Recession Worse Than Prior Estimates, Revisions Show

Bloomberg reports:
By Bob Willis

July 31 (Bloomberg) -- The first 12 months of the U.S. recession saw the economy shrink more than twice as much as previously estimated, reflecting even bigger declines in consumer spending and housing, revised figures showed.

The world’s largest economy contracted 1.9 percent from the fourth quarter of 2007 to the last three months of 2008, compared with the 0.8 percent drop previously on the books, the Commerce Department said today in Washington.

“The current downturn beginning in 2008 is more pronounced,” Steven Landefeld, director of the Commerce Department’s Bureau of Economic Analysis, said in a press briefing this week. The revisions were in line with past experience in which initial figures tended to underestimate the severity of contractions during their early stages, he said.

The updated statistics also showed that Americans earned more over the last 10 years and socked away a larger share of that cash in savings. The report signals the process of repairing tattered balance sheets following the biggest drop in household wealth on record may be further along than anticipated.

Spending Slumps

Consumer spending, which accounts for 70 percent of the economy, decreased 1.8 percent in last year’s fourth quarter from the same period in 2007, exceeding the prior estimate of a 1.5 percent drop. Purchases also began sinking sooner than previously projected, registering their first decline at the start of 2008 rather than in the second half.

Treasuries headed higher after the report, while stock- index futures declined. Benchmark 10-year note yields were at 3.58 percent at 8:51 a.m. in New York, from 3.61 percent late yesterday. Contracts on the Standard & Poor’s 500 Stock Index were down 0.3 percent at 979.

Residential construction fell 21 percent during the period, almost 2 percentage points more than previously reported, aggravating what was already the worst slump since the Great Depression.

The Commerce Department also reported today that the economy contracted at a 1 percent annual rate from April through June after shrinking at a 6.4 percent pace in the first quarter, the most since 1982. The decline in the first three months of the year was previously reported as 5.5 percent.

Recession’s Start

The National Bureau of Economic Research, the accepted arbiter of U.S. business cycles, last year determined the recession started in December 2007. The private group is based in Cambridge, Massachusetts,

Today’s updates are part of comprehensive revisions that take place about every five years and are more extensive than the changes announced at this time each year. Figures as far back as 1929 can be revised.

Over the most recent period, the third quarter of 2008 underwent one of the biggest changes, going from a 0.5 percent decrease in gross domestic product to a 2.7 percent drop. The new reading better illustrates the effect the September collapse of Lehman Brothers Holdings Inc. had on the economy and credit markets.

The deeper deterioration last year underscores why Federal Reserve Chairman Ben S. Bernanke and his colleagues at the central bank cut the benchmark rate to a record low and extended credit to non-banks for the first time since the 1930s.

The new GDP data also help explain why the unemployment rate shot up 2.3 percentage points last year, the biggest annual jump since 1982.

2001 Recession Milder

The revisions showed that the 2001 recession was less severe than originally estimated, reflecting a smaller decline in business investment. The economy actually grew 0.1 percent from the fourth quarter of 2000 to the third quarter of 2001, erasing the 0.2 percent drop previously reported.

Personal income was revised up over the last decade, after the government boosted its adjustments for the underreporting and non-reporting of income using more recent data from the Internal Revenue Service. The increases in the most recent years reflect gains from rents, interest and proprietors’ income. The government changed the way it accounts for natural disasters, such as Hurricane Katrina, eliminating much of the prior volatility in income calculations.

More Savings

Higher incomes and less spending translated into bigger savings. The savings rate for 2008 was revised up to 2.7 percent from 1.8 percent. The rate shot up to 5.2 percent in the second quarter, the highest level since 1998.

The government revised corporate profits down for 2006-2008 and up for 2004 and 2005.

Finally, Commerce shifted food services, which include meals purchased at restaurants or served in schools, out of the food category. As a result, the Fed’s preferred inflation gauge -- which tracks consumer spending and excludes food and fuel -- was pushed up by 0.2 percentage point for the three-year period from 2006 to 2008.

The costs of meals away from home are not as volatile as fresh food, the government said, and therefore services should be included in the measure commonly known as the core index.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Gold Erases Gains in New York, London After Consumption Drops

Bloomberg reports:

By Claudia Carpenter

July 31 (Bloomberg) -- Gold erased gains in London and New York after the U.S. reported a drop in personal consumption, paring a drop in the dollar.

U.S. personal consumption fell 1.2 percent in the second quarter, the Commerce Department said today, more than the 0.5 percent median decline forecast in a Bloomberg News survey. Gold has moved in an opposite direction to the dollar every month since April, resuming a pattern in five of the past seven years.

The dollar is the “strongest driver” of gold prices, Alan Heap, a Sydney-based analyst of Citigroup Inc., wrote in a report today.

Gold futures for December delivery fell $1.40, or 0.2 percent, to $935.90 an ounce as of 8:41 a.m. on the New York Mercantile Exchange’s Comex division, paring the monthly gain to 0.6 percent. Bullion for immediate delivery dropped 0.1 percent to $933.74 after earlier rising as much as 0.6 percent.

The dollar dropped 0.3 percent, after earlier falling as much as 0.6 percent.

To contact the reporter on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net

U.S. Initial Jobless Claims Rise by 25,000 to 584,000

By Courtney Schlisserman

July 30 (Bloomberg) -- The number of Americans filing claims for jobless benefits last week held below levels seen in late June, before auto-related distortions set in, indicating firings are slowing as the economy stabilizes.

Applications rose by 25,000 to 584,000 in the week ended July 25, higher than forecast, figures from the Labor Department showed today in Washington. More than 600,000 claims were filed every week last month. The number of people collecting unemployment insurance decreased for a third week.

An analyst at Labor said distortions from the timing of auto-plant shutdowns “worked themselves out” of the data last week, returning claims to “trend.” While a resumption in hiring will be slow to materialize, payroll reductions are likely to slow as housing and manufacturing, the areas that led the economy into the worst recession in five decades, steady.

“Initial claims are still trending lower, which does suggest some improvement in conditions,” said Michelle Meyer, an economist at Barclays Capital Inc. in New York, which had forecast claims would increase to 585,000. “What we are seeing is less firing.”

Futures on the Standard & Poor’s 500 index extended their gains after the report, rising 1.1 percent to 985.60 at 8:43 a.m. in New York. Futures also rose as Motorola Inc. reported a loss that was narrower than estimated and commodity producers rose on higher metal prices.

Economists’ Forecasts

Economists forecast claims would increase to 575,000 from a previously estimated 554,000, according to the median of 40 projections in a Bloomberg News survey. Estimates ranged from 539,000 to 630,000.

The four-week moving average, a less-volatile measure than weekly initial claims, fell to 559,000 from 567,250 the prior week. The average at the end of June, before the auto distortions set in, was 616,000, higher than last week’s reading.

Claims tend to be volatile in late June and July when automakers typically halt production and idle workers to re-equip factories to build new models. General Motors Co. and Chrysler Group LLC halted production earlier than usual as they worked through bankruptcy proceedings.

GM emerged from bankruptcy this month and Chrysler did the same in June.

Continuing Claims

The level of continuing claims decreased by 54,000 to 6.197 million in the week ended July 18, the lowest level since April. Because they come out with a one-week lag, these figures are still being distorted by the plant closings.

The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 4.7 percent in the week ended July 18. Eight states and territories reported an increase in new claims, while 45 reported a decrease. These data are also reported with a one-week lag.

Figures for the week ended July 18 coincide with the week the Labor Department conducts its survey for the monthly payrolls report. U.S. employers have eliminated 6.5 million positions since the recession began in December 2007, the most of any downturn since the Great Depression.

Economists have forecast that the worst of the job cuts may have past. Even so, hiring is limited and economists surveyed by Bloomberg earlier this month project the jobless rate will exceed 10 percent by early 2010.

‘Plodding’ Rebound Seen

The U.S. economy is nearing its low point and will begin a “gradual, slow, plodding,” rebound next year, Southern Co. Chief Executive Officer David Ratcliffe said yesterday in an interview. “For the most part we believe that this has stabilized and is poised for a recovery.”

Southern, the biggest U.S. power producer, said second-quarter earnings rose 15 percent as lower costs cushioned the impact of declining electricity demand.

Verizon Communications Inc. is among companies still paring staff. It said July 27 it plans to eliminate more than 8,000 jobs in the second half.

Eye on the Economy: Planet Goldman reigns supreme

As King Midas is fondly remembered by the Greeks for turning everything into gold that he touched bringing about the term, Midas touch, another institution has during this global economic recession been on the right side of the market every time, timing it more than perfect constantly.
As was reported on July 19th on this blog, Goldman posted record profits along with JP Morgan/Chase. The fact that Goldman Sachs made record profits betting against it's own bad mortgages bundled/packaged together as derivatives and hedge its own bets and had companies like AIG to provide insurance - known as credit-default swaps as well as receiving government TARP funds is not sitting well with main street.

Matt Taibbi attacked Goldman in his article in Rolling Stone magazine titled, "THE GREAT AMERICAN BUBBLE MACHINE", "From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they're about to do it again"
please read the full article here

David Weidner also had a go on the www.marketwatch.com in his article "Government Sachs is in control"
please read the full article here
Matt Goldstein also posted an article on Reuters, "Goldman’s real estate gambit", "This savvy and somewhat stealthy strategy enabled Goldman to pawn off lots of its soon-to-be toxic mortgages and mortgage-backed securities on other institutions — forcing those foolhardy speculators to pay the price when the subprime market blew up.And much to everyone else’s chagrin, Goldman even made money off the housing meltdown when some of its hedges — specifically a bet that a subprime mortgage index would plunge — paid off handsomely."
Please see the full article here.

No article on Goldman can also be posted without Max Keisers meltdown on their Modus Operandi, Enjoy.

Quote of the Day

"The reason I talk to myself is that I'm the only one whose answers I accept. "
George Carlin

Eye on the Economy: U.S. manufacturers scraping bottom

From the Charlotte Observer:
U.S. factory output at its lowest point in 60 years, and even massive job cuts haven't produced profits.

By Kevin G. Hall
McClatchy Newspapers

Posted: Tuesday, Jul. 28, 2009

LANDRUM, S.C. Las Vegas has always served as an important – if odd – barometer for Charles Martin's manufacturing firm, which makes commercial-grade door hinges.

That's because even in bad times, casinos still went up in Nevada.

Not so today.

“When gamblers aren't building, forget about people who make rational decisions,” said Martin, president of Bommer Industries, the last completely American manufacturer of door hinges for hotels, malls, universities and other big commercial buyers. “The gamblers have quit building, and they're always optimistic.”

The U.S. manufacturing sector is trying to claw back from a deep downturn, and manufacturing globally is on the skids. The climb back will be long and painful because the situation facing the sector isn't just bad. It's awful.

The Federal Reserve's latest measure of industrial output shows that in June, U.S. manufacturers operated at 64.6 percent of capacity. It means they are producing at more than a third below their potential – the worst rate since recordkeeping began in 1948. Since December 2007, through last month, manufacturers shed 1.9 million jobs, according to the U.S. Labor Department.

Located 70 miles west of Charlotte, Bommer Industries was founded in 1876 to make hinges for barn doors. It's since come to dominate the market for spring-loaded hinges in a way that Xerox became synonymous with copiers. Martin's product isn't glamorous, but it's essential to virtually any large-scale commercial construction.

That makes Bommer a good measure of the broader U.S. manufacturing sector. Already struggling against what Martin calls the “Chinese invasion,” the company is positioning itself for the eventual economic rebound, trimming its workforce by 18 percent and hunting for new business.

Even if the recession ends in the fall, as many economists predict, significant growth for Bommer and other manufacturers will remain elusive.

“At best, the latter part of 2010,” Martin said during an in interview in tiny Landrum, where the company relocated from Brooklyn, N.Y. in 1953. “From my own perspective, we've got at least 12 (more) months in the doldrums.”

Data researcher Sageworks Inc. collects data from privately held manufacturers – those who don't offer shares of stock to the public. It recently found bad news in two belwethers: The time to collect payment from buyers and the amount of inventory on hand.

Another important measure, profit per employee, is at the lowest level since the 2001-2002 recession. Sales by private manufacturers contracted almost a percentage point in 2001, but have shrunk by more than 3.7 percent in the first half of this year. Even as manufacturers shed jobs, they're not becoming more profitable.

“Basically the economy is softer than we thought,” said Brian Hamilton, CEO of Sageworks. “It's taken us by surprise… and is worrisome. We're obviously not as reliant on the manufacturing sector, but that's the one you think always has more stability.”

The Bureau of Economic Analysis estimates manufacturing accounted for 11.5 percent of all U.S. economic activity last year – far below the record 28.3 percent of all U.S. economic activity in 1953.

In past recessions, there wasn't the blanket downturn witnessed today.

“All the key demand components have fallen off and that is unprecedented, especially when compared to the last recessions,” said David Heuther, chief economist for the National Association of Manufacturers. “This downturn has really hit manufacturing across the board.”

Quote of the Day

Behold the fool saith, "Put not all thine eggs in the one basket" -- which is but a manner of saying, "Scatter your money and your attention;" but the wise man saith, "Put all your eggs in the one basket and --WATCH THAT BASKET."
- Pudd'nHead Wilson's Calender
Mark Twain

U.S. Economy: Home Prices Rise, Confidence Declines

Bloomberg Reports:
July 28 (Bloomberg) -- A gauge of U.S. house prices posted its first monthly gain in three years, providing some solace to consumers shaken by rising joblessness.

The S&P/Case-Shiller home-price index rose 0.5 percent in May from the prior month, the first gain since July 2006 and biggest since May of that year, the group said today in New York. A Conference Board report showed consumer confidence this month fell more than forecast.

Stabilization of the worst housing market since the 1930s and a rebound in stocks may bring an end this quarter to the record slump in household wealth. Even so, Americans are likely to boost savings and limit spending as unemployment is projected to top 10 percent by early 2010, restraining any recovery from the deepest recession in five decades.

“The fact that home prices may be finding some semblance of stability is good news that things are not likely to get worse,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Folks are still concerned about their jobs” and “the loss of housing wealth is going to weigh on consumer spending for years to come.”

Stocks fell and Treasury securities rose after the worse- than-projected confidence report. The Standard & Poor’s 500 index closed at 979.62, down 0.3 from the prior day’s eight- month high. The yield on the benchmark 10-year Treasury note fell to 3.68 percent at 4:11 p.m. in New York from 3.72 percent late yesterday.

Less Confidence

The Conference Board’s confidence index dropped to 46.6, a second consecutive decline, following a reading of 49.3 in June, the New York-based research group said. The figure reached a record low of 25.3 in February.

The S&P/Case-Shiller home-price index was down 17.1 percent from May 2008, less than projected and the smallest year-over- year drop in nine months.

Economists forecast the index would drop 17.9 percent from a year earlier, according to the median of 32 projections in a Bloomberg News survey. Estimates ranged from declines of 17.5 percent to 18.3 percent.

Compared with a month earlier, 14 cities showed price gains, led by a 4.1 percent jump in Cleveland and a 1.9 percent increase in Dallas.

The price figures aren’t adjusted for seasonal effects, so economists prefer to focus on year-over-year changes. Adjusted for seasonal changes, the index fell 0.2 percent in May, the smallest monthly decline since February 2007.

Signs of ‘Bottom’

“If you’re looking for a bottom, there’s a lot of good stuff here,” Karl Case, an economics professor at Wellesley College and co-creator of the S&P/Case-Shiller index, said on a Bloomberg Radio interview. “If you’re looking for a real recovery, it’s going to take some time.”

The report buttresses other measures that have shown a deceleration in price declines. The Federal Housing Finance Agency said last week that its purchase-only price index was down 5.6 percent in May from a year earlier, the smallest annual drop in 10 months.

The FHFA index is a national measure that tracks houses bought with mortgages purchased by Fannie Mae or Freddie Mac and excludes many of the foreclosure sales and properties bought with non-conventional mortgages. In addition to being limited to 20 areas, the S&P/Case-Shiller report also includes distressed properties and those bought with non-conventional loans such as jumbo mortgages.

Confidence Breakdown

The Conference Board’s measure of present conditions decreased to 23.4 from 25 the prior month, reflecting deteriorating perceptions on job availability. The gauge of expectations for the next six months fell to 62 from 65.5 as Americans grew more pessimistic about jobs and income prospects.

Today’s figures corroborate other reports. The Reuters/University of Michigan final index of consumer sentiment declined in July for the first time in five months as surging unemployment and stagnant wages shook households.

The economy has lost 6.5 million jobs since the recession began in December 2007, making it the biggest employment slump of any downturn in the last eight decades. Economists surveyed by Bloomberg predict the unemployment rate will exceed 10 percent by the first quarter of next year from 9.5 percent in June, the highest level since 1983.

Declines in home prices and stocks cut household net worth by $13.9 trillion through the first quarter, according to figures from the Federal Reserve. The need to rebuild tattered finances has prompted Americans to limit spending and boost savings.

Slow Recovery

“We are preparing for this recovery to take a while to pick up steam,” Frits van Paasschen, chief executive officer of Starwood Hotels & Resorts Worldwide Inc., said in a conference call with analysts last week. The third-largest U.S. lodging company’s second-quarter earnings beat analysts’ estimates.

Fed Chairman Bernanke said July 22 he cannot “guarantee by any means” that declines in home prices are over “but we have seen a few positive indicators.”

The central bank has established a $1.25 trillion program to purchase securities backed by home loans in an effort to put a floor under the housing market and lower borrowing costs.

Eye on the Economy:Financial bailout's cost to U.S. could total almost $24 trillion

From the Associated Press:
Watchdog says U.S. bill for TARP could be huge

Financial bailout's cost to U.S. could total almost $24 trillion

The Associated Press

updated 3:07 p.m. CT, Mon., July 20, 2009

WASHINGTON - The federal government has devoted $4.7 trillion to help the financial sector through its crisis, a watchdog report said Monday.

Under the worst of circumstances, the report said, the government's maximum exposure could total nearly $24 trillion, or $80,000 for every American.

The figures are part of a tough new quarterly report to Congress from special inspector general Neil Barofsky, who accuses the Treasury Department of repeatedly failing to adopt recommendations aimed at making one component of the government financial rescue effort more accountable and transparent.

The $4.7 trillion commitment to the industry equals about one third of the overall U.S. economy and takes into account about 50 initiatives and programs set up since 2007 by the Bush and Obama administrations as well as by the Federal Reserve. Barofsky oversees one of the initiatives — the $700 billion Troubled Asset Relief Program.

Much of the government assistance is backed by collateral and Barofsky's $23.7 trillion estimate represents the gross, not net, exposure that the government could face. No one has suggested that the full amount will be used.

Because of declining participation in short-term loan programs and because some infusions of money have been repaid, the maximum amount actually spent has declined to a current outstanding balance of $3 trillion, Barofsky said.

The agencies and the programs assisting the financial sector include a newly created Federal Housing Finance Agency, increased deposit insurance initiated by the Federal Deposit Insurance Corp., and 18 support programs created by the Fed under the special powers it can deploy to address a systemwide financial crisis.

Banks have cut back on their use of the Fed's emergency lending program as well as other programs to ease credit stresses. Given that, the Fed has reduced the amount it will lend to financial institutions under two programs and it has decided to let a program to support money market mutual funds to expire as currently scheduled at the end of October.

Barofsky's $23.7 trillion estimate represents the maximum exposure that the government would face if all eligible applicants requested the maximum assistance at the same time. It does not account for the fees and other costs that some of these programs charge and for the collateral that many of the programs require that participants provide.

"While quantity and quality of the assets backing all of these programs vary, ignoring that side of these programs misrepresents 'potential exposure' associated with them," Treasury spokesman Andrew Williams said.

In his report, Barofsky says Treasury has accepted some of his recommendations for greater accountability, but says the department has not taken steps to require all TARP recipients to report on their actual use of funds. He said Treasury also should report the values of its investments in banks and other financial institutions, disclose the identity of borrowers under a nonrecourse loan program and disclose trading activity under a public-private investment fund.

Barofsky says Treasury's inaction means taxpayers have not been told what the financial institutions that have received assistance are doing with the money.

Barofsky's conclusion is contained in a quarterly report to Congress and in testimony he is prepared to give Tuesday to the House Oversight and Government Reform Committee.

"The very credibility of TARP (and thus in large measure its chance of success) depends on whether Treasury will commit, in deed as in word, to operate TARP with the highest degree of transparency possible," Barofsky said.

Retailers fear two more years of woe: survey

LONDON (Reuters) - Almost three-quarters of some of the world's largest retailers expect the current economic downturn to impact their business for up to two more years, according to a survey on Monday from business advisory firm AlixPartners.

The survey of executives at about 100 retailers with headquarters spread across the world's largest economies said firms planned to cope with the expected two-year hangover by making significant structural changes to their businesses.

It said planned actions included store and warehouse closures, staff cuts and product pruning.

The survey also found that almost three quarters of companies were not communicating with their suppliers' credit insurers frequently, while nearly half have had their suppliers' credit limits cut.

"This study shows that retailers across Europe, and elsewhere, are not communicating regularly enough with credit insurers," said AlixPartners director Sanjay Bailur.

"This lack of communication, coupled with a lax approach to cash management can quickly result in companies facing serious liquidity issues."

Quote of the Day

"It isn't the sum you get, it's how much you can buy with it, that's the important thing; and it's that that tells whether your wages are high in fact or only high in name."

- A Connecticut Yankee in King Arthur's Court,
Mark Twain

Economic Update II: Goldman Sachs Posts Record Profit, Beating Estimates

Bloomberg reports:

July 14 (Bloomberg) -- Goldman Sachs Group Inc. posted record earnings as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10 billion in U.S. rescue funds.

Second-quarter net income was $3.44 billion, or $4.93 a share, the New York-based bank said today in a statement. That surpassed the $3.65 per-share average estimate of 22 analysts surveyed by Bloomberg and was 65 percent higher than last year’s second quarter.

Chief Executive Officer Lloyd Blankfein, after repaying the government’s bailout money along with $426 million in dividends to taxpayers, is reverting to a business model analysts deemed irretrievably broken during the global credit crisis. While rivals including Morgan Stanley have pared risks, Goldman Sachs has increased them this year.

“The wind is at their back, so their earnings numbers are going to be very strong,” said Jon Fisher, a portfolio manager at Fifth Third Asset Management in Minneapolis, which oversees about $18 billion. “I think numbers are going up. I think they repeat this quarter next quarter and the quarter after that.” Fisher said Fifth Third doesn’t own the shares now and will probably buy them in the next few weeks.

Repaying Treasury

Last year’s credit freeze led Blankfein to convert the firm to a Federal Reserve-regulated bank, accept government funds and report the first quarterly loss as a public company. This year Goldman Sachs has issued new shares, repaid the U.S. Treasury and reaped higher fees from selling stocks and bonds.

It’s also paying its employees more money. The company set aside $6.65 billion for compensation and benefits in the period, or 48 percent of revenue, compared with $4.71 billion in the first quarter. The number of employees fell 1 percent to 29,400 from 29,800 at the end of March.

Senator Sherrod Brown, an Ohio Democrat, said Goldman Sachs should “show some restraint” on compensation after criticism that outsized pay packages contributed to the financial crisis by encouraging excessive risk-taking.

James Reynolds, chief executive officer of Loop Capital Markets LLC in Chicago, said criticism of Goldman Sachs’s success was misplaced.

Government’s Intention

“This is what the government investment was meant to do,” Reynolds said in an interview. “I just don’t understand why the country, or a working person in Michigan, Ohio or Kansas, would cheer against Goldman doing well just because the government invested in Goldman at a time when the financial markets were in chaos.”

Goldman Sachs, the fifth-biggest U.S. bank by assets, climbed 77 percent in New York Stock Exchange trading this year. It gained 22 cents to $149.66 in composite trading at 4 p.m. Goldman Sachs has struggled to climb back above $150 since the stock fell below that level after Lehman’s bankruptcy in September.

The difference between the yield on Goldman Sachs’s bonds and U.S. Treasuries, known as the spread, has narrowed this year, indicating investors have regained comfort in lending to the company. The spread on $3.2 billion of 5.95 percent senior unsecured notes maturing in 2018 was 268 basis points yesterday, compared with 472 basis points on March 31. A basis point is one-hundredth of a percentage point.

Government Backing

Chief Financial Officer David Viniar said on a conference call with analysts today that there are no call provisions on the $30 billion of government-guaranteed debt that Goldman issued between November and March so the firm isn’t able to buy it back.

“While markets remain fragile and we recognize the challenges the broader economy faces, our second-quarter results reflected the combination of improving financial market conditions and a deep and diverse client franchise,” Blankfein, 54, said in the statement.

The results follow the U.S. bank-rescue effort that funneled about $200 billion from taxpayers to financial firms, including $10 billion to Goldman Sachs, after the bankruptcy of Lehman and near-failure of American International Group Inc.

Revenue in the three months ended June 26 was $13.8 billion, compared with $9.43 billion in the first quarter and $9.42 billion in the second quarter a year earlier. The company’s second quarter ended in May until Goldman Sachs changed its fiscal year last quarter.

Book Value

Book value per share rose to $106.41 at the end of June compared with $98.82 at the end of March. Return on equity, a gauge of how effectively the firm invests earnings, was 23 percent in the second quarter compared with 14.3 percent in the first quarter and 20.4 percent in last year’s second quarter, the company said.

Revenue from fixed-income, currencies and commodities, the company’s biggest unit, was a record $6.8 billion in the second quarter, which compared with $6.56 billion in the first quarter and $2.38 billion in last year’s second quarter.

Goldman’s earnings included $1.4 billion of writedowns related to commercial real estate, including $700 million of fixed-income writedowns, $500 million lost on equity investments and $170 million of impairment charges, Viniar said in an interview with Bloomberg.

The figures also included about $300 million of writedowns related to the narrowing of the firm’s own credit spreads during the quarter, Viniar said.

Equity Revenue

Equities revenue of $3.18 billion in the quarter compared with $2 billion in the first quarter and $2.49 billion in last year’s second quarter.

Value-at-risk, a statistical measure of how much the firm’s trading operations could lose in a day, rose to an average of $245 million in the quarter from $240 million in the first quarter. In the second quarter of 2008, VaR averaged $184 million.

“Our model really never changed, we’ve said very consistently that our business model remained the same,” Viniar said.

Revenue from equity underwriting jumped to $736 million from $48 million in the first quarter and compared with $616 million a year ago.

“There are still a lot of corporations around the world that need to rebuild their balance sheets,” Viniar said on a conference call with analysts. “If markets stay OK and stay receptive, I think there will be a lot of equity offerings” in the second half, he said.

Debt Underwriting

Debt underwriting revenue was $336 million compared with $248 million in the prior period and $269 million in last year’s second quarter. Financial advisory, which includes fees for takeover advice, fell to $368 million from $527 million in the first quarter and $800 million a year ago.

Principal investments, which include the value of Goldman Sachs’s stakes in other companies and real estate, generated $811 million of gains after losing $1.41 billion in the first quarter.

Asset-management revenue declined to $922 million from $949 million in the first quarter and compared with $1.16 billion a year earlier. Revenue from securities services, the company’s prime brokerage business that serves hedge funds, rose to $615 million from $503 million in the first quarter.

Investors will receive earnings reports later this week from JPMorgan Chase & Co., Citigroup Inc., and Bank of America Corp. Morgan Stanley, which was the second-biggest U.S. securities firm behind Goldman Sachs before both firms converted to banks last year, said it will report next week.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Economic Update I :JPMorgan Profits From Investment Bank; Defaults Rise

Bloomberg reports:

July 16 (Bloomberg) -- JPMorgan Chase & Co., the second- largest U.S. bank, said profit rose for the first time since 2007 on record investment-banking fees. Chief Executive Officer Jamie Dimon predicted more losses on consumer loans.

Second-quarter earnings increased to $2.7 billion, or 28 cents a share, from $2 billion a year earlier, the New York- based bank said today in a statement. The average estimate of 14 analysts surveyed by Bloomberg was 5 cents a share, including costs to repay government bailout funds and an assessment by the Federal Deposit Insurance Corp.

Investment-banking revenue from trading and stock and bond underwriting is helping offset rising defaults on consumer loans, such as mortgages and credit cards. Dimon said he doesn’t expect the card business to make a profit this year or in 2010, and the company increased its loss projections for prime and subprime mortgages.

“The credit problems, although they have stabilized, we’re still not out of the woods,” said Gerard Cassidy, a banking analyst at RBC Capital Markets in Portland, Maine, in a Bloomberg Radio interview. “For JPMorgan Chase, the challenge going forward is going to continue to be deterioration of credit.”

JPMorgan fell 13 cents to $36.13 at 4 p.m. in New York Stock Exchange composite trading, paring its gain for the year to 15 percent.

Net Revenue

The firm’s total net revenue was a record $27.7 billion on a managed basis, which compares with $19.7 billion in last year’s second-quarter. The return on common equity fell to 3 percent, which includes a charge for repaying government money. That figure would have been 6 percent excluding the charge to repay the Troubled Asset Relief Program, unchanged from the previous year’s period.

JPMorgan’s retail bank posted income of $15 million as home-equity and prime mortgage defaults continued to rise. Home- equity charge-offs climbed to $1.3 billion, or 4.61 percent. Prime mortgage defaults were $481 million, or 3.07 percent, versus $104 million, or 1.08 percent a year earlier.

Credit cards lost $672 million, compared with income of $250 million in the second-quarter last year. The managed charge-off rate, which generally tracks unemployment, climbed to 10.03 percent, from 7.72 percent in the first quarter and 4.98 percent in the year-earlier period, according to the statement.

JPMorgan said losses in its Chase credit-card portfolio may be 10 percent next quarter and will be “highly dependent” on unemployment after that. Losses for cards issued by Washington Mutual, which the bank acquired in September of 2008, may reach 24 percent by the end of the year, the company said.

Credit Losses

The lender boosted its loan loss reserve to $2 billion in the quarter, adding to the $28 billion set aside to cover credit losses as of March 31. Tier 1 capital, a gauge of the bank’s ability to withstand losses, climbed to 9.7 percent from 9.3 percent in the first quarter.

JPMorgan said prime mortgage losses may be $600 million “over the next several quarters,” and subprime losses may be $500 million. Its guidance for home-equity loan losses remained the same at $1.4 billion.

Dimon, 53, said the firm supported “proper consumer protection” and that pending legislation setting up an agency to monitor consumer lending practices would hurt short-term profits in credit cards.

“There should be less regulatory agencies and not more” to avoid unnecessary bureaucracy, Dimon said on a call with analysts.

Investment Bank

The investment bank generated $1.47 billion of profit, almost quadruple the amount earned in last year’s second- quarter, as fees from underwriting stock and bond deals and fixed-income trading boosted results.

This was the first time since the beginning of the credit crisis in 2007 that JPMorgan didn’t take writedowns on its leveraged loans, Chief Financial Officer Michael Cavanagh said. The bank had “modestly positive” gains in the second quarter, net of hedges.

JPMorgan now holds loans with a market value of $3.3 billion, down from $43 billion in September 2007, including loans acquired from failed investment bank Bear Stearns Cos.

The bank ranks No. 1 in underwriting stocks globally and in managing bonds sold in the U.S., according to data compiled by Bloomberg.

Goldman Sachs Group Inc. said July 14 it made $3.44 billion in the quarter on record revenue from trading and underwriting stock. Revenue in the three months ended June 26 was $13.8 billion, up from $9.43 billion in the first quarter and $9.42 billion in the second quarter a year earlier.

Asset Management

Profit at JPMorgan’s asset-management unit fell 11 percent to $352 million, while treasury and securities services posted income of $379 million, 11 percent less than the previous year. The commercial banking unit had income of $368 million, a 4 percent increase from last year’s quarter.

The bank is the largest to repay government cash under the Troubled Asset Relief Program, freeing it from compensation and other government restrictions. JPMorgan returned $25 billion in government funds last month, and paid more than $795 million to the U.S. in dividends, according to a June 17 statement. The TARP repayment accounted for 27 cents a share, or $1.1 billion, the bank said today.

JPMorgan paid the FDIC a special assessment of $675 million in the quarter, resulting in a cost of 10 cents a share, as the agency asks banks to help replenish its cash reserves. The fund fell to $13 billion in the first quarter, the lowest since September 1993, after 53 lenders failed far this year.

Bank of America Corp., the biggest U.S. bank by assets, and No. 3 Citigroup Inc. are scheduled to release their latest results tomorrow. Wells Fargo & Co. and Morgan Stanley will announce earnings July 22.

To contact the reporter on this story: Elizabeth Hester in New York at ehester@bloomberg.net.

Quote of the day

“We can't solve problems by using the same kind of thinking we used when we created them.”

- Albert Einstein

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Quote of the Day

"Judge a man by his questions rather than his answers."

-Voltaire

Small Businesses: In Downturns, Invest in Public Relations

From Expert Business Source

Suzanna de Baca

In today’s economy, businesses large and small are aggressively cutting costs. Companies are laying off valued workers, freezing salaries, slashing budgets, foregoing business travel, and canceling entertainment. But as you prune your budget, think strategically: one area you can’t afford to trim is public relations.

I’m not a PR person; I’m an investment advisor to individuals and business owners. But if you’re looking for some quick ROI, focusing on your public relations efforts is probably one of the best investments you can make right now. In a difficult economy, public relations – which can cover a wide range of marketing, prospecting communications, advertising, and customer/client outreach efforts– can be the key to success now and in the future.

It doesn’t matter what you make or do, you have to sell it. If people don’t know about you, your products or your services or if they aren’t reminded about them, then how can they buy from you or hire you? You must be visible.

The good new is that public relations can be one of the most affordable ways to let customers know what you’re doing and how you can help them. In addition to using a traditional PR firm to help you get press, you can employ countless free or inexpensive PR techniques yourself.

The digital world has made grass roots PR easier than ever. Email can be your best friend. It costs very little, if anything, to send out email blasts highlighting your successes, offering special incentives or unique offerings to customers or clients, or brief newsletters discussing points of interest in your industry.

If you have not already done so, consider using social media such as MySpace or Facebook. Of course, blogs are an effective way of getting your message out, creating conversations with customers, or driving traffic to your website. For more tech savvy companies, there are text messaging, Twitter, or iPhone apps.

As I mentioned in an earlier Expert Business Source article, “Client Thank You Notes: A Personal Touch in a Tough Time,” sometimes a simple gesture like a call or handwritten note can be the most powerful type of communication. Call your clients or customers. Invite them into your office, if only for a cup of coffee. Give them updates. Thank them for their business. Ask them for suggestions of what might be good promotions or niche markets, products or services. Ask them what is on their minds. Ask if they’d like to contribute to your newsletter or blog. Depending on your type of business, ask for referrals to other people you might be able to help or serve. Letting your clients know you appreciate them is always great PR – also referred to as good old client service!

In a difficult environment, small businesses cannot afford to hibernate. You must be seen and you must communicate. Investing in your own public relations efforts will keep you in front of your customers and let them know that your doors are open. Plowing time and even a small amount of money into communications and outreach can be one of the best investments you can make in any environment. In this challenging atmosphere, concentrating on public relations might be the smartest investment you can make.

Economic update

There have been a couple of interesting stories over the weekend covering the U.S and global economic crisis. Instead of posting the entire article, please see some short descriptions and links to reports that stood out.

Credit-card companies raising interest rates, cutting holders' limits by The Seattle Times - Credit card companies has raised interest and lowering credit limits since credit-card-reform legislation was signed into law in May. Greg McBride a senior analyst with Bankrate.com warns that between now and late February when the legislation takes effect, issuers will continue to raise credit-card rates as well as institute new and higher fees.

I have reported on California's fiscal crisis.The have issued IOU's to pay vendors. The Financial Times reports on the impact this will have on financial markets, "California ills could give US headache".

The Los Angeles Times reported that"Many underwater homeowners are deliberately walking away from mortgages", A study finds that 26% of the defaults across the country are calculated economic decisions to bail out of loans by borrowers who could afford to make the monthly payments.

U.S. Commercial Construction to Drop 16% This Year, Report Says

Posted on Bloomberg:

July 13 (Bloomberg) -- Construction spending on offices, retail centers and hotels is likely to fall 16 percent this year and 12 percent in 2010, more than previously forecast, the American Institute of Architects said.

Rising unemployment and reductions in business spending prompted the Washington-based institute to cut its outlook from January, when it predicted non-residential construction spending would drop 11 percent this year and 5 percent in 2010.

“We’ve had a really rocky six months in the economy and in the construction sector,” Kermit Baker, the institute’s chief economist, said in a telephone interview. “People are seeing a real tough environment out there and not a lot of incentive to invest in projects.”

Sentiment among U.S. consumers dropped this month as the country’s unemployment rate approached 10 percent, according to a Reuters/University of Michigan preliminary index. The economy probably shrank at a 1.8 percent rate from April to June, according to a Bloomberg News survey. Nonresidential construction tends to lag behind the economy, Baker said.

Spending on office buildings is forecast to sag 22 percent this year and 17 percent in 2010, while retail construction probably will sink 28 percent this year and 13 percent in 2010, the architects group said.

Looking for Signs

“Why do you build new office buildings? You need to see job numbers pick up,” Baker said. “Why do you build new retail centers? You need to see consumer spending pick up.”

Hotel construction is likely to decline 26 percent this year and 17 percent in 2010, the institute said. Industrial spending is forecast to dip 0.8 percent this year and 28 percent in 2010, according to the report.

The Consensus Construction Forecast uses projections from sources including Global Insight Inc., Moody’s Economy.com, the Portland Cement Association and management consulting firm FMI Corp. The report forecasts U.S. construction spending, adjusted for inflation, over the coming 12 to 18 months.

To contact the reporter on this story: Daniel Taub in Los Angeles at dtaub@bloomberg.net.

Alcoa Loss Is Narrower Than Forecast on Output Cuts

By Rob Delaney

July 8 (Bloomberg) -- Alcoa Inc., the largest U.S. aluminum producer, reported a second-quarter loss that was narrower than analysts’ estimates after production cuts and workforce reductions helped the company save money.

Excluding certain items, the loss was 26 cents a share, narrower than analysts’ average estimate for a 38-cent loss. The net loss of $454 million, or 47 cents a share, compared with net income of $546 million, or 66 cents, a year earlier, New York- based Alcoa said today in a statement. Sales fell 41 percent to $4.24 billion.

Chief Executive Officer Klaus Kleinfeld has reduced output and fired workers as the recession slows demand from builders and manufacturers. Excess production capacity and stockpiles that have risen 89 percent this year have kept aluminum’s price little changed this year, compared with a 54 percent gain for copper and a 28 percent increase for nickel.

“Alcoa has the staying power and reduced cost base to withstand the most serious downturn in the history of the aluminum industry,” Kleinfeld said in the statement.

Alcoa rose 5 cents to $9.46 at 4:15 p.m. in New York Stock Exchange composite trading. The shares fell 16 percent this year before today.

Alcoa is the first company in the Dow Jones Industrial Average to announce results for the three months through June.

To contact the reporter responsible for this story: Rob Delaney in Toronto at robdelaney@bloomberg.net.

One-Third of All Packaging Materials to be Eco-Friendly by 2014, Forecasts Pike Research

The following article was posted on Packaging Digest

Business Wire, May 19, 2009 Tuesday 9:00 AM GMT

In the industrialized world, packaging for all types of products has become both necessary and truly ubiquitous. As more people become "modern consumers" around the world, it is an increasing burden on producers, individuals, and the environment. According to a new study from Pike Research , sustainable packaging is a fast-growing segment of the global packaging industry, and will grow to 32% of the total market by 2014, up from just 21% in 2009.

"The $429 billion global packaging industry is huge but extremely fragmented, with no clear market leaders," says managing director Clint Wheelock. "As such, the move toward sustainable packaging represents a broad-based effort by manufacturers, retailers, industry groups, and governments to promote the design of minimal packaging that can be easily reclaimed. A tremendous amount of innovation is going into reducing energy requirements to manufacture packaging and using more recyclable and compostable materials, but there is still a long way to go."

The cleantech market intelligence firm forecasts that plastic-based packaging, which represents 35% of all materials used, will be the fastest-growing sector of the sustainable packaging market over the next five years. Metal-based packaging, one of the easiest materials to recycle, will continue to be the sector with the highest percentage of sustainability - by 2014, more than 63% of metal-based packaging will be environmentally friendly.

Pike Research's study, "Sustainable Packaging" , assesses the current market conditions for packaging and outlines the future opportunities to create more environmentally responsible, sustainable, and eco-friendly packaging processes. The report examines key market drivers and challenges in various industries around the world and includes detailed five-year forecasts for the total packaging market as well as the sustainable packaging sector, segmented by packaging material categories and world regions.

Breaking news:Yuan Deposes Dollar on China Border in Sign of Future

The following article appear on Bloomberg after earlier this week Reuters reported that "China, Russia and Brazil will use this week's G8 summit in Italy to push their view that the world needs to start seeking a new global reserve currency as an alternative to the dollar"

By Bloomberg News

July 8 (Bloomberg) -- Huang Xinyuan, who sells mining equipment and pesticides to customers across China’s border with Vietnam, says he no longer wants payment in U.S. dollars and prefers the yuan.

Sales using the greenback at Guangxi Jinbei Group, where Huang is vice president, dropped to 30 percent of contracts in 2008 from 87 percent in 2007. The yuan, which has gained 21 percent since it was allowed to strengthen against the dollar starting in 2005, offers greater stability, he said.

“In recent years, the dollar has gone in only one direction and that is down,” said Huang, 45, in his second- floor office in Pingxiang, a town set amongst karst limestone hills and sugar-cane fields in China’s southwest Guangxi Zhuang Autonomous Region, three kilometers (1.9 miles) from Vietnam. “Settling our orders in yuan removes a major risk.”

China expanded yuan settlement agreements last week from border zones to its largest financial centers, including Shanghai, Guangzhou and Hong Kong. The program is being rolled out across Malaysia, Indonesia, Brazil and Russia, all nations seeking to reduce the dollar’s role as the linchpin of world finance and trade.

The central bank first brought up the concept of a supranational currency to replace the greenback in reserves in March. It will sponsor use of the yuan in trade by arranging export tax rebates. Russia and India said the global financial crisis had highlighted the dollar’s flaws and called for a debate before the Group of Eight leaders meet in L’Aquila, Italy, starting today.

‘Raise Questions’

“It does give you an idea of what the future could look like,” said Ben Simpfendorfer, chief China economist in Hong Kong at Royal Bank of Scotland Group Plc, the fifth-biggest foreign-exchange trader. “The Chinese see an opportunity at this point to raise questions about the dollar and its status as a reserve currency.”

China, the biggest overseas holder of U.S. Treasuries, trimmed its holdings of government notes and bonds by $4.4 billion to $763.5 billion in April. Premier Wen Jiabao said in March that he was “worried” the dollar would weaken as U.S. President Barack Obama sells record amounts of debt to fund his $787 billion economic stimulus plan.

“The objective is to develop a substitute for the dollar as the world’s reserve currency,” said Tim Condon, Singapore- based head of Asia research at ING Groep NV, part of the largest Dutch financial-services group. “That will reduce the ability of the U.S. government to finance deficits with impunity.”

‘Justifiable Confidence’

Treasury Secretary Timothy Geithner said during a visit to Beijing on June 2 that Chinese officials expressed “justifiable confidence” in the strength of the American economy. China expects the greenback to maintain its role for “many years to come,” Deputy Foreign Minister He Yafei told reporters in Rome on July 5.

In Pingxiang’s Puzhai border zone, traders prefer the yuan. A parking lot that doubles as a wholesale market is jammed with container trucks with license plates from as far as Shandong, about 1,930 kilometers to the north. Garlic-laden motorcycles snake through a checkpoint to the border control.

Traders from Vietnam bring harvests of lychees and dragon fruit, departing with toys, household appliances and medical supplies to sell back home.

Luo Huiguang, 27, who sells as much as 100 tons daily of onions and garlic, collects payment in yuan wired from Vietnam.

“I prefer it to the Vietnam dong or U.S. dollar,” said Luo as he shuttled between warehouses and trucks. “There’s less hassle and we don’t need to convert the currency.”

Erase Profits

Exporters typically set prices to earn 5 percent profit on sales, so 1 percent currency transaction costs and swings in the value of the dollar can wipe out returns, Simpfendorfer said. Many businesses lack the scale to hedge foreign-exchange risks, said Huang at Jinbei, which did $50 million in trade last year.

Limited use of the yuan has been allowed since 2003 in border trade with Vietnam and Laos to the south and Mongolia and Russia in the north, according to a book published by the Beijing-based State Administration of Foreign Exchange.

The central bank extended settlement last week by offering companies in Shanghai and four southern cities tax breaks to start conducting trade in the currency with Hong Kong, Macau and the 10 members of the Association of Southeast Asian Nations, which includes Indonesia, Thailand and Malaysia.

In five years, yuan contracts may account for 50 percent of China’s trade with Hong Kong, which totaled $204 billion in 2008, according to Lian Ping, chief economist in Shanghai at Bank of Communications Co., the nation’s fifth-largest lender. They may make up 30 percent of shipments between the nation and Asean countries that last year reached $231 billion, he said.

Yuan Appreciation

“The yuan will resume appreciation next year,” Lian said. “More people will use the yuan in international trade.”

China’s central bank has limited the yuan’s gains in the past year to 0.3 percent to help support exports during the global recession. The dollar may depreciate by 5 percent annually against the currency over the next two years, ING’s Condon said. Simpfendorfer forecast the yuan will rise 5 percent to 6.5 per dollar from 6.833 by the middle of next year. The median forecast of 27 analysts in a Bloomberg survey was 6.7.

For all the concern that the dollar’s role is waning, China has continued to lead buying of U.S. assets. The greenback accounted for 65 percent of central bank reserves on March 31, up from 62.8 percent in June 2008, according to the International Monetary Fund in Washington.

‘China’s Desire’

“This is not a six-month or one-year story,” said Kenneth Akintewe, a Singapore-based fund manager who helps oversee $138 billion of assets at Aberdeen Asset Management Plc. “China’s desire to control the currency, particularly in the current environment, will supersede its ambitions for the yuan.”

China’s currency isn’t fully convertible for investment purposes. HSBC Holdings Plc, based in London, and Bank of East Asia Ltd. in Hong Kong won approval in May to be the first foreign banks to sell yuan bonds in Hong Kong.

Asian companies may be willing to accept yuan to win market share in the world’s fastest-growing economy, said Pushpanathan Sundram, a deputy secretary-general of Asean. The U.S. economy will contract 3 percent in 2009, while China expands 7.2 percent and the Asia-Pacific region grows 5 percent, according to World Bank forecasts.

“The use of the yuan may eventually boil down to simple economics,” Pushpanathan said. “Given China’s growing share in international trade, traders may find it makes economic sense to make settlements in the yuan.”

Russia, Brazil

Since December, the People’s Bank of China has provided 650 billion yuan ($95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency swaps, encouraging its use in trade and finance. Russia and China agreed to expand use of the ruble and yuan in bilateral trade on June 17. Brazil and China began studying a similar proposal in May.

Converting payments to a third currency “seems to be unreasonable” when Chinese partners are both supplying equipment and buying processed raw materials, said Pavel Maslovsky, deputy chairman of Peter Hambro Mining Plc, Russia’s second-largest gold producer. It develops iron ore projects in the Amur region bordering China.

“The Chinese economy is in such a shape now that their project to export yuan may turn highly efficient,” said Eduard Taran, chairman of OOO RATM Holding, a Siberian cement producer also considering buying Chinese machinery in yuan and exporting output in the currency.

About 160 kilometers north of Pingxiang, yellow cranes jut skywards from a dusty 3 square-kilometer construction site in the provincial capital of Nanning. The plot will house trade missions and businesses from the Asean countries.

“Many countries view China as the savior in this global economic crisis,” said Pan Hejun, vice-mayor. “It’s natural that other countries will be willing to use the yuan to settle trade and hold it among their reserves.”

--Chua Kong Ho, Judy Chen. With assistance from Shanthy Nambiar in Bangkok, Lilian Karunungan in Singapore and Brad Cook and Ilya Khrennikov in Moscow. Editors: Sandy Hendry, Neil Western