Financial life in a big town

General Motors Corp (GM.N: Quote, Profile, Research) expects the recovery in the U.S. auto market will be “a long haul” that only begins in the second half of the year, a senior executive at the No. 1 U.S. automaker said on Wednesday.

The market comments by Mark LaNeve, vice president for sales for GM North America, were the first by a top GM executive since Ford Motor Co (F.N: Quote, Profile, Research) cut its outlook for U.S. sales last week, citing rising gas prices and sharply lower demand for its trucks and SUVs.

“I think it’s going to be a long haul,” LaNeve said at an industry conference in Los Angeles, when asked when he expected U.S. auto sales to recover. “We think it starts to get better in the back half of the year.”

But LaNeve said the battered U.S. housing market and consumer confidence would have to both improve to support a rebound for auto sales.

“We don’t look for it to come roaring back. We think it will be a slow ramp up,” LaNeve said at the event in Los Angeles sponsored by Automotive News.

U.S. sales for GM are down almost 17 percent for the first four months of the year, compared with a decline of about 8 percent for industrywide sales.

Most analysts now see U.S. sales of cars and light trucks dropping to near 15 million units in 2008, down from about 16.15 million in 2007 and the lowest annual tally for the industry since 1994.

GM said in late April when it announced a $3 billion first-quarter loss that it would face a slower recovery in its home market than it had first forecast and a faster shift out of higher margin trucks and SUVs in response to higher gas prices. 

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OTTAWA–The federal government recorded a $1.2-billion budgetary deficit in March, likely trimming its surplus for the just-completed fiscal year to $10.2 billion.

The Finance Department says the deficit last March was half what the government experienced in March 2007, when it spent $2.4 billion more than it earned.

The department also says preliminary accounting points to a $10.2-billion surplus for the 2007-08 financial year that ended March 31, the exact amount forecast in Finance Minister Jim Flaherty's budget in February.

The federal government's revenues were up $1 billion, or 5.2 per cent, in March, largely as a result of higher receipts in taxes from individuals. Program expenses were flat.

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Time Warner Inc (TWX.N: Quote, Profile, Research) will completely split with Time Warner Cable Inc (TWC.N: Quote, Profile, Research) by the end of the year, and receive a $9.25 billion payout, to separate its media content and distribution businesses.

The plan will break up a two-decade marriage of traditional distribution and content, a strategic combination of assets that has fallen out of favor on Wall Street as big media corporations compete with faster-moving Internet companies.

Left unanswered is how Time Warner Inc’s 85 percent ownership of Time Warner Cable will be distributed to Time Warner Inc shareholders. Details will be decided closer to the closing of the deal in the fourth quarter, executives said.

The long-expected move lifted Time Warner Inc shares 2 percent in morning trading on the New York Stock Exchange, while Time Warner Cable shares rose 3.5 percent.

Wall Street has clamored for the once top media company to streamline its focus as a pure media content company — with the Warner Bros movie studios, Time Inc magazines and Turner cable networks — and stem a stock-price decline.

It will also leave Time Warner Inc more time to determine what to do with its AOL Internet division, whose growth has been eclipsed by Web leaders like Google Inc (GOOG.O: Quote, Profile, Research) and Yahoo Inc (YHOO.O: Quote, Profile, Research). Time Warner Inc has continued to discuss with Yahoo and Microsoft (MSFT.O: Quote, Profile, Research) a transaction to sell, spin off or merge its AOL division, sources have said.

“Two independent companies will have better long-term strategic, financial and operational flexibility, something we believe is of growing importance,” Time Warner Inc Chief Executive Jeffrey Bewkes told analysts on a conference call.

Investors will be eager to hear how Time Warner plans to invest the payout for the media company. 

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VIENNA, Austria – Oil prices spiked a new trading high Tuesday, sweeping past $129 (all figures U.S.) a barrel as supply concerns intensified the momentum buying that has lifted crude deeper into record territory.

The June contract for light, sweet crude traded as high as $129.31 in electronic pre-opening trading on the New York Mercantile Exchange before settling back to $128.75, up $1.70.

Prices are currently being driven higher by supply concerns. This latest surge comes after OPEC's president was quoted as saying his organization won't increase its output before its next meeting in September.

The imminent expiration of the June contract is adding to the volatility. The contract will end at the close of trading Tuesday.

The contract reached a new closing high of $127.05 Monday after Algerian Energy Minister Chakib Khelil, the current president of the Organization of Petroleum Exporting Countries, was quoted by a government newspaper as saying OPEC won't increase its output during the U.S. summer driving season, which begins this weekend. OPEC's next meeting is scheduled for Sept. 9.

Concern about supply has recently become the primary driver of the market, replacing earlier worries about a weakening dollar, and not even Saudi Arabia's promise last week of an additional 300,000 barrels of crude a day could alleviate those new concerns.

Despite that pledge from the world's leading oil producer and the U.S. move to temporarily stop filling government stockpiles, prices have shown no indication of stopping their record run.

Through Monday's close, the front-month contract has hit nine trading or closing records in 11 sessions. Analysts have said speculative buying has also contributed to oil's record high run.

In other news lifting prices, independent refiner Holly Corp. said a key unit at its New Mexico refinery was shut down for repairs, cutting estimated May gasoline production by as much as 756,000 gallons per day. The shutdown occurred while the fluid catalytic cracking unit was being brought back online from a previous shutdown May 7.

The refinery in Artesia, New Mexico, is Holly's largest.

As oil prices reach new heights, so have gasoline and diesel costs.

"Average gasoline prices in the U.S. rose for an eighth straight week and for the 15th time this year, up 1.8 percent or 6.9 cents to a record $3.791 a gallon," noted Stephen Schork in his Schork Report. "Gasoline at the pump is averaging 28.5 percent above last year's pace.''

Drivers in some parts of the U.S. are paying considerably more, however. Gas pump prices in parts of California have been stuck above $4 a gallon for weeks now.

In other Nymex trading, heating oil futures rose 0.14 cent to $3.7665 a gallon while gasoline prices rose 4.89 cents to $3.2855 a gallon. Natural gas futures rose 17.9 cents to $11.133 per 1,000 cubic feet.

Associated Press Writer Thomas Hogue contributed to this report from Bangkok, Thailand.

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Stocks will face major obstacles to extending their gains next week if the price of oil continues to break records, as fears about inflation and the discretionary spending power of the embattled American consumer are forced into the spotlight.

The gyrating price of oil has been a significant factor in the price of stocks in the past week. Oil rose to a record $127.82 a barrel on Friday, after Goldman Sachs, the most active investment bank in energy markets, forecast a continued spike in prices through the end of the year, due to thin supply.

“The idea that oil could rise a lot further before it reaches a tipping point is really slipping into investors’ psyche,” said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama.

Earnings from a handful of major retailers, including Target (TGT.N: Quote, Profile, Research), could shed more light on how much the rising costs of fuel and food and deteriorating home prices are affecting consumer spending. Investors also will be keeping a keen eye on inflation data.

“If oil prices continue to move up, with Memorial Day coming up, I think traders and investors will be very cautious,” said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

The Memorial Day holiday in the United States typically marks the start of the summer driving season.

For the week, the Dow Jones industrial average gained 1.9 percent, while the Standard & Poor’s 500 Index .SPX advanced 2.7 percent and the Nasdaq Composite Index .IXIC climbed 3.4 percent.

At the close on Friday, the S&P 500 was within 3 percent of being in the black for the year, while the Dow needs to gain about 2.2 percent and the Nasdaq about 4.8 percent.  

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Royal Bank of Canada disclosed Wednesday its results for the February-April quarter will be hit by $855 million in writedowns "relating to market conditions."

The writedowns will be worth $420 million after tax, Canada’s largest bank said.

"We are not happy about taking any writedowns and certainly do not take them lightly," president and CEO Gord Nixon said in a statement.

"That said, these writedowns are manageable and our risk profile continues to remain within our risk appetite. This is due to our disciplined risk management, our strong balance sheet and our business diversity."

RBC Capital Markets will take the biggest writedown at $715 million, followed by the bank’s Corporate Support division at $140 million.

"RBC believes a significant portion of the writedowns reflect liquidity pressures on assets that we continue to hold, rather than underlying credit quality," the bank said.

The bank will also book a gain of $50 million, or $20 million after tax, on the change in fair value of liabilities "designated as held-for-trading as a result of its credit spreads widening over the second quarter."

The writedowns included:

– $200 million for credit default spreads on exposures to a subsidiary of U.S. monoline insurer MBIA Inc.

– $90 million related to retained positions in U.S. subprime collateralized debt obligations of asset-backed securities and other structured credit trading positions.

– $185 million on U.S. Auction Rate Securities, most backed by student loan collateral that is largely government-insured.

– $140 million at its U.S. Municipal GIC business, mostly mortgage-backed securities, discount bonds and notes.

– $175 million on other trading portfolios, primarily related to market liquidity.

– $65 million on "available-for-sale" holdings related to the deterioration in the U.S. subprime market.

The bank is scheduled to release full quarterly results on May 29. In February it reported a 17 per cent drop in first-quarter profit of $1.25 billion, including a $430-million pretax writedown at Capital Markets.

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Canadians shouldn’t let the gloomy news about the United States’ economic crunch persuade them that things are bad in this country, too, says Finance Minister Jim Flaherty.

In an address in Toronto, he admitted that manufacturing - particularly in forestry and autos - faces major challenges in Canada. But Flaherty said the economy, overall, is faring much better in the current uncertain economic period than in the U.S.

"There is a steady drumbeat of negative media coverage on the state of the U.S. economy," he told a business audience this morning.

"Sometimes I think this spills over into Canadian readership and influence on Canadians. Often, when you pick up a newspaper, economic forecasts are being adjusted downwards. And certainly there’s been a psychological effect of the recession in the U.S. housing sector."

The Bank of Canada has recently said that the economy is barely limping along in the April-to-June period and will grow by a weak 1.4 per cent for the year as a whole.

But Flaherty, clearly trying to deflect complaints about his management of the business environment, stressed that no one is predicting a decline in output in Canada.

"Keep in mind: Canadian projections are on the positive side of the ledger," he said.

He said Canada continues to have low unemployment, tame consumer-price inflation and balanced government books in Ottawa.

"We have the strongest economic fundamentals of all of the major industrialized countries" in the Group of Seven nations, Flaherty added.

And Canadians and Canadian businesses have shown resilience in face of the collapse of the U.S. housing bubble, higher energy prices, increased competition from abroad and the higher-valued loonie, he said.

"Canada is in a good position to weather this economic storm."

He added, "We are not the United States," pointing out that the causes of the "current American malaise" are not likely to be duplicated here.

Canada’s financial institutions have not faced the drastic credit crunch that has rocked banks south of the border. And Canadian banks are not heavily exposed to risky securities backed by U.S. subprime mortgages, he said.

"Canada’s housing market remains solid. It has not experienced the same stresses as in the United States, certainly not the same bubble."

For Ontario, which is facing near-recessionary conditions, Flaherty had nothing new to offer today. He said the Conservative government’s major policy thrust has been trying to stimulate the economy by cutting personal and corporate taxes and the GST.

He rejected direct support measures for troubled industries, saying a program of short-term assistance to help struggling regions "always leads to failure."

"In our view, it is not only misguided, it’s expensive and it does long-term damage."

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Citigroup offered some investors an unwelcome dose of deja vu on Friday.

The largest bank in the United States presented its most comprehensive turnaround plan since Morgan Stanley banking and trading veteran Vikram Pandit took over as chief executive in December, but many of its key plans sounded all too familiar.

Pandit said on Friday that Citigroup Inc (C.N: Quote, Profile, Research) businesses would work together, allowing them to squeeze more revenue from individual products by selling them across multiple units. He also said he would cut costs and invest overseas.

If all this sounds familiar, there’s a good reason: it’s exactly what was promised at Citi’s last analyst day in December 2006 by the then-CEO, Chuck Prince, before he was succeeded by Pandit a year later.

“We thought Citi was going to start on a new road, and lo and behold, we’re down the same road again,” said Helena Ocampo, an analyst covering financial stocks at Sentinel Investments, which manages $5.6 billion of assets and owns Citi shares.

Skepticism helped push Citi’s stock down 2.8 percent to $23.63 on Friday, bringing its loss this year to nearly 20 percent.

To be sure, Pandit is making some bold moves. He said Citi would shed some $400 billion of non-core assets within three years, scale back in businesses like bond trading and ramp up in prime brokerage and electronic trading.

But by and large, Pandit is not proposing massive strategic changes, and is focusing instead on making sure Citi doesn’t see a repeat of the last two quarters, when it posted more than $15 billion of losses. 

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Drug developer Biovail Corp. is undergoing a major shift in focus and will concentrate on developing products to treat central nervous system disorders, a strategy the company hopes will restore its flagging growth.

The Toronto-based company said Thursday its new direction, following a strategic review, aims to capitalize on a US$70-billion global market for treatments targeting diseases such as Parkinson's disease and multiple sclerosis.

"We will leverage Biovail's existing core capabilities in drug delivery and formulation for the therapeutic area of central nervous system disorders – a large market where unmet medical needs and growth potential are high," chief executive officer Bill Wells said in a statement.

Biovail reported Thursday a first-quarter profit of US$56.4 million, 35 cents per share, down from year-ago earnings of $93.8 million, 58 cents per share, as revenues dropped to $208.5 million from a prior-year $247 million a year before.

The company said it plans to close its two Puerto Rico factories over the next 18 to 24 months, moving some of their production to a Steinbach, Man., facility.

It will also invest more than $600 million in research and development through 2012, "exploring niche in-licensed and acquired late-stage new chemical entities, new indications and in-house reformulation opportunities."

The new strategic plan is expected to result in charges of about $80 million to $100 million in the next few quarters, with potential annual savings of between $30 million and $40 million.

Some of Biovail's non-core assets will be sold, generating possibly more than $100 million in proceeds.

Shares in Biovail were down 16 cents at $11.84 in early trading at the Toronto Stock Exchange.

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Canada’s slowing economy is starting to take a toll on homeowners.

"Defaults are rising in certain parts of the country," said Peter Vukanovich, president of Genworth Financial Canada, which insures mortgages against default.

Which parts of the country?

"Here in Ontario and in Quebec," he replied.

The Canadian real estate market is healthier than in the United States, where prices are falling and many homeowners are facing foreclosure.

Still, there’s a concern that some homeowners in Canada may not keep up their mortgage payments if they lose their jobs.

"We’re monitoring losses and making sure the lending is responsible," Vukanovich said.

Homebuyers are required to buy mortgage insurance if their down payment is less than 20 per cent of the purchase price.

Mortgage insurance protects lenders when borrowers fall behind and properties have to be sold at a loss.

Canada Mortgage and Housing Corp., a federally owned Crown corporation, is the largest provider.

Genworth, owned by General Electric Co., is the largest private-sector mortgage insurer.

In its 2006 budget, the federal government opened the mortgage insurance market to more competition.

With competition came innovation. Mortgage insurance providers started underwriting loans with no down payments and with amortizations of up to 40 years.

"The longer amortizations and the 100 per cent loan-to-value products have been relatively popular," Vukanovich said.

But what if Canada’s economy flattens out? How will this affect highly leveraged buyers?

It’s not only CMHC, Genworth and other mortgage insurers on the hook if there’s a rash of defaults.

Taxpayers will also be liable for losses.

Few people know that Ottawa guarantees 100 per cent of CMHC-insured mortgages and 90 per cent of privately insured mortgages (up to $200 billion).

Because of the federal guarantee, mortgage insurers don’t have to carry capital on their books to match their potential risks.

In recent months, the finance department has been holding secret talks with mortgage industry players.

"We consult on a regular basis on a wide variety of issues," said a finance spokesperson.

While Ottawa won’t confirm the discussions, mortgage lenders know they’re going on.

"The degree of risk that’s involved with 40-year mortgages and no down payments is certainly of some concern to the finance department," said Don Drummond, chief economist with TD Bank Financial Group.

"It definitely creates a riskier environment."

Here’s how the risk could play out.

Suppose you bought a home in the Toronto area last year, borrowing the whole purchase price and opting for a 40-year payback. Your mortgage insurance premium added another 3.5 per cent to the loan amount.

Suddenly, you lose your job or have your hours cut back. Or this happens to your spouse.

Within a few months, you can no longer cover mortgage payments.

You think about selling. But you can’t make money because you have no equity and 99.9 per cent of your payments are interest, not mortgage principal.

So, you wait for the lender to take over your house under a power of sale.

Our mortgage lenders are strict about checking credit scores and making sure borrowers don’t take on too much debt.

But there’s a sky-high bill to shoulder if a slowing economy results in mortgage defaults.

It’s time for Ottawa to talk openly about cutting back its mortgage insurance guarantee to adapt to a climate of looser lending.

Ellen Roseman’s column appears Wednesday, Saturday and Sunday.

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