Wednesday, December 31, 2008
WASHINGTON -- The Treasury Department is considering a plan to revitalize the U.S. home market that would push down interest rates for loans to purchase a home, according to people familiar with the matter.
The plan, which is in the development stage, would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5%, more than a full point lower than prevailing rates for standard 30-year fixed-rate mortgages.
Government officials are under pressure to address falling home prices and mounting foreclosures, which underpin the financial crisis. The Treasury has struggled for months to come up with a plan that would ease the strains on borrowers without appearing to bail out homeowners and lenders.
The plan remains in discussion and may not be made final before the Bush administration's term ends in January. President-elect Barack Obama has said repeatedly that his administration would do more than the current one to help struggling homeowners but he has not offered specifics.
Treasury views this plan as potentially halting the slide in home prices by enabling borrowers to afford bigger loans, thus increasing demand and pushing up home values. The lower interest rates would be available only to borrowers who are buying a home, not those refinancing a mortgage.
Borrowers would have to qualify for a mortgage guaranteed by Fannie, Freddie or the Federal Housing Administration. Those guarantees apply to loans where borrowers can document their income and afford their monthly payments, steering the government away from backing loans considered risky.
The Treasury and the Federal Reserve are already working to bring mortgage rates down through a program announced last week in which the Fed will buy up to $600 billion of debt issued or backed by Fannie and Freddie, along with Ginnie Mae and the Federal Home Loan Banks. That move helped push down rates on 30-year mortgages, and applications to refinance have jumped, the Mortgage Bankers Association said Wednesday. Using Lawn Care is an effective way to increase the chances your home will be sold.
Benefit To Stocks
In this climate, stocks of banks and home builders drew more investor attention Wednesday, helping the Dow Jones Industrial Average rise 172.60 points, or 2.05%, to 8591.69, despite continued bleak economic news in the Fed's "beige book" survey of regional conditions.
The plan the Treasury is considering would encourage banks to issue new mortgages at lower rates by offering to purchase securities underpinning the loans at a price equivalent to the 4.5% rate.
The Treasury would fund the purchases by issuing Treasury debt at 3%, suggesting the government could make a profit on the difference.
The average rate on 30-year fixed-rate mortgages conforming to Fannie's and Freddie's standards was about 5.75% Wednesday, according to HSH Associates, a financial publisher. That's up from about 5.5% Monday but down from more than 6% before last week's announcement.
The plan is very similar to an idea floated in October by R. Glenn Hubbard and Christopher Mayer, academics at Columbia University's Business School. "I think a program to substantially bring down rates for homebuyers would be an incredibly valuable program, and I think it captures a real part of solving what has been an incredibly challenging dislocation in the credit markets," Mr. Mayer said in an interview. He estimated the idea under consideration could quickly help 1.5 million to 2.5 million people buy homes, giving a major boost to the housing market and broader economy.
The plan also could be good news for banks hit hard by the housing slowdown. In addition to having the government play the role of guaranteed buyer, financial institutions could pocket fees for making loans to buyers able to afford homes at the lower rates. That, in turn, could boost the economy and improve the weak outlook for other consumer loans, such as credit cards, that also are weighing heavily on the banking industry's profitability.
Normally, the rates lenders charge consumers, including home buyers, are determined by the secondary market, in which investors buy mortgages or mortgage-backed securities. But Treasury Secretary Henry Paulson views lowering mortgage rates as key to fixing the housing crisis; hence the mortgage-security-buying program announced last week.
"The most important thing we can do to mitigate foreclosures and progress through the housing correction," Mr. Paulson said in a speech Monday, "is to reduce the cost of mortgage finance, so more families can afford to buy a home and so homeowners can refinance into more affordable mortgages."
Fannie, Freddie, their regulator and the Department of Housing and Urban Development -- which oversees the FHA -- all declined to comment. "The Secretary has said repeatedly that we are looking at a number of options to help homeowners," said Treasury Spokeswoman Jennifer Zuccarelli.
The Refinancing Picture
On the refinancing front, the Mortgage Bankers Association said its index of refinance applications had tripled from the previous week, the largest increase since it began tracking such data in 1990. Applications to buy homes, which tend to be less sensitive to interest-rate movements, also increased, by a smaller amount.
Application volume remains lower than it was as recently as March. Last week's numbers are adjusted for a shortened holiday week, which can make comparisons more difficult.
The Treasury plan is similar to ideas previously floated by the National Association of Realtors and the lobby group for home builders, but has skeptics. "I don't think it's the answer to the foreclosure problem because that problem is a combination of negative equity with unemployment," said Mark Zandi, chief economist of Moody's Economy.com.
Mr. Paulson has been wrestling for months with ways to stem foreclosures. The Bush administration has supported mostly voluntary efforts to get the mortgage industry to help borrowers in danger of losing their homes and has resisted calls to use taxpayer money to bail out homeowners. Those voluntary efforts have had only a limited impact as home prices continue to fall and foreclosures to rise.
The administration has been split about its approach, with Federal Deposit Insurance Corp. Chairman Sheila Bair floating a proposal to use $24 billion from the government's $700 billion financial rescue fund to provide a federal guarantee on roughly two million modified mortgages.
Her plan was a hit with Democrats and some Republicans on Capitol Hill but fell flat with the White House, where some speculated the FDIC plan could cost $70 billion to $80 billion. Mr. Paulson has expressed reservations about the plan on the ground that it would spend taxpayer money, instead of investing it, and that it could encourage banks to foreclose and borrowers to halt payments. Treasury staff have been working on a plan to improve Ms. Bair's model, but Mr. Paulson has so far resisted implementing it over concerns that it costs too much and might not be all that effective.
Resolving the crisis is likely to fall to Mr. Obama. He reiterated his position on Wednesday, saying, "We've got to start helping homeowners in a serious way, prevent foreclosures." Some Treasury officials are frustrated that the Obama team has not provided more specifics about what it would like the Treasury to do to help homeowners.
A deadline for GMAC LLC investors to swap bonds for lesser-valued debt expired Friday, and Wall Street awaited word of what would happen next.
The $38 billion debt-restructuring proposal is part of the lender's efforts to become a bank-holding company, which will allow it access to federal funds amid tight credit markets.
GMAC has been weakened by the billions of dollars it pumped into its mortgage unit, Residential Capital, which was a large subprime lender.
GMAC, which is co-owned by General Motors Corp. and an investor group led by private-equity firm Cerberus Capital Management LP, has been locked in negotiations with bondholders for weeks. Before Friday, GMAC already had extended the deadline for the debt exchange two times and sweetened the terms of the offer.
"There's some posturing going on here. Both bondholders and the company are playing hardball," said Mark Wasden, an analyst at Moody's Investors Service. GMAC and Cerberus representatives declined to comment. General Motors spokeswomen didn't return calls for comment.
Hope persisted that the company would improve the deal for bondholders. Law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP represents a committee of GMAC bondholders. Firm lawyer Andrew Rosenberg didn't return phone calls seeking comment.
Bondholders have resisted the proposed exchange, with less than a third of the number necessary agreeing to the plan as of Wednesday; some bondholders have said the plan doesn't ask enough sacrifice from GMAC's owners. They want equity holders to put in their share of new capital.
Investors are being offered combinations of new GMAC notes, GMAC preferred stock and cash in a deal that will cut GMAC and its mortgage unit's debt levels. The lower debt level will free up capital, allowing GMAC to satisfy conditions attached to its quest to become a bank-holding company.
As of Wednesday, GMAC had received 22% or less of existing debt securities, far below the 75% it needs for the debt exchange to go through. At the time, investors said they were reluctant to participate in the debt exchange because they felt that they were being asked to shoulder too much of the burden.
The lender's most actively traded debt -- its 5.85% bonds maturing in 2009 -- were up slightly late Friday afternoon at 81 cents on the dollar, according to bond-trading platform MarketAxess.
The success of the proposed debt exchange is essential to GMAC, which may face bankruptcy protection if it isn't completed, and it also would benefit GM. The auto maker suffered a setback Thursday after an auto-industry bailout plan collapsed in the Senate.
Cerberus, which is also the parent of Chrysler LLC, owns a 51% stake in GMAC, purchased in 2006 for about $14 billion. GM owns the rest.
GM has warned that it could run out of cash within weeks without government aid. The company burned through $6.9 billion in cash in the third quarter. Even if GM gets bailout aid, financing for customers and dealers to keep the business running is critical.
Troubles at GMAC have put the auto maker at a disadvantage. GM said last month that its 45% sales skid in October was fueled by GMAC's restricted lending, which cost GM anywhere from 45,000 to 60,000 in sales in the month. More capital will mean GMAC will be able to continue lending to GM dealerships, which borrow money to put new cars in their lots.
—Kate Haywood contributed to this article.
Treasury Yields Hit Lows on Recession Fears
Treasury yields fell to lows as fears about the length and depth of the U.S. recession persisted, though the rally in prices was tempered by renewed hopes for an auto-industry rescue. Late in New York Friday, the 10-year note was up 17/32, or $5.3125 per $1,000 face value, at 110 3/32, to yield 2.590%, from 2.648% Thursday. The 30-year bond was up 19/32, or $5.9375 per $1,000 face value, at 127 24/32, to yield 3.062%. The two-year note yielded 0.785%. The 10-year yield fell as low as 2.47%, a 45-year low, in Friday trading while the two-year yield had reached 0.66%. Ecuador's decision to withhold an interest payment due on the country's 2012 global bonds also boosted Treasurys as investors sought out a haven. Deborah Lynn Blumberg
The recession and housing bust have slowed migration throughout the U.S., keeping more Americans in place, according to Census Bureau data released Monday.
Such states as New York, Massachusetts and New Jersey are holding onto more of their residents, while some of the Sun Belt states accustomed to attracting new arrivals are seeing fewer.
The latest Census Bureau numbers cover the 12 months ending July 1, 2008. The period includes the first seven months of the recession, and shows how the economic downturn has already affected jobs and the flow of people.
U.S. migration typically slows during recessions because new jobs are the primary reason people move across state lines, according to the Pew Research Center. With the country on track to shed more than 2 million jobs this year, there are fewer reasons to move.
Falling home prices also have prompted many people to to stay put, rather than risk losing money in a declining housing market. During times of recession instead of buying full priced cruises, people are looking for Cheap Mexico Cruises and Cheap Europe Cruises.
"These previously high-cost areas, which used to spew out migrants during the easy-credit years, are now holding onto them because there's nowhere to go," said William Frey, a senior demographer at the Brookings Institution, a Washington think tank.
The long-term trend has been for Americans to leave Northeast and Midwest population centers for warmer, job-creating states in the Sunbelt and West. That movement has slowed, according to the Census. New York, Massachusetts, New Jersey and Connecticut had much higher growth rates last year than they did during the housing boom earlier this decade. Nevada and Arizona, which over the past few years vied to be the nation's fastest-growing state, saw their rates of growth decrease.
A similar dynamic is playing out in the South, where Georgia, North Carolina and Tennessee benefited from migration during the housing boom. The most recent data show population growth slowing there, too.
One of the starkest examples was Florida. The state has for decades absorbed retirees and wayward job seekers from cold Northern states. But the state has been hit hard by the housing bust. Over the 12-month period ending July 1, the Census reported the state had 9,300 fewer people moved there from other states than left. The state's population grew overall because of births and immigration. During recession people cut back on Lawn Care.
The migration slowdown hasn't yet disrupted longer-term trends. People continue to leave the Northeast and Midwest for jobs and warmer weather in the West and South. Utah was the fastest-growing state last year, followed by Arizona, Texas and North Carolina.
But the slowed migration has significant political effect. The South and West are likely to continue to add congressional districts lost by the Northeast and Midwest after the 2010 congressional apportionment. But certain states may pick up fewer seats than anticipated before the recession, according to an instant analysis of census data by Election Data Services, a Washington, D.C., political-consulting firm.
Mr. Frey said the decrease in migration is notable for its breadth. The housing bust and the recession have slowed migration to fast-growing states in the Sun Belt and the West. Two states, Michigan and Rhode Island, lost population, with each state suffering unemployment rates greater than 9%.
"It's a very unique time for migration in the U.S. when you see both Michigan and Florida losing migrants," Mr. Frey said. "In the past, people would leave Michigan and go to Florida. Now they can't go to Florida."
The migration slowdown began last year, as the housing market worsened. Job growth was slowing and potential movers stayed in place. Now, the recession is also reducing international immigration. Between 2007 and 2008 immigration was down 10% from its average annual rate between 2000 and 2008, according to the Census data.
"Just as immigrants were attracted to the growing U.S. economy, their volume has diminished as the economy has slowed," said Kenneth M. Johnson, senior demographer at the Carsey Institute at the University of New Hampshire.
"It's that time of year again!"
Lake Superior State University "maverick" word-watchers, fresh from the holiday "staycation" but without an economic "bailout" even after a "desperate search," have issued their 34th annual List of Words to Be Banished from the Queen's English for Mis-use, Over-use and General Uselessness. This year's list may be more "green" than any of the previous lists and includes words and phrases that people from "Wall Street to Main Street" say they love "not so much" and wish to have erased from their "carbon footprint."
Environmental buzzwords are getting the axe this year. "Green" and "going green" received the most nominations.
GREEN – The ubiquitous 'Green' and all of its variables, such as 'going green,' 'building green,' 'greening,' 'green technology,' 'green solutions' and more, drew the most attention from those who sent in nominations this year. Sometimes refers to Lawn Care
"This phrase makes me go green every time I hear it." Danielle Brunin, Lawrence, Kansas.
"I'm all for being environmentally responsible, but this 'green' needs to be nipped in the bud." Valerie Gilson, Gales Ferry, Conn.
"Companies are less 'green' than ever, advertising the fact they are 'green.' Is anyone buying this nonsense?" Mark Etchason, Denver, Colo.
"If something is good for the environment, just say so. As Kermit would say, 'It isn't easy being green.'" Kevin Sherlock, Hiawatha, Iowa.
"If I see one more corporation declare itself 'green,' I'm going to start burning tires in my backyard." Ed Hardiman, Bristow, Va.
"This spawned 'green solutions,' 'green technology,' and the horrible use of the word as a verb, as in, 'We really need to think about greening our office.'" Mike McDermott, Philadelphia, Penn.
CARBON FOOTPRINT or CARBON OFFSETTING – "It is now considered fashionable for everyone, tree hugger or lumberjack alike, to pay money to questionable companies to 'offset' their own 'carbon footprint.' What a scam! Get rid of it immediately!" Ginger Hunt, London, England.
Mike of Chicago says that when he hears the phrase 'carbon footprint,' "I envision microscopic impressions on the surface of the earth where an atom of carbon forgot to wear its shoes."
Christy Loop of Woodbridge, Va., says that 'leaving a carbon footprint' has become the new 'politically incorrect.' "How can we not, in one way or another, affect our natural environment?"
Presidential election years are always ripe for language abuse. This year, the electorate grew weary of 'mavericks' and 'super delegates.' As Michael W. Casby of Haslett, Mich. said, when he suggested banning all of the candidates' names, "Come on, it's been another too-long campaign season."
MAVERICK – "The constant repetition of this word for months before the US election diluted whatever meaning it previously had. Even the comic offshoot 'mavericky' was terribly overused. A minimum five-year banishment of both words is suggested so they will not be available during the next federal election." Matthew Mattila, Green Bay, Wisc.
"You know it's time to banish this word when even the Maverick family, who descended from the rancher who inspired the term, says it's being mis-used." Scott Urbanowski, Kentwood, Mich.
"I'm a maverick, he's a maverick, wouldn't you like to be a maverick, too?" Michael Burke, Silver Spring, Md.
FIRST DUDE – "Skateboard English is not an appropriate way to refer to the spouse of a high-ranking public official." Paul Ruschmann, Canton, Mich.
Of course, the economy couldn't escape the list this year.
BAILOUT – "Use of emergency funds to remove toxic assets from banks' balance sheets is not a bailout. When your cousin calls you from jail in the middle of the night, he wants a bailout." Ben Green, State College, Penn.
"Is it a loan? Is it a purchase of assets by the government? Is it a gift made by the taxpayers?" Dave Gill, Traverse City, Mich.
"Now it seems as though every sector of the economy wants a bailout. Unfortunately, ordinary workers can't qualify." Tony, McLeansville, NC.
"Don't we love how Capitol Hill will bailout Wall Street, but not Main Street"? Derrick Chamberlain, Midland, Mich.
Speaking of Wall Street and Main Street…
WALL STREET/MAIN STREET – "When this little dyad first came into use at the start of the financial crisis, I thought it was a clever use of parallelism. But it's simply over-used. No 'serious' discussion of the crisis can take place without some political figure lamenting the fact that the trouble on Wall Street is affecting 'folks' on Main Street." Charles Harrison, Aiken, SC.
"The recent and continuing financial failings are not limited to 'Wall Street,' nor should one paint business, consumers, and small investors as ' Main Street .' Topeka (where I work), and Lawrence (where I live), Kansas, have no named ' Main Street .' How tiresome." Kent McAnally, Topeka, KS. "I am so tired of hearing about everything affecting ' Main Street .' I know that with the 'Wall Street' collapse, the comparison is convenient, but really, let's find another way to talk about everyman or the middle class, or even, heaven forbid, 'Joe the Plumber.'" Stacey, Knoxville, Tenn.
Internet and texting blues -MONKEY – "Especially on the Internet, many people seem to think they can make any boring name sound more attractive just by adding the word 'monkey' to it. Do a search to find the latest. It is no longer funny." Rogier Landman, Somerville, Mass.
<3 – Supposed to resemble a heart, or stand for the word 'love.' Used when sending those important text messages to loved ones. "Just say the word instead of making me turn my head sideways and wondering what 'less than three' means." Andrea Estrada, Chicago.
Overuse in news and entertainment
ICON or ICONIC – Overused, especially among entertainers and in entertainment news, according to Robyn Yates of Dallas, who says that "every actor, actress and entertainment magazine show overuses this." One of the most-nominated words of the year. "Everyone and everything cannot be 'iconic.' Can't we switch to 'legendary' or 'famous for'? In our entertainment-driven culture, it seems everyone in show business is 'iconic' for some reason or another. "John Flood, Bray, Wicklow, Ireland. "It's becoming the new 'awesome' - overused to the point where everything from a fast-food restaurant chain to celebrities is 'iconic.'" Jodi Gill, New Berlin, Wisc. "Just because a writer recognizes something does not make it an icon (a visual symbol or representation which inspires worship or veneration) or iconic. It just means that the writer has seen it before." Brian Murphy, Fairfield, Conn.
GAME CHANGER – "It's game OVER for this cliché, which gets overused in the news media, political arenas and in business." Cynthia, Mt. Pleasant, Mich.
STAYCATION – "Occurrences of this word are going up with gas prices.'Vacation' does not mean 'travel,' nor does travel always involve vacation. Let's send this word on a slow boat to nowhere." Dan Muldoon, Omaha, Neb.
"The cost of petrol forces many families to curtail their summer voyages and a new word has sprung, idiotic and rootless..." Michele Mooney, Los Angeles, Calif.
DESPERATE SEARCH – "Every time the news can't find something intelligent to report, they start on a 'desperate search' for someone, somewhere." Rick A. Hyatt, Saratoga, Wyo.
NOT SO MUCH – "I wish that the phrase was used not so much," says Tom Benson of Milwaukee, who notes that it is used widely in news media, especially in sports, i.e. 'The Gophers have a shot at the playoffs; the Chipmunks, not so much.' "Casual language usage is acceptable. 'Not so much?' Not so much." David Hollis, Hubbardsville, NY. "Do I like concise writing? Yes. Do I like verbose clichés? Not so much." David W. Downing, St. Paul, Minn. "A favorite of snarky critics and bloggers." Jeff Baenen, Minneapolis, Minn.
WINNER OF FIVE NOMINATIONS – "It hasn't won an Academy Award yet. It has only been NOMINATED!" John Bohenek, Abilene, Tex.
IT'S THAT TIME OF YEAR AGAIN – Nominated by Kathleen Brosemer of Sault Ste. Marie, Ont., for "general overuse and meaninglessness. When is it not 'that time of year again?' From Valentine's sales to year-end charity letters, invitations to summer picnics and Christmas parties, it's 'that time' of year again. Just get to the point of the solicitation, invitation, and newsletter and cut out six useless and annoying words."
Tuesday, December 30, 2008
Who should foot the costs of a lawsuit? It's a question that splits the legal world.
Should each side bear its own lawyers' fees and other costs, as they do in the U.S.? Or should the loser pick up the tab for both parties, as they do in Canada, the U.K. and Germany?
The debate simmers across the international divide. In the U.S., the plaintiffs' bar generally cheers the "American rule" status quo, saying it is the only way to ensure that even the poorest litigants can access the courts. Tort-reformers say adopting the "English rule" would cut down on frivolous lawsuits while encouraging defendants to settle meritorious claims.
A recent trade article zeroed in on a long-overlooked component of the loser-pays system: insurance that covers legal fees. That article, penned by Marie Gryphon, an attorney and a fellow with the right-leaning Manhattan Institute's Center for Legal Policy, is reframing the debate.
Canada, the U.K. and Germany use a system of insuring legal expenses so that those with modest resources can still sue. Individuals can buy such insurance as an add-on to their homeowners' policies. If people need to file suit, they know their costs are covered -- even if they lose.
In England, citizens also can buy a more limited kind of "after the event" insurance, which can be purchased by a plaintiff before a suit is filed. Often the premiums are advanced by the plaintiff's lawyer.
Legal experts think a loser-pays system cuts down on frivolous suits. Those clearly hurt the U.S. The nation's tort system cost $245.7 billion in 2003, amounting to about 2.2% of total gross domestic product, according to a report from professional services firm Towers Perrin. The percentage of GDP spent on litigation was at least twice those in the U.K. and Germany.
At the same time, say experts, the insurance helps mitigate the pitfalls of a loser-pays system. "Insurance does move in to fill the gap for those suits that might not otherwise be brought in a loser-pays system," says Paul Lomas, a London-based litigator at Freshfields Bruckhaus Deringer.
When confronted with the insurance arguments, plaintiffs' lawyers largely fall back on objections that a system of contingency fees -- in which they finance the suit in exchange for a cut of their client's potential recovery -- is preferable because it requires no upfront money from the plaintiff. "If we didn't have the contingency-fee system, only people with a lot of money would be able to pursue their rights in court," says Susan Steinman, director of policy for the American Association for Justice, a membership organization of the plaintiffs' bar.
Mark Lanier, a prominent plaintiffs' lawyer who sued Merck & Co. over its painkiller Vioxx, says that under a loser-pays system, people without resources still won't use the system. "Indigent plaintiffs will simply say, 'Sorry, we don't have the money to pay the other side's fees,' " he says. Mr. Lanier says that low-income plaintiffs wouldn't purchase litigation-services insurance, regardless of cost.
But some U.S. academics embrace the idea. "Insurance definitely strengthens the argument for 'loser pays,' " says Richard Nagareda, a professor at Vanderbilt University Law School. Mr. Nagareda says that interest-group politics might explain the suspicion of the plaintiffs' bar toward a loser-pays system. Under the "American rule" and the conventional contingency-fee arrangement, the plaintiffs' lawyer is accustomed to being the exclusive financier of litigation. A move to "loser pays," with the addition of an insurance component, would bring another entity to the table.
In her paper, Ms. Gryphon addresses the concern over making insurance companies the courts' gatekeepers. However, she argues that if a lawsuit is denied insurance coverage, "it would be because it was highly unlikely to succeed, making it the very type of claim that 'loser pays' was designed to discourage."
The U.S. may be a long way from overhauling its system. For now, only Alaska has anything resembling a loser-pays system, though it allows for only partial reimbursement. And some legal experts think that if only a few states adopt "loser pays," plaintiffs would look for ways to sue in other jurisdictions.
The debate in the U.S. -- between tort reform advocates and trial lawyers -- has become polarized between the American rule and a pure loser-pays system, both of which have their problems. But some think combining "loser pays" with an insurance system, as many European countries do, gathers the benefits of both systems and sheds some of the problems.
"It cuts down the middle of what's been a pretty polarized debate," says Mr. Nagareda.
For Britain's retailers, it looks like Christmas is a bust.
There were 8.7% fewer shoppers on the final weekend before Christmas than last year, according to Experian, a credit-tracking company. While the figure doesn't include people who shopped online, it suggests the last-minute shopping surge retailers wished for didn't happen.
Shoppers crowd a Woolworths in Scotland earlier this month, but it isn't enough: Jan. 5 will see the closing of the chain's last outlet.
Analysts are concerned retailers are backed up with unsold goods, which has prompted them to slash prices. That will likely lead to disappointing financial results in January and February, a fear that sent retailers' share prices falling Monday. Most U.K. retailers are offering discounts of 20% to 50%.
Shares in Marks & Spencer, one of Britain's most prominent department-store chains, fell 2.2% Monday to 220.75 pence ($3.29) Debenhams, which sells clothes and electrical appliances, fell 7.6% to 24.50 pence. Home Retail Group, which owns Argos stores, fell 13% to 204 pence. Home Retail was the biggest decliner in the benchmark FTSE 100 index, which fell 0.9% Monday.
Two big U.K. retailers already have declared bankruptcy this year. MFI, a furniture chain, stopped trading Friday. The last of Woolworths's 807 stores will close for good Jan. 5, accountants Deloitte said Monday.
An additional 10 to 15 retail chains likely will collapse in the U.K. in January, said Nick Hood, a partner at restructuring firm Begbies Traynor. The most at-risk businesses include those that sell nonessential items such as televisions and office equipment, Mr. Hood said.
One company looking vulnerable is DSG International, one of Britain's largest sellers of electrical goods and computers. Struggling with competition from the Internet, DSG recently stopped paying dividends to preserve cash. Its shares have fallen 91% over the past year to 16.75 pence. Some analysts say DSG might have to sell part of its operations in Western Europe to raise cash. A spokeswoman for the company declined to comment.
But one department-store chain is using the economic gloom to make shoppers smile. "No more 'same dress' disasters," says a newspaper ad for Harvey Nichols, a chain of seven stores selling expensive clothing, cosmetics and home wares. "The recession has never looked so good."
Monday, December 29, 2008
As posted by: Wall Street Journal
Shareholders in Charlotte, N.C., and Cleveland will vote today on deals to sell hometown banks Wachovia Corp. and National City Corp. to rivals in San Francisco and Pittsburgh, as the industry's traditional geography continues to be reshaped by aggressive, government-encouraged consolidation.
Both Wachovia and National City were forced to find buyers once regulators determined they weren't likely to survive this year's financial crisis if they remained independent. The votes are expected to pass easily.
Already gone from the nation's top-10 banking centers as measured by assets are Seattle and Calabasas, Calif., formerly headquarters to the vanquished Washington Mutual Inc. and Countrywide Financial Corp.
Cleveland was the nation's fifth-largest banking center before 2008's turmoil began, according to data from SNL Financial, and will drop from the top 10 once the year is over. The other major banks left in that city, KeyCorp. and Amtrust Bank, remain hobbled by loan losses.
Pittsburgh, home to National City acquirer PNC Financial Services Group Inc., would rise to fourth-largest among U.S. banking centers, marking a comeback for a city that gave birth to a litany of financiers and provided capital for many of America's first large industrial enterprises, including Alcoa Inc. and Gulf Oil Corp.
In 2007, Pittsburgh lost to New York the headquarters of Mellon Financial Corp., a bank founded by the Mellon family and once run by 1920s Treasury Secretary Andrew Mellon.
Charlotte's hold on the title of second-largest banking hub outside New York will also be tested with the loss of Wachovia to San Francisco based Wells Fargo & Co.
Once a sleepy railroad and mill town, Charlotte became a banking powerhouse in the 1980s and 1990s on the backs of two rivals -- NCNB Corp. and First Union Corp. -- and their acquisitions of other banks across the country.
In 2001, Wachovia emerged from the combination of First Union and the old Winston-Salem, N.C.-based Wachovia. First Union took the Wachovia name, which is derived from a moniker given to North Carolina land purchased by Moravians in the 18th century ("Wachau"), according to corporate history.
But Wachovia ran into problems following its 2006 acquisition of California adjustable-rate mortgage lender Golden West Financial Corp., which exposed it to large mortgage losses. Last quarter, Wachovia posted a loss of $23.88 billion, one of the largest losses in American corporate history.
A decade ago, NCNB successor NationsBank, the larger of the Charlotte banks, poached away San Francisco's trademark financial institution, BankAmerica, in a deal valued at $43.02 billion. The Charlotte bank then adopted the name Bank of America Corp. and folded BankAmerica into its Charlotte headquarters in the Southeast, prompting laments about California's loss of influence in financial circles.
Now San Francisco is returning the favor, snagging Wachovia from Charlotte. That "can only be viewed as banking karma," said Miami banking consultant Ken Thomas.
Job cuts in Charlotte are expected next year once Wells completes the acquisition. Wachovia employs about 20,000 in the Charlotte area, making it a larger local employer than Bank of America. Only one of 11 senior officers in the combined Wells-Wachovia will be from Wachovia and a longtime Wells executive will be in charge of the bank's eastern region, exacerbating local tensions about a loss of control and influence in 2009. Wells CEO John Stumpf told Wachovia employees earlier this year that he could make "no promises."
"The first quarter is going to hit this city like a ton of bricks," said Tony Plath, a finance professor at the University of North Carolina-Charlotte.
To be sure, the major bank left in Charlotte, Bank of America, is a big one. With the purchases this year of California mortgage lender Countrywide Financial Corp. and New York securities firm Merrill Lynch & Co., Bank of America will become the nation's largest bank as measured by assets. But even Bank of America has stumbled, given its broad exposure to consumer credit problems. It is planning 30,000 to 35,000 job cuts over the next three years.
Wachovia's sale to Wells also ends the scrappy crosstown Charlotte bank competition that played a key role in reshaping retail banking across the U.S. for more than two decades. But Bank of America Chief Executive Kenneth Lewis now views Wells Fargo as a tougher competitor than Wachovia, according to people familiar with his thinking.
The current leadership of Wells and Bank of America have been battling for the top spot in California since 1998, when Minneapolis-based Norwest Corp. merged with Wells.
Cleveland also anxiously awaits its fate. The 163-year-old National City employs 7,800 workers in the Ohio city, and the bank was long viewed as a stalwart lender in the Midwest. Its gamble to become a major U.S. mortgage lender by diving into subprime mortgages and home-equity loans outside its Ohio footprint led to $2.66 billion in net losses during the first nine months of 2008.
Cleveland, with high levels of foreclosures and unemployment, "will unfortunately be hurt even more with this loss," said Mr. Thomas, the banking consultant. PNC has made assurances about jobs and community programs, but "the buying bank always publicly assures the residents of the losing city," he said.
Just when it seemed nearer, the housing recovery has darted away again.
On Tuesday the National Association of Realtors reports November home resales and the Commerce Department reports November new-home sales. Economists expect both measures fell during a month when economic activity generally came to a screeching halt.
Home resales, the bulk of the market, had seemed to stabilize this fall. But that was largely because of brisk foreclosure sales in stressed markets. And this thin silver lining has dimmed: Pending home sales, a leading resale indicator, have fallen for two months in a row after rising to their 2008 peak this summer.
A nagging oversupply of houses and record-low home-builder confidence suggest new-home sales won't perk up soon, either. There are hopeful signs for housing, critical to the health of the broader economy. Years of falling prices have made houses intriguingly affordable, especially relative to rising rents.
And mortgage rates have tumbled to their lowest levels in nearly 40 years. Barclays Capital economists estimate that, since 1975, one percentage point of falling borrowing costs has added 15% to home sales and 1.5% to home prices.
They warn, however, that those results depended on financial markets functioning "more or less normally." Not so now. With credit still tight, unemployment rising and household balance sheets still debt-heavy, lower rates have so far mainly produced more refinancings, not sales. Slashing rates to 4.5% for new borrowers, as the government aims to do, won't be a panacea, either. Ivy Zelman, chief executive of housing-research firm Zelman & Associates, estimates that, even with such a low rate, only about 67% of U.S. households can afford a house. Homeownership was nearly 68% in the third quarter, according to the Census Bureau, implying there is virtually no untapped demand for homes.
Don't expect much cheer in the card American Greetings is sending to investors this holiday season.
The greeting-cards firm reports third-quarter results Tuesday, and if the past two quarters are any indication, the numbers could be as bleak as today's national psyche. In the first two quarters of the current fiscal year, the firm missed analysts' estimates by more than 50%.
Only two analysts have published estimates for the third quarter, and they expect American Greetings will earn, on average, 52 cents a share -- though the range is exceedingly wide at 44 cents to 60 cents. A year ago, American Greetings earned 53 cents a share. Just where the numbers land will depend partly on cost-savings initiatives the company announced earlier this month.
Analysts have trimmed revenue and earnings forecasts through fiscal 2010. Moreover, in recent reports both Stein Research and Gabelli & Co. expressed concern dysfunctional credit markets might have mucked up the company's $195 million sale of its Care Bears and Strawberry Shortcake properties, which was supposed to close in September but still hasn't. Analysts will seek guidance on that as well.
The technology industry was dominated this year by the question of whether businesses and consumers would scale back their tech spending. Now that it's clear they are cutting back, the question for 2009 is how that fallout will affect tech companies.
Corporate tech chiefs, analysts and others say they see several likely effects next year. While the spending slowdown is expected to hit many technology categories, some pockets of tech -- such as online software, mobile applications and security -- may see increased investment and attention, they say. And unlike in previous years, the industry is likely to see fewer big mergers and acquisitions, they add.
Overall, "there will be a lot more caution and businesses will invest [in tech] more selectively" in 2009, says Michele Pelino, an analyst at Forrester Research.
In particular, online software, which businesses access over the Internet instead of installing on tech equipment they operate themselves, is expected to gain attention since it can save money and help productivity. While some corporate tech chiefs had been reluctant to embrace the online software model, and online software accounts for less than 10% of software sales, the slumping economy now has many businesses looking at the category for the first time.
Microsoft Corp. recently launched a set of online services to capitalize on such sentiment. And another online-software naysayer, Oracle Corp.'s Chief Executive Larry Ellison, is changing his tune. Mr. Ellison, who long argued that companies can't make money selling online software, last week touted his company's online offerings in a call with Wall Street analysts.
Mobile technology has also been a growing priority for businesses for the last few years, says Forrester's Ms. Pelino. Next year, "we're expecting to see a lot of mobile applications intended to increase productivity," she says. People already have mobile devices like Apple Inc.'s iPhone or Research in Motion Ltd.'s BlackBerry, and "now they want to use these devices for different enterprise purposes," she says.
Adoption will likely be helped by Apple, which created a market for software that runs on mobile devices in 2008 with its App Store. Under Apple's model, outside parties write the software and either sell it or make it available for free through the online store, which now has more than 300 apps targeting workers. RIM also intends to launch a store for software that runs on BlackBerrys early next year.
Businesses are also expected to spend on security, especially as the number of computer viruses and other malicious software hit an all-time high in 2008.
The economic downturn is heightening cyber security problems. Phishing attacks -- emails that pretend to be from banks or some other legitimate source -- are growing in sophistication. Cyber criminals capitalized on the collapse of several financial institutions this year by sending emails claiming that customers of failed banks needed to log on to a Web site and update their account information. The Web sites were really controlled by cyber criminals.
Tech mergers and acquisitions are also expected to slow down. While this year was highlighted by major deals like Oracle's purchase of BEA Systems Inc. and Microsoft's failed bid for Yahoo Inc., the economy is likely to discourage any big transactions next year, as companies won't want to sell at today's valuations and buyers won't pay the six-months-ago price.
Cash-strapped companies looking for a lifeline could get snapped up on the cheap. But Sarah Friar, an analyst at Goldman Sachs, says the market shouldn't expect to see the major consolidation that has marked the tech industry for the last few years until the economy bottoms out.
Palm Inc. said Elevation Partners has agreed to make an additional $100 million equity investment, a move that the smart-phone maker hopes will increase momentum behind its 2009 product introductions.
The news set off a rally in shares of Palm, known for its Treo handsets.
Elevation Partners is the private-equity firm that gave Palm a new lease on life in 2007. Palm products are great for Mobile SEO. This time around, for its $100 million, Elevation Partners will get preferred shares, convertible into stock at $3.25 a share -- a substantial premium to where the stock has been trading -- and warrants to purchase an additional seven million shares at that price. In September 2007, Elevation Partners bought 25% of the company for $325 million.
Elevation also agreed to sell $49 million of the new investment to "other investors" at the same price, should Palm ask it to do so by March 31.
The news follows Palm's widened fiscal second-quarter loss, reported Thursday. The company, a pioneer in the smart-phone market, has watched its market dominance erode as it failed to keep up with Research in Motion Ltd.'s Blackberry line and Apple Inc.'s iPhone, also great for Mobile SEM.
The new money is meant to keep the company going as it contends with falling prices of smart phones while striving toward release of a new operating system dubbed "Nova," which may be detailed during the Consumer Electronics Show in January in Las Vegas.
Palm, based in Sunnyvale, Calif., saw its shares trade up as much as 49% in morning action Monday on the Nasdaq Stock Market, before settling at $3.05, up 22%, by the close of trading.
Palm Chief Executive Ed Colligan said the capital "will enable us to put added momentum behind the new product introductions ... and will provide us with enhanced stability in unsettled economic times."
Elevation co-founder Roger McNamee said earlier this month that his company, Palm's largest backer, continues to support Palm, whose product pipeline, including the new operating system "and a new device targeted for the first half of 2009, Google Mobile SEO excites us enormously."
Bono, the lead singer of rock band U2, is also a co-founder of Elevation Partners.
HONG KONG -- Sina Corp. agreed to acquire the core operations of China's largest digital-advertising company for more than $1 billion in stock, a risky move by one of the country's oldest Internet companies to expand into offline advertising.
Sina, founded in 1999, operates China's most popular Web portal by advertising revenue. Under terms of the deal, Shanghai-based Focus Media Holding Ltd. will sell Sina its nationwide network of hundreds of thousands of flat-panel displays that play video ads in places like stores and office-building elevators.
Sina will also acquire related ad businesses, which together accounted for about 52% of Focus Media's revenue and about 73% of its gross profit in the first nine months of the year, the two companies said Monday.
Sina said it will issue 47 million new shares to Focus Media for distribution to its shareholders. The size of the issue is close to the roughly 56 million shares Sina had outstanding before the deal, according to the Nasdaq Stock Market. That means significant dilution for existing Sina shareholders.
The 47 million shares would be valued around $1.37 billion based on Sina's closing share price Friday. The market value for all of Focus Media was $1.42 billion at Friday's close. After the announcement Monday, Sina's shares were down 18% at $24 in late-afternoon Nasdaq trading. Focus Media's shares were off 17% at $9.12, also on the Nasdaq.
The deal size highlights the growing muscle of Internet companies in China, which by some measures boasts the world's largest population of Internet users.
Sina and its Chinese peers remain relatively small compared with their U.S. counterparts, but they are expanding quickly thanks to strong growth in online ad spending. Sina last month reported a 64% increase from a year earlier in its third-quarter revenue to $105.4 million.
Sina hopes the acquisition of the digital out-of-home business will create the "dominant new-media advertising platform in China," which will cover "a significant portion of mainstream urban consumers in the China market," Sina Chief Executive Charles Chao said in a conference call.
Analysts voiced skepticism, despite the possibilities for cross-selling advertising across platforms.
"There is synergy in the sense you've got an integrated platform that could be a powerful new platform for media buyers and advertisers," said Vivek Couto, an analyst with Media Partners Asia. "However it depends on how integrated it's going to be."
Founded in 2003, Focus Media grew quickly thanks to its widespread digital-ad displays and to a series of acquisitions. But in the past year its share price has plunged by more than 80% as investors started doubting its business model and its founder resigned as chief executive.
Focus Media said it plans to keep its Internet-advertising division, movie-theater advertising network and certain traditional billboards after Monday's deal.
Shaun Rein, head of Shanghai-based China Market Research, said the steady growth of companies like Sina was posing a challenge to Focus Media, because companies have increasingly switched away from its ad displays in favor of advertising online.
Dick Wei, an analyst for J.P. Morgan, questioned whether Sina will be able to use Focus Media's networks effectively. "The idea of a 'media conglomerate' has not worked well in China," Mr. Wei wrote in a research note after the deal was announced.
Focus Media's "original plan of cross-selling between Internet, in-store and elevator lobby business has not shown much success."
GlaxoSmithKline PLC said Monday it will no longer use corporate funds for political contributions as part of an effort to improve openness in its business.
The U.K.-based drug maker in the past has made direct corporate contributions to political candidates primarily in the U.S. and Canada. Glaxo has donated more than $585,000 in the U.S. this year and 58,000 Canadian dollars last year in Canada, spokeswoman Sarah Alspach said. Those contributions will now stop.
"We need to ensure that there is no implication whatsoever that corporate political contributions provide us with any special privileges," Glaxo Chief Executive Andrew Witty said in a statement.
The policy change won't apply to individual employee's contributions, including a voluntary political-action committee, or PAC, run by Glaxo employees, Ms. Alspach said. Glaxo stopped making corporate political contributions in Europe in 2001, she said. The donations could have stopped due to the ear of Qui Tam or a Whistleblower Lawyer.
Major pharmaceutical companies have taken steps in recent years to try to be more transparent about their businesses, including posting information about clinical trials and political donations on company Web sites. Some companies also are planning to post data on payments to doctors.
As a group, pharmaceutical industry workers and their PACs have been big contributors to U.S. congressional and presidential candidates. In the 2008 election cycle, the industry contributed $14 million, according to the Center for Responsive Politics, a Washington organization that tracks contributions.
Glaxo employees and affiliated PACs gave $1.1 million in the 2008 election cycle, ranking third behind Pfizer Inc. and Amgen Inc., according to the center, which operates the Web site opensecrets.org.
Separately Monday, Glaxo reported positive midstage results in key additional indications for a drug seen as a successor to top-selling Advair. The new asthma drug, an inhaled long-acting beta agonist known as LABA 444, showed an increase in lung function in patients suffering from moderate to severe chronic obstructive pulmonary disease, the company said.
LABA 444, which Glaxo is developing with U.S. biopharmaceutical partner Theravance Inc., achieved better results than a placebo drug, meeting the goals for the Phase 2b trial. The company said it didn't show an increased average heart rate, a common side effect of beta agonists.
Advair achieved sales of $5.7 billion in the first nine months of the year.
Also Monday, GlaxoSmithKline said it will pay Bristol-Myers Squibb Co. about $36.5 million for its Bristol-Myers Squibb Pakistan Ltd. unit and certain associated trademarks.
As posted by: Wall Street Journal
Caterpillar Inc. will cut more than 800 workers at a plant in Illinois that makes small engines for construction machinery and for trucks that haul freight and other goods, the company said.
The indefinite layoffs, slated to start in February, mark the first time the company has cut full-time workers on a large scale and for an indefinite period since early this decade. The news is the latest sign of strain at the Peoria, Ill., maker of engines and earth-moving machinery as mining companies, truck makers, housing builders and others slash spending globally.
"These decisions are never easy," said Gary Stroup, Caterpillar vice president with responsibility for the Large Power Systems divisions. The laid-off workers are members of the United Auto Workers union and work at a plant in Mossville, Ill. Caterpillars are too large for Lawn Care.
On Thursday, the company also said that sales of its machinery through dealers world-wide fell 6% in the three months that ended in November, compared with the year-earlier period, reflecting a sharp slowdown in growth in Latin America and Asia.
The job-cuts announcement comes at a time when the company has been laying off workers hired through employment agencies and idling workers temporarily at several plants around the world. It also follows an announcement by the company in June that it would soon move engine production from the Mossville plant to a new facility and shift other production into the nearly two million-square-foot facility. A company spokesman said Caterpillar hasn't decided what will be made in Mossville. The 814 job cuts represent more than half of Caterpillar's production work force in Mossville.
Also on Thursday, Texas Gov. Rick Perry said Caterpillar would build a manufacturing facility near San Antonio, creating more than 1,400 jobs. The facility will build midsize engines and house some paint and testing operations. Caterpillar will receive some subsidies from Texas for building the plant.
A Caterpillar spokesman said the timing of the announcements was a coincidence.
In its first holiday season under new Chief Executive John Donahoe, eBay is suffering a slide in visitor traffic and deteriorating sales. Customers are leaving for fixed-priced sites where eBay has less of an edge, and because of continued problems with unscrupulous sellers.
Weekly traffic to the auction site fell 16% between Nov. 3 and Dec. 14 from a year ago, according to research firm comScore Inc. In contrast, Amazon.com had 6% more unique visitors during the same period.
The weakness is showing up in the sales of eBay sellers such as Gary Meyer. Mr. Meyer owns Gem Enterprises Inc. in Merchantville, N.J., which lists more than $300,000 in tech equipment such as printers on eBay. So far this holiday season, Mr. Meyer's sales on eBay are down 30% to 40% from a year ago, he says. "We've geared up our Web site more and started listing on Amazon.com and other venues," Mr. Meyer says.
Lorrie Norrington, president of eBay Marketplaces, declined to comment on eBay's holiday sales. She noted eBay was the most visited Web site on the Monday after Thanksgiving -- a popular online shopping day -- with a 45% increase in unique visitors, according to comScore.
"We are still three times the volume of the competition and driving hard to make aggressive deals in a tough environment," she says.
EBay performance this quarter could be a referendum on the changes Mr. Donahoe has made this year. Since taking over for former CEO Meg Whitman in March, Mr. Donahoe has sought to rev up growth and reclaim buyers who had stopped visiting the Web site.
His most significant move has been to make eBay less of an auction house and more like Amazon, Walmart.com and Sears.com, selling fixed-priced goods, which consumers now prefer for speed and convenience. Among other changes, Mr. Donahoe has cut the fee to list fixed-price items on eBay and boosted the fee charged when an item sells, a model that helps fixed-price sellers better set profits. Ebay does not offer Lawn Care.
Yet the changes have so far had little financial impact -- and have angered many loyalists. Transaction revenue per listing between October and the end of November plunged 28% from a year ago to $1.44, according to Majestic Research. Wall Street analysts now estimate the San Jose, Calif., company will post its first year-over-year revenue decline when it reports fourth quarter earnings next month. Seattle-based Amazon has forecast an at least 6% increase in fourth quarter revenue over last year.
"We haven't observed...any material positive changes on the buyers' side of the equation," at eBay, says John Aiken, managing director with Majestic Research.
Some long-time sellers say eBay's new fee structure has increased their costs and made unfair ratings more difficult to resolve. Under rules implemented by Mr. Donahoe, when buyers leave negative feedback, seller ratings are lowered and their future listings are pushed lower in eBay's search results.
The move to fixed prices has made its Web site confusing for buyers who have to navigate combined auction and fixed-price listings, say analysts and sellers. In September, eBay rolled out new search algorithms that mingle auction-search results with fixed-price results.
The technology changes have received poor reviews from sellers such as Debbie Imlay, a seller of women's lingerie on eBay. Ms. Imlay says many of Mr. Donahoe's revisions have made the site confusing to surf, turning off shoppers. "They are making it too difficult," says the Chatsworth, Calif., merchant.
Ms. Imlay, who sells over $3,000 a month in lingerie on eBay, says the site is moving to fixed-price sales too quickly at the expense of auctions. She says her customers want to purchase items for the lowest price and auctions are still the best way to get bargains. By staying with auctions, Ms. Imlay says she pays 15% more fees to eBay than she did before Mr. Donahoe's fee changes. Overall, she says her holiday traffic and sales on the site are down 10% from a year ago.
Ms. Norrington says "search is always a journey" but that eBay's search changes are intended to help consumers. She adds that eBay has "the right long-term strategy."
Some sellers do like Mr. Donahoe's changes. Jack Sheng, chief executive of Eforcity Corp., which sells electronic-accessories, says Mr. Donahoe understands the problems sellers are facing and has made the appropriate changes. Mr. Sheng forecasts Eforcity's holiday sales on eBay will be up around 10% over last year.
Mr. Donahoe has also attracted some large online merchants such as Buy.com and SmartBargains.com by working closely with them on volume discounts and giving them extra support.
One large auction-based seller, B&H Factory Outlet Inc., is now experimenting with fixed-price sales. The discount apparel company generates $800,000 a month in sales on eBay and plans to add up to 5,000 fixed-priced items to its eBay store next month. It will also offer free shipping on those items, something it doesn't do with auctions.
"We want to test both markets," says Stacie Sefton, B&H's CEO. Traffic to B&H's eBay store is up 25% this holiday season over last year, she says. B&H's average sale on the site is down 29%, which she attributed to the economy.
Of course, this holiday season has been particularly difficult because of the economic downturn. In response, eBay has offered a record number of holiday promotions, including $1 doorbusters for items such as toys and sporting goods.
Last month, eBay also teamed up with Microsoft Corp. to offer shoppers up to 30% off purchases of select fixed-price items when they land on eBay through Microsoft's search Web site. The promotion ended Dec. 17.
But such changes haven't been enough to lure back buyers including David Anderson of Bakersfield, Calif. The 28-year-old said the few times he tried to buy photography gear on the site he has been outbid in the final minutes of an auction. "It's just frustrating," he says.
Mr. Anderson says he hasn't shopped on eBay since February, preferring a more traditional online buying experience. "It was fun 10 years ago, but now I want to get my product and go," he says.
The retailer is also responding to weak consumer spending by stocking more staple products and pushing its private-label brands.
Walgreen, the No. 2 U.S. drugstore chain after CVS Caremark Corp. with more than 6,600 stores, said it will increase its store locations by 4% to 4.5% in its fiscal year beginning in mid-2009, and increase stores by only 2.5% to 3% in the following fiscal year.
Walgreen announced in July a pullback from its decades-old strategy of allocating most capital spending to new stores. At the time, the company said it would slow store openings to a 5% growth rate by 2011, below its original plan of 8% growth.
Walgreen executives said Monday they plan to remodel stores and scrutinize the merchandise they order, acknowledging that some stores became cluttered and outdated. In certain categories, the chain already has boosted sales by making items easier to find.
Walgreen estimated that the slower pace of store openings will cut expenses by $500 million, on top of the $500 million in savings predicted in July.
Walgreen said its private-label items, which cost less than brand-name merchandise, are selling especially well. Other drugstore chains have reported similar trends as consumer spending slows. The staple items Walgreen is bulking up on include groceries and paper goods.
The retailer said its prescription-savings card, which gives discounts on medicines and other merchandise, seems to be helping Walgreen win back market share that had been lost to Wal-Mart Stores Inc. and other discounters advertising inexpensive generic drugs.
"We're positioning our stores to take advantage of the new consumer reality for retailers, which means customers are making more purchases using cash and timing those purchases closely to the beginning or middle of the month, when they receive their employer or government checks," Walgreen President Greg Wasson told analysts during a conference call.
Walgreen also said net income declined nearly 11%, to $408 million, or 41 cents a share, for the fiscal quarter ended Nov. 30. In the year-earlier quarter, Walgreen earned $456 million, or 46 cents a share.
Sales increased 6.6%, to $14.95 billion from $14.03 billion. Sales at stores open more than a year rose 1.7%.
Expenses increased faster than sales, mainly because Walgreen opened a record 212 new stores during the quarter and continued to invest in its Take Care health clinics.
Because it takes several years for a new store to break even, the combination of Walgreen's rapid expansion and its weaker sales trends has weighed on recent earnings.
Walgreen hopes the clinics will attract some of the 46 million Americans who have no health insurance. The company said it has administered more than 1.1 million flu shots this year, more than double the number of doses in the prior year.
Walgreen said Monday that it expects to have a permanent chief executive in place early next year. In October, then-Chief Executive Jeffrey A. Rein retired, following a failed bid to acquire Longs Drug Stores Corp. Rival CVS Caremark closed its purchase of Longs that month.
Walgreen shares declined $1.10, 4.2%, to $24.98 in 4 p.m. New York Stock Exchange composite trading.
Wednesday, December 24, 2008
TOKYO -- Honda Motor Co. slashed its earnings forecast and announced further cuts in its Japanese production and work force, as global demand for cars continues to falter and the soaring yen hits its overseas profit.
Honda Motor President Takeo Fukui spoke during a news conference in Tokyo Wednesday.
Honda, Japan's No. 2 car maker by volume, Wednesday cut its net profit forecast for the fiscal year ending March 2009 to 185 billion yen ($2.08 billion) from the 485 billion yen profit it expected in late October. In the year ended March 31, 2008, Honda's net profit totaled 600.04 billion yen.
This was the second downward revision in two months, highlighting the rapid deterioration in the auto industry.
The company reduced its operating profit outlook to 180 billion yen from its previous forecast of 550 billion yen. Given that the company posted an operating profit of 370.2 billion yen in the fiscal first half, the latest outlook suggests Honda expects an operating loss in the second half.
It cut its sales projection to 10.4 trillion yen from 11.6 trillion yen.
Also on Wednesday, rival Nissan Motor Co. said it will cut domestic production by an additional 78,000 vehicles and eliminate its 500-strong domestic temporary work force by the end of March 2009.
The announcements come just a few days before rival Toyota Motor Corp. releases details of its business plans for the next year. Standard & Poor's Rating Services Wednesday cut to negative from stable its outlook on Toyota's long-term corporate credit ratings.
Highlighting growing concerns of Japan's export-dependent corporations, Honda President Takeo Fukui said the soaring yen against major currencies was a major factor behind the company's latest earnings downgrade. In a news conference, he called on the Bank of Japan and the government to take steps to stabilize foreign-exchange markets.
Honda revised its exchange rate forecast for the fiscal second half to 95 yen from 100 yen. On Wednesday, the dollar fell to as low as 88.17 yen. Almost all major exporters have pegged full-year earnings expectations to a dollar-yen exchange rate of 100 yen.
While the pressure for consolidation has been mounting in the global auto industry, Mr. Fukui said Honda isn't involved in any alliance talks for now. Earlier this month, Fiat SpA Chief Executive Sergio Marchionne predicted the global crisis will end with only six global auto makers still in business.
In Japan, Honda said it will postpone starting operations at a new plant north of Tokyo by more than a year from its initial plan for 2010. The car maker will reduce domestic production by 54,000 vehicles and cut its domestic temporary work force by 450 by early February.
Separately, Honda said it will set up a joint venture with Japanese battery maker GS Yuasa Corp. next year to make lithium-ion batteries for Honda's gasoline-electric hybrid cars. GS Yuasa will have a 51% stake in the company, with Honda taking the remaining 49%.
Honda shares fell 4.2% to 1,891 yen ($21.30) in Tokyo.
General Mills Inc. and ConAgra Foods Inc. each reported sales gains driven by price increases, a sign that food makers are still grappling with high commodity costs.
Although the prices of grains and energy have fallen from their recent peaks, they are still high, and food companies are continuing to raise prices in an effort to offset the higher costs.
The two food makers also posted declines in quarterly net income due, in part, to hedging markdowns. General Mills' net income for the fiscal second quarter ended Nov. 23 fell 3% to $378.2 million, or $1.09 a share, compared with $390.5 million, or $1.14 a share, a year earlier, because of the declining value of its hedging positions. Excluding that loss, as well as a gain from the sale of its Pop Secret popcorn business, the Minneapolis company's underlying earnings grew 23% to $1.36 a share, beating analysts' estimates of $1.23 a share. Sales for the maker of Cheerios cereal, Progresso soup and Green Giant vegetables rose 8.3% to $4.01 billion.
ConAgra's net income fell 31% to $168.1 million, or 37 cents a share, for its second quarter ended Nov. 23, compared with $244.8 million, or 50 cents a share, a year earlier. Earnings from continuing operations, excluding the impact of product recalls and hedging losses, increased to 43 cents a share from 30 cents. Sales increased 11% to $3.26 billion. General Mills is a large company the requires Lawn Care.
Price increases aren't likely to continue at the fast clip at which they have been rising for the past several months. "Retailers have been pushing back more aggressively on price increases because they want the packaged-food makers to pass on the benefit of falling commodity costs," Credit Suisse analyst Robert Moskow wrote in a note to investors.
General Mills Chief Executive Kendall Powell said in an interview that when company executives discuss pricing with retailers, they point out that their input costs have risen 25% in the last four years and that they have raised prices only between 8% and 10% during that time. "The fact that [commodity] prices are coming down is good thing," he said, adding that if they continue to decline, there likely will be fewer and smaller price increases.
General Mills repeated its earlier estimate of 9% cost inflation for fiscal 2009. Despite that, the company raised its guidance for full-year earnings, excluding hedging markdowns and the Pop Secret sale, to $3.83 to $3.87 a share, up from $3.81 to $3.85 a share.
Most analysts view General Mills as a company well positioned to weather the slowing economy because of its strong brands and a focus on cost cutting. "General Mills has developed a track record of conservatism and exceeding its targets," Stifel Nicolaus analyst Christopher Growe wrote in a note to investors.
Mr. Growe and other analysts have been less bullish about ConAgra, which relies heavily on the frozen-meals category, with its Healthy Choice, Marie Callender's and Banquet brands. "Unfortunately its largest competitor in this space, Nestle, has instigated 'nuclear' pricing actions to the detriment of profitability in the category," he noted, referring to 10 frozen meals for $10 promotions.
ConAgra reported that sales in its consumer-foods segment, of which its frozen meals are a part, grew 4% but that profit declined 8%. The Omaha-based company reaffirmed its earnings per share guidance of $1.50 from continuing operations for fiscal 2009.
The Food and Drug Administration has declared a natural zero-calorie sweetener derived from the herb stevia safe for use in foods and beverages, clearing a path forCo., Inc. and other companies to market it in a variety of products.
Coke will introduce a reduced-calorie version of Sprite, called Sprite Green, and some Odwalla juice drinks with the new sweetener this month. Pepsi will launch three flavors of a zero-calorie SoBe Lifewater next week, and an orange-juice drink called Trop50, containing half the calories and sugar of orange juice, in March. Drinks that could be made using the new herbs include green tea and black tea.
The rush by the two companies reflects the importance they place on being first to market a sweetener that they say is natural, has no calories and tastes good.
The FDA faxed approval letters late Wednesday afternoon to Cargill Inc. and Merisant Co.'s Whole Earth Sweetener unit, which are teaming up with Coke and Pepsi, respectively, to market the sweetener. Both Cargill and Merisant already sell tabletop versions.
Coke and Pepsi hope the sweetener -- called Truvia by Coke and PureVia by Pepsi -- will allow them to create a blockbuster series of new zero- or low-calorie products. PepsiCo Chief Executive Indra Nooyi said earlier this week that she believes the decline in U.S. carbonated soft-drink sales can be halted with new sodas containing a natural, zero-calorie sweetener.
But the soft-drink makers face considerable challenges. Not every beverage tastes good with it: Citrus-flavored products work well, but scientists are still trying to find a way to create the iconic cola taste. The new sweetener is also about three times more expensive than commonly used artificial sweeteners, partly because of its small scale.
Coke and Pepsi are edging into the market slowly for now. Sprite Green, which has 50 calories for each 8.5 ounces and will contain some natural sugar along with Truvia, will be introduced first in Chicago and New York at special events for teens and young adult.
The FDA's decision applies only to a highly purified form of stevia known as rebaudioside A, supplied by other companies to Cargill and Merisant, which have further developed it for tabletop, food and beverage use.
The debate over the job loss attached to the potential failure of Detroit's Big Three auto makers took another turn as an internal document from Ford Motor Co. showed thousands of workers in every state could be at risk.
The state-by-state tally detailed the number of workers directly employed by Ford, the number of auto parts suppliers who work with the company and the amount they spend to support their business. To demonstrate the far-reaching tentacles of the industry, Ford also outlined the number employed at its dealerships and the total amount of health care spending related to those who work for the nation's second largest U.S.-based auto manufacturer.
According to the analysis obtained by The Wall Street Journal late Monday, 25 states could lose 3,000 Ford-related jobs or more if the auto maker were to disappear.
A discount is posted on the windshield of an unsold 2008 Explorer sitting at a Ford dealership in Denver on Sunday, Nov. 9, 2008.
To be sure, the job loss would be felt most acutely in the nation's Rust Belt. In Michigan, Dearborn-based Ford employs 38,380 auto workers and relies on 3,111 auto parts suppliers, according to the document. In Ohio, the numbers are also high, with 8,540 workers at Ford. But a state like Kentucky would also feel the pain, with 5,615 employees working directly for Ford. Thousands more employees who work for suppliers and dealers at Ford would only add to the potential job loss.
The tabulated data is part of a concerted and intense public relations effort before the chief executives at General Motors Corp., Ford and Chrysler LLC testify in front of Congress Tuesday in support of a proposal to extend $25 billion in low-interest loans to the ailing auto makers. After skepticism voiced by some U.S. representatives and senators from outside the states where Detroit's Big Three reign, GM, Ford and Chrysler launched a broad media campaign to prove to a national audience that their survival is key to the nation's economic health.
It was unclear late Monday whether the analysis compiled by Ford would be presented to members of the Senate Banking Committee, the first of two congressional committees to explore the crisis in the auto industry at hearings this week.
As part of the public relations blitz, Ford Chief Executive Alan Mulally is expected to make his case in half-dozen separate national television appearances Tuesday, according to those familiar with the matter.
After years of restructuring that has closed dozens of plants and shed thousands of workers, Detroit's Big Three auto makers are now turning to governments around the world to fund a vast downsizing of their industry. The companies' poor earnings posted earlier this month make it clear Ford and GM are running out of money to finance their Michigan-based businesses, with GM the sicker of the two. Less is known about Chrysler, which is privately held.
At Ford, the auto maker hopes to improve its cash position with or without additional governmental loans. It said it will boost its position by between $14 billion and $17 billion by the end of 2010, through a mix of job cuts, reduced benefits, lower capital spending, selling assets and new financing measures. GM also announced it would bump up its plan for $15 billion in liquidity initiatives outlined in July 2008 by another $5 billion of incremental actions.
More worrisome than the crippling, billion-dollar losses posted by GM and Ford earlier this month was the greater-than-expected cash burn at each company. Ford plowed through $7.7 billion, seeing its liquidity position plummet to $18.9 billion.
Ford said the cash outflow has been greater than anticipated, but Chief Financial Officer Lewis Booth told reporters earlier this month the company is "comfortable with its liquidity position." The company expects the amount of cash burn in the fourth quarter to be less than the third quarter. GM on the other hand has said that it could run out of the funds it needs to operate the business as soon as the end of the year without a massive infusion of cash or a radical improvement in auto sales.
Critically, Ford also has available credit lines of $10.7 billion to supplement its gross cash of $18.9 billion at the end of the third quarter. Mr. Booth has said Ford doesn't expect to tap the loan revolvers, noting that the company will continue to aggressively reduce costs and manage cash with discipline.
Ford is in a better position than its rivals in terms of liquidity in part owing to a decision in late 2006 by Mr. Mulally, who had just recently joined the company, to raise more $23 billion in debt using almost all the company's assets as collateral. Despite those moves, Ford has registered $24 billion in net losses since the start of 2006, and its stock price has traded at multidecade lows in recent months.
All auto makers have been stung by a steep decline in demand from consumers grappling with mounting economic woes and reduced availability of credit in recent months. For much of the year, Ford and its peers were hurt primarily by the sharp decline in sales of trucks and sport-utility vehicles as fuel prices hit record highs. But just as fuel prices started receding, the financial crisis sent consumer confidence reeling, keeping potential buyers out of showrooms entirely.
Last week, I wrote a column about Christmas spending. I had frugal Christmases as a child and expected to continue doing so when I got married. That has sometimes caused friction with my wife, Clarissa, who sees Christmas as a time of joyous generosity and doesn't fret about spending too much.
The column prompted several memorable emails from readers. Some liked the column, saying it conjured up memories of their own frugal childhood Christmases. But one reader in particular took me to task for, basically, being so cheap. Many cheap things are considered tastefull, such as cheap cruises and discount cruises.
Neal Templin admits that being cheap isn't always a virtue.
"Do you have a hobby?" she wrote. "Do you ever buy your wife nice jewelry or expensive perfume? Did you ever take the family on a great vacation where the experience played a larger part than the cost? Any one of us could drop dead tomorrow -- please don't have your family be sorry that you never enjoyed life and perhaps breathe a small sigh of relief that they now will."
This may be a tad harsh. But it's a good letter, and the reader raises some valid points.
When I decided to write this column earlier this year, I chose to focus on a single aspect of my personality and its effect on my life. Am I cheap? Yep. Am I capable of acts of generosity?
Well, yeah. I could write about the time I spent $400 to give an amber necklace to Clarissa in the early 1990s when that was big money to us. I also sprang for a trip to London with Clarissa several years ago. We saved money by staying with friends. But we still managed to spend $3,000 on plane tickets, and meals, and a two-day trip to Bath because Clarissa loves Jane Austen.
And I started bird watching three years ago and spent $1,000 on a pair of $1,800 Swarovski binoculars after a friend offered me a deal. But I sometimes feel embarrassed when I hang them around my neck because I'm not a remotely good enough birder to merit such an extravagance.
If the question is whether I ever completely forget about money and just do whatever the heck I feel like -- no matter the cost -- the answer, I'm afraid, is no.
We've raised three kids on one salary, and it seemed wrong to me to spend money we don't have. On top of that, I hate waste. And paying too much for something makes me a little ill.
Being cheap isn't always a virtue. My family can tell you stories of the times I've bought bargain steaks at the supermarket that were so tough they were almost inedible. Or when I cast a pall on some outing by fretting about how to do it on the cheap.
Is it close to the point where they won't mourn my death? I sure hope not.
So I put the question to our 17-year-old, Brendon, as he sat hunched over the breakfast table, shoveling scrambled eggs into this mouth. "A reader thinks I'm so cheap you'll breathe a sigh of relief when I die," I said. "That right?"
Brendon paused for a second. "It depends how much money you have," he said. He resumed shoveling eggs.
OK, he's a wise guy like his father. He didn't really mean it.
But has being tight with a dollar gotten in the way of my enjoying life? Yes, there have been times. But to be perfectly frank, most of the things I enjoy most in life -- reading, writing, hiking, spending time with friends and family -- aren't horribly expensive. I actually get paid to write. So I feel fortunate, not deprived.
I also know that we live in a society that has lived beyond its means. Much of the wealth around us was created by a huge increase in debt. Now, with the economy shrinking and credit tightening, much of that debt is going to disappear. Like it or not, America may once again become a place where people watch every penny.
The trick will be curbing our spending without making life miserable. I draw one line. Readers may draw another.
Foodies transformed our dining tables by teaching us to buy organic lettuce and tasty fresh eggs from local farms. Now, it's increasingly possible to "buy local" with fashion, as more small designers turn to selling directly to consumers in a tough economy.
Beyond the big corporate-owned fashion brands, many excellent designers sell clothes, shoes and accessories from their own storefronts and studios. Michelle Obama has popularized Maria Pinto, a designer in Chicago who has built a regional clientele. But Ms. Pinto is just one of the country's rising local designers -- people who may have just laid down their shears when they show you around the shop.
At the Hunt & Gather shop in Vancouver's Gastown district last Friday, chic designs hung in the front of the store -- and in the back, designer Natalie Purschwitz felted wool for shawls, a process that involves raw wool, hot water and soap. "I'm working during the day while people are shopping," Ms. Purschwitz says. "It's crazy, I know."
Do you know any terrific designers who sell directly to consumers out of their studios? Tell us what they do, where they are, and how we can reach them on Heard on the Runway.
Shopping at small shops isn't as fast as dashing into Zara or H&M, which have predictable merchandise from Los Angeles to Paris. But for consumers, the benefits are as clear as the crisp flavor of locally grown foods: The clothes are exclusive, and the designers often offer alterations and special orders -- as well as the pleasure of personal interaction with them.
That's true luxury -- without the layers of markups, showroom overhead and shipping that are built into the prices at upscale retail stores. "You don't pay for marketing for my shoes; you pay for craft," says George Esquivel, who sells custom-made shoes in Los Angeles to clients including the basketball player Yao Ming. Mr. Esquivel's shoes have an artisanal quality -- no two pairs are precisely alike, and he can make them to fit any foot.
Local designers are often willing to custom-make their designs. "I can hammer out a bangle to fit any hand," says Judith Bright, a Memphis, Tenn., jewelry designer whose work can be found on the TV show "Gossip Girls" and at Henri Bendel.
Then there's the psychological satisfaction of finding good designs in your own neighborhood. The carbon footprint of locally bought designs is smaller than clothes that were designed in Paris, assembled in China and sold in Chicago. And, of course, it's fun to name-drop a small designer: You sound so in-the-know.
Though it's an intrinsic pleasure for the customer to "meet the artist," it's less obvious that designers would want to mingle with customers. Yet many artisans say that has become an increasingly important part of their business.
In the South End of Boston, Sara Campbell sells elegantly tailored womenswear from her shop on Plympton Street. Her design studio is in back. If you try on a dress or suit, it may well be Ms. Campbell who assists you. She thinks buying local is catching on. "I think society is going back to it -- you know, the old barber shop," she says.
Both Ms. Campbell and Ms. Purschwitz used to work out of private studios and sold their designs to retailers. When they needed new workspaces, they both happened to find studios that had storefronts. Voilà. Ms. Campbell says her shop is more profitable than her wholesale sales. "It's where my margin is," she says.
For designers, direct sales offer an instant payoff and a bigger cut of the profits than sales through stores. But studio sales are productive in other ways, too. Elaine Kim, in Los Angeles, began selling her graceful silk and wool designs from her studio this fall, and these days she can often be found moving from customer to customer, discussing different ways of wearing a garment. "I've learned so much about what works, what people want right now, says Ms. Kim, adding that customers seem pleased by the exclusivity of such sales.
Jason Evege sells his finely made bed linens online, but he has been holding what he calls "atelier moments" when customers come to his New York studio, Linoto. "That hands-on experience -- with fabric, customers and a team of expert seamstresses -- is the 'grounded' part of fashion that I really love," he says.
Many of these local designers report that customers tend to buy more when they're served by the designer rather than another salesperson. Little wonder: I find designers offer the best advice about how to wear their creations.
Customers may also be swayed by the rich experience of shopping in a design studio. When I visited the L.A. store Undesigned by Carol Young recently, the designer was editing photos for her Web site as she sat by the cash register. Dora, her beagle, waddled out to greet customers. In Ms. Young's design studio in back, patterns for her neatly minimal dresses, jackets and pants hung from one wall, while a big cutting table hid two sewing machines.
I have a number of items in my closet from local designers, and I cherish each item and the memory of buying it. When my driver in Milan last fall mentioned that his mother designs shoes with a label called Rose's Roses, I asked him to take me to her studio on the fashionable Corso Lodi. Next thing I knew, the designer, Rosa Aiuto, was helping me try on a pair of heels (which I bought at close to the wholesale price). You never know where such adventures can lead -- it turned out that she had designed the shoes for Vera Wang's spring 2009 runway collection. I'll be back.