Financial life in a big town

The U.S. economy will grow 4 percent this year, said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut, mirroring rebounds from recessions in the 1970s and 1980s.

Darda said growth will be ignited by the “initial spark” from a recovery in capital markets and corporate earnings, as well as the rebuilding of business inventories. The job market will recover more slowly, with the unemployment rate falling to about 9 percent by the end of this year from 10 percent in December, Darda said.

“If you look at the tone and tenor of indicators that tell us where the economy is going in the future, they’ve all improved fairly dramatically,” Darda said in an interview today on Bloomberg Radio.

The index of U.S. leading indicators increased more than anticipated in December, a sign the economy will keep growing through the first half of the year, the New York-based Conference Board said today. The board’s gauge of the outlook for the next three to six months rose 1.1 percent, the most in three months, after climbing 1 percent in November.

Darda’s outlook for the economy is more optimistic than the median forecast in this month’s Bloomberg survey of economists, which calls for growth of 2.7 percent in 2010 after a contraction of 2.5 percent last year.

A recovery from the deepest recession since the 1930s will do little to bring down an unemployment rate that’s close to a 26-year high, according to the survey fast cash now.

Labor Market Outlook

Unemployment is forecast to average 10 percent this year, the highest annual rate in seven decades. Employers have cut more than 7.2 million jobs since the recession began in December 2007.

“When you are coming out of such a deep, deep hole it takes time” for the labor market to heal, Darda said. “You could have a rip-roaring recovery and still not get unemployment to a level you would consider full employment.”

The Federal Reserve will probably keep its benchmark interest rate close to zero through the third quarter of the year in a bid to bring down unemployment. The rate-setting Federal Open Market Committee next meets Jan. 26-27.

The Fed’s regional economic survey, the Beige Book, reported the economy improved in 10 of the central bank’s 12 districts. The survey was released Jan. 13.

(In the U.S., hear Bloomberg Radio on satellite radio: Sirius Channel 130 and XM Channel 129. In New York City, tune to WBBR 1130 on the AM dial.)

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MONDAY

StatsCan: Releases November international security transactions.

TUESDAY

Bank of Canada: Interest rate announcement.

StatsCan: Releases leading indicators for December.

WEDNESDAY

StatsCan: Releases December consumer price index, November manufacturing sales, travel between Canada and other countries.

Earnings: Danier Leather reports second-quarter results.

THURSDAY

Earnings: MDS Inc. and Viterra report their fourth-quarter results.

StatsCan: Releases November wholesale trade figures.

FRIDAY

StatsCan: Releases November retail sales.

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A closely-watched manufacturing index blew away all expectations Monday, raising hopes that the U.S. economy is not just back on solid ground, but heading higher at a good clip.

Good news for the United States, to be sure, but connecting the dots to the Canadian economy is a bit more complicated.

"Anytime we see positive economic news out of the U.S., it’s a sign that our strongest trading partner is improving and we can expect to see knock-on effects on our own economy," said Meny Grauman, senior economist at CIBC World Markets.

"The direct links are not there but it’s definitely an encouraging sign in general that there is some support for Canadian economic recovery."

As usual, the loonie is throwing a wrench into the works. It rose by almost a full penny Monday alone, pulled along by higher prices for oil and other commodities. In its first day of 2010 trading, the Canadian dollar jumped 0.87 of a cent (U.S.) to 96.02 cents. The U.S. Institute for Supply Management’s index came in well ahead of economists’ expectations, rising to 55.9 in December, up from 53.6 in November. That’s also its highest level in almost three years. A reading above 50 indicates expansion. The bigger the difference, the faster the expansion.

"It’s huge," said Derek Holt, vice-president of economics with Scotia Capital.

"If the U.S. manufacturing sector really is stabilizing and recovering, then given the seamless cross-border integration of manufacturing production, it’s going to be a boon to Canada as well.

"The trillion-dollar question is: Is it believable?" Holt said.

The index first registered growth in August after 18 months of contraction, hitting a low of 32 high quality business cards.9 a year earlier.

One concern is the recovery may not be broad enough. Fewer industries reported growth in December than in the past couple of months, said Sal Guatieri, senior economist at BMO Capital Markets.

"It’s a glass half-full or half-empty scenario. Half the industries did report growth. We could take it as a positive or a negative."

But that doesn’t automatically mean the demand for Canadian products will be strong.

"It’s more positive if we see domestic spending strengthening in the U.S. That implies more demand for Canadian exports," Guatieri said.

"Consumer spending has turned modestly higher and the jury is still out on business investment. It picked up in the third quarter then weakened in the fourth."

Canada lacks a broad index to gauge the health of the manufacturing sector.

But economists have spotted signs of growth. In November, the monthly labour-force survey by Statistics Canada showed a small gain in manufacturing jobs.

Canadian manufacturers have been hamstrung by the rising dollar, which makes their products more expensive for U.S. customers.

"Economic fortunes may be rising, but a stronger Canadian dollar goes along with that and counteracts some of those positives. It makes the recovery in Canadian manufacturing more complicated," Grauman said.

"It will continue to be an issue over the next few months."

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After a 44-year run serving one of the poorer neighborhoods in St. Louis, Gateway Bank collapsed last month under a pile of bad loans.

Now, a small bank from Kansas City thinks it can build a profitable enterprise on the wreckage of Gateway. Central Bank of Kansas City bought Gateway from the Federal Deposit Insurance Corp., which took over the bank a month ago.

So, why would Central Bank think it can make a go of it in a north St. Louis city neighborhood where another bank failed?

A cheap price is part of the equation. Central Bank paid 70 cents for each $1 in face value of Gateway’s assets. Of course, many of those assets aren’t worth face value. When it failed, 7 percent of Gateway’s loans were seriously behind in payments. Central Bank will also inherit 70 foreclosed properties, most of them houses and apartment buildings.

The FDIC will pay $9.2 million to cover Gateway’s losses.

Central’s executives didn’t have long to mull the decision. The FDIC opened Gateway’s books to prospective bidders on a Thursday in late October. Central Bank made its bid the next Monday, and took over the bank that Friday, Nov. 6.

William Dana, Central Bank CEO, says it will succeed because it knows how to serve poor neighborhoods. That’s its forte in Kansas City, he says.

Most banks want to go where the money is. They want "high net worth, low transaction, low-touch customers," says Dana. They’re people who have big bank accounts, borrow much and deal with the bank by computer.

"Our customers are the antithesis of that," says Dana. They have lower credit scores and small bank accounts. "Many people have trouble coming up with the minimum deposit, $50, to open an account," said Dana. "It’s just tougher."

Serving them requires a bigger staff. But Central’s customers are more willing than the well-off to keep their money in checking and savings accounts paying low interest. That low cost of deposits allows the bank to make a wider profit margin on its loans, Dana said.

Serving low-income neighborhoods qualifies the bank to dole out federal largess under the federal New Markets Tax Credit program. It can give those credits to business borrowers who qualify.

"They work in these challenged neighborhoods where access to capital is limited or difficult," said Ruben Alonso, who runs the New Markets program for the Kansas City municipal government. He cites a loan the bank made to an engineering firm that is going to anchor a redevelopment planned for an area near downtown.

"They bring a lot of expertise in how to bring capital to low-income areas," he added.

The lack of banking services in poor, minority neighborhoods has been a vexing issue for federal regulators. In a study released last week, the FDIC reported that 21.7 percent of U.S. black households have no checking or savings accounts, while 19.3 percent of Hispanic households are "unbanked." Roughly 3.5 percent of Asian and white households have no checking or savings accounts.

The same study found the disparity is even greater in St. Louis: 31 percent of the area’s black households are unbanked, while only 1.1 percent of white, non-Hispanic households have no accounts.

St. Louis’ unbanked percentage among black households was the highest among 20 most populated metro areas studied by the FDIC, though seven areas didn’t report a breakdown for black households. Detroit was the second-highest at 30 percent, followed by Chicago’s 25.5 percent.

BIG BUSINESSES HELP

In Kansas City, Central Bank gets a helping hand from big businesses. A local electric utility and Microsoft deposit money at low interest to encourage Central’s lending. "We guarantee them that we’ll make loans into the community," said Dana.

Central’s strategy seems to be working. The bank earned $1.6 million in the first nine months of the year. That gave it a return on assets — a standard measure of bank profitability — of 1.26 percent, far above the 0.17 percent of peer banks. It’s been profitable for at least the last four years.

Central has $169 million in assets, ranking it as tiny by banking standards. Gateway had a mere $30 million.

Gateway Bank’s single branch is on Union Boulevard near Natural Bridge Road. Median income in the bank’s ZIP code was 58 percent of the national average, according to 2000 census figures. That matches the income around Central Bank’s headquarters, east of downtown Kansas City.

Central Bank’s neighborhood is a Kansas City melting pot — 50 percent white, 16 percent black, 7 percent Asian and 18 percent "some other race." The Census lists 30 percent as Hispanic, who can be of any race. By contrast, Gateway’s ZIP code is 98 percent black, according to the 2000 census.

Gateway was born in the civil rights movement. It was founded in 1965 by black businesspeople and professionals who wanted a bank to serve the minority population. For its last two decades, it was the only black-owned bank in St. Louis.

Central Bank’s ownership is white, the family of Lucille Tutera. Will that affect customer loyalty?

"We have to convince our depositors that our products and services will be better than before," said Dana.

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Dubai’s Nakheel asked for three of its listed Islamic bonds worth $5.25 billion to be suspended pending details of restructuring plans at its parent company, a move likely aimed at dampening speculation on the bonds.

The request briefly stalled but did not stop trading in the bonds, which are exchanged over the counter and not on the bourse, where the listing is regarded as a technicality.

The request also added to confusion that has reigned in the markets since the Dubai government last week said it would seek debt standstill agreements from creditors to Nakheel and Dubai World, briefly sparking fears of a renewed crisis.

“After the suspension announcement, it took some time on compliance to establish if they could trade, but as of 11:30 they started trading,” Mohieddine Kronfol at Dubai-based fund manager Algebra Capital said.

The three instruments listed on the exchange are a $3.5 billion sukuk due on December 14, a 3.6 billion dirham sukuk ($980.1 million) due on May 13 and a $750 million sukuk due on January 16, 2011.

Nakheel’s December bond was trading at 58 on Monday, according to Thomson Reuters data, having traded as high as 110 on Wednesday before the Dubai government’s announcement. Its 2011 debt was trading at 55.

“They are trying to minimize the huge amount of speculation going on until a definitive statement comes out,” said a Dubai-based fixed income banker.

Nakheel, developer of a series of created islands in the shape of palm trees off Dubai’s coast, said it had asked Nasdaq Dubai to suspend all three of its listed Islamic bonds, or sukuk, “until it is in a position to fully inform the market.”

Nakheel officials were not immediately available to give further details on the suspension.

Nakheel’s first bond, the $3.5 billion sukuk, was widely expected by the market to be repaid on time.

United Arab Emirate stocks tumbled 6 to 7 percent on Monday as the market reopened for the first time since Dubai called for the delay in debt repayments.

The UAE on Sunday offered the country’s banks emergency support and Abu Dhabi said it would provide selective support to Dubai companies.

($1=3.673 Uae Dirham)

(Reporting by John Irish and Jason Benham; editing by Kim Coghill, Thomas Atkins and Karen Foster)

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Premier Wen Jiabao on Sunday restated China’s long-standing position that the yuan’s exchange rate should be kept at a reasonable, balanced level.

State television showed Wen meeting a trio of top economic officials from the euro zone, who were making the case for a strengthening of the Chinese currency.

Wen also said China wanted to see stability in the world’s major reserve currencies — a thinly veiled way of saying China is unhappy with the weakening trend of the dollar.

(Reporting by Zhou Xin and Alan Wheatley)

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Citigroup Inc will sell its Phibro energy trading business to Occidental Petroleum Corp, allowing the bank to defuse a battle with regulators over a $100 million pay package for the unit’s star trader.

Citigroup is shedding a business that has generated profit by taking big risk, while oil and gas producer Occidental is venturing into new territory after long trading conservatively. Occidental was drawn to a bargain, analysts said.

The price of the transaction was not disclosed, but Occidental said its net investment would be only about $250 million and that it was paying roughly the net asset value of the business. Analysts concluded that Citi had sold Phibro for a pittance.

Andrew Hall, the unit’s star trader, will invest in the business alongside other executives, and his 2009 compensation will be paid out in future years based on the unit’s performance.

Hall, who famously collects contemporary art that he houses in a castle in Germany, has become a lightning rod for criticism over Wall Street compensation.

The Obama administration’s “pay czar,” Kenneth Feinberg, who is reviewing compensation at major bailout recipients, would have struggled to change Hall’s 2009 pay package because he lacks legal authority over long-standing contracts, according to people familiar with the matter.

Feinberg pressed Citigroup to fix the problem, and to reduce Hall’s pay in future years, people familiar with the matter said, making Hall unlikely to stay.

Phibro has been profitable in recent years but has lost money in the past. In 1998, Citigroup put the unit on the auction block because of its wildly fluctuating profits, but the bank never found a buyer.

Government regulators have particular sway over Citigroup, which has yet to repay a $45 billion taxpayer bailout and is roughly one-third owned by taxpayers on line pay day loans.

Last month Citigroup Chief Executive Vikram Pandit said publicly that $100 million was too much for an employee to earn, given the bank’s circumstances.

“When the government is an owner and Congress and regulators are looking over (CEO Pandit’s) shoulder when he writes a check, then he has to be trembling if he writes a $100 million check,” said Holland & Co President Michael Holland, who worked with Hall in the 1990s.

Citigroup said the sale was not material to its earnings. Hall and his team trade out of a former dairy farm in Westport, Connecticut. The Phibro unit operates almost completely separately from the rest of Citigroup, meaning that removing it should have no impact on the bank’s other businesses, including its commodities trading business for clients, people familiar with the matter said.

The sale of Phibro would be the latest in a series of divestitures by Citigroup. Earlier this year it sold a controlling stake in its Smith Barney retail brokerage to rival Morgan Stanley, as it faced pressure from regulators to raise capital and overhaul operations.

Citigroup considered many options for its Phibro business, ranging from spinning it off to opening it to outside investors, people familiar with the matter have told Reuters.

Citigroup shares were down 1 cent at $4.64 in afternoon trade, while Occidental was off 43 cents, or 0.5 percent, at $79.66. 

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The Toronto stock market snapped a five-session winning streak Thursday, pulled lower by a sharp drop in base metal and gold stocks.

"We have some profit taking," said Fred Ketchen, manager of equity trading at Scotia Capital. "This market is in a state where it needs to be relaxed for a bit."

The S&P/TSX composite index lost 27.37 points to 11,528.23 near the end of a strong trading week in which optimism about economic recovery had sent the main TSX index running ahead to its highest close in almost a year on Wednesday.

"I think it is probably justified, I think there is growing enthusiasm because there's growing confidence," added Ketchen.

The TSX base metals sector fell 3.98 per cent as the December copper contract declined 4.05 cents to $2.896 a pound. Teck Resources (TSX: TCK.B) lost 61 cents to $29.39 and 1st Quantum Minerals lost $6.10 to $64.25.

The gold sector was also a major decliner, down 2.25 per cent as December gold on the New York Mercantile Exchange gave back $6.70 to $1013.50 (U.S.) an ounce. Goldcorp Inc. (TSX: G) lost 54 cents to $44.97.

The TSX Venture Exchange declined 11.8 points to 1,272.74.

Stock markets in Canada and the United States are up smartly this week after Federal Reserve chairman Ben Bernanke said that the U.S. recession was likely over and a report on Wednesday showed industrial activity surged 0.8 per cent in August, better than the 0.6 per cent increase economists had forecast.

The Canadian dollar closed 0.17 of a cent lower to 93.74 cents U.S. after a report showing that consumer prices in Canada declined in August for the third consecutive month and other data indicating a Canadian economic recovery is on the way.

Statistics Canada reported that the annual rate of inflation was negative 0.8 per cent last month, as the relatively low cost of gasoline and energy continued to drag the consumer price index down.

That compared with the July reading of minus 0.9 per cent, which was Canada's lowest inflation rate in 56 years.

The agency also said that its composite leading index, designed to indicate where the economy is headed in the next six to 12 months, rose 1.1 per cent in August, the biggest jump since April 2002.

The agency said jumps of one per cent or more in the index usually come early in a recovery that follows a downturn.

The TSX energy sector was down 0.4 per cent with the October crude contract on the Nymex down four cents at $72.47 (U.S.) a barrel. Crude oil had surged about $4 a barrel over the last three sessions amid signs the U guaranteed fast personal loans.S. economy, the world's largest consumer of crude, has stopped shrinking. In turn, the rise has sent the TSX energy sector up well over three per cent this week.

New York markets were little changed amid some earnings disappointments and positive economic data.

The Dow Jones industrial average was down 7.79 points to 9,783.92.

The Nasdaq composite index fell 6.4 points to 2,126.75 while the S&P 500 index was off 3.27 points to 1,065.49 as the U.S. Commerce Department said that construction of new homes and apartments rose 1.5 per cent to an annual rate of 598,000 units last month, slightly lower than the 600,000-unit pace that economists had forecast. But it was still the highest level in nine months.

There was also an indication that job cuts are slowing as the U.S. Labour Department said that the number of newly laid-off workers seeking unemployment benefits fell last week to the lowest level since early July.

Earnings news wasn't quite so positive as FedEx said its first-quarter earnings fell 53 per cent to $181 million and warned its profit will remain weak through the end of the year.

Revenue fell 20 per cent to about $8 billion and its shares lost $1.74 to $76.46.

The TSX financial sector was the best performing sector, up 0.45 per cent. Manulife Financial Corp. (TSX: MFC) shares rose 50 cents to $22.15 (Canadian) as it said it is buying fund manager Markland Street Asset Management Inc. Manulife said the deal allows it to expand its presence in the retail structured products area. Markland had assets under management of approximately $114 million at the end of August.

Sun Life Financial Inc. (TSX: SLF) shares ticked 31 cents higher to $31.62 after the life insurer reassured investors on Thursday that it won't slash dividend payments in the near future. During the second quarter, Manulife cut its quarterly dividend in half despite a 76 per cent surge in profits during the second quarter.

Elsewhere in the resource sectors, shares in Opti Canada Ltd. (TSX: OPC) were unchanged at $2.25 on heavy volume of 20.7 million shares after going as high as $2.57, in a second volatile day of trading.

Copper Mountain Mining Corp. (TSX: CUM) shares jumped after the company called an unsolicited takeover offer from Taseko Mines Ltd. (TSX: TKO) "untimely" and said it undervalues the company's growth potential and jeopardizes its current plans. Copper Mountain shares jumped 24 cents or 17 per cent to $1.65 while Taseko Mines added one cent to $2.93.

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Eli Lilly and Co said on Monday it plans to cut 5,500 jobs, or 13.5 percent of its workforce, as it girds for generic competition by 2011 on its Zyprexa schizophrenia drug and Gemzar cancer treatment.

The Indianapolis-based drugmaker, whose revenue outlook has also been dimmed by competition for its Byetta diabetes drug and safety concerns for its recently approved Effient blood clot preventer, said it aims to cut annual costs by $1 billion by the end of 2011.

The company aims to streamline its structure and shrink its workforce to 35,000, from its current strength of 40,500, by the end of 2011. But the new headcount does not include any sales force additions in fast-growing emerging markets and Japan. Lilly, which reached its peak employee count of 46,000 in mid-2004, has cut jobs in recent years, but not with the ferocity of some rival drugmakers.

Lilly’s biggest challenges are the U.S. patent expirations on Gemzar, Zyprexa and anti-depressant Cymbalta, set for late 2010, late 2011 and 2014, respectively. Cheaper generics are expected to wrest away the majority of their U.S. sales.

That is a huge concern, given the fact that the trio are among Lilly’s biggest products, with combined global annual revenue of more than $9 billion — or about 43 percent of Lilly’s total current annual sales.

“We will soon enter the most challenging period in our company’s history,” Chief Executive John Lechleiter said. “This calls for strong measures to speed our output of new medicines, better meet the changing needs of our customers and reduce our costs.”

Lilly, which reaffirmed its 2009 profit forecast of $4.20 to $4.30 per share, previously said it expects double-digit compound annual earnings-per-share growth from 2007 to 2011.

In an interview, Lechleiter said the cost-cutting and restructuring measures announced on Monday “will undoubtedly help us pull ahead” largely by speeding up drug launches.

Chris Armbruster, an analyst with Al Frank Asset Management, said the cost cuts may improve earnings growth over the next three to five years. Over that time, he expects Lilly to post low-single-digit profit gains on generally flat sales.

“If they’re able to control the cost side, we think there’s plenty that could go right for Lilly over the next couple of years that could lead to a meaningfully higher stock price,” said Armbruster.

JP Morgan analyst Chris Schott was less enthusiastic. He said Lilly’s planned cost cuts represent about 7 percent of the company’s cost base and are coming sooner than expected. Even so, Schott stuck to his anemic long-term profit view for Lilly of an average 5 percent annual decline between 2009 and 2015.

Lilly’s streamlining program is similar to one recently implemented by Pfizer Inc, which is battening down the hatches for the patent expiration — also in 2011 — on its Lipitor cholesterol fighter.

Lilly said it will create a new organizational structure by January 1, 2010, with five global business units: oncology, diabetes, emerging markets, established markets and animal health.

The company has a long-standing focus on diabetes and cancer, and both are hot areas because of the aging population and the hefty price tags of those drugs.

Although they will not have their own business units, Lechleiter said neuroscience, cardiovascular, bone and autoimmune drugs remain important, and Lilly may seize opportunities to license or buy drugs in those and other areas. 

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Seniors battered by the tough economy are selling their life insurance policies to replenish their retirement nest eggs.

Unlike younger investors, older adults may not have time to wait for the market to recover their losses, so they’re turning to this previously overlooked asset to see whether they should sell it and use the money to pay medical bills or other expenses.

Seniors sold life insurance policies with a face value of $11.8 billion last year, almost double the value of policies sold just two years earlier, according to the U.S. Senate’s committee on aging, which recently held a hearing on such transactions.

A "life settlement," as a sale is called, may be an attractive option for seniors who determine they no longer need their life insurance policy, said Doug Head, executive director of the Life Insurance Settlement Association, an industry group.

Policyholders typically sell their insurance through life settlement brokers to investment companies for lump sums that are usually several times greater than they would receive if they surrendered the policies to the insurance companies, he said.

The new owners pay the remaining premiums and become the beneficiaries when the original policyholders die.

But a life settlement doesn’t always make sense, experts caution, and seniors considering such a sale should consult with an independent financial adviser to figure out whether it’s the best move.

"If you’re thinking about selling your life insurance mostly because you’re strapped for cash, there may be other ways to tap the value of your policy without losing your coverage," said lawyer and insurance expert David McDowell.

"You may be able to take out a loan against your policy or receive a partial payout through an accelerated death benefit," he said. "It’s worth visiting with your life insurance agent and exploring the option."

"The best candidates for a life settlement are now people in their 70s or older who have a life insurance policy valued at $500,000 or more that they no longer need, perhaps because their spouses have passed away," said Scott Gibson of Lewis and Ellis, an actuarial consulting firm cash advance america.

Though the amount that seniors receive for their life insurance will vary depending on their age, gender and health, the average payout today is slightly less than 20 percent of the policy’s death benefit, said Russel Dorsett, co-managing director of the Select Life Settlement Corp. in Houston.

"That’s still three or four times more than they’d get if they simply surrendered their policies to the insurer," he said.

Still, selling a life insurance policy is often a complex transaction involving time and paperwork, so consumers should turn to financial advisers who know the risks, said Ana Smith-Daley, a deputy insurance commissioner for Texas.

"An independent adviser can help you decide whether selling your policy is in your best interest," she said. "If it is, the adviser will probably call on a broker to shop around your policy to determine what kind of price it will fetch."

Seniors also need to understand that their medical records will be examined as part of the sales and that the buyers of their policies will occasionally check on them to determine when to collect the death benefits, she said.

Smith-Daley said sellers may also pay taxes on the proceeds from a life settlement and lose their eligibility for Medicaid or other government benefits, so anyone contemplating a sale should consult a tax adviser or lawyer.

But even with those considerations, industry officials expect life settlements to exceed $100 billion over the next couple of decades as boomers convert unwanted or unneeded life insurance to cash to bolster their lagging savings.

"Under the right circumstances, it’s a viable and valuable option that will only become more popular," Gibson said.

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