Financial life in a big town

MONTREAL–The Ontario Securities Commission moved Friday to restrict the short sale of 13 financial stocks that are also listed in the United States after regulators in that country and the United Kingdom suspended short selling of financial stocks.

"This order is being issued as a precautionary measure to prevent regulatory arbitrage with respect to short selling in Ontario of the securities of the financial sector issues and to promote fair and orderly markets in Ontario," the provincial regulator said.

The restriction, effective immediately, expires Oct. 3.

The stocks affected included the Big 5 Canadian banks (TSX:BMO, TSX:BNS, TSX:CM, TSX:RY, TSX:TD), Manulife Financial Corp. (TSX: MFC) and Sun Life Financial Inc. (TSX: SLF).

Ontario Finance Minister Dwight Duncan said the ban was consistent with recent steps taken in the United States and U.K.

"We are actively monitoring market developments and working with the OSC as it continues to work closely with other securities and financial market regulators in Canada and other countries as we go forward," Duncan said in a statement.

Short-selling is a form of trading that makes money for an investor when a stock's price goes down, rather than up. Market observers say it is not as widespread in Canada as on Wall Street.

The Canadian Securities Administrators said it supported the decision by the Ontario regulator.

"Other jurisdictions in the CSA will be taking similar action today, or in the coming days," Jean St-Gelais, chairman of the CSA and head of Quebec's securities regulator, said late Friday.

Earlier in the day, St-Gelais noted that some of short-selling techniques that have been occurring in the United States are banned in Canada.

"We are following this like everyone around the world. If we can have a united approach, so much the better," St-Gelais told reporters, adding Canadian regulators are "in the loop" of discussion by global regulators.

The U.S. Securities and Exchange Commission took the unusual move to temporarily ban short-selling of 799 financial stocks. The rule took effect immediately and extends through Oct. 2.

Short-selling is a complicated form of trading that sometimes unnerves even seasoned market professionals because of the potential for losses is potentially huge, while other money managers consider it a routine manoeuvre.

In essence, the trader borrows shares and then quickly sells them, knowing that the shares will have to be repurchased and returned to the lender.

The only way short sellers make money is if the stock price falls significantly before the shares must be repurchased and returned 1500 payday loans. The strategy can backfire and create losses for the trader if stock price goes up.

It is a legitimate method of trading, but there have been allegations of abuse, such as spreading false rumours or manipulating debt derivatives to drag down share prices artificially.

Christopher Cox, chairman of the U.S. Securities and Exchange Commission, said Friday that the SEC is "committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets."

"The emergency order temporarily banning short-selling of financial stocks will restore equilibrium to markets," he said.

The move appeared to work, at least in the short term. North American stock markets rebounded strongly Friday, essentially reversing the losses experience throughout the week.

Chyanne Fyckes, chief investment manager at Stone Asset Management, noted, the situation in Canada is complicated by the presence of 13 provincial and territorial securities commissions – not one national regulator like the Securities and Exchange Commission in the United States.

"I think anybody at this point in time would tell you that the fact that we don't have a single securities regulator is a huge impediment," she said.

"It's completely nonsensical and it makes life very difficult."

Tom Caldwell, chairman of Toronto-based money manager Caldwell Securities Ltd., welcomed the SEC ban, but noted that Canadian markets have a so-called uptick rule which helps control short-selling.

The rule, introduced in the U.S. Securities Exchange Act of 1934 after the stock market crash but eliminated last year, aimed to prevent short-sellers from adding to downward price momentum.

The uptick rule prevents short-selling when the last bid is lower than the previous one, but the SEC scrapped it because it can be circumvented by new financial instruments.

-With files from Canadian Press reporter Kristine Owram in Toronto

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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.

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WASHINGTON–U.S. wholesale inflation plunged in August by the largest amount in nearly two years, reflecting a steep drop in energy prices. The Labor Department reported yesterday that wholesale prices fell 0.9 per cent last month, nearly double the 0.5 per cent decline that economists had been expecting.

The price moderation followed three months in which wholesale costs had shot up at levels exceeding 1 per cent a month as energy costs had surged.

Core inflation, which excludes energy and food, was also well-behaved, edging up just 0.2 per cent in August, right in line with expectations, and well below the 0.7 per cent spike of the previous month.

The sharp retreat in wholesale prices will be welcome news at the Federal Reserve, which had been worried that it might have to start raising interest rates if inflation pressures did not start to moderate.

Fed officials are expected to keep rates unchanged when they meet next Tuesday.

With inflation retreating, they will likely hold rates steady for the rest of this year.

If the Fed had been forced to start raising interest rates it would have presented another problem for an economy facing a host of headwinds from rising unemployment, a prolonged housing recession, a severe credit crunch and a troubled financial system.

The 0.9 per cent drop in wholesale prices, the largest one-month decline since October 2006, could show up in lower prices for shoppers eventually first cash advance.

Even with the August decline, wholesale prices over the past 12 months are up by 9.6 per cent.

For August, gasoline prices at the wholesale level fell by 3.5 per cent, the price of natural gas fell by 5 per cent, home heating oil costs were down 13.6 per cent and the cost of liquefied petroleum gas fell by 19.5 per cent.

Food costs edged up 0.3 per cent in August, matching the July gain. The 0.2 per cent rise in prices excluding food and energy left core inflation rising by 3.6 per cent over the past 12 months, the highest since a 3.7 per cent increase for the 12 months ending in May.

Associated Press

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The Toronto stock market slipped more than 200 points after the opening bell Thursday as fears of continued credit problems in the United States multiplied, rather than abated, sending every sector lower.

The drop followed investor unease about U.S. investment bank Lehman Brothers' recovery plan and speculation about whether oil prices could move below $100 a barrel before the end of the session.

Toronto's S&P/TSX composite index fell 233.58 points to 12,546.99 after gaining 350.39 points on Wednesday.

The Canadian dollar was at 93.13 cents US, down 0.35 of a cent after Statistics Canada said that the country's trade surplus with the rest of the world fell to $4.9 billion in July from a revised $5.6 billion in June.

Exports continued to rise, up 2.2 per cent to $44.3 billion in July with volume up 1.7 per cent and prices half a per cent.

The energy sector dropped 1.8 per cent as oil prices slipped lower despite hurricane Ike's march toward oil platforms in the Gulf of Mexico.

The light, sweet crude September contract slid six cents to US$102.52 a barrel on the Nymex.

Concerns have centred around whether hurricane Ike could harm refinery operations in the Gulf of Mexico, falling U.S. crude inventories and an OPEC decision to cut production by 500,000 barrels a day.

Ike, coming on the heels of last week's hurricane Gustav, was expected to blow ashore early Saturday somewhere between Corpus Christi and Houston, with some forecasts saying it could become a Category 4 storm.

On Wall Street, the Dow Jones industrial average fell 146.80 points to 11,122.12.

Investors latest concern about the financial sector follows Lehman Brothers Holdings Inc.'s announcement Wednesday that it plans to sell its investment management unit and spin off its commercial real estate assets guaranteed cash advance. The company is seeking to raise cash after making bad bets on holdings tied to real estate.

The Nasdaq composite index lost 35.30 points to 2,193.40, while the S&P 500 index slid 18.11 at 1,213.93.

The U.S. Labour Department reported that jobless benefit applications fell less than expected to 445,000, down by 6,000 from the prior week.

In earnings, Vancouver-based sportswear retailer Lululemon Athletica Inc. (TSX: LLL) posted a profit of just over US$11 million in the second quarter on higher revenues.

But the revenue figure, which was 48 per cent higher than a year ago, fell below analyst expectations. Shares in the company were down four cents to $19.19.

Canadian companies expected to report later Thursday include Transcontinental Inc. (TSX: TCL.A) and Sobeys supermarket chain owner Empire Company Ltd. (TSX: EMP.A).

Overseas, Britain's FTSE 100 fell 1.66 per cent, Germany's DAX index fell 1.72 per cent, and France's CAC-40 lost 1.52 per cent.

Asian markets fell sharply Thursday as the troubles at Lehman Brothers fanned fears of more credit-market losses and drove down financial company shares across the region.

Japan's key stock index sank to its lowest in nearly six months as investors dumped banks and brokerages. The Nikkei 225 closed down 1.98 per cent to 12,102.50 – its lowest closing level since March 18.

In Hong Kong, the Hang Seng Index shed 3.1 per cent to 19,388.72, its worst finish since March 20 last year.

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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.

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Apple Inc (AAPL.O: Quote, Profile, Research, Stock Buzz) shares fell as much as 5 percent on Monday ahead of a highly anticipated event on Tuesday when the maker of the Mac, iPod and iPhone is expected to roll out a new iPod Nano and may give an update on iPhone sales.

Stock in the high-flying company often sells off ahead of its major product announcements, said Shannon Cross, an analyst at Cross Research, adding that concerns about the strength of overall consumer spending also weighed on Apple shares.

The Cupertino, California-based company e-mailed reporters and analysts last week with an invitation to a San Francisco event entitled “Let’s Rock,” which bore an image of an iPod- wearing man jumping in the air, with the words “playing soon.”

Analysts said ahead of the event that they expected more incremental updates to the iPod line. Cross said some may have been expecting new versions of their laptop line, but those may not be announced on Tuesday.

“Right now Apple stock is kind of caught between concerns about strength in the consumer market and questions about how quickly they will be refreshing products and what they will announce tomorrow,” Cross said instant payday advance. “It is kind of a buy on the rumor sell on the news kind of stock. Apple often sells off ahead of their announcements.”

Analyst Shaw Wu of American Technology Research said in a note to clients: “While there is always room for surprise, it seems this event may be somewhat underwhelming vs previous expectations and events.”

He said his checks in the industry suggested the event will be focused mainly on the market-leading iPod, which in a sense was Apple’s coming out as a consumer electronics company, known for more than just its iconic Mac computers.

“This may be viewed as disappointing as some were hoping to see new Macs,” Shaw wrote. 

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Euro area inflation fell in August from a record high, offering some relief as economic confidence plunged to the lowest level in five years, the European Commission said Friday.

Inflation dropped to 3.8 percent in August, down from a record high of 4 percent in June and July when prices for fuel and food rose sharply from a year ago, the EU statistics agency Eurostat said.

But businesses are gloomy about prospects ahead for the 15 nations that share the euro. Economic confidence fell again in August to 88.8 with industry, the construction sector and retailers more worried than they were last month.

The European economy is slowing as prices at the gas pump and grocery store soar and amid tight borrowing conditions triggered by the global credit crisis as well as a slowdown in major trading partners, Britain and the United States.

The EU figures add pressure on the European Central Bank to hold off an interest rate increase that would make borrowing more expensive and risk hurting a fragile economy payday loans lenders. It raised rates from 4 percent to 4.25 percent in June to try to contain rocketing inflation. 

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Lehman Brothers Holdings Inc. shares bounced from its lows Thursday after an analyst upgraded his rating on the investment bank to "Buy," and believes it now has become a "hostile takeover candidate."

Ladenburg Thalmann analyst Richard X. Bove believes that Lehman Brothers (LEH, Fortune 500) management values the company at a premium, and would be willing to sell at the right price. He believes that a "deep pocket buyer" could emerge to buy the nation’s fourth-biggest investment bank.

"So the market is at a stand-off," Bove said in a note to clients. "Investors are unwilling to accept any positive view of the company; management is unwilling to sell out at a deeply distressed value. The stage is set for a hostile bid to take over the whole company."

Immediately after the note was published, Lehman Brothers shares - down about 6% earlier in the session - bounced higher. Shares of the company were down 9 cents at $13.64 in afternoon trading. The stock has traded between $12.02 and $67.73 over the past year.

Before the opening bell in New York, shares were initially under pressure after another analyst increased his third-quarter loss estimate and slashed his price target for the investment bank, projecting yet another tough quarter of write-downs.

In a note to clients issued Wednesday night, Citi Investment Research analyst Prashant A. Bhatia also said he saw a "lower probability" that the New York-based investment firm would sell its Neuberger Berman business or raise capital in the near term.

Several Wall Street analysts have been speculating about a possible sale of all or a portion of Lehman’s asset-management business.

"Even under the potentially more stringent rating agency guidelines related to the amount of preferred securities in the capital mix, we anticipate that Lehman can absorb over $3 billion of after-tax losses without adding more common equity," Bhatia wrote in a research note.

He lowered his third-quarter estimates on Lehman, predicting a "difficult operating environment, characterized by lower client-related trading volumes and losses on hard-to-sell assets."

Bhatia widened his projection of a quarterly loss to $3.25 per share from a previous forecast of a loss of 41 cents per share free credit reports. Wall Street analysts expect a profit of 12 cents per share, according to a poll by Thomson Reuters.

The analyst also axed his price target to $35 from $50. Nevertheless, he rates Lehman Brothers as a "Buy."

Bhatia said he expects Lehman to take fresh asset related write-downs of $2.9 billion during the most recent quarter.

"Based on further deterioration in several indices, we expect further write-downs, primarily related to mortgage assets," he wrote.

Investment banks have been struggling with mounting losses and write-downs on bonds and debt backed by mortgages. As mortgages increasingly have defaulted over the past year, the value of bonds backed by the troubled loans has declined.

Banks have been forced to cut the value of their holdings or sell their investment at losses. 

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Lehman Brothers Holdings Inc is expected to follow in Merrill Lynch & Co Inc’s footsteps and sell a lot of risky assets at a loss. But shedding the assets may create another headache for Lehman — the need to raise large amounts of new capital, including common equity.

Any capital raise would be painful for Lehman and its shareholders, given that the company just raised $6 billion in June and trades at a significant discount to its book value, or the net accounting value of its assets.

But Lehman, the fourth-largest U.S. investment bank, may have little choice as it wrestles with roughly $65 billion in mortgage-related assets, particularly after Merrill Lynch agreed to shed $30.6 billion in toxic assets at a fire-sale price of 22 cents in the dollar, analysts said.

“Lehman’s caught between a rock and a hard place. They’re getting more and more pressure from regulators and investors to add reserves or mark these things down,” said David Hendler, an analyst at independent research firm CreditSights in New York.

“In normal times, they could wait it out, but the market wants it done now,” Hendler added.

The New York Post reported on Friday that Lehman was talking to potential buyers about selling $30 billion in assets payday loans. CNBC television reported Friday that Lehman was in talks with BlackRock Inc to sell mortgage securities and other assets. Both Lehman and BlackRock declined to comment.

Lehman’s chief financial officer told Merrill analyst Guy Moszkowski recently that the investment bank was willing to sell assets at a loss if the deal materially reduced risk, the analyst said in a report.

Lehman had roughly $65 billion in mortgage and real estate-related assets on its balance sheet as of May 31. 

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If this weekend’s news about Fannie Mae and Freddie Mac and Friday’s IndyMac failure weren’t scary enough, now Wall Street will have to contend with what is likely to be dismal quarterly results from many top financial firms.

Merrill Lynch (MER, Fortune 500) and Citigroup (C, Fortune 500) are each expected to report another quarterly loss. Merrill’s results are due out Thursday afternoon while Citigroup will report its results Friday morning.

Analysts expect profits at other big banks, such as Wells Fargo (WFC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), to fall sharply from a year ago. Wells Fargo’s second-quarter results are due out Wednesday morning and JPMorgan Chase will report its numbers Thursday.

The bad news is likely to be repeated next week as well. Profits for Bank of America (BAC, Fortune 500), due out on July 21, are expected to be less than half of what they were just a year ago. And Wachovia (WB, Fortune 500), which will report its results on July 22, warned last week that it expected to lose anywhere between $2.6 billion and $2.8 billion during the second quarter.

"It is difficult in this environment for anybody to be too optimistic," said Tom Kersting, financial services analyst at Edward Jones.

The familiar, yet nagging, problem of credit remains the biggest problem for most banks.

Analysts and portfolio managers that keep close tabs on the banking sector expect most financial institutions to report further deterioration across their mortgage portfolios.

As a result, banks will most likely have to set aside more cash to compensate for bad loans. Washington Mutual (WM, Fortune 500) and Bank of America did that in the first quarter.

There’s also the grim reality of writedowns. Several major financial institutions will once again have to go through the painful process of witting down the value of their assets, particularly those related to mortgage-backed securities, leveraged loan portfolios and bond insurers Ambac and MBIA.

Earlier this month, Oppenheimer & Co. analyst Meredith Whitney warned that she expects Merrill Lynch to take $5.8 billion in writedowns and Citigroup to mark down its balance sheet by $12.2 billion.

Analysts will also be paying particularly close attention to banks’ credit card and auto loan portfolios for any signs of rising delinquencies.

However, financial institutions tend to report an improvement in credit conditions during the second quarter, helped by tax refunds, Citigroup analyst Keith Horowitz pointed out in a note published Friday.

And given this year’s economic stimulus package, that could bode well for banks’ loan portfolios as consumers try to keep from falling behind on payments. Horowitz wrote that there could be a "reprieve from the rapid pace of delinquency."

Analysts say that banks may also see some benefit from the Federal Reserve’s drastic rate-cutting campaign since last September 500 fast cash. Lower interest rates have driven down the short-term borrowing costs for banks. That should boost their net interest margins, or the profits they make from taking in deposits and lending them back out.

During the first quarter, the country’s nearly 8,500 domestic insured depository institutions reported a 9.6% jump in net interest income from a year ago, to nearly $95 billion, according to the Federal Deposit Insurance Corp.’s most recent quarterly banking report.

But what little in the way of good news banks have to report may be overshadowed by some major announcements about raising more capital.

Several banks raised cash earlier this year by selling stakes to private-equity firms and sovereign wealth funds. Analysts think there could be similar announcements during earnings reports….and maybe even some asset sales.

There has been plenty of speculation, for example, that Merrill Lynch will unveil a major capital raising initiative, including plans to sell all, or part, of its stakes in asset manager BlackRock or the media outlet Bloomberg LP.

Facing pressure from regulators to shore up their books by raising capital, other financial institutions could follow suit, said Chris Hagedorn, a portfolio manager at Fifth Third Asset Management, which owns shares of Bank of America, JPMorgan and Wells Fargo among other banks.

"I think it is a distinct possibility depending on how big the writedowns are and how much deterioration companies are seeing in their capital ratios," he said.

Finally, banks face a lot of uncertainty about the fates of Fannie Mae and Freddie Mac.

On the one hand, the proposal from the Treasury Department and the Federal Reserve over the weekend to prop up the two mortgage finance giants should be good news.

The two government-sponsored enterprises provide a crucial source of funding for banks and other lenders by purchasing mortgages they originate.

But at the same time, banks and other financial institutions own more than $1 trillion of the mortgage-backed securities that Fannie and Freddie sell to investors all over the world.

Were Fannie and Freddie to enter into default, banks would then find themselves on the hook for those home loans they first originated and would most likely have to raise billion of dollars in additional capital.

"That would probably put more pressure on many of the banks," said Frank Barkocy, director of research with Mendon Capital Advisors, a firm that invests primarily in financial stocks. "You have to have the capital to backstop those loans." 

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