Financial life in a big town

News and information publisher Thomson Reuters Corp reported slower revenue growth in its key Markets division as the U.S. credit crisis forced layoffs and budget cuts at global investment banks, sending its shares down 4.5 percent.

The company affirmed its 2008 outlook — citing resilience in the Professional division that sells databases and tools to accountants, lawyers, tax, health and other professionals — but investors worried that the real test would come when customers set their 2009 budgets.

Second-quarter pro forma revenue rose 11 percent from a year earlier to $3.4 billion, compared with the first quarter’s 12 percent increase to $3.3 billion.

The pro forma results assume Thomson and Reuters had been operating as one company in the second quarter of last year.

Markets division revenue rose 12 percent to $2.1 billion, but the closely watched organic growth rate — which excludes the impact of currency exchange fluctuations and acquisitions — was 7 percent, slower than the first quarter’s 9 percent.

Analysts had been looking for organic growth of 7 percent to 8 percent in the Markets division as the U.S. subprime mortgage crisis and credit crunch have led to thousands of layoffs among firms that are Thomson Reuters’ clients.

“The results were not great. The market was pricing in half-decent figures and that’s what it got,” said Manoj Ladwa, a derivatives trader at TradIndex.

Thomson Corp of Canada bought London-based Reuters Group Plc in April this year for about $16 billion in cash and stock, aiming to expand its market beyond North America. For Reuters, the deal reduced its exposure to financial markets. 

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Personal income rose slightly in June after surging the previous month on the first wave of economic stimulus checks, the government reported Monday.

The Commerce Department said individual income increased by 0.1% in June after a revised 1.8% jump in May. Economists polled by Briefing.com were expecting a 0.1% decrease in June.

Personal spending in June increased by 0.6%, which was more than the 0.5% increase that economists polled expected.

However, the spending jump was driven by inflation. Individual spending, when adjusted for inflation, actually fell by 0.2% following a 0.3% increase in May, according to the report.

"Inflation is taking a pretty big bite out of the actual dollars," said Adam York, economic analyst at Wachovia. "It means that we are spending more dollars on gas, food, and things that are increasing in cost."

Another measure in the report that tracks prices that consumers pay on goods and services, excluding food and energy, rose by 0.3% over the previous month.

In addition, the core personal consumption expenditures index - a year-over-year inflation gauge that excludes food and energy - rose to 2.3% from 2.0% a year earlier. Core PCE was 2.2% in March, April and May. The Federal Reserve is widely believed to prefer that core PCE stay in a range of 1% to 2%.

While personal income rose in June, disposable income fell by 1.9%, after spiking up by 5.7% in May. And in inflation adjusted dollars disposable income decreased by 2.6% after jumping 5.2% in May.

Disposable income is what consumers have left over after they pay taxes.

The drop-off in disposable income tracks a monthly decline in the amount of economic aid distributed by the federal government.

The Treasury Department sent out $48.1 billion in economic stimulus payments in May and $27.9 billion in June.

"The pattern of changes in income reflect the pattern of payments associated with the Economic Stimulus Act of 2008," according to the report.

Excluding stimulus rebate payments, disposable personal income actually increased by 0.3% in June after increasing by 0.4% in May.

"There is no way that the underlying trend increase could make up for the decline in the tax rebate payments," said York. 

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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. 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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An emergency move by U.S. securities regulators this week aimed at curbing manipulative short-selling in some major financial firms should be expanded to all publicly traded banks, or it could erode confidence in the banking industry, a top trade group said.

A letter from the American Bankers Association to the Securities and Exchange Commission this week stressed that banks could be vulnerable as they are suffering from the financial turmoil stemming from the downturn in the U.S housing market.

“The emergency order could further exacerbate a loss of confidence in the safety and soundness of this country’s banking industry,” ABA President Ed Yingling said in a Thursday letter to the SEC.

“As the commission is aware, it would be an understatement to say that short interest in financial services companies has greatly increased over the year,” Yingling said.

On Friday the SEC, the U.S. markets watchdog, amended its action from earlier in the week but limited the protection to 19 firms including U.S. housing finance giants Fannie Mae and Freddie Mac whose shares plunged on concerns they were undercapitalized.

The rule also applies to the stocks of 17 Wall Street firms, primary dealers that have access to the Federal Reserve’s discount window, such as Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz).

Short selling is a legitimate strategy where the investor arranges to borrow shares they consider overvalued and sell them in hopes of profiting when the price drops. A naked short occurs when an investor sells stock that has not yet been borrowed.

Wall Street, which was thrown off guard when the SEC announced the emergency rule on Tuesday, and U.S. stock exchanges applauded the rule modifications and guidance. But the ABA wanted the SEC protection expanded to all banks and their holding companies that are publicly traded. 

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WASHINGTON–Worker productivity increased at a faster pace in the first three months of this year than previously estimated, while wage pressures moderated.

The Labor Department reported Wednesday that productivity rose at an annual rate of 2.6 per cent in the January-March period, faster than the government's initial estimate of 2.2 per cent made a month ago.

Wage pressures, meanwhile, moderated from the final three months of last year with unit labor costs rising at an annual rate of 2.2 per cent in the first quarter. That was a marked slowdown from a 4.7 per cent surge in labor costs in the final three months of last year.

While rising wages and benefits are good for employees, those increases can lead to higher inflation if businesses are forced to boost the cost of their products to cover the higher payroll costs. However, if productivity is increasing, it allows businesses to finance higher wages out of the increased output.

The Federal Reserve, always on guard about the threat of inflation, closely monitors developments in productivity since wage pressures are often the main way inflation gets out of control.

The 2.6 per cent rate of growth in productivity was a significant improvement from a 1.8 per cent increase in the final four months of last year. The 2.2 per cent rise in labor costs, unchanged from the initial estimate a month ago, marked a sharp slowdown from a 4.7 per cent rate of growth in labor costs in the fourth quarter of last year.

Those developments should be welcomed by the Fed, which has started to worry more about inflation pressures in the face of a relentless surge in energy and food costs. The Fed cut rates for a seventh time on April 30, but the reduction was a smaller quarter-point move. The central bank indicated the rate cuts could be drawing to a close as the attention shifted from worrying about keeping the country out of a steep recession to concerns about inflation.

Fed Chairman Ben Bernanke discussed his inflation concerns in a speech on Tuesday, worrying that a rapid rise in prices, if sustained, "might lead the public to expect higher long-term inflation rates, an expectation that ultimately could become self-confirming.''

Bernanke's remarks were seen as a strong signal that the Fed is through cutting interest rates and may start raising rates later this year as a way to battle inflation pressures.

The Fed wants to make sure that soaring energy costs don't produce higher wage pressures that could trigger a disastrous wage-price spiral like the country experienced in the 1970s.

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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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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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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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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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