This is from Barron's weekly stock market report (subscription required). Notice the market hit intra-day highs 4 times last week, but could not hold these highs to the close.
Liveblogging World War II: May 20, 1943
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Spending on U.S. construction projects jumped 0.9% in May, the most since February 2006, boosted by hefty gains in spending on federal and private nonresidential construction projects.
The gain outpaced economists' expectations. Analysts surveyed by MarketWatch were expecting construction spending to rise by just 0.1% in May. See Economic Calendar.
Spending on federal projects climbed by 4.1%, the most since October 2006, the Commerce Department reported.
Private nonresidential construction spending rose by 2.7% in May. Public construction spending, meanwhile, rose by 2.2%.
Once again, however, spending on private residential projects like homes and apartment buildings dropped, reflecting a still-weak housing market. Outlays on private residential projects fell by 0.8% in May, following a decline of 0.4% in April.
Consumer spending in the U.S. rose less than forecast in May and the Federal Reserve's preferred inflation gauge cooled, a sign moderating growth is restraining price pressures.
The 0.5 percent rise in spending matched the gain in April, the Commerce Department said today in Washington. Core prices, which exclude food and fuel costs, rose at the slowest pace since March 2004 in the year ended May.
The figures may comfort Fed policy makers, who said yesterday that inflation remained their biggest concern pending more evidence of a sustained moderation in prices. Treasury securities extended their gains, with benchmark 10-year notes heading for the first back-to-back weekly advance since March.
``There has been a clear slowing in core prices the past few months, but as the Fed cautioned yesterday, it remains to be seen whether that is sustainable,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``Consumer spending has slowed pretty decisively in the second quarter.'' O'Sullivan correctly forecast the gain in spending.
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.
Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.
In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
Kia Motors Corp., South Korea's second-largest automaker, canceled a $500 million bond sale for this week as skittish investors cut demand for riskier assets.
At least eight companies from Kohlberg Kravis Roberts & Co. in New York to steelmaker Arcelor Mittal in Rotterdam, Netherlands, pulled more than $3 billion of debt sales amid concern that losses from bonds backed by U.S. subprime mortgages will spread to other markets. Caliber Global Investment Ltd., a $908 million hedge fund, said today it will close after losses.
``This may mark a tipping point in the credit cycle,'' said Robert Appleby, who helps manage $2 billion at ADM Capital in Hong Kong. ``If we see a shakeout, it will be a healthy one because it will prevent deals from being priced incorrectly.''
Mergers and acquisitions are increasing at the slowest pace since January. Companies announced about $304 billion of takeovers this month, half the amount in April or May. Leveraged buyouts, where firms use mostly borrowed money to fund acquisitions, account for 21 percent of this year's mergers.
1. Interest rates on the long end going to at least 6%-7%. At that point, I believe it will get too risky.
2. The equity market being closed to the IPOs of the companies that need to be flipped. It's wide open right now.
3. Not one, not two, but maybe three or four, or even five deals going bust. Can't we wait for even one to go belly-up before we get too nervous?
4. Valuations ramping up more. With the S&P 500 selling for about 17.5 times next year's earnings, there is plenty of room to keep buying.
5. Private equity funds running out of money. Very unlikely.
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 0.7 percent in the first quarter of 2007, according to final estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.5 percent.
Real personal consumption expenditures increased 4.2 percent in the first quarter, the same increase as in the fourth quarter.
Real nonresidential fixed investment increased 2.6 percent, in contrast to a decrease of 3.1 percent. Nonresidential structures increased 4.8 percent, compared with an increase of 0.8 percent.
The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.7 percent in the first quarter, 0.1 percentage point more than the preliminary estimate; this index increased 0.2 percent in the fourth quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 2.9 percent in the first quarter, compared with an increase of 2.4 percent in the fourth. About 0.2 percentage point of the first-quarter increase in the index was accounted for by the pay raise for federal civilian and military personnel, which is treated as an increase in the price index of employee services purchased by the federal government.
There wasn't any similar-sized stumble yesterday. But Catalyst Paper Corp., citing "adverse" market conditions, scrapped a $200 million offering of junk bonds the Canadian company planned to use for funding its business and other investments or acquisitions.
Meanwhile, underwriters delayed the launch of a buyout-financing deal for Myers Industries Inc. in the hope that the market would settle down in coming days. Late in the day, Magnum Coal Co. became the latest company to postpone a junk-bond offering, this one for $350 million.
In Europe, Arcelor Finance, the borrowing vehicle for Arcelor SA, which is being acquired by Mittal Steel Co., put off its plans to issue more than €1 billion ($1.34 billion) in bonds, citing the turbulent debt market. In Malaysia, shipping company MISC Bhd. put plans for a $750 million bond offering on the back burner.
In another sign that investors may be developing some indigestion from the buyout boom, Blackstone Group, the buyout firm that listed shares on the New York Stock Exchange last week, fell 2.7% in 4 p.m. composite trading yesterday to $29.92, below its offer price of $31 a share.
Part of the answer lies in the strength of the financial system's shock absorbers, which have improved since 1987, the 1997 Asian financial crisis, the 1998 Long-Term Capital mess and Sept. 11 attacks. Hedge fund Amaranth Advisors collapsed without many side effects. It looks like the same may go for the two Bear Stearns funds, whatever their fate.
Recent history is encouraging. The 1987 stock-market crash, as frightening as it was, didn't tank the U.S. economy. Neither did the horror of the Sept. 11 attacks. The economy gulped and then rebounded. That isn't any guarantee that the next crash or crisis, and there will be one someday, will have similarly passing effects on the impressively resilient U.S. economy. But it is encouraging.
Increases in borrowing costs can typically be differentiated as reflective or restrictive. Reflective rises in yields are a product of vibrant growth. In order to keep investment and savings in balance, higher rates should accompany the increase in desired investment relative to desired savings. Eventually, a tipping point occurs in financial markets, at which point rises in bond yields hamper the economic expansion. While it is not easy to time this event, one variable to watch is the gap between GDP growth and interest rates. Based on this measure, it appears that interest rates are not yet restrictive. Consistently, share prices should perform well so long as rises in yields remain indicative of strong growth and an inflation scare does not develop. Bottom line: It will take a much sharper rise in the cost of debt to curtail the bull market in global equities. Until then, our outlook for higher stock prices remains intact.
WITH ANOTHER EARNINGS SEASON ABOUT to kick off, health care, technology, heavy industry, and even the fickle energy sector could be Corporate America's pennant winners.
Energy companies in particular could hit a big homerun off rising oil prices and low expectations in the second quarter.
"The rationale here is that earnings growth leads stock prices," says Michael Thompson, director of research at Thomson Financial. "Stock prices reflect good earnings and these are places where you will find it."
If that's the case, some financial stocks might be best left on the bench right next to home builders, auto makers and several retailers.
New orders for manufactured durable goods in May decreased $6.1 billion or 2.8 percent to $213.0 billion, the U.S. Census Bureau announced today. This followed three consecutive monthly increases including a 1.1 percent April increase. Excluding transportation, new orders decreased 1.0 percent. Excluding defense, new orders decreased 3.2 percent.
Orders for U.S. durable goods fell more than forecast in May, casting doubt on the strength of a projected rebound in business investment.
Demand for goods meant to last several years fell 2.8 percent, the first drop in four months, after a revised 1.1 percent gain in April that was larger than previously estimated, the Commerce Department said today in Washington. Excluding transportation equipment, orders dropped 1 percent after rising 2.5 percent.
The decline was led by fewer orders for aircraft, metals, and machinery. A reluctance to buy new equipment, along with a lingering housing slump, may call into question Federal Reserve forecasts for gradual improvement in the economy the rest of this year, economists said. Policy makers, meeting today and tomorrow, are projected to hold interest rates unchanged.
``It's clear that businesses are still somewhat risk averse and that they are being cautious in light of the softness in the economy,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. ``Capital spending is not moving forward with the strength we had hoped.''
Underwriters pulled a $1.55 billion bond offering by U.S. Foodservice, the nation's second-largest food distributor. The company also postponed plans to sell $2 billion in loans to fund the deal, according to people familiar with the matter. For now, the banks involved in underwriting the deal will have to lend the $3.6 billion directly to U.S. Foodservice, which is being bought from Royal Ahold NV of the Netherlands.
While the banks will try to resell the loans and bonds to investors in the year ahead, the FoodService deal could reset the equilibrium of the buyout business at large, giving banks more clout in financing negotiations while also putting strains on the amount of money available for deals. One person involved in the deal described it as a "healthy correction" for an overheated market.
Big buyouts in the past few years have been fueled by bond and loan investors who have been willing to accept skimpy interest rates and easy terms on the companies borrowing from them. But in a wave of midsize debt deals that hit the market in the past week, investors have shoved deals back to underwriters, demanding better terms.
The yen rose the most in 10 weeks against the euro as investors pared holdings of emerging-market bonds and stocks funded by loans in the Japanese currency.
Japan's yen gained against all 16 of the most-active currencies, extending its rally after Finance Minister Koji Omi yesterday stressed the risk of one-way foreign-exchange bets. Stocks in Europe and Asia declined as investors shunned riskier assets, prompting an unwinding of the so-called carry trade.
``The combination of a very clear change of stance towards the currency markets within Japan's Ministry of Finance along with continued losses for global equity markets is taking its toll,'' said Simon Derrick, chief currency strategist at Bank of New York in London. ``Yen-funded carry trades are experiencing a sharp unwinding.''
Home prices in 10 major U.S. cities dropped at the fastest pace in 16 years during the 12 months ending in April, according to Standard & Poor's Case-Shiller home price index released Tuesday.
Home prices in the 10 cities fell 2.7% on a year-over-year basis, the largest decline since September 1991. Meanwhile, prices in 20 cities dropped a record 2.1% year over year.
Price appreciation has slowed for 17 consecutive months. Nationally, prices have doubled since 2000.
Fourteen of the 20 cities showed falling prices in the past year, led by Detroit (down 9.3%), San Diego (down 6.7%) and Washington (down 5.7%). Seattle had the largest price gains over the past year at 9.6%, while prices are up 7% in Charlotte, N.C., and 6.4% in Portland, Ore.
"No region is immune to weakening price returns," said Robert Shiller, chief economist for MacroMarkets LLC and the co-creator of the index. Even in regions such as the Pacific Northwest or the Southeast, where prices are still rising, the gains have been slowing.
# Atlanta: up 0.8% in April, up 2.1% year-on-year
# Boston: up 0.6% in April, down 4.5% year-on-year
# Charlotte: up 1.2% in April, up 7% year-on-year
# Chicago: down 0.7% in April, up 0.2% year-on-year
# Cleveland: down 0.2% in April, down 2.8% year-on-year
# Dallas: up 1.3% in April, up 2% year-on-year
# Denver: up 0.5% in April, down 1.8% year-on-year
# Detroit: down 2.5% in April, down 9.3% year-on-year
# Las Vegas: down 0.8% in April, down 3% year-on-year
# Los Angeles: down 0.5% in April, down 2.6% year-on-year
# Miami: down 1.2% in April, down 1% year-on-year
# Minneapolis: down 0.5% in April, down 2.9% year-on-year
# New York: down 0.2% in April, down 1.5% year-on-year
# Phoenix: down 0.8% in April, down 4.5% year-on-year
# Portland: up 1% in April, up 6.4% year-on-year
# San Diego: down 0.3% in April, down 6.7% year-on-year
# San Francisco: up 0.2% in April, down 2.8% year-on-year
# Seattle: up 1.3% in April, up 9.6% year-on-year
# Tampa: down 1.1% in April, down 5% year-on-year
# Washington: down 0.5% in April, down 5.7% year-on-year
# 10-city composite: down 0.3% in April, down 2.7% year-on-year
# 20-city composite: down 0.2% in April, down 2.1% year-on-year
U.S. new home sales fell 1.6% in May after surging in April to a seasonally adjusted annual rate of 915,000 units, the Commerce Department said Tuesday. Economists expected sales to fall to 930,000 units. At the same time, sales in February, March and April were revised down by 84,000 units. April's sales pace was revised to 930,000 units from the 981,000 units initially reported, a 12.5% rise from March's downwardly revised 827,000 annual pace. This is still the largest sales increase since September 1993. New home sales are down 15.8% in the past year. Inventories of unsold homes fell 1.1% to 536,000, representing a 7.1-month supply at the May sales pace. The supply of inventory peaked at 8.3 months in March. Inventories of unsold homes are down 5% in the past year. The median sales prices fell 0.9% in the past year to $236,100.
Lennar Corp., the largest U.S. homebuilder, reported a loss for the fiscal second quarter as the housing slowdown discouraged buyers and prompted price reductions.
The net loss amounted to $244.2 million, or $1.55 a share, in the three months ended May 31, compared with a profit of $324.7 million, or $2, a year earlier, Miami-based Lennar said today in a statement. Revenue tumbled to $2.88 billion from $4.58 billion.
Rising defaults among subprime borrowers and mortgage rates near an 11-month high are hampering sales for homebuilders even as they cut prices. The slump in housing has moved into its second year as prospective buyers hold off purchasing in anticipation prices will continue to fall.
``As we look to our third quarter and the remainder of 2007, we continue to see weak, and perhaps deteriorating, market conditions,'' Chief Executive Officer Stuart Miller said in the statement. ``We currently expect to be in a loss position in our third quarter.''
Refiners say there are a variety of reasons behind the lingering outages, including tougher federal clean-fuel standards. But industry observers also cite wear and tear on aging equipment in a nation where no new refinery has been built since the 1970s.
Because capacity hasn't grown as much as demand in the past few years, refiners have been running their equipment harder and for longer periods without maintenance, making for extended shutdowns when they do stop to fix things. A shortage of skilled labor is also pushing maintenance projects, normally scheduled in the winter or the spring, into the summer months. The strains point to a lingering trouble spot in the nation's energy stream at a time when Americans show little sign they will curb gasoline use anytime soon.
The shutdowns have put a growing portion of the nation's oil-refining capacity -- currently 17.5 million barrels a day -- out of circulation at a time when demand is at its highest. The Energy Information Administration recently said the refinery utilization rate had sunk to 87.6%. On average, refineries used about 94% of their capacity this time of year from 2001 to 2005. Even last year, when refineries were still recovering from damage suffered during hurricanes Katrina and Rita in 2005, the utilization rate ran at 93%.
While the public is groaning about high gasoline prices, refiners have seen their profit margins soar. In the first quarter, the major gasoline producers in the U.S. made about $10 billion in refining profits domestically and abroad, up 50% from a year earlier. Daniel Barcelo, an analyst with Banc of America Securities, expects refining margins, or the difference between the price refiners pay for oil and the prices their fuels fetch, to be even higher in the second quarter.
LONDON (Thomson Financial) - Queen's Walk Investment Ltd posted a net loss for the year ended March 31 mainly as a result of fair value adjustments made to
investments in 2007.
The group posted a net loss of 67.7 mln eur for the full year while net asset value decreased to 7.24 eur as at March 31, 2007 from 9.90 eur as at Dec 31, 2006. It had reported a net profit of 9.77 mln eur for the period from Sept 6, 2005 to March 31, 2006.
The first full-year results as a public company reflect a period of exceptional turbulence in many of the asset-backed securities markets in which the company has invested, primarily during the fourth quarter of the financial year, chairman Tom Chandos said.
And, Queen's Walk Investment Ltd., a United Kingdom-based publicly traded closed-end fund managed by Cheyne Capital Management (U.K.) LLP, said it had a net loss of €67.7 million ($91.2 million) in the first quarter and a loss of €98.8 million in the fourth quarter, due to losses in the mortgage-backed bond market. The net asset value of the securities in the fund fell 26.8%. More broadly, bond markets show signs of trouble digesting recent issues of corporate debt.
Monday, it said it had marked down by half the value of its U.S. assets, in the latest setback for the banks and hedge funds that had been betting on much-lower delinquency rates from U.S. home loan borrowers with poor credit histories
Stuart Fiertz, a founder of Cheyne Capital, told Dow Jones Newswires he isn't anticipating further pain in Queen's Walk's U.S. subprime portfolio, mainly because it has sold three of its four U.S. subprime mortgage positions, reducing the size of its overall portfolio to around EUR319.9 million as of May 31.
That reduced the U.S. subprime portion of its portfolio from 12% to 3%, though it still has exposure to higher-quality tranches of U.S. mortgage-backed securities.
Bear Stearns (BSC) may have a lot of explaining to do about a big restatement of losses at one of its troubled hedge funds—and not just to its investors. BusinessWeek has learned that the Securities & Exchange Commission recently opened a preliminary inquiry into the near-collapse of Bear Stearns' High-Grade Structured Credit Strategies Enhanced Leveraged Fund. People familiar with the inquiry say regulators are interested in learning how the Wall Street investment firm came to dramatically restate the April losses for the 10-month-old fund, which invested heavily in securities backed by subprime mortgages, or home loans to consumers with shaky credit histories.
A spokesman for the SEC declined to comment, as did a Bear Stearns spokesman. But people familiar with the inquiry say lawyers from the SEC's main office in Washington are beginning to gather information about the troubling series of events at the hedge fund.
But the magnitude of the April restatement is raising eyebrows on Wall Street. Mortgage and bond traders say that while the banks may have contributed to some of Bear Stearns' higher losses, it's unlikely they were the complete cause of the restatement. Some have speculated that Bear Stearns may have had to recalculate the price of its subprime-backed bonds after liquidating some assets to honor earlier investor redemptions. Others says Bear Stearns' system for modeling the value of its subprime securities may have been too optimistic, prompting the hedge funds' auditors to raise questions about the methodology and forcing recalculations.
To be sure, it's worth noting that the SEC inquiry is so preliminary that regulators have not issued any subpoenas. It's not uncommon for the SEC to open investigations after hedge-fund blowups. Last fall, the SEC's Boston office began examining the collapse of Amaranth Advisors , a hedge fund that lost nearly $6 billion from a series of wrong-way bets on the natural gas market. To date, nothing has come of that inquiry. The fund shut down in 2006.
Two large hedge funds managed by investment bank and brokerage Bear Stearns are close to being shut down as their complex mortgage-related bets have soured, the Wall Street Journal reported.
The Journal said the two funds held over $20 billion of investments just a few weeks ago, mostly tied to risky securities linked to so-called subprime mortgages.
The two funds were identified by the Journal as the High Grade Structured Credit Strategies Enhanced Leverage Fund and the High Grade Structured Credit Strategies Fund.
Meanwhile, CNBC's Charlie Gasparino reported that the Securities and Exchange Commission is closely monitoring the unfolding hedge fund situation at Bear Stearns, though no formal inquiry has been announced. "If they (the SEC) feel this is getting much worse, you could see them go in and basically start an investigation and ask Bear Stearns, 'What did you know, and when did you know it, and when did you disclose that?'" Gasparino said.
The Journal report said Bear Stearns Bear Stearns Co Inc has been "besieged" by investors and lenders racing to pull their money out of the investment vehicles as the funds' performance has plummeted sharply.
Bear Stearns could not be reached for immediate comment by Agence France-Presse.
However, the financial group, told investors last week that its profits from mortgage-related trading had moderated significantly.
Sales of previously owned homes in the U.S. fell in May to the lowest level in almost four years, reinforcing concerns about a protracted housing slump.
Purchases declined 0.3 percent to an annual rate of 5.99 million, from a revised 6.01 million the prior month, the National Association of Realtors said today in Washington. The supply of unsold homes jumped to a record.
The housing recession, the worst since 1991, is the biggest threat to an economy that's otherwise showing signs of recovering from a yearlong slowdown. The growing number of homes on the market and higher interest rates may further discourage buyers, economists say.
``The slow bleed in housing continues,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``The inventory adjustment is going to be slow and painful. This means we're in for more pressure on prices and more pressure on construction.''
The supply of homes for sale increased 5 percent to 4.43 million, the most ever. At the current sales pace, that represented 8.9 months' worth, the highest since June 1992 and up from 8.4 months' worth at the end of the prior month.
The median price of an existing home fell 2.1 percent last month from a year ago to $223,700, the 10th consecutive month of year-over-year declines, the Realtors group said.
The recent rise in milk prices is affecting everyone from small dairy companies like Oberweis to the nation's largest milk producers and food companies. On Friday, the Agriculture Department, which regulates the minimum milk prices received by farmers, set the price that processors will have to pay for drinkable milk in July at $20.91 per hundred pounds of milk, up 17% from the June price and up 84% from a year earlier.
In the past few months, several factors have reduced the supply of milk world-wide or raised its cost of production. The European Union is ending subsidies on dairy exports, and a drought in Australia has cut the supply of milk available to Asia. In the U.S., some dairy farmers are raising milk prices to offset the higher prices they pay for cattle feed as corn prices rise. Corn is a key feed ingredient.
As processors pass their higher costs on to consumers in the form of more-expensive cartons of milk at the grocery store, it will add to the strain on many family budgets already stretched by higher fuel and energy costs. In May, the average price of a gallon of whole milk in the U.S. was $3.26, up 6.2% from $3.07 a year earlier, according to the Labor Department.
Investors with plenty of cash on hand, thanks to years of low interest rates, have flocked to illiquid investments in search of outsize returns, often with the help of borrowed money. Some market experts worry that investing in illiquid assets, despite their inherent risks, has become almost mainstream.
In 2006, U.S. institutions such as pension funds and endowments, had about $1 of every $10 invested in less easily traded assets -- such as hedge funds, real estate and private-equity funds -- up 27% from 2003, according to consulting firm Greenwich Associates.
The Bear Stearns funds, whose investors include wealthy individuals, other hedge funds and some of the firm's own executives, are part of a recent boom in investment vehicles specializing in illiquid assets, such as exotic securities, highways and timber lands.
Unlike stocks or bonds listed on an exchange, such assets can't be readily bought or sold. That makes it hard to establish an accurate price for them. Fund managers have broad discretion in attaching a value to these assets, and often don't reveal many details of their trades.