 429.9 million shares.

Overseas stocks were mixed. Japan's Nikkei stock average dropped 4.7 percent and Hong Kong's Hang Seng index fell 5.4 percent. In Europe, Britain's FTSE 100 slipped 0.15 percent, Germany's DAX index rose 0.72 percent, and France's CAC-40 rose 0.69 percent.

------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Stocks Rebound After Tuesday's Plunge, NYT, 6.2.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Dow Off More Than 300 Points on Weak Business Survey

February 5, 2008
The New York Times
By GRAHAM BOWLEY

Stocks plummeted on Wall Street on Tuesday after a business survey provided another strong signal that the United States may be in the early stages of a recession. The Dow Jones industrial average was off 300 points.

The Institute for Supply Management reported that activity in the non-manufacturing sector contracted in January for the first time since March 2003.

The institute’s non-manufacturing business activity index fell from a seasonally adjusted 54.4 in December to 41.9 in January — the lowest level since October 2001. Readings below 50 indicate a contraction. Most economists had been expecting a figure of around 53, signaling a slowdown from December but not a contraction.

“This is an indication for the first time that the bulk of the economy is contracting,” said Joshua Shapiro, chief United States economist at MFR. “It is sending people into recession panic mode here.”

At 3 p.m., the Dow Jones Industrial Average was down 306.30, or 2.4 percent, to 12,358.13. The Standard & Poor’s 500 Index and the Nasdaq composite showed a comparable decline. Stock markets in Europe also fell sharply amid signs of the deepening economic woes in the United States.

In London, the FTSE 100 closed down 2.6 percent. In Frankfurt, the DAX was down 3.4 percent, and the CAC 40 index in France was off 4 percent.

Confidence among European investors had also been undermined by weaker-than-expected European economic data. Economists said the data suggested that the economic weakness was no longer solely a problem in the United States but was spreading to Europe.

“The weak European data is starting to become more prevalent,” Mr. Shapiro said. “The concept of America as an island and everyone else being fat and happy is no longer clear.”

In the United States survey, businesses complained of rising costs and falling orders. In responding to the survey, 42 percent of businesses said they felt worse about the next 12 months compared to 2007; only 16 percent felt better.

For the first time, the institute published a new monthly composite index to provide a broader measure of the non-manufacturing sector, taking in the measures of business activity, new orders, employment and supplier deliveries. This index was 44.6 in January, indicating a contraction.

Some economists warned against reading too much into the extraordinary weakness of the indices since the series has been published for only a relatively short time, but taken together with other recent economic statistics they appeared to point to a gathering economic slowdown.

According to the new non-manufacturing report, only three non-manufacturing industries reported growth in January, while 14 contracted.

The index was released earlier than the institute had planned on Tuesday morning, the institute said, because of a possible leak of information. Analysts said rumors that the figures were going to be poor had circulated earlier in the markets and may have been one of the reasons for the early weakness in stocks.

In the report, the institute’s chairman, Anthony Nieves, said, “The overall indication in January is that non-manufacturing has come to the end of a long-term period of growth and has contracted for the month of January."

“The figures are terrible,” said Nigel Gault, chief domestic economist at Global Insight. “This clearly makes it more likely that it’s not just a slowdown but a recession in the first half of this year. The general picture emerging is that the economy is contracting.”

Mr. Gault said that during earlier slowdowns, the index had declined gradually over several months, but that this time the index had dropped extraordinarily sharply.

The latest survey followed the publication of government figures Friday showing that the nation’s employers eliminated 17,000 jobs in January, the first decline in the work force in more than four years, and adding to the evidence of a severely weakening economy.

    Dow Off More Than 300 Points on Weak Business Survey, NYT, 5.2.2008, http://www.nytimes.com/2008/02/05/business/05cnd-stox.html?hp

U.S. Service Sector Contracts in January

February 5, 2008
Filed at 3:29 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- For the first time in almost five years, the nation's services sector -- including restaurants, travel, banking, construction and retail -- contracted in January, stoking rising worries of a recession.

The Institute for Supply Management's report, released Tuesday, shook the stock market while bond prices surged. The Dow Jones industrial average, the Standard & Poor's 500 index and the Nasdaq composite index all fell.

''This is an absolute collapse of this index,'' said Nigel Gault, chief U.S. economist at Global Insight.

The Institute for Supply Management reported that its new composite index measuring the health of the service sector was 44.6 in January. A reading above 50 indicates expansion, while below 50 indicates contraction. ISM introduced the composite index on Tuesday.

ISM's measure of non-manufacturing business activity fell to 41.9 in January from a revised reading of 54.4 in December. Economists surveyed by Thomson Financial/IFR had expected a slight slowdown but had still forecast growth, with a median estimate for the index of 53.

The consensus among survey respondents was that the services sector, which accounts for about two-thirds of the economy, has ''come to the end of a long-term period of growth,'' said Anthony Nieves, chairman of the Institute for Supply Management's non-manufacturing business survey committee.

Gault said that in March 2001, the beginning of the last recession, the index had a break-even reading of 50 and during that recession, the index hung around 48 or 49 -- several points higher than January's reading.

''This is a very bad report,'' Gault said, in terms of convincing economists that we may be in or headed for recession. ''I think it will be tipping plenty of people over the edge.''

Price increases have slowed while costs are up, said Nieves, who is also senior vice president for supply management at Hilton Hotels Corp. Survey respondents cited recession fears taking hold, high energy prices, and worries over inflation and the housing market.

''It gives me a dose of reality that this sector, which has been resilient for some time, now it has become susceptible to all the influences in the economy,'' Nieves said.

ISM said only three service industries reported growth, while 14 showed contraction. The three growing segments -- utilities, professional services and educational services -- include more crucial needs such as doctor visits. Meanwhile, cutbacks in less-essential spending has dragged down such segments as arts and entertainment, fishing and hunting, and lodging and food services.

Two measures that fell were those for new orders and employment, which Nieves said were more forward-looking -- so their drops could indicate trouble ahead. New orders fell to 43.5 while employment fell to 43.9.

''That's not instilling any confidence in me that we're going to see any real strong uplift,'' he said.

The drop in employment is especially troubling, according to Global Insight, because the service sector has been the overall economy's engine of job growth for months.

That stirs greater fears of falling employment as factories eliminated 28,000 jobs in January and have cut 269,000 jobs over the past 12 months, drops the government reported last week. The economy as a whole lost 17,000 jobs last month, which was the first nationwide loss of jobs since August 2003, during a recovery from the last recession.

Tuesday's report was issued roughly an hour earlier than its usual 10 a.m. release because of what ISM called ''a possible breach of information.''

A spokeswoman for the trade group said it decided late Monday to release the index early, before U.S. markets opened on Tuesday, because someone who was familiar with the contents had inadvertently made a comment about it on Monday night.

''It was a slip of the tongue,'' spokeswoman Andrea Waas said. ''The person doesn't think the other individual had a clue.''

The Securities and Exchange Commission did not immediately have any comment on the matter.

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On the Net:

www.ism.ws

(This version CORRECTS Corrects grafs 4-5 to compare business activity index in January vs December and that January composite index is new. )

    U.S. Service Sector Contracts in January, NYT, 5.2.2008, http://www.nytimes.com/aponline/business/AP-Economy-Services.html

Economy Fitful, Americans Start to Pay as They Go

February 5, 2008
The New York Times
By PETER S. GOODMAN

For more than half a century, Americans have proved staggeringly resourceful at finding new ways to spend money.

In the 1950s and ’60s, as credit cards grew in popularity, many began dining out when the mood struck or buying new television sets on the installment plan rather than waiting for payday. By the 1980s, millions of Americans were entrusting their savings to the booming stock market, using the winnings to spend in excess of their income. Millions more exuberantly borrowed against the value of their homes.

But now the freewheeling days of credit and risk may have run their course — at least for a while and perhaps much longer — as a period of involuntary thrift unfolds in many households. With the number of jobs shrinking, housing prices falling and debt levels swelling, the same nation that pioneered the no-money-down mortgage suddenly confronts an unfamiliar imperative: more Americans must live within their means.

“We don’t use our credit cards anymore,” said Lisa Merhaut, a professional at a telecommunications company who lives in Leesburg, Va., and whose family last year ran up credit card debt it could not handle.

Today, Ms. Merhaut, 44, manages her money the way her father did. Despite a household income reaching six figures, she uses cash for every purchase. “What we have is what we have,” Ms. Merhaut said. “We have to rely on the money that we’re bringing in.”

The shift under way feels to some analysts like a cultural inflection point, one with huge implications for an economy driven overwhelmingly by consumer spending.

While some experts question whether most Americans, particularly baby boomers, will ever give up their buy-now/pay-later way of life, the unraveling of the real estate market appears to have left millions of families with little choice, yanking fresh credit from their grasp.

“The long collapse in the United States savings rate is over,” said Ethan S. Harris, chief United States economist for Lehman Brothers. “People are going to start saving the old-fashioned way, rather than letting the stock market and rising home values do it for them.”

In 1984, Americans were still saving more than one-tenth of their income, according to the government. A decade later, the rate was down by half. Now, the savings rate is slightly negative, suggesting that on average Americans spend more than their disposable income.

Though the savings rate does not account for the increased value of stock and property, or the gains on retirement accounts, many economists still view it as the most useful gauge of the degree to which Americans are making provisions for the future.

For the 34 million households who took money out of their homes over the last four years by refinancing or borrowing against their equity — roughly one-third of the nation — the savings rate was running at a negative 13 percent in the middle of 2006, according to Moody’s Economy.com. That means they were borrowing heavily against their assets to finance their day-to-day lives.

By late last year, the savings rate for this group had improved, but just to negative 7 percent and mostly because tightened standards made loans harder to get.

“For them, that game is over,” said Mark Zandi, chief economist at Economy.com. “They have been spending well beyond their incomes, and now they are seeing the limits of credit.”

Many times before, of course, Americans have found innovative ways to finance spending, even when austerity seemed unavoidable. It could happen again.

The Me Decade was declared dead in the recession of the early 1980s, only to yield to the Age of Greed and later the Internet boom of the 1990s. Over the longer term, the economy should keep growing at a pace that reflects improving productivity and population gains.

But for the first time in decades, credit is especially tight as the bursting of the housing bubble has spread misery across the financial system. In homes now saturated with debt, conspicuous consumption and creative financing have come to seem a sign of excess not unlike that of a suntan in an age of skin cancer.

The return to reality is on vivid display at shopping centers, where consumers used to trading up to higher-price stores are now heading to discounters. Wal-Mart and T. J. Maxx are thriving, but business has slowed at Coach, Tiffany and Williams-Sonoma.

Not long ago, Elena Gamble would have looked at the Cadillac parked across the street from her modest home in Elk City, Okla., and felt a twinge of jealousy.

“We live in a small town, and everybody looks at your clothes and what you drive and where you have your hair done,” said Ms. Gamble, who earns about $2,600 a month as a grievance counselor at a local prison.

Now, she and her husband — a prison guard who brings home $2,000 a month — are grappling with $10,000 in high-interest debt. They no longer go to the movies or out to eat, except occasionally to McDonald’s. They quit their Internet service. Their car was repossessed. “What we say now is, ‘If we can’t afford it, we can’t buy it,’ ” Ms. Gamble said.

And when she looks across the street at that Cadillac, her envy has been replaced by pity for the neighbor on the hook.

“I say, ‘Oh my, you’re living here, and driving that? There’s got to be something wrong,’ ” Ms. Gamble said. “ ‘You’re in debt, and you’re in trouble.’ ”

For decades, that envy has been a prime engine of economic growth. Debt-willing consumers hungering for the latest-generation this and the fastest that kept factories busy from Michigan to Malaysia.

From 1980 to 2007, consumer spending swelled from 63 percent of the economy to over 70 percent, according to Economy.com, while the share of after-tax income absorbed by household debt increased from 11 percent to more than 14 percent.

During the technology boom of the 1990s, an extravagant mind-set took hold. In ads for the discount broker Ameritrade, a spiky-haired hipster ridiculed middle-aged professionals for settling for conventional returns.

Even after the “stock market as money machine” line of thinking proved bogus, extra spending continued. The Federal Reserve cut interest rates to near record lows, banks marketed mortgages with exotically lenient terms and another fable of wealth creation took hold: the notion that housing prices could go up forever.

The come-ons for stocks were replaced by a new crop of advertisements. A house was no longer a mere place to live; it was a checkbook that never required a deposit. Between 2004 and 2006, Americans pulled more than $800 billion a year from their homes via sales, cash-out mortgages and home equity loans.

“People have come to view credit as savings,” said Michelle Jones, a vice president at the Consumer Credit Counseling Service of Greater Atlanta.

Some Americans have so much wealth that they can spend enough to fuel much of the economy. The top fifth of American earners generates half of all consumer spending, noted Dean Maki, chief United States economist at Barclays Capital.

For the others, some say credit is an intrinsic part of modern life, and Americans will soon be back for more. “A river of red ink runs through the history of the American pocketbook,” said Lendol Calder, author of “Financing the American Dream: A Cultural History of Consumer Credit.”

“Partly because of desire, partly because of optimism, partly because lenders have been free to invent useful borrowing tools that minimized shame and bother,” he added, “I think it will take a great catastrophe, greater than the Great Depression, to wean Americans from their reliance on consumer credit.”

Credit counselors are now swamped by calls not just from people of modest means, but from professionals earning six-figure incomes, their access to finance warping their distinction between necessity and desire.

“The longer someone has lived on a high income, the harder it is for someone to cut back,” said Manuel Navarro of Money Management International in San Diego. “I ask them, ‘Do you really need to have a 60-inch flat-screen TV hanging on your wall?’ ”

Fran Barbaro has an M.B.A. and a résumé of computer industry jobs with salaries reaching $150,000 a year. She used to have a stock portfolio worth about $1 million. She hung original art on the walls of her three-bedroom house in Boston.

But divorce, illness and motherhood drained her savings. Her home is worth less than she owes, and she owes another $200,000 to credit card companies, banks and tax collectors.

Ms. Barbaro, 50, said she knew she was living beyond her means. But her house demanded work. Her two boys needed after-school programs running $25,000 a year. Medical bills multiplied.

“These were simple day-to-day expenses,” she said. “The money was always there.”

Until it wasn’t. Her take-home pay is $5,200 a month, but her debt payments reach $4,400.

Ms. Barbaro has rented out her house while negotiating to lower her mortgage. She has moved to an apartment, where her sons sleep in the lone bedroom while she sleeps on a pull-out sofa.

“It’s the worst,” Ms. Barbaro said. “How do you salvage what you have and hopefully go back?”
 

Michael Barbaro contributed reporting.

    Economy Fitful, Americans Start to Pay as They Go, NYT, 5.2.2008, http://www.nytimes.com/2008/02/05/business/05spend.html

Markets Fall Sharply on Weak Business Survey

February 5, 2008
The New York Times
By GRAHAM BOWLEY

Stocks plummeted on Wall Street on Tuesday after a business survey provided another strong signal that the United States may be in the early stages of a recession. The Dow Jones industrial average was off 300 points.

The Institute for Supply Management reported that activity in the non-manufacturing sector contracted in January for the first time since March 2003.

The institute’s non-manufacturing business activity index fell from a seasonally adjusted 54.4 in December to 41.9 in January — the lowest level since October 2001. Readings below 50 indicate a contraction. Most economists had been expecting a figure of around 53, signaling a slowdown from December but not a contraction.

“This is an indication for the first time that the bulk of the economy is contracting,” said Joshua Shapiro, chief United States economist at MFR. “It is sending people into recession panic mode here.”

At 2 p.m., the Dow Jones Industrial Average was down 306.30, or 2.4 percent, to 12,358.13. The Standard & Poor’s 500 Index and the Nasdaq composite showed a comparable decline. Stock markets in Europe also fell sharply amid signs of the deepening economic woes in the United States.

In London, the FTSE 100 closed down 2.6 percent. In Frankfurt, the DAX was down 3.4 percent, and the CAC 40 index in France was off 4 percent.

Confidence among European investors had also been undermined by weaker-than-expected European economic data. Economists said the data suggested that the economic weakness was no longer solely a problem in the United States but was spreading to Europe.

“The weak European data is starting to become more prevalent,” Mr. Shapiro said. “The concept of America as an island and everyone else being fat and happy is no longer clear.”

In the United States survey, businesses complained of rising costs and falling orders. In responding to the survey, 42 percent of businesses said they felt worse about the next 12 months compared to 2007; only 16 percent felt better.

For the first time, the institute published a new monthly composite index to provide a broader measure of the non-manufacturing sector, taking in the measures of business activity, new orders, employment and supplier deliveries. This index was 44.6 in January, indicating a contraction.

According to the new non-manufacturing report, only three non-manufacturing industries reported growth in January, while 14 contracted.

The index was released earlier than the institute had planned on Tuesday morning, the institute said, because of a possible leak of information. Analysts said rumors that the figures were going to be poor had circulated earlier in the markets and may have been one of the reasons for the early weakness in stocks.

In the report, the institute’s chairman, Anthony Nieves, said, “The overall indication in January is that non-manufacturing has come to the end of a long-term period of growth and has contracted for the month of January."

“The figures are terrible,” said Nigel Gault, chief domestic economist at Global Insight. “This clearly makes it more likely that it’s not just a slowdown but a recession in the first half of this year. The general picture emerging is that the economy is contracting.”

Mr. Gault said that during earlier slowdowns, the index had declined gradually over several months, but that this time the index had dropped extraordinarily sharply.

The latest survey followed the publication of government figures Friday showing that the nation’s employers eliminated 17,000 jobs in January, the first decline in the work force in more than four years, and adding to the evidence of a severely weakening economy.

    Markets Fall Sharply on Weak Business Survey, NYT, 5.2.2008, http://www.nytimes.com/2008/02/05/business/05cnd-stox.html?hp

First Job Losses in 4 Years Raise Recession Fears

February 2, 2008
The New York Times
By LOUIS UCHITELLE and MICHAEL M. GRYNBAUM

The nation’s employers eliminated 17,000 jobs in January, the government reported Friday, the first decline in the work force in more than four years, and the strongest signal yet that the United States may be in the early stages of a recession.

Politically, the job figures were particularly troubling for the Republican Party and President Bush, who had just this week responded to doubts about the economy by noting in his State of the Union address a 52-month streak of uninterrupted job growth. That streak ended last month.

The broad weakness in the job market, which affected many sectors, shows how the collapse of the housing bubble is rippling through the rest of the economy and suggests the likelihood of more pain for millions of American families in the months ahead from job losses, lower real wages and fewer working hours.

Citing the new jobs report, Mr. Bush — who was in Kansas City, Mo., on the third day of a trip that also took him to California, Nevada and Colorado — acknowledged that it provided “some troubling signs” that the economy was weakening.

The four leading presidential candidates — uniformly referring to a damaged economy — urged Congress to move quickly on a stimulus package, with the Democrats demanding that the current proposal include an extension of unemployment benefits.

“It is immaterial whether we are in a formal recession,” said Douglas J. Holtz-Eakin, chief economic adviser to John McCain, a leading Republican contender. “We are growing way too slowly.”

The unemployment rate, which jumped in December to nearly 5 percent from 4.7 percent, was essentially unchanged, the Bureau of Labor Statistics said, declining to 4.9 percent.

Adding to the indications that the fall in payroll jobs in January could portend worse to come, the bureau issued one of its periodic benchmark revisions, based on more complete data. This revision showed much weaker job creation over the past year than initially reported.

“They took away on average 16,000 jobs a month,” said Nigel Gault, chief domestic economist at Global Insight. “It suggests that income was lower than previously thought and consumers are more stressed than we previously thought.”

There were other signs of a potential recession, which is generally defined as a period extending at least several months in which economic activity shrinks, resulting in fewer jobs, weaker investment and less spending. The employment report came a day after the Commerce Department said that the economy had expanded at a minuscule annual rate of 0.6 percent in the fourth quarter.

The two reports convinced many on Wall Street that the Federal Reserve, trying to reverse the slide, would continue to cut the benchmark interest rate that it controls, even after the sharp reduction of 1.25 percentage points last month to 3 percent. Some analysts suggested that the federal funds rate could be reduced to 2 percent this year, putting downward pressure as it falls on mortgage and consumer loan rates.

“The key story right now is whether fiscal stimulus and the Fed’s interest rate cuts can arrest the sliding economy,” said Ethan Harris, chief domestic economist at Lehman Brothers. “It’s a kind of race against time.”

The economy has displayed a few bright spots lately, including an uptick in consumer confidence and a report Friday that manufacturing activity bounced back unexpectedly in January. Those reports have been overwhelmed by bleaker news elsewhere, however, like a further fall in construction spending.

The jobs report only added to the gloom. The long-term unemployed — those who have been seeking work for at least six months — represented 18.3 percent of the nation’s 7.65 million men and women looking for jobs. That was up from 16.2 percent a year ago, which helps explain why Hillary Rodham Clinton and Barack Obama, the two Democratic candidates for president, called on Congress to include in its stimulus package an extension of unemployment benefits beyond the present 26 weeks.

“Today’s report that the economy actually lost jobs in January confirms my view that we are sliding into a second Bush recession,” Senator Clinton said in a statement, referring to the 2001 downturn, which ran, according to official accounting, from March 2001 through November. Few economists, however, blame Mr. Bush for a recession that began so early in his term.

Mr. Bush called on the Senate to quickly reach agreement on a House stimulus plan and get the bill to his desk for signature. “The fundamentals are strong,” Mr. Bush said, speaking to workers after touring the headquarters of Hallmark Cards.

“We’re just in a rough patch,” he added. “I’m confident we can get through this rough patch, and one way to do it is for Congress and the administration to work collaboratively and get this deal done.”

Employment has been weakening for months. While employers continued to add jobs last year, they did so at an ever slower pace, averaging 95,000 jobs a month. That was down from 175,000 a month in 2006, when the recovery from the 2001 recession was still in full swing.

“Taken as a whole, you clearly have a deceleration of the rate of job growth,” said Jan Hatzius, chief domestic economist at Goldman Sachs.

More than half of the nation’s industries lost jobs in January, with construction, manufacturing and finance topping the list. The private sector managed to add only 1,000 jobs, in part because of gains in health services and in some upper-end hiring of accountants, lawyers, computer specialists and architects.

Government employment pulled the job market into negative territory, contracting by 18,000 jobs, mostly at state universities and community colleges. The decline reflected pressure on state budgets as a weakening economy cuts into tax revenue.

The monthly employment reports have served as chapter headings in the tale of a housing slump and credit crisis that gradually spread to other sectors. The December job count, originally reported as an increase of just 18,000 jobs, was the first strong signal that the overall economy was hurting. That number was revised to 82,000 on Friday. On the other hand, job creation in November turned out to be 55,000 less than initially reported.

Indeed, job growth in nearly every month last year was less than initially reported, and by December there were 376,000 fewer jobs than the original total, the bureau concluded as a result of its benchmark revision. That revision is based on a once-a-year count of all jobs covered by unemployment insurance.

Apart from the shrinking job numbers, inflation-adjusted wages and hours worked also declined.

“It is awfully tough,” said Jared Bernstein, a senior economist at the labor-oriented Economic Policy Institute, “to find a silver lining in this latest jobs report.”
 

Steven Lee Myers contributed reporting from Kansas City.

    First Job Losses in 4 Years Raise Recession Fears, NYT, 2.2.2008, http://www.nytimes.com/2008/02/02/business/02econ.html?hp

Talking Business

A Giant Bid That Shows How Tired the Giant Is

February 2, 2008
The New York Times
By JOE NOCERA

Oh, how the mighty have fallen.

This may seem like an odd way to characterize a company that just announced its willingness to plunk down $44.6 billion to make its first hostile takeover ever. A company that will probably generate somewhere around $60 billion in revenue when its fiscal year ends in June. A company whose market share in its two core products is still so high — despite recent inroads by a certain flashy competitor — that it qualifies as a monopoly.

But this is Microsoft we’re talking about, and if its proposed acquisition of Yahoo signals anything, it serves as a confirmation that Microsoft’s glory days are in the past. Having failed to challenge Google where it matters most — in online advertising — it has been reduced to bulking up by buying Google’s nearest but still distant competitor. In many ways, the company has become exactly what Bill Gates used to fear the most — sluggish, bureaucratic, slow to respond to new forms of competition — just as I.B.M. was when Microsoft convinced that era’s tech behemoth to use Microsoft’s operating system in its new personal computer.

The I.B.M. PC was introduced in the summer of 1981. Here we are nearly 27 years later, and Microsoft’s core product is still its operating system, now called Windows — that and its suite of applications, called Office, that run on Windows. They generate billions of dollars annually for the company. The most recent version of Windows, released almost exactly a year ago, has already been installed in 100 million computers. Yet in technology, 27 years is a lifetime, and there is a powerful sense that while it has spent enormous effort over the years protecting its monopoly, the world has passed it by. In particular, the technology world now centers on the Internet, where Google reigns supreme, and Microsoft has never succeeded in making serious inroads. Years ago, it started its own online service, MSN. It has made efforts to develop a search engine that could compete with Google’s. It has developed an advertising infrastructure to both place ads on other Web sites —another Google specialty—and to generate its own ad revenues. In every case, it has come up a day late and a dollar short. For instance, only 4 percent of Internet searches worldwide are done with Microsoft’s engine, compared with over 65 percent done with Google’s.

“Of its five major divisions,” said Brent Thill, the software analyst for Citigroup, “the online division is the only one that loses money. They are software engineers at Microsoft,” he continued, “and their DNA is very different from the DNA of someone who builds online assets. It’s just a different mind-set.”

Besides, the old strategies that once worked so well for Microsoft — strategies that worked when the world still revolved around Windows — have no place in this new world. In the mid-1990s, when Netscape posed a threat to Microsoft’s hegemony, Microsoft created its own competing browser, Internet Explorer, made it an integral part of Windows, and used its desktop monopoly to fight back. Eventually, Netscape was reduced to also-ran status — and the Justice Department took Microsoft to court on antitrust violations.

Today, Microsoft lacks both the weaponry and the nimbleness to compete with Google. Its operating system monopoly gives it no advantages in this battle. People can use Microsoft’s operating system and browser to get to the Internet — and to Google — or they can use Apple’s. It truly doesn’t matter. Meanwhile, with every new Internet fad, like the current frenzy over social networking, Microsoft is invariably caught flat-footed and has to race to just get a foot in the game. But that’s always the way it is when companies get big — and it is why real innovation always comes from small companies that don’t have a predetermined mind-set, or monopoly profits to protect.

Will the purchase of Yahoo — assuming it goes through, which is far from a foregone conclusion — be a game-changer for Microsoft? Anything is possible, I suppose. I spoke to a number of technology experts Friday who were convinced that it made some sense. Andy Kessler, the technology investor and writer, called it “a smart offensive move.” Mark Anderson, the president of Strategic News Service, said, “They are getting the No. 2 online guy in the ad business at a good time and a good price.” Rob Enderle of the Enderle Group told me that it was only a matter of time before somebody made a bid for Yahoo — “and it makes sense that it’s Microsoft.”

But let’s be honest here. Microsoft isn’t exactly buying a high-flier. Even after a Microsoft-Yahoo merger, Google would still have twice the search market of its competitor. Its ad placement service is superior to either Microsoft’s or Yahoo’s. And Yahoo has struggled enormously in the last few years. It, too, could have been early in social networking; its chat rooms could have lent themselves easily to something that might have rivaled Facebook. Just like Microsoft, it missed the opportunity. It is quite clearly a company that has lost its way, and the question of whether Microsoft can refocus into a viable Google competitor, well, let’s just say I’m dubious.

I also have to wonder about what Yahoo gets out of the deal — other than a premium for its depressed stock. “Does it help their brand?” asked Mark Mahaney, who covers Yahoo for Citigroup. “No. Does it give them better search technology? No. Does it give them a better ad sales force? No. I suspect this is the question being asked in Yahoo’s boardroom right now,” he added.

What was most striking to me Friday was Microsoft’s own expectations for the deal. To put it bluntly, they are awfully low. When I spoke to Yusuf Mehdi, Microsoft’s senior vice president for strategic partnership — and the man who had been driving much of its online efforts in recent years — he never once talked about crushing the competition, or even catching up.

A Yahoo deal, he told me, “will be good for consumers who want another search engine, Web publishers who want another ad placement service, and syndicated advertisers” — who also want a choice other than Google. He continued: “Because of Google’s heavy volume and its algorithms, they are a very efficient buy. But people are rooting for a credible No. 2. We got lots of calls today from Web sites and others saying, ‘We’re with you.’ ”

Was he really saying that Microsoft would be content as a “credible No. 2?” I had a hard time believing it. But when I pushed him on this point, he reiterated it. “Online advertising revenues are going to be $80 billion within a couple of years,” he said. (They’re about $50 billion now.) “That is going to mean a tremendous opportunity to all players. There has to be a place for another credible player.”

I think back to the fall of 2005, when Bill Gates visited The New York Times, and an editor asked him if Microsoft “would do to Google what you did to Netscape?”

“Nah,” laughed Mr. Gates, “we’ll do something different.” This ain’t it.

    A Giant Bid That Shows How Tired the Giant Is, NYT, 2.2.2008, http://www.nytimes.com/2008/02/02/technology/02nocera.html

Bush Sees 'Troubling Signs' for Economy

February 2, 2008
Filed at 2:22 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

KANSAS CITY, Mo. (AP) -- President Bush pressed Congress to pass an economic rescue package, saying Friday's labor report marking the end of a 52-month streak of national job growth was another ''troubling'' sign that the economy is sputtering.

Bush toured Hallmark Cards Inc. in the nation's heartland to push a plan of tax rebates for millions of people and tax breaks for companies. The stimulus package, passed by the House, has hit roadblocks in the Senate.

The president spoke just hours after the Labor Department reported that employers cut 17,000 jobs in January -- the first such reduction in more than four years.

''Interest rates are low, inflation is low, productivity is high, but there are certainly some troubling signs,'' Bush said. ''There are serious signs that the economy is weakening and that we got to do something about it. Today we got such a sign when after 52 consecutive months of job creation, we lost 17,000 jobs.''

His message to the Senate at the greeting card maker, however, seemed more softly worded than in recent days.

''I appreciate the fact that the Senate is trying to work through this as quickly as possible, so I'm just urging them to get it done,'' Bush said. ''Because the sooner this package makes it to my desk -- that actually focuses on ways to stimulate growth -- the better off our economy is going to be.''

The House quickly adopted a $161 billion economic stimulus plan this week that would send $600-$1,200 rebates to more than 100 million Americans in hopes they would spend the money quickly and give the flagging economy a shot in the arm.

Senate Democrats are pushing to add elements to the House plan that they say will add a bigger boost, including smaller rebates that would go to more people such as low-income older Americans, wealthier taxpayers and disabled veterans, plus heating aid for the poor. The Senate plan, estimated to cost $204 billion, also would extend unemployment benefits.

Senate Majority Leader Harry Reid, D-Nev., said the jobs report showed that Bush's assessment of the economy is ''greatly misguided.'' He pushed for the Senate version of the stimulus package, which would extend unemployment insurance to the jobless.

''We hope Republicans similarly recognize the urgency of helping Americans who are being pushed out of the work force, and our stimulus bill is one important step in that direction,'' Reid said.

While acknowledging the negative jobs report, Bush said the underpinnings of the U.S. economy remained strong. ''We're just in a rough patch,'' he said, adding that Congress could help by passing free-trade pacts, reforming the housing administration, renewing his education law and keeping taxes down.

Bad economic news has followed Bush on his three-day swing through California, Nevada, Colorado and Missouri to highlight themes of his State of the Union address and raise more than $4.7 million for the Republican Party and its candidates.

Just before Bush spoke Wednesday at a helicopter factory in Torrance, Calif., the Commerce Department reported that the economy nearly stalled in the last quarter of last year, growing by just 0.6 percent, half the pace economists expected. A day later, the department reported that consumer spending was up just 0.2 percent in December, the weakest in six months.

Bush's trip was overshadowed by a busy week on the campaign trail. Republicans and Democrats vying for Bush's job debated in California. And the GOP's Rudy Giuliani and Democrat John Edwards both bowed out of the race.

That didn't stop Bush from having some fun.

At Hallmark, he stepped into a veritable kid's dream -- an interactive playhouse filled with art supplies and colorful props. As kindergartners buzzed from station to station, Bush patted the kids on their heads and leaned way over so he could talk to them face to face.

When he sat down to make his own card with a red marker, Bush looked at reporters and asked, ''Who deserves a valentine?''

Hallmark is having some fun this Valentine's Day with a line of cards that poke fun at politicians. One card, featuring Bush as cupid, reads: ''My arrows are weapons of mass seduction!'' Another with Sen. Hillary Rodham Clinton as cupid says: ''I'd vote for Valentine's Day fun! (and, by the way, speaking of votes ...)

Bush said one Hallmark employee made him a card that said: ''For your daughters.''

''It was sweet, but it just didn't have any warning in there about how to conduct myself for the upcoming wedding,'' the president joked, referring to the future marriage of his daughter, Jenna.

------

On the Net:

Hallmark: http://corporate.hallmark.com

White House: http://www.whitehouse.gov

    Bush Sees 'Troubling Signs' for Economy, NYT, 2.2.2008, http://www.nytimes.com/aponline/us/AP-Bush.html

Bush Sees Serious Signs U.S. Economy Is Weakening

February 1, 2008
Filed at 12:06 p.m. ET
By REUTERS
The New York Times

KANSAS CITY, Missouri (Reuters) - President George W. Bush on Friday said there were troubling signs that the economy is weakening and urged Congress to move on a stimulus package to help prop up the economy, which has been hit hard by a housing slump and credit crisis.

"There are certainly some troubling signs, serious signs that the economy is weakening and we've gotta do something about it," the President said.

"The sooner this package makes it to my desk... the better off our economy is going to be," he said.

Even with some troubling signs, including the latest government data showing a falloff in employment, Bush said there are some strong points to the economy and said that encouraging businesses to invest is a key part of the package.

(Reporting By Joanne Morrison; Editing by James Dalgleish)

    Bush Sees Serious Signs U.S. Economy Is Weakening, NYT, 1.2.2008, http://www.nytimes.com/reuters/washington/politics-usa-bush-economy.html

White House: Economy solid but uncertainty exists

Fri Feb 1, 2008
Reuters
11:00am EST

WASHINGTON (Reuters) - The White House on Friday reiterated its view that the U.S. economy is on a "solid foundation" but acknowledged that the country was going through a period of economic uncertainty.

The White House statement, which included a renewed call on Congress to pass a large economic stimulus package, followed a Labor Department report showing U.S. payrolls shrinking in January for the first time in nearly 4-1/2 years.

"Our economy has a solid foundation, but the U.S. is going through a period of economic uncertainty," the White House said. "Wages have risen, but so have the costs of food, gasoline, and health care. In addition, the downturn in the housing sector and the volatility of the financial markets are leaving many Americans feeling uncertain.

(Reporting by Matt Spetalnick; Editing by Theodore d'Afflisio)
 

    White House: Economy solid but uncertainty exists, R, 1.2.2008, http://www.reuters.com/article/domesticNews/idUSWAT00880120080201

China’s Inflation Hits American Price Tags

February 1, 2008
The New York Times
By DAVID BARBOZA

SHANGHAI — China’s latest export is inflation. After falling for years, prices of Chinese goods sold in the United States have risen for the last eight months.

Soaring energy and raw material costs, a falling dollar and new business rules here are forcing Chinese factories to increase the prices of their exports, according to analysts and Western companies doing business here.

The rise was a modest 2.4 percent over the last year. But even that small amount, combined with higher energy and food costs that also reflect China’s growing demands on global resources, contributed to a rise in inflation in the United States. Inflation in the United States was 4.1 percent in 2007, up from 2.5 percent in 2006.

Because of new cost pressures here, American consumers could see prices increase by as much as 10 percent this year on specific products — including toys, clothing, footwear and other consumer goods — just as the United States faces a possible recession.

In the longer term, higher costs in China could spell the end of an era of ultra-cheap goods, as well as the beginning of China’s rise from the lowest rungs of global manufacturing.

Economists have been warning for months that this country’s decade-long role of keeping a lid on global inflation was on the wane.

“China has been the world’s factory and the anchor of the global disconnect between rising material prices and lower consumer prices,” said Dong Tao, an economist for Credit Suisse. “But its heyday is over. We’re going to see higher prices.”

Chinese imports constitute 7.5 percent of spending by Americans on consumer goods, but they make up much bigger shares of several popular categories, including about 80 percent of toys, 85 percent of footwear, and 40 percent of clothing.

Even when the market share held by Chinese goods is relatively small, their low prices put pressure on other producers to keep costs down.

Whether Chinese factories will succeed in making wholesalers pay more for their goods and whether retailers will be able to pass much of their higher costs on to American consumers is unclear, analysts say.

But companies that operate in China or buy from here are already reeling from mounting cost pressures that they say will weaken their profits and could disrupt their supply chains.

Those supply lines were already called into question by large-scale recalls of Chinese exports last year, involving everything from toys to pet food to tires.

“This is what I call the perfect storm,” said Alan G. Hassenfeld, the chairman of Hasbro, one of the world’s largest toy makers, during a recent visit to China. “We’ve got higher labor costs and labor shortages, plastic prices have gone way up and we’re doing more safety testing.”

While no reliable figures exist on average Chinese wages, experts say that factory wages have risen 80 percent or more in many coastal areas in recent years, with the lowest wage about $125 a month.

Some of the current cost pressures are actually by design — Beijing’s design.

After years of complaints from the United States and Europe about China’s growing trade surplus, authorities here have removed incentives that once favored exporters of cheap goods.

Starting last June, for instance, China removed or reduced tax rebates on hundreds of items for export, including toys, apparel, leather, wood and other goods, effectively taxing those industries.

But the actions are also part of Beijing’s desire to move China higher up the global manufacturing chain — away from the least- finished products, like plastic children’s toys, toward more advanced exports that require skilled labor, like small electronics and even automobiles.

Whatever the government’s motivation, many Chinese exporters say the timing of the rebate cut was disastrous. Their factories had been struggling to cope with problems that included power shortages, higher raw material costs, rising wages and inflation in other areas.

For instance, the cost of some types of plastic has risen more than 30 percent in the last few years because of higher oil or petroleum costs. Plastic is a major component in toys and other consumer goods.

Many Chinese factory owners say a tough new labor law, which went into effect on Jan. 1, complicates the hiring and firing process and threatens to raise labor costs even more, at a time when parts of the country are already plagued with labor shortages. Some factory owners say there have already been strikes and other turmoil over the interpretation of the new law and how it should be applied.

“We have seen lots of brawls between employees and employers,” said Hong Jiasheng, vice president of the Taiwan Merchant Association, which represents investors in China. “We think the enactment of the new labor law is too hasty.”

Analysts say Beijing is also stepping up its enforcement of environmental laws, putting added pressure on factories that had long skirted regulations. Adhering to those often ignored rules increases cost, too.

These changes take place against the backdrop of a dollar falling modestly against the Chinese currency. The dollar is down about 7.6 percent in the last year against the yuan and is expected to fall further this year.

The weaker the dollar, the more expensive Chinese and other goods become when their prices are converted to dollars.

All in all, toy producers are among the hardest hit by the changes in law and prices. They rely on large quantities of plastic. They face heightened regulatory scrutiny after the product safety scandals last year. Indeed, some toy factories went bankrupt, squeezed between rising local costs and pressures from foreign customers to deliver a better product at an even lower price.

“I’ve been in the toy industry for almost 20 years, but these past two years have been the hardest time,” said Guo Jinshen, manager of the Fenggang Fengyuan Plastic Toys Company. “Costs are rising, there are recalls, stricter regulation, more complicated inspection — all these things make it difficult.”

To reduce costs, some factory owners are considering moving to inland China, where wages are lower, or to other parts of Asia, like Vietnam and Indonesia.

Li & Fung, one of the biggest companies for supplying products worldwide, says its customers are already responding to Chinese inflation.

“There’s a shift in sourcing driven by higher prices in China,” says Bruce Rockowitz, president at Li & Fung. “We’ve already seen a big move in furniture to Indonesia.”

But while relocating production to cheaper countries could keep prices low for Western consumer goods, moving factories and complex supply chains is difficult. Such changes can take years and cost millions of dollars.

In the meantime, makers of toys, apparel and footwear — highly labor-intensive industries — are being forced to consider raising prices even as growth in the United States slows, a rare confluence of events not seen in decades.

Companies that began outsourcing production to China in the 1990s mostly benefited from lower costs, which translated into both higher corporate profits and lower consumer prices. Now, many Western companies have to rethink pricing.

“Companies are now ordering for the spring of 2009,” says Nate Herman, director of international trade at the American Apparel and Footwear Association, based in Arlington, Va., that represents some big clothing and footwear makers. “Factories are coming back and asking for 20, 30, 40, 50 percent price increases.”

Will importers pass those costs on to consumers? “It’s going to be hard to avoid some increase,” he said.

    China’s Inflation Hits American Price Tags, NYT, 1.2.2008, http://www.nytimes.com/2008/02/01/business/worldbusiness/01inflate.html?hp

Employment Drops in a Pink Slip Blizzard

February 1, 2008
Filed at 3:48 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- In a shower of pink slips, U.S. employers cut jobs last month for the first time in more than four years, the starkest signal yet that the economy is grinding to a halt if it hasn't already toppled into recession.

Conditions are deteriorating, according to the most up-to-date employment snapshot by the Labor Department, which showed nervous employers slicing payrolls by 17,000. The country hasn't seen such a nationwide job loss since 2003, when employers were still struggling to recover from the last previous recession.

''We are certainly on thin ice,'' said John Silvia, chief economist at Wachovia. And even President Bush, normally a cheerleader for the economy, said there were ''serious signs'' it was weakening.

Wall Street, however, took the news in stride. Stock prices were up near the close of the trading day.

Job losses were widespread in January. Factories, construction companies, mortgage brokers and real-estate firms were among those eliminating jobs -- casualties of the housing bust and credit crunch. The government cut jobs for the first time since last July.

All those cuts swamped job gains in education, health care, retailing and elsewhere.

The unemployment rate actually dipped slightly to 4.9 percent, from 5 percent in December, as people left the labor force.

''Discouraged by a sluggish job market, many more adults are sitting on the sidelines,'' said Peter Morici, an economist and business professor at the University of Maryland.

Wage growth also slowed, another indication of belt-tightening. Smaller wage gains could make people who still have jobs -- already squeezed by high energy prices -- reluctant to spend, further hurting the economy.

President Bush prodded Congress anew to quickly pass an economic rescue package.

''There's serious signs that ... the economy is weakening and that we've got to do something about it,'' Bush said. On Capitol Hill, Democratic and Republican supporters of a stimulus package -- including tax rebates for people and tax breaks for businesses -- agreed the gloomy employment report underscored a need for urgency. The package is pending in the Senate, where there are disputes over attempts to expand it.

The Democratic presidential contenders, Sens. Hillary Rodham Clinton of New York and Barack Obama of Illinois, said the job losses were evidence of failed Bush policies. ''We are sliding into a second Bush recession,'' Clinton said. Obama called the employment figures ''troubling news'' and urged Congress to extend unemployment benefits ''for more time and to more people.''

To help ease the credit crisis, the Federal Reserve announced it would provide cash-strapped banks with an additional $60 billion in short-term loans through auctions later this month. The Fed started the auctions in December and has already provided $100 billion in loans to banks.

With fears of recession growing, the Fed has gotten much more aggressive -- ordering two big interest rate reductions in just over a week. A severely depressed housing market, hard-to-get credit, turbulence on Wall Street and ''some softening in labor markets'' were cited by the Fed when it lowered rates by a bold half-point on Wednesday. The weak employment report would justify additional rate cuts, economists said.

The health of the nation's job market is a critical factor shaping how the overall economy fares. If companies continue to cut back on hiring and put a lid on wages, that will spell more trouble.

People running companies are concerned.

''They are thinking if there is some capital spending I should postpone for a while, I should do that. If there is some hiring I don't necessarily need to do right now, I can put that off for a few months to see what happens,'' said Joel Naroff, president of Naroff Economic Advisors. ''The problem with that thinking is that more economic weakness or a recession can become somewhat of a self-fulfilling prophecy.''

Average hourly earnings for jobholders rose to $17.75 in January, a 0.2 percent increase from the previous month. It was half the pace logged in December. Over the past 12 months wages went up by 3.7 percent. With high energy and food prices, though, workers may feel like their paychecks aren't stretching as far.

The unemployment rate had shot up in December to 5 percent, from 4.7 percent in November. The magnitude of that increase -- something not seen since right after the September 2001 terror attacks -- set off alarms. In the past, such a big increase has signaled the economy was starting a recession or already in one.

With economic growth slowing this year, the unemployment rate will climb again. In fact, Mark Zandi, chief economist at Economy.com, predicts the jobless rate will rise to near 6.5 percent in early 2009.

The 17,000 drop was in total payrolls -- both government and private employers -- in January, the first monthly decline since August 2003. The government sliced 18,000 positions, while private employers added just 1,000, the fewest in nearly a year.

The government on Friday also released annual revisions -- based on more complete information -- that showed job creation was even weaker last year than initially thought.

The economy added an average of just 95,000 jobs per month in 2007, versus an earlier estimate of 111,000 a month. In 2006, payroll employment grew by an average of 175,000 a month.

Construction and factory workers have been especially hard hit by the meltdown in housing, which has catapulted home foreclosures to record highs. Construction companies cut 27,000 jobs last month and have lost 284,000 since employment peaked in September 2006. Spending by private builders on housing projects last year plunged by a record 18.3 percent, the Commerce Department said in a separate report.

Factories eliminated 28,000 positions in January, and have cut 269,000 jobs over the past 12 months. Manufacturing activity gained some ground in January, after contracting in December, the Institute for Supply Management said in still another report Friday.

The economy nearly stalled in the final three months of last year, and some economists believe it may actually be shrinking now.

Under one rough rule, the economy would have to contract for six months for the country to be considered in a recession. The likelihood of a recession has risen sharply over the past year, and analysts increasingly believe the U.S. will be in one during the first half of 2008. The worry is that people and businesses will hunker down and pull back their spending, sending the economy into a tailspin.

Bush said, ''We're just in a rough patch. And, I'm confident we can get through this rough patch.''

------

On the Net:

Employment report: http://www.bls.gov

    Employment Drops in a Pink Slip Blizzard, NYT, 1.2.2008, http://www.nytimes.com/aponline/business/AP-Economy.html

U.S. Economy Unexpectedly Sheds 17,000 Jobs

February 1, 2008
The New York Times
By MICHAEL M. GRYNBAUM

The economy lost 17,000 jobs in January, the Labor Department reported on Friday, the first decline in four years and the most striking evidence yet that the United States may be slipping into a recession.

Jobs disappeared across a broad spectrum of professions, with the steepest losses coming in the manufacturing, construction and goods-producing industries.

The unemployment rate, after jumping to 5 percent in December, fell back slightly, to 4.9 percent.

“This is the clearest signal yet that the job market is either in or teetering on a recession,” said Jared Bernstein, senior economist at the liberal Economic Policy Institute in Washington.

With the collapse of the housing market, trouble on Wall Street and the continuing fallout of the subprime mortgage crisis, many economists have pointed to the continued growth in the labor market as the final holdout in a sluggish economy.

But the employment report puts the job market in a startlingly different light. Economists had predicted a substantial gain in January payrolls, and early signs pointed to a relatively strong report. Instead, the government reported the first decline in jobs since August 2003.

“There’s a race going on between an economy that’s gathering weakness and aggressive monetary and fiscal policy,” said Ethan Harris, chief United States economist at Lehman Brothers. “Whether we have a recession in the U.S. or not depends on which of these two forces moves quicker.”

Mr. Harris noted that the employment data can be quite volatile from month to month. The last reported monthly decline, in August 2007, was later revised up to a 74,000 gain.

Just last month, the December report showed an anemic 18,000 rise in payrolls, prompting a significant downturn in the stock market. On Friday, the Labor Department raised that estimate to a gain of 82,000 jobs.

“People were saying the recession started in December,” Mr. Harris said. “Look, it didn’t. December was fine.”

Still, there were several signs of weakness in the employment report. Payrolls at private companies increased by a mere 1,000 jobs. Businesses are reducing the number of hours that their employees work.

And workers’ salaries have effectively fallen in the last 12 months. The average hourly wage for rank-and-file workers — about 80 percent of the total work force — rose 3.7 percent since last January, below the pace of inflation.

Average hourly earnings ticked up 0.2 percent last month, slowing from a 0.4 percent rise in December.

The government also sharply lowered its estimates for employment in 2007 as a whole. In November, for example, the government had said 115,000 jobs were created. That number was reduced to 60,000 in the latest report.

The jobs report was accompanied on Friday by a batch of mixed economic data. Manufacturers appeared to recover from a sudden drop in business in December, as a closely watched indicator — a survey by the Institute for Supply Management — ticked up on a surge in foreign and domestic demand.

The I.S.M. index had fallen to 47.7 in December, setting off concern on Wall Street, but that figure was revised up to 48.4. The index was at 50.7 for January, suggesting that December’s downturn was a momentary blip.

Despite the waves of bad economic news, American consumers were more confident about the state of the economy in January, according to a survey by the University of Michigan and Reuters. Consumer confidence rose to a reading of 78.4 from 75.5 in December.

Finally, the Commerce Department reported that spending on construction projects fell 1.1 percent in December. The decline was mostly due to the problems in the housing markets, as home builders cut back on groundbreakings in response to lagging sales. Nonresidential construction was flat for the month.

    U.S. Economy Unexpectedly Sheds 17,000 Jobs, NYT, 1.2.2008, http://www.nytimes.com/2008/02/01/business/01cnd-econ.html?hp

Measuring Payroll Jobs, Unemployment

February 1, 2008
Filed at 11:25 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- The number of payroll jobs declines for the first time in more than four years but the unemployment rate falls. Why the discrepancy?

The difference results from the fact that the two figures come from different surveys of the labor market.

The unemployment rate is based on a survey of households. It shows the number of unemployed people looking for work as a percentage of the total number of persons in the labor force.

The number of payroll jobs created each month is based on survey of payroll data from businesses and government agencies.

The two figures over time generally show the same trends in the labor market, but the monthly report can at times diverge because two surveys are being used.

    Measuring Payroll Jobs, Unemployment, NYT, 1.2.2008, http://www.nytimes.com/aponline/us/AP-Jobless-Explainer.html

Oil Prices Fall Below $90 a Barrel

February 1, 2008
Filed at 11:18 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Crude oil prices dropped below $90 a barrel Friday after the government said employers cut jobs in January, renewing worries that a possible U.S. recession will eat into oil demand.

The economic news followed OPEC's announcement that it will maintain current oil output levels.

The Labor Department said Friday that employers cut 17,000 jobs last month, the first reduction in more than four years and a sign that the economy continues to weaken.

Light, sweet crude for March delivery lost $1.79 to $89.96 a barrel on the New York Mercantile Exchange. The contract fell 58 cents to settle at $91.75 a barrel on Thursday.

In London, Brent crude futures fell $1.51 to $90.70 a barrel on the ICE Futures exchange.

''The jobs number is truly calling into question what kind of demand we're going to have in this first half of this year,'' said James Cordier, president of Liberty Trading Group in Tampa, Fla. ''Economic conditions are deteriorating faster than earlier expected.''

Even expansion in the nation's manufacturing sector last month didn't provide any optimism for traders. The modest rise in growth, reported by the Institute for Supply Management on Friday, follows a contraction in December.

''All signs right now are pointing to a weaker economy,'' Cordier said.

On Thursday, the government said consumer spending in December posted its worst performance since June, while claims for unemployment benefits jumped more than three times what economists expected.

Meanwhile, the Organization of Petroleum Exporting Countries said Friday in Vienna that output levels will not be increased out of concerns that a weakening global economy will result in softer demand.

''The OPEC decision was telegraphed by oil minister comments over the past two weeks, so the market was well-prepared for a quota rollover,'' said Tim Evans, an energy analyst at Citigroup Global Markets.

Friday's special meeting was set in December after prices flirted with the $100-a-barrel level to give the 13-nation organization a chance to step in and increase output in case volatile markets needed calming.

However, looking ahead to the next meeting in March, Qatar's Abdullah bin Hamad Al Attiyah said ''all the possibilities are there'' -- shorthand for a possible cut in production, if the U.S. economy weakens enough to cut into demand.

Through Wednesday, oil prices had risen $5.34 a barrel, or 6.1 percent, over five trading days on optimism that the U.S. Federal Reserve's rate cuts and an economic stimulus package working its way through Congress will stave off a serious downturn. But many investors doubt the plans will work.

The U.S. Energy Department said Wednesday the country's crude oil and gasoline inventories jumped more than expected last week. Gasoline inventories are at their highest levels in nearly two years, analysts said.

Heating oil futures fell 1.48 cent to $2.5345 a gallon, while gasoline prices slipped 2.49 cents to $2.3091 a gallon.

At the pump, gas prices inched up to a national average of $2.988 a gallon Friday from $2.986 the day before, according to AAA and the Oil Price Information Service. Retail prices, which typically lag the futures market, have risen slightly over the past two days after falling below $3 a gallon last week. But if oil continues falling, gas prices will retreat further from the $3 level, analysts said.

Natural gas futures declined 17.7 cents to $7.897 per 1,000 cubic feet.

------

Associated Press writers Gillian Wong in Singapore and Pablo Gorondi in Budapest contributed to this report.

    Oil Prices Fall Below $90 a Barrel, NYT, 1.2.2008, http://www.nytimes.com/aponline/business/AP-Oil-Prices.html

Exxon Mobil Profit Sets Record Again

February 1, 2008
The New York Times
By JAD MOUAWAD

Exxon Mobil delivered its strongest performance ever last year, earning a record $40.6 billion in net income because of surging oil prices, the company said Friday.

The figure, a 3 percent increase from the previous year, exceeded the company’s own record for profits at an American corporation, set in 2006, and is nearly twice what it earned in 2003.

Exxon said its fourth-quarter net income rose 14 percent, to $11.7 billion, or $2.13 a share. That also made it the company’s most profitable quarter ever.

The top Western oil companies are having a tougher time finding reserves and expanding their production as access to resources has tightened in recent years in places like Russia and Venezuela and conventional sources of oil dries up in the North Sea. The industry is also being pressured by rising costs and shortages of workers, rigs and engineering capacity.

But Exxon, like most oil companies, has benefited from a near-doubling of oil prices last year. In New York, oil futures rose from a year-low of about $50 a barrel in early 2007 to a peak of nearly $100 by the end of the year.

The company recorded annual sales of $404.5 billion, up 7 percent from 2006. It had $20.9 billion in capital and exploration expenditure, up $1 billion from the previous year.

Exxon expanded its hydrocarbons production in the fourth quarter by 1 percent, thanks to growing natural gas output from its projects in Qatar. Natural gas production rose 12 percent, to 10.4 billion cubic feet a day, in the fourth quarter.

But oil production dropped by 6 percent in the last quarter, to 2.5 million barrels a day, after the company pulled out of Venezuela.

Meanwhile, OPEC, which was meeting in Vienna on Friday, decided to leave its production levels unchanged, resisting pressure from developing nations to pump more oil into the global economy.

The Organization of the Petroleum Exporting Countries is set to meet again next month, and the cartel signaled it would be ready to cut production then to make up for a seasonal slowdown in demand in the second quarter.

OPEC’s actions mean the cartel is determined to keep prices from falling below $80 a barrel, according to energy experts.

“The significant uncertainties associated with the projected downturn in the global economy called for vigilant attention to their impact on key market fundamentals,” OPEC said in a statement after the meeting. The cartel, which accounts for 40 percent of the world’s oil exports, signaled its “determination to take every measure deemed necessary to keep the market stable.”

Chevron, the second-largest American oil company, reported that its fourth-quarter net income rose 29 percent, to $4.87 billion.

The company’s exploration and production division benefited from the rise of oil prices but profits at its refining business fell sharply because of unplanned shutdowns at some of its plants in the United States. Quarterly earnings at the refining unit fell 79 percent to $204 million.

Chevron’s oil and gas production fell slightly to 2.61 million barrels a day in the fourth quarter, compared with 2.65 million barrels in the year-earlier period.

    Exxon Mobil Profit Sets Record Again, NYT, 1.2.2008, http://www.nytimes.com/2008/02/01/business/01cnd-exxon.html?hp

Microsoft Bids $44.6 Billion for Yahoo

February 1, 2008
The New York Times
By MIGUEL HELFT

SAN FRANCISCO — In a bold move to counter Google’s online pre-eminence, Microsoft said Friday that it had made an unsolicited offer to buy Yahoo for about $44.6 billion in a mix of cash and stock.

If consummated, the deal would redraw the competitive landscape in Internet consumer services, where both Microsoft and Yahoo have both struggled to compete with Google.

The offer of $31 a share represents a 62 percent premium over Yahoo’s closing stock price of $19.18 on Thursday. It would be Microsoft’s largest acquisition ever.

Microsoft said the combination of the two companies would create efficiencies that would save approximately $1 billion annually. The software giant also said that it has an integration plan to include employees of both companies and intends to offer incentives to retain Yahoo employees.

Steven A. Ballmer, the Microsoft chief executive, said that he called his Yahoo counterpart, Jerry Yang, on Thursday night to tell him that Microsoft intended to bid on the company, and that they had a substantive discussion. “I wouldn’t call it a courtesy call,” he said in an interview.

Mr. Ballmer said he had decided to pursue a takeover because friendly deal negotiations would most likely be protracted and would probably become public.

“These things are hard to keep quiet in the best of times,” he said. He said his conversation with Mr. Yang was constructive, but suggested that a deal may not come easily.

Yahoo said in a news release Friday that its board would evaluate Microsoft’s bid “carefully and promptly in the context of Yahoo’s strategic plans.”

In a letter to Yahoo’s board, Mr. Ballmer wrote that the two companies discussed a possible merger, as well as other ways to work together, in late 2006 and 2007. Mr. Ballmer said that in February 2007, Yahoo decided to end the merger discussions because its board was confident in the company’s “potential upside.”

“A year has gone by, and the competitive situation has not improved,” Mr. Ballmer wrote.

As a result, he said, “while a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo that we are proposing.”

Mr. Ballmer met several times in late 2006 and 2007 with Terry S. Semel, then Yahoo’s chief executive, people involved in the talks said. While the talks — originally focused on the prospect of a merger or a joint venture — were initially constructive and appeared to move forward, they quickly broke down, these people said.

After a series of secret meetings between both sides in hotels around California and elsewhere, Mr. Semel and Yahoo’s board decided against progressing with the talks, betting that its stock would turn around as it introduced a new advertising system called Panama, these people said. Mr. Yang, in particular, was adamantly against selling the company to Microsoft and championed the view of remaining independent, they added.

Mr. Ballmer constantly consulted with Bill Gates, the Microsoft chairman, about the progress of the negotiations, people close to the company said, and when the talks collapsed, he decided to wait to see the fate of Yahoo’s stock price. As the stock continued to fall, they said, Microsoft’s management became emboldened and began internal meeting in late 2007 about the prospect of making a hostile bid.

Despite their heavy investments in online services, both Yahoo and Microsoft have watched Google extend its dominance over Internet search and the lucrative online advertising business that goes along with it.

In recent months, Yahoo has struggled to develop a plan to turn around the company under Mr. Yang, its co-founder, who was appointed chief executive amid growing shareholder dissatisfaction last June.

Yahoo investors, however, remain skeptical. The company’s shares have slumped, and the closing price on Thursday was 44 percent below its 52-week high.

In pre-market trading Friday, Yahoo’s shares were up 50 percent, to almost $29. Microsoft’s shares were down about 4 percent, and Google’s shares were down 6 percent.

Microsoft, like Yahoo, has faced an uphill battle against Google. The company invested heavily to build its own search engine and advertising technology. Last year, it spent $6 billion to acquire the online advertising specialist aQuantive. Microsoft’s online services unit has been growing, but remains unprofitable.

Meanwhile, Google’s share of the search market and of the overall online advertising business has continued to grow.

Announcing its quarterly earnings earlier this week, Yahoo said it would cut 1,000 jobs in an effort to refocus the company and reduce spending, and issued an outlook for 2008 that disappointed investors.

The timing of Microsoft’s bid could allow the company to mount a proxy contest for control of Yahoo’s board should it try to dismiss the offer. Microsoft has discussed the prospect of mounting such a campaign, people close to the company said, and has until March 13 to propose a slate.

In his letter to Yahoo’s board, Mr. Ballmer wrote, “Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo’s shareholders are provided with the opportunity to realize the value inherent in our proposal.”

On Thursday night, Yahoo announced that Mr. Semel, its nonexecutive chairman and former chief executive, was leaving the board. Under Mr. Semel, a long-time Hollywood studio executive who ran Yahoo from 2001 to 2007, the company became more focused on its advertising and media businesses, but was unable to keep up with Google’s challenge in Web search and advertising and with the rise of social networking sites such as MySpace and Facebook.

A longtime board member, Roy J. Bostock, has been named nonexecutive chairman, Yahoo said.

Microsoft said it believes the Yahoo transaction could receive the necessary regulatory approvals in time to close by the second half of this year.

Andrew Ross Sorkin contributed reporting.

Microsoft Bids $44.6 Billion for Yahoo, NYT, 1.2.2008, http://www.nytimes.com/2008/02/01/technology/01cnd-subyahoo.html