Actual finance blog

Bank of America Corp. said Tuesday it plans to raise its stake in China Construction Bank Corp. to nearly 11%.

The Charlotte-based banking company said it will exercise part of the option it has to buy more common shares of the Beijing-based China Construction Bank.

The option would be exercised under the terms of agreement when it first invested in the China bank in June 2005, when Bank of America (BAC, Fortune 500) bought a 9% stake in the bank in a $3 billion deal.

Bank of America said it intends to purchase 6 billion H-shares on or about June 5 for about 2.42 Hong Kong dollars per share, which would take its total stake to 25.1 billion H-shares, or 10.75% of China Construction (CICHF) bank’s issued shares. The 6 billion new shares may not be sold until Aug. 29, 2011, the company said.

Bank of America currently holds about 8.2% of the issued shares.

Since 2005, the two banks have launched nearly two dozen partnership projects, including a leasing business in Beijing and no-fee cash withdrawals from Bank of America’s ATM machines in China.

Shares of Bank of America rose 18 cents to $34.11 in morning trading Tuesday. 

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Bank of Montreal profits dropped to $642 million in the second quarter as the bank booked $151 million in provisions for credit losses, but gave a mildly optimistic outlook on the state of credit markets.

Earnings for the period ended April 30 were worth $1.26 per share, down from $671 million or $1.31 per share a year ago.

The bank's revenue improved four per cent year-over-year, to $2.62 billion.

In the capital markets division, net income dropped 7.5 per cent to $182 million, including a recovery of $42 million pre-tax, or about six cents per share, from writedowns logged in previous quarters.

Part of the reversal of previous charges was tied to the troubled Apex and Sitka asset-backed commercial paper trusts. Apex underwent a restructuring that completed on May 13, after the quarter ended, and the bank says it expects to recover more of its writedowns in the third quarter.

"Results in BMO Capital Markets reflect current market conditions as activity in the investment banking business was slow in the quarter," said BMO president and CEO Bill Downe.

But, he added, the bank has seen "indications that concerns are easing in credit markets as credit spreads are trending towards more normal levels and we are encouraged by these developments."

BMO's earnings per share (TSX: BMO) were below expectations, excluding the recoveries and an unusually low tax rate of 16.3 per cent, according to John Aiken of Dundee Capital Markets. He said core EPS was between $1.10 and $1.14 per share, compared with a Thomson Financial consensus expectation of $1.19.

"Further, with BMO, traditionally the low-provision bank, increasing its provision guidance, we believe that the other banks will face earnings headwinds in the coming quarters related to deteriorating credit and higher provisions," Aiken added.

BMO shares opened with a gain of one per cent after the quarterly release, but by midmorning were down 16 cents at $48.84 – compared with over $70 a year ago.

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Oil prices will likely take on more importance for the stock market next week as the summer driving season officially kicks off and as more companies are seen feeling the pinch of higher energy prices on their profit margins.

For the week, the Dow fell 3.9 percent, the S&P 500 shed 3.5 percent and the Nasdaq dropped 3.3 percent. For all three indexes, it was their worst weekly percentage drop in three months.

Pressure from higher energy costs is already being felt, with Kimberly-Clark (KMB.N: Quote, Profile, Research) announcing it intends to hike prices on its consumer goods products by 6 to 8 percent in the third quarter. The maker of Kleenex tissues and Huggies diapers said higher energy and raw materials costs were to blame for the price hikes.

Earlier in the week, Ford Motor Co (F.N: Quote, Profile, Research) said it no longer expected to return to profitability in 2009, with analysts saying the automaker’s recent gains have been overrun by a weak U.S. economy and spiraling oil prices.

With the earnings agenda nearly empty, investors will pay close attention for any other intermittent announcements about energy prices and their impact on profitability.

The industries most likely to downgrade their earnings outlooks are those “which have less elasticity of demand, such as the consumer discretionary sector, restaurants in particular,” said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama. “All they can do it make portions smaller or raise their prices, neither which are popular.”

The Dow Jones U.S. Restaurants & Bars index .DJUSRU fell 4.5 percent this week, its worst five-day percentage decline since the first trading week of the year.

More price hikes are likely to come from staples producers, which could help the individual shares, but may stoke overall inflation fears, said Brandon Thomas, chief investment officer with Portfolio Management Consultants in Chicago, a unit of Envestnet Asset Management. 

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Staples Inc. posted a slim 1.5% increase in its first-quarter profit, after posting small declines the previous two quarters amid slow retail sales of office products.

The world’s largest office products supplier said Tuesday its profit rose to $212.3 million, or 30 cents per share, in the three months ended May 3. That compares with a profit of $209.1 million, or 29 cents per share, a year earlier.

The latest profit matches analysts expectations.

Staples (SPLS, Fortune 500) says sales rose 6% to $4.9 billion from $4.59 billion a year ago, slightly beating analysts’ forecast of $4.83 billion.

Staples reaffirms its profit and sales forecast for the full year. It expects a weak economic climate throughout 2008. 

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Lowe’s Cos. reported a 17.9% drop in first-quarter earnings on Monday as the slumping U.S. housing market and softer economy hurt sales. Its shares fell almost 3% in premarket trading.

The nation’s second-biggest home improvement retailer said it earned $607 million, or 41 cents per share, in the three months ended May 2. That is down from $739 million, or 48 cents per share, in the first quarter of 2007.

Revenue slipped to $12.0 billion from $12.2 billion a year ago.

Analysts surveyed by Thomson Financial had been looking for net income of 40 cents a share on revenue of $12.4 billion. Estimates usually exclude one-time items.

Comparable-store sales — a closely watched gauge of retail health that measures sales at stores open at least a year — declined 8.4%. The company predicted that number would drop at least 6% in the current quarter and the year.

Lowe’s (LOW, Fortune 500) shares fell 73 cents, or 2.9%, to $24.16 in premarket trading.

"The challenging sales environment we have been experiencing for the past six quarters continued into the first quarter of 2008," said Chairman and Chief Executive Robert A. Niblock in a statement accompanying the report. "The generally poor economic outlook, including well-known housing pressures, rising food and fuel prices and a more negative employment picture eroded consumer confidence and impacted discretionary purchases for the home."

The company expects second-quarter total sales to rise about 1% on earnings of about 54 cents to 59 cents a share. Analysts have forecast earnings of 56 cents per share. For the year, total sales are expected to increase about 1%.

Lowe’s and bigger rival Home Depot Inc., which is expected to post first-quarter numbers Tuesday morning, have seen profits slide over the past year as a slump in the housing industry continues.

But the sentiment on Wall Street has been positive recently, and many expect home improvement retailers to benefit from an eventual recovery in the housing market. Shares of Lowe’s have risen 10% so far this year. 

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There is a growing sense that the worst of the credit crunch may be behind us. And despite a tamer-than-expected reading for April, inflation is still very much a concern for many Americans.

So with that in mind, could the Federal Reserve be forced to raise interest rates before the end of the year….even in the midst of the presidential race?

The Fed has historically been reluctant to make significant policy moves in the months leading up to the election.

In fact, some Republicans still think that President George H.W. Bush would have won in 1992 if Alan Greenspan had lowered interest rates more aggressively.

Still, the market now seems to think that Fed chair Ben Bernanke may take action just a few days before Election Day on Nov. 4.

According to futures listed on the Chicago Board of Trade, investors are currently pricing in a 56% chance that the Fed will raise its benchmark federal funds rate by a quarter of a point, to 2.25%, at the conclusion of a two-day meeting on Oct. 29. Traders widely expect the Fed to keep rates at 2% at meetings in June, August and September.

There have been calls for the Fed to, at the very least, leave rates alone for the foreseeable future. Critics of the Fed have maintained that a relatively low federal funds rate, an overnight bank lending rate that affects how much interest many consumers and businesses pay on loans, has weakened the dollar and helped fuel the boom in commodity prices.

The economy, as it was in 1992, is likely to be the primary focus for this election. There is a reason why we at CNN and CNNMoney.com have dubbed this ‘Issue #1′ after all.

Even those who don’t think the Fed would mess with an election think rates are heading higher by year’s end.

"I really doubt the Fed would go and raise rates right before the election, especially one that’s hotly contested. But I think they could definitely raise rates in December," said John Derrick, director of research with U.S. Global Investors Inc., an institutional investment firm based in San Antonio.

Still, if the Fed were to make a move just before the election, would that be the right decision? I’d argue yes. The Fed has to do its best to steer clear of politics. And even though raising (or lowering) interest rates in the days before Americans hit the polls might have an impact on the race, the Fed has to do what it is best for the economy.

If food and gas prices continue to rise and the dollar remains weak, the central bank may have no choice but to start raising rates.

At this point, it’s unclear which candidate a rate hike would benefit (or hurt).

If it boosts the dollar and lowers oil and gas prices, a rate hike could actually make Americans feel better about the current economy.

What’s more, many voters, particularly older ones, would welcome rate increases since that would lead to higher rates on savings accounts. The Fed’s series of rate cuts since last September has caused rates on CDs, money market accounts and other savings instruments to fall below the inflation rate, a blow to many retirees.

So if (and these are admittedly big ifs) the housing market starts to show signs of stabilization later this year and the economy bounces back a bit as consumers spend their tax rebate checks, then inflation, not a recession, is likely to be the top concern for voters and the Fed this fall.

"There is no reason to think the Fed will do anything but sit tight for awhile," said Jim Glassman, senior economist with JPMorgan Chase. "But over the summer months, my guess is Wall Street will realize maybe that economic stimulus is working and those who thought the economy was falling apart may start pricing in more of a chance of tightening later this year."

And that means that the candidate that makes the best pitch for a stronger dollar and shows the best inflation fighting credentials could wind up winning the White House.

So instead of blaming Ben Bernanke for costing them the election, John McCain, Barack Obama or Hillary Clinton may actually need to thank him if the Fed raises rates in October.

Issue #1 - America’s Money: All this week at noon ET, CNN explains how the weakening economy affects you. Full coverage.

Are you buried under a pile of debt and need help getting out? Did you recently manage to pull yourself out of debt and want to share your story? Tell us about your experience with debt and how the current credit crisis is affecting you.. Send us your photos and videos, or email us to share your story.  

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Whole Foods Market Inc. said Tuesday that sales surged in the second quarter, but absorbing the Wild Oats chain it bought last year caused profit to sag by 13%.

The retailer of organic and natural foods said net income in the quarter ended April 13 fell to $40 million, or 29 cents per share, from $46 million, or 32 cents per share, a year earlier.

The Austin-based grocer said the acquisition of Wild Oats Markets Inc. cost $8.6 million, or 6 cents per share.

Analysts surveyed by Thomson Financial had predicted a profit of 30 cents per share.

Revenue rose 28% to $1.87 billion from $1.46 billion a year ago, but fell short of analysts’ forecast of $1.89 billion.

Sales at stores open at least a year, a key measure of retailing strength, rose 6.7% but slowed to 5.7% in the first four weeks of the new quarter, which the company blamed on changes in a couple of store locations.

Before the report was issued, Whole Foods (WFMI, Fortune 500) shares fell 11 cents to close at $33.64. In after-hours trading, they dropped $2.84, or 8.4%, to $30.80.

While still growing, Whole Foods in recent years has seen a slowing of its pace, from double-digit gains to quarters like the one just ended, as heavy spending on new stores has weighed on results.

Chairman and Chief Executive John Mackey said the recent quarter was a strong one at the chain’s core stores, and the company will press ahead with its long-term growth plans.

Through the first six months of its fiscal year, the company earned $79.1 million, or 56 cents per share, compared with $99.74 million, or 70 cents per share, a year earlier. Sales gained 29.7% to $4.32 billion from $3.33 billion, and same-store sales increased 8.2%.

The company has changed 27 of the Wild Oats stores over to Whole Foods, and it said sales growth doubled at those locations. It is closing others.

Whole Foods operates about 270 stores and has 89 in development, which are much larger on average than its existing ones. 

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Although many retailers reported improved April sales, following a disastrous March, analysts cautioned Thursday that it’s premature to declare a resurgence in consumer spending.

"It’s false hope to think that these numbers show that a rebound is about to take place in consumer spending," said Ken Perkins, president of sales tracking firm Retail Metrics, adding that there are still too many "headwinds" constraining consumers’ discretionary budgets.

Specifically, Perkins pointed to four months of job losses, record-high gas prices, higher food prices, tighter credit availability and declining home values as the primary culprits.

Perkins estimates that sales at stores open at least a year, which is a key measure of retail performance, have averaged about 1% monthly growth so far this year.

"That compares with a monthly average increase of 2.6% last year and 3.7% monthly same-store sales increase in 2006," he said. "Monthly sales growth has tailed off significantly."

"I’m not expecting monthly sales to get anywhere near 2% or over this year," he added.

What’s more, retailers benefited last month from much easier year-over-year sales comparisons. So even though sales tracker Thomson Reuters expects total April sales for 36 of the nation’s largest chains it tracks to have increased 2.5%, that compares with a 1.8% drop in total sales for the same month a year ago.

Thomson Reuters senior research analyst Jharonne Martis said most analysts typically look at March-April sales together because of the impact of the Easter holiday weekend. This year, sales for the two months combined are forecast to rise 0.9%. That still would trail last year’s 2.1% increase for the two months, she said.

At the same time, Perkins said the federal stimulus money that has been going out to Americans becomes the "wild card" - helping to somewhat boost discretionary spending, but maybe not enough to affect a rebound.

"Discretionary items aren’t selling well," Perkins said. "Even Wal-Mart warned that its shoppers are struggling more paycheck to paycheck."

Wal-Mart Stores reported April same-store sales that topped its own forecast. However, the retailer also tempered its forecast for May, citing a tough economy and its impact on its mostly paycheck-to-paycheck customer base.

The No. 1 retailer said sales at its stores open at least a year, a key measure of retail performance known as same-store sales, rose 3.2% in April. Wal-Mart has forecast sales to increase between 1% to 3% for the month.

The company said strong sales in its grocery, health and wellness, and entertainment segments, driven by purchases of flat-panel TVs video games and gaming systems, boosted its monthly performance.

Additionally, it said sales were also higher for over-the-counter medications. But sales of home-related merchandise continued to be weak.

Analysts point out that another factor working in Wal-Mart’s favor is the "trading down" trend as more budget-conscious households switch to discount chains for their shopping needs.

This trend has also benefited wholesale club operators such as Costco (COST, Fortune 500), BJ’s (BJ, Fortune 500) and Wal-Mart unit Sam’s Club.

April same-store sales at Sam’s Club jumped 6.6% for retail-related purchases, excluding fuel purchases.

Last week, Wal-Mart announced it would let shoppers cash their federal stimulus checks for free at its stores and offer additional discounts on groceries, as a way to pull in more consumers into its stores.

Despite these incentives, Wal-Mart executives were still cautious about the overall spending environment.

"The economy continues to get tougher and the ‘paycheck cycle’ is more pronounced for customers than in past months," said Eduardo Castro-Wright, CEO of Wal-Mart U.S.A.

"As money gets tighter for them toward the end of the month, sales drop more than we have seen in the past," he said. To that end, Wal-Mart (WMT, Fortune 500) said it expects May sales to be between flat to up 2%.

"The tone of the April numbers is a little bit better," said Michael Niemira, chief retail analyst with the International Council of Shopping Centers (ICSC). "That aside, what we saw in the month was a confluence of factors that included easier comparisons from last year and a calendar shift with Easter coming much earlier."

"I do agree that the best gauge would be to take March and April sales together," he said. "Our average for the two months would be an increase of 1.5%, which is still pretty sluggish."

Wal-Mart’s rival Target (TGT, Fortune 500) logged a 3.1% same-store sales gain in April that fell well short of analysts’ forecast for a 4.5% increase, according to Thomson Reuters.

Some teen clothiers had a good month. Aeropostale (ARO) posted a 25% sales surge, but that compared to a 14% drop in sales for the same period a year ago. Gap Inc., (GPS, Fortune 500) the No. 1 apparel seller, posted a disappointing 6% drop in April same-store sales, although that decrease was much less pronounced than last year’s 16% decline.

Sales at Limited Brands (LTD, Fortune 500), which operates Victoria’s Secret and Bath & Body Works chains, fell 5%, much worse than analysts’ forecasts for a 2.3% fall. 

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Apparel retailer Gap Inc. said Thursday its same-store sales fell 6% in April, widely missing analyst expectations, hurt by weak results at Old Navy and international stores.

Analysts surveyed by Thomson Financial expected combined same-store sales to fall just 1.9%.

Same-store sales, or sales at stores open at least a year, is a key measure of retailer performance, because it measures growth at existing stores rather than from newly opened ones.

For the four-week period ended May 3, same-store sales were flat at namesake Gap (GPS, Fortune 500) stores and Banana Republic, down 12% at Old Navy and down 7% at international stores.

Analysts had predicted declines of just 4.5% and 2.7% at Old Navy and overseas, respectively, while expecting Banana Republic stores to post a 2.8% increase. Gap’s North America same-store sales were slightly better than Wall Street’s projection for a 1% decline.

Total sales rose 1% to $1.1 billion from $1.09 billion last year.

For the fiscal first quarter ended May 3, same-store sales fell 11%, while total sales fell 5% to $3.38 billion. Analysts expected higher sales of $3.45 billion.

Gap said though traffic patterns and sales continue to be challenging, it reaffirmed its earnings outlook for the year.

The company continues to expect earnings between $1.20 and $1.27 per share, while analysts polled by Thomson Financial, on average, expect a profit of $1.23 per share.

The San Francisco-based company said it expects first quarter net of 30 cents to 32 cents per share, including a $15 million tax benefit.

Analysts expect earnings of 27 cents per share. Analyst estimates usually exclude one-time items. 

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Citigroup Inc will present plans to sell as much as $400 billion of extraneous assets when it meets with investors and analysts on Friday, a person familiar with the situation said.

Newly-installed Chief Executive Vikram Pandit, scrambling to slash Citi’s costs and assets that have been hard hit by the global credit crunch, also intends to reaffirm his promise to cut annual expenses at the largest U.S. bank by roughly 20 percent, the source told Reuters on Thursday.

Citigroup declined to comment.

The sales could amount to nearly 20 percent of Citi’s current assets, and according to the Financial Times, which first reported the story on Thursday, would take place over several years.

Although Citi has said previously that it plans to shed assets to improve its capital position, the magnitude of the potential sales struck some analysts as worrisome.

“The only reason you’d sell off that many assets is you have a lot more losses coming than you originally thought,” said Jim Huguet, co-chief executive at fund manager Great Companies LLC, which does not own Citi shares.

Since late last year, Citi has recorded more than $45 billion of writedowns and credit losses, raised more than $40 billion of new capital including $2 billion of preferred shares this week, and slashed its dividend 41 percent.

Precisely which non-core assets are for sale is unclear, but analysts speculated that consumer finance businesses in the United States, Japan, Mexico, and Germany are possible. 

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