Financial life in a big town

At first glance, the losses on Wall Street look to be a bottomless pit. As the financial crisis enters its second year, there appears no end in sight, with total losses on soured investments now estimated by the International Monetary Fund at $1 trillion (U.S.), about the same as the tab for U.S. military operations in Iraq and Afghanistan.

Some good will come of the maelstrom that hit Wall Street over the weekend like a Category 5 hurricane. But for now, the Street’s denizens are numbed by how their world has abruptly changed. A crippled Merrill Lynch & Co., which pioneered Main Street investing, has been rushed into the arms of Bank of America Corp.

The venerable Lehman Brothers Holdings Inc., America’s fourth-largest brokerage, has filed for Chapter 11 bankruptcy protection. New York-based American International Group, among the world’s biggest insurers, has secured a $20 billion lifeline. Washington Mutual Inc., America’s largest thrift, or savings and loan, is hanging by a thread.

The current disaster is without precedent in the modern history of the markets. Previous crises such as the 1980s insolvency of brokerage Drexel Burnham Lambert and the 1998 rescue of Long-Term Capital Management were isolated events. Today’s damage is so widespread that the stock market value of the U.S.’s largest banks and brokerages – even the ones that appear most sound – has plummeted as much as 80 per cent.

It isn’t so much fear that grips the denizens of Lower Manhattan today as self-doubt and mourning. The masters of the universe, as Tom Wolfe called them, believed themselves to be geniuses as they promoted and profited enormously from the record U.S. housing boom of the mid-decade. These financial engineers are now clueless about how many subprime, effectively junk mortgages, are on their balance sheets.

The bonus-fuelled exuberance of these stewards of the financial system has culminated in their exposure as incompetents – and they know it absolutely free credit report. If it keeps up like this much longer the grief counsellors will have to be called in. Wall Street firms already have shed some 85,000 employees, even before the weekend’s traumatic events. And with this hollowing out of the Street’s greatest institutions, New York is in danger of losing its status as the world’s financial capital to London, which already leads Gotham by several measures.

All this, of course, after Washington’s $200 billion bailout just last weekend of the gigantic mortgage lenders Fannie Mae and Freddie Mac and the Feds’ forced merger earlier this year of brokerage Bear Stearns Cos. into J.P. Morgan Chase Co. with a guarantee that Uncle Sam will backstop $29 billion worth of Bear’s irrevocably lost "assets."

But here’s the real, hopeful story.

There were no bank runs by retail or institutional clients. A consortium of global banks has pledged $70 billion to a bailout fund for banks in trouble.

And, most important, with Lehman the Feds drew a line in the sand by letting it fail, signalling that from here out the survivors who authored this crisis will have to find their own way out of it or, like Lehman and its wiped-out shareholders, pay the ultimate price for failure.

Flushing the system of dubious assets and failed managers and practices that have caused the biggest U.S. financial crisis since the Great Depression is a necessary curative. The end-game will see the emergence of fewer but stronger financial players, more scrupulously monitored by regulators. That’s why capitalism, as Americans conduct it, is called "creative destruction."

Source

50

Percentage of teens who expressed an interest in learning more about managing money

14

Percentage of teens who have taken a personal finance class in school

69

Percentage who say what they know about managing money they learned from their parents

36

Percentage who did not have this discussion last year

Source: Capital One Financial Corp.

Source

NEW YORK — Many large companies, especially those in the financial services, utilities and telecommunications industries, have cut their technology budgets this year because of the economic slowdown.

In a report that was due to be released today, Forrester Research Inc. found that 43 percent of large U.S. and European businesses it surveyed have cut their overall spending on technology products and services in 2008.

Some companies, meanwhile, have put discretionary spending on hold and others are planning to negotiate lower rates for information-technology services.

The research firm did not change its annual technology spending forecast, but it is reviewing it.

In its most recent forecast, in February, Forrester had said it expects tech spending to grow 2.8 percent this year. That marked a significant downward revision from a December 2007 forecast of 4.6 percent growth.

Today’s report, said Forrester vice president and principal analyst John McCarthy, is "really just a snapshot" of companies’ spending sentiments.

In general, corporate technology buyers were less optimistic than they were in the last such survey, in October 2007, just before the credit market tightened and the housing market "really fell apart," McCarthy said.

Forrester’s survey found that the effects of the economic downturn varied by geography and by sector. U.S. companies were more likely to cut their budgets than those in Europe, for example. And while companies in finance, utilities and telecom are tightening their belts considerably, those in media and entertainment are spending more paydayloans. McCarthy noted that such companies are going through a "fundamental upheaval" that requires they spend on technology regardless of how the economy is doing.

In the survey, taken in late May and early June of nearly 950 IT managers at companies in North America and Europe, nearly half of the U.S. respondents said they have already cut their IT spending budgets, compared with 38 percent of those in Canada and 28 percent of companies in Germany. And 70 percent of respondents said they expect to negotiate lower rates with IT service suppliers.

"Clearly, we are entering a period of very judicious IT spending," McCarthy said. But, he added, this isn’t the "outright slash and burn" of technology budgets seen in 2002.

Last time around, the fallout was from the bust in the tech sector itself, while this time it’s the financial, real estate and auto industries that are leading the downturn.

"We see continued growth in service spending overall," McCarthy said.

In August, research firm Gartner Inc. said it expects worldwide IT spending to exceed $3.4 trillion in 2008, an 8 percent increase from 2007.

But much of this growth, analysts said, was based on the decline of the U.S. dollar. Otherwise, Gartner forecast IT spending to grow about 4.5 percent.

Source

McDonald’s Corp (MCD.N: Quote, Profile, Research, Stock Buzz) posted July sales that beat many analysts’ forecasts as its key U.S. market posted its largest gain in five months with offers like $1 beverages appealing to cash-strapped consumers.

Shares of the world’s largest restaurant chain rose to an all-time high on Friday after it reported an overall 8 percent increase in sales at stores open at least 13 months.

The United States, where McDonald’s derives about 45 percent of its sales, has been under pressure as consumers cut back on spending due to rising food and fuel costs.

But $1 beverage offers and marketing focused on the company’s Big Mac hamburger sandwich helped lift same-store sales in the United States to a 6.7 percent increase, the largest since an 8.3 percent rise in February when sales were helped by an additional day for the leap year, the company said.

Analysts had been expecting a July same-store sales increase of 4.5 percent to 6.4 percent globally and 4 percent to 4.5 percent in the United States, according to three analysts’ research notes.

The company has also benefited as U.S easy payday loans. consumers trade down from casual dining chains when they do eat outside the home. Casual dining has been particularly hard hit by the U.S. slowdown, as evidenced by the bankruptcy of Bennigan’s and other chains.

“There probably is some continuing trading down,” John Owens, restaurant analyst at Morningstar, said. “I think that they are also gaining share in the fast-food space as well.”

Owens noted that McDonald’s also appeals to consumers because of the ubiquity of the chain. 

Read more

Malaysia's exports rose at the slowest pace in three months in June as shipments of electronics to the U.S. and European Union declined.

Overseas sales increased 18.4 percent from a year earlier to 58.2 billion ringgit ($17.8 billion), the Trade Ministry said in a statement in Kuala Lumpur today. That matched the median estimate of 14 economists in a Bloomberg News survey.

Slowing growth in the U.S., Asia's largest export market, is crimping demand for made-in-Malaysia Intel Corp. computer chips and other electronics. The pace of expansion in Malaysia's $151 billion economy may ease to about 5 percent this year from 6.3 percent in 2007, the central bank said last month.

“You've got an electronics slowdown,'' said Joseph Tan, a senior market strategist at Fortis Bank SA in Singapore. “Invariably there will be a slowdown from the growth that we had last year, because the U.S. is still a very major trading partner for Malaysia.''

Shipments to the U.S. fell 5.8 percent to 7.07 billion ringgit in June from a year earlier on lower exports of electrical and electronics products, the trade ministry said. Sales to the EU slipped 1.7 percent.

The U.S., No. 1 buyer of Malaysian products last year, has fallen behind Singapore in the first six months of 2008.

Economic growth may moderate in the next 12 months, Bank Negara Malaysia said last week. The central bank broke with its inflation-fighting Asian neighbors when it kept rates unchanged at 3.5 percent on July 25, saying its immediate concern was to “avoid a fundamental economic slowdown.'' Inflation jumped to a 26-year high of 7.7 percent in July.

Palm Oil

Overseas sales may weaken further in coming months as easing prices reduce the gains made by Malaysia's palm oil and energy exports so far this year low fees payday loan. Malaysia is Southeast Asia's second-largest oil and gas producer and the world's No. 2 palm oil seller.

“Signs are emerging that this commodity boom may soon come to an end as a slower world economy and sky-high prices damp global demand for commodities,'' said Azrul Azwar Ahmad Tajudin, an economist at Bank Islam Malaysia Bhd. in Kuala Lumpur.

Crude oil in New York has slipped more than 14 percent from a record $147.27 a barrel on July 11, and palm oil produced by Sime Darby Bhd. and other Malaysian planters closed below 3,000 ringgit a ton on July 29 for the first time since December.

Exports of palm oil jumped 82.8 percent in June from a year earlier, though they fell 4.2 percent from May. Sales of crude oil climbed 50.2 percent from a year ago, the slowest pace in six months. Shipments of liquefied natural gas rose 60.1 percent.

Sales of Unisem Bhd. semiconductors and other electrical and electronics goods rose 6.5 percent from a year earlier, the smallest gain in three months. Such goods accounted for 38.5 percent of total exports in June, down from 40.4 percent the previous month.

Imports expanded 12.1 percent in June, leaving a trade surplus of 12.97 billion ringgit.

Exports increased 15.5 percent in the first six months from a year earlier. Imports rose 8.3 percent in the same period, leaving a trade surplus of 67.59 billion ringgit.

Source

Moody’s Corp (MCO.N: Quote, Profile, Research, Stock Buzz), the parent of Moody’s Investors Service, said quarterly profit fell 48 percent, as the global credit crisis caused demand to shrink for mortgage bonds and collateralized debt obligations.

Though results topped forecasts, Moody’s shares gave up some early gains after Connecticut Attorney General Richard Blumenthal said he plans to sue Moody’s and its main rivals, McGraw-Hill Cos (MHP.N: Quote, Profile, Research, Stock Buzz) Standard & Poor’s, and Fimalac SA’s (LBCP.PA: Quote, Profile, Research, Stock Buzz) Fitch Ratings, for alleged “deceptive and unfair practices costing taxpayers millions of dollars.”

Second-quarter net income for New York-based Moody’s, whose largest investor is Warren Buffett’s Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research, Stock Buzz) (BRKb.N: Quote, Profile, Research, Stock Buzz), fell to $135.2 million, or 54 cents per share, from $261.9 million, or 95 cents, a year earlier.

Moody’s said profit excluding items was 51 cents per share cash till payday. On that basis, analysts on average expected 47 cents per share, according to Reuters Estimates. Revenue fell 25 percent to $487.6 million, topping the average $465.7 million forecast.

“They beat the numbers in pretty much all categories,” said Edward Atorino, an analyst at Benchmark Co in New York. “I think we’re bouncing along the bottom. The third quarter is starting pretty slow, but we’re at the bottom of a trough.”

Results were weakened by a 56 percent plunge in revenue from CDOs and other structured products, including such asset classes as residential mortgage-backed securities, commercial real estate finance and credit derivatives. In the United States alone, structured finance revenue fell 67 percent.

Expenses declined 10 percent as Moody’s cut jobs and reduced incentives and stock-based compensation.

CRITICISM 

Read more

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 quick payday. 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."

Source

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 free credit report instantly.

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.

Source

We noted some time ago that the annual national competitive rankings of the World Economic Forum (WEF), which placed Canada 13th in 2006, were in our view suspect since the survey is not a comparative exercise, but a survey of how business leaders in each country regard local business conditions.

We imagine, for instance, that many Alberta oil executives regard that jurisdiction as being less business-friendly after Premier Ed Stelmach’s increase in royalty rates, but that view, to be meaningful, has to be set against the much higher royalties – and outright expropriation – that is the norm in other oil-producing regions.

In a comparative study of 10 nations released last month, consulting firm KPMG International ranked Canada second only to Mexico in cost-effective places to do business. And last week, Britain’s Economist Intelligence Unit (EIU) put Canada fourth among the world’s most business-friendly nations, trailing Denmark, Finland and Singapore. Australia ranks sixth, the U.S. places 10th.

The WEF’s latest survey puts the U.S. first, 12 nations ahead of Canada, so it’s no surprise that it’s the WEF rankings that are cited by local policy mavens critical of real and perceived weaknesses in Canada’s competitive advantage. But again, all the WEF tells us is that American business leaders think more highly of U.S. business conditions than, say, Finns canvassed by the WEF think of theirs.

It would seem obvious the KPMG and EIU surveys are more accurate assessments of competitive assets and liabilities because they compare tax, labour, bureaucratic and other conditions among countries. But for local critics of Canadian business conditions, such surveys provide the wrong answer, so we expect the WEF survey will continue to be invoked by local critics, even though it isn’t what it’s purported to be.

Down in the depths

When the history of the current global credit crisis is written, it will be noted that relatively low-ranking traders and money managers were jeopardizing the future of immense financial institutions. While the damage from soured U.S. subprime mortgages is remarkably widespread, inflicting malaise worldwide and across investment agencies of all kinds, from banks to brokerages to hedge funds to government-managed pension funds, the three biggest losers have been Citigroup Inc., the U.S.’s largest bank, Merrill Lynch & Co., world’s No. 1 brokerage, and UBS AG, Europe’s largest bank.

In a chilling report released last week on what went wrong at UBS, analyst Peter Thorne of Swiss brokerage Helvea wrote: "The fixed income division [of UBS] was focused on revenue maximization regardless of risk with no limits on balance sheet usage, and bonuses were paid regardless of damage done to the UBS franchise long term."

In the last wave of catastrophic business mismanagement and criminality, we learned that chief financial officers at the likes of Enron Corp., WorldCom Inc. and Tyco International Inc. played a key role as enablers of sophisticated transactions that the CEOs of those firms endorsed but didn’t understand – except that the ploys were going to artificially inflate their stock holdings. So we learned that previously obscure chief financial officers bear watching.

In this new disaster – which got underway just three years after the massive stock-market collapse of 2000-02 – we learn that under-supervised junior staffers can bring near ruination to enormous enterprises such as UBS, which will write off an estimated $37.7 billion (U.S.) for 2007 and 2008 cash advance loan. And that senior management, never mind the board of directors, often hadn’t a clue this ultra-risky activity was underway.

By his own admission, Robert Rubin, the Clinton-era U.S. treasury secretary and later vice-chairman of Citigroup, was not aware of the term "collateralized debt obligation," one of the innovative new devices at the centre of the banking meltdown.

Worth repeating

This from Henry Kaufman, the U.S. economist who called the onset of the 18-year bull market that began in 1982: "A longtime advocate of tougher financial regulations that would have prevented the current global credit crisis, tells the UK Financial Times that banks and other financial institutions need to become "too good to fail," rather than "too big to fail." Those now whinging about the U.S. Federal Reserve Board bailout of insolvent Bear Stearns Cos. should re-direct their energies from bashing central bankers trying to save the system after its latest departure from prudence to alchemists at the world’s largest banks and brokerages whose imperfect innovations for turning fool’s gold into the real thing brought the system to its knees."

Where’s our share?

A U.S. federal court has awarded the heirs of Jerome Siegel, who created the Superman character in the 1930s with Toronto native Joseph Shuster, a claim on a share of the U.S. copyright to the superhero from current owner DC Comics, a unit of Walt Disney Co. Shuster, a one-time Toronto Daily Star paperboy who emigrated to Cleveland at age 10, modeled the skyline of the comic strip’s Metropolis on that of Toronto, and the original Clark Kent was a Toronto Daily Star employee. When DC took Superman into international distribution, the Daily Star became the Daily Planet.

Signs of the times

Women with MBAs are twice as likely as their male peers to separate or divorce, according to a study by professor Robin Fretwell Wilson of Washington & Lee University, to appear in a book to which Wilson contributed, Rethinking Business Management. Based on a study of a National Science Foundation survey of more than 100,000 professionals, Wilson also reports that women professionals abstain from marriage at twice and sometimes almost three times the rate of men, depending on the profession … The lengthy Hollywood writers’ strike enabled writer/actress Tina Fey of "30 Rock" and her daughter to enjoy "the maternity leave I never got. She is now able to pick me out of a line-up of four or five women."

This date in history

Born this date in 1926 in Monroeville, Ala., she gained renown for her sole novel, To Kill A Mockingbird.

(Answer, reverse: Eel Reprah.)

Quotable tycoon

"An overburdened, over-stretched executive is the best executive, because he or she doesn’t have the time to meddle, to deal in trivia, to bother people."

–Jack Welch, CEO of General Electric Co. in the 1980s and 1990s

Source

Health products maker Johnson & Johnson reported a 40 percent jump Tuesday in its first-quarter profit, due to higher sales of consumer products, favorable exchange rates and a research charge a year ago.

The New Brunswick, N.J.-based maker of contraceptives, medical devices, baby care items and prescription drugs reported net income of $3.6 billion, or $1.26 per share, for the first three months of the year, up from $2.57 billion, or 88 cents a share, a year ago.

Revenue rose 7.7 percent to $16.19 billion from $15.04 billion a year earlier fast cash now.

Source