Actual finance blog

A radical shake-up on Wall Street and heavy losses in financial markets have recast the debate for Tuesday’s Federal Open Market Committee meeting to set interest rate policy.

Fed officials will assemble as a storm rages over the global financial system, overshadowing discussion of such bread-and-butter issues as the medium-term growth and inflation outlook.

As recently as Friday, analysts had expected the Fed to keep benchmark interest rates steady on Tuesday as it weighs a sputtering economy and an ebbing of inflation pressure.

On Monday, however, bets that the Fed will be forced into a quarter-point cut to the federal funds rate, to 1.75 percent from 2 percent, were rising paydayloans. Dealers now see more than an even-money chance of a rate cut.

“Fed views have swung dramatically in response to the gut-wrenching developments,” said Marc Chandler, currency strategist at Brown Brothers Harriman in New York.

The FOMC held rates steady when the panel met in June and August, after lowering them in April. That cut bought the fed funds rate down by a cumulative 3.25 percentage points from mid-September 2007.

Following are some factors policy-makers are considering:

FINANCIAL INSTITUTIONS: 

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NEW YORK–Wall Street greeted the U.S. government’s seizure of mortgage giants Fannie Mae and Freddie Mac with a sigh of relief yesterday, hoping it would provide some relief to ongoing crises in housing and credit markets.

However, many analysts said the bailout of the United States’ two biggest mortgage finance companies, which could be the government’s costliest ever, was a symptom of the still-dismal state of credit markets after a year of crisis.

The immediate reaction on the mortgage front was favourable. Mortgage rates fell in the hope that now the government was standing behind Fannie and Freddie, they’d be able to continue providing ample funds for home loans and bolster the ailing housing market. Thirty-year home mortgage loan rates fell about a half percentage point from Friday to 6 per cent, according to Bankrate.com.

In financial markets, stock prices around the world surged on hopes the U.S. Treasury’s plan to take control of the companies – which together back about half the $12 trillion in U.S quick payday loan. home mortgages – might put at least a temporary floor under troubled financial markets.

While the Dow Jones industrial average rose, Fannie Mae and Freddie Mac stocks got hammered, losing more than 80 per cent of their value and trading below $1 a share.

The takeover came as worries heightened over shrinking capital at the congressionally chartered companies, which had combined losses of nearly $14 billion the last four quarters.

It was welcome news to China and Japan, the biggest buyers of the two companies’ bonds, who praised Washington for its rescue of the mortgage giants.

But analysts noted this was only the latest in a string of bailouts. None has achieved lasting success.

Yesterday, U.S. Treasury Secretary Henry Paulson said he couldn’t estimate how big the taxpayers’ burden would be until the extent of mortgage market declines were fully known.

Reuters News Agency

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Ford Motor Co. this week launched a much-anticipated multimedia advertising campaign for the Flex crossover vehicle that relies on the Woodlawn stamping plant for a major share of its body components.

The automaker (NYSE: F) hopes the effort will light a fire under sales which, in the absence of a national campaign, have not taken off.

Flex began hitting dealer lots in June. Since then, 5,593 units have been sold, including 2,010 in August, according to sales data released Sept. 3.

Local plant officials said last May that when production is up to speed, Flex will account for about 11 percent of the facility’s output, compared to 37 percent for Edge and Lincoln MKX, 28 percent for Crown Victor and GMC Trucks free credit report .com.

F-Series pickup trucks and the Ford Ranger represent the remainder of the plant’s production of body sides, front doors, hoods, quarter panels, roofs and other components.

The facility’s 1,116 employees produce 80 percent of the stamped steel parts for the Flex.

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The only thing to fear in the slowing Chinese economy may be excessive fear of a slowdown itself.

Some worrying is warranted. But rushing into a fiscal stimulus, a hot topic of late, could make the economy a bubbling cauldron of unstable growth and inflation, its biggest problems just a few months ago.

“It’s very easy for them to relax policy more than they should,” said Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong. “All of a sudden you could see a return of overheating risks.”

China’s economy has decelerated markedly, the latest evidence coming this week in surveys that showed its manufacturing sector was shrinking for the first time in three years.

Disruptions from the Olympics, when scores of factories were shuttered to clean the air, likely exaggerated the slump but the trend of a slowing economy is clear enough payday advance lenders. China’s annual growth was 10.1 percent in the second quarter, well off last year’s scorching 11.9 percent pace.

That has prompted calls for government spending to prop up momentum. Speculation has run high that Beijing might craft a hefty stimulus package, with Chinese media reports talking about plans for tax cuts, academics recommending pump-priming and exporters pleading for support.

Resisting such appeals is made difficult by the fact that China could easily afford a cash splurge.

The overall national budget turned to a surplus of 173.9 billion yuan, or 0.7 percent of GDP, last year. Total government revenue grew 30.5 percent from a year earlier in the first seven months of 2008, outpacing expenditure. 

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Drug developer Merck says its second-quarter profit rose 5% as cost-cutting efforts offset a drop in sales of its asthma treatment Singulair and cholesterol drugs Zetia and Vytorin.

Whitehouse Station, N.J.-based Merck & Co (MRK, Fortune 500). says profit rose to $1.77 billion, or 82 cents per share, from $1.68 billion, or 77 cents per share, during the prior-year period. Sales fell 1% to $6.05 billion from $6.11 billion.

Excluding restructuring charges, Merck says it earned 86 cents per share faxless payday loans.

Analysts polled by Thomson Financial expected profit of 83 cents per share on revenue of $6.05 billion.

Merck shares fell 23 cents to $35.10 in after-hours trading after falling $2.35, or 6.2%, to close at $35.33. 

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Taxpayers got some good news Friday: Freddie Mac wants to take your money just as little as you want to hand it over.

The struggling mortgage giant said Friday that it plans to raise $5.5 billion by selling common and preferred stock to shore up its balance sheet - a step that could reduce fears that a government bailout is around the corner.

Freddie had previously said it would raise that money, but on Friday it finally registered its stock with the Securities & Exchange Commission, a move that allows the company to proceed. Freddie didn’t specifiy when the offer would come.

By diluting the stake of existing shareholders and saddling the company with costly preferred dividend obligations, raising capital could be costly for Freddie (FRE, Fortune 500) and its shareholders, who have seen the value of their investments drop 75% over the past year.

Raising, say, $2.75 billion by selling common stock at current prices would entail issuing more than 300 million shares - reducing current investors’ stake in the company by a third.

Freddie would presumably raise the rest of the money by selling preferred stock, but that won’t come cheap either. Freddie’s preferred dividend tab tripled from a year ago in the first quarter, to $272 million.

Despite the dilution that would come with a new stock offering, shares of Freddie surged for the third straight day in heavy trading Friday, as investors wagered that by raising new money the company would put itself in better position to weather the mortgage meltdown and resume making money when the economy rebounds.

Freddie and its larger cousin, Fannie Mae (FNM, Fortune 500), agreed to register with the SEC under a 2002 deal with legislators designed to put the two government sponsored enterprises on the same footing as other public companies when it comes to their financial reporting. Fannie registered with the SEC in 2003, but Freddie’s registration was delayed after accounting issues surfaced. Together the companies own or guarantee $5 trillion in home mortgages.

It’s been a head-spinning two weeks for Fannie and Freddie. The companies’ shares lost more than half their value last week, amid fears that falling house prices will lead to big losses on the mortgages the companies own and on the mortgage-backed securities they insure.

The selloff prompted Treasury Secretary Henry Paulson to announce Sunday that the government stood ready to buy the companies’ shares or provide them with expanded credit lines. Paulson & Co. want to ensure that Fannie and Freddie can continue to support the mortgage market amid a flight of private investors from that arena.

Paulson’s comments heightened concern that shareholders could be wiped out. Preferred stock shares that Fannie Mae issued in a May traded as low as 32 cents on the dollar Tuesday advance america cash advance. Just a month earlier they had fetched three times that.

But the companies’ common stock has bounced back over the past three days, following SEC Chairman Christopher Cox’s announcement Tuesday that the agency would tighten the rules governing short sales of big financial stocks. Since then, shares in Fannie have nearly doubled and those in Freddie have jumped 80%, though both remain far below their highs earlier this year.

Raising new money could help to ease fears that government assistance will be necessary soon. Freddie has repeatedly noted that it is adequately capitalized by the standards of its regulator, the Office of Federal Housing Enterprise Oversight, and has plenty of cash on hand. The company said Friday it expects to be in compliance with OFHEO capital guidelines when it reports second-quarter numbers next month.

Still, skeptics note that at the end of the first quarter, when Freddie was also in compliance with OFHEO targets, it had just $16 billion in shareholder equity - a measure of net worth and the company’s cushion against future losses - supporting more than $800 billion in mortgages and other assets.

The prospect of rising losses as house prices fall, together with the heavy use of leverage, has prompted critics such as hedge fund manager William Ackman - who is betting against the companies’ shares - to propose that the companies be recapitalized.

Ackman’s plan - which would certainly benefit him - would wipe out current shareholders and give holders of the firms’ senior unsecured debt control of the reconstituted companies’ equity, via an arrangement under which the bondholders would take a 10% haircut on their debt holdings and receive an equivalent amount of stock in the new companies.

Others believe Fannie and Freddie should be nationalized, wiping out shareholders and putting an explicit government guarantee behind the companies’ obligations. But Treasury Secretary Paulson has said he believes the companies should continue to be shareholder-owned.

And even if the companies eventually need government aid, there could be a case for letting them keep their stock exchange listings.

Josh Rosner, principal at Graham-Fisher in New York, says he sees a parallel in the Chrysler bailout of the early 1980s, in which the government took warrants in the automaker in exchange for providing an emergency loan guarantee. When Chrysler returned to health later in the decade, the government was able to cash in the warrants, allowing taxpayers to share in the fruits of the company’s recovery.  

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European automakers have put on a brave face and fared better than their U.S. counterparts but a reality check looms as surging fuel and raw material prices put earning forecasts at risk.

Analysts say France’s PSA Peugeot Citroen (PEUP.PA: Quote, Profile, Research, Stock Buzz) and Renault (RENA.PA: Quote, Profile, Research, Stock Buzz) could miss their operating margin targets, forcing them to either trim targets or boost cost cutting, possibly as part of mid-year results due this month.

“It’s unrealistic to assume that Renault will achieve its original guidance,” said Pierre-Yves Quemener, head auto analyst at Landesbanki Kepler.

“The chances of “commitments miss” are growing week after week as cost inflation bites each time deeper and as the macro environment is depressing volumes.”

PSA and Renault, Europe’s No 2 and No 6 makers, have declined to comment ahead of their mid-year results cheap payday loans.

Sergio Marchionne, CEO of Italy’s Fiat (FIA.MI: Quote, Profile, Research, Stock Buzz), which ranks fifth, has stood by his group targets.

“Despite what is happening, we are not only keeping our 2008 profit and cash flow forecasts, but we confirm those for 2009,” Marchionne told a conference this week.

But in a year when the price of oil is up 45 percent, some steel prices are up 50 percent and other raw materials such as aluminum have also surged, assumptions and forecasts are proving hard to hold on to. 

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Citigroup is preparing to fire thousands from its worldwide investment-banking division, The Wall Street Journal reported on Sunday.

The Journal, citing people familiar with the matter, said the layoffs are part of a plan to cut about 10% of the staff of the 65,000-member investment-banking group.

Messages left with Citigroup spokesmen on Sunday were not immediately returned. The Journal said the fired employees could be notified as early as Monday.

The New York-basked global bank, along with much of Wall Street, is in the throes of recovering from bad investments on mortgages and leveraged loans that cut billions of dollars from its portfolio.

It was not immediately clear if the reported job cuts would be in addition to cuts announced by Citigroup (C, Fortune 500) in April. After reporting a $5.1 billion first-quarter loss, the bank said then it was reducing its staff by 9,000, in addition to the 4,200 job cuts the bank announced late last year.

As of the end of last year, Citigroup had about 147,000 full-time employees.

In May, Citigroup unveiled a three-year plan that included getting rid of more businesses, mortgages, real-estate operations and jobs.

The bank called for shedding between $400 billion and $500 billion of its $2.2 trillion in assets and growing revenue by 9 percent over the next few years as it tries to rebound from the huge losses tied to deterioration in the credit markets.

Earlier this month, the bank said it was closing the Old Lane Partners hedge fund that was co-founded by Chief Executive Vikram Pandit paydayloans. The bank is shuttering the fund just 11 months after it was acquired for more than $800 million. 

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Inflation, the curse of the 1970s, is staging a comeback, led by sky-high oil prices. This time, the menace is more genuinely global than three decades ago, and this time much of it is “Made in China”.

Wary of past errors, Western central banks may well opt for shock therapy — interest rate rises — in an effort to prevent prolonged stagflation, the toxic mix of inflation and economic stagnation that followed the oil crises of the 1970s.

Their prospects of success depend at least in part, though, on how willing the rising powers of the developing world are to play the game, above all China, an economy that was shut to the outside world 30 years ago but has now taken it by storm.

While inflation is far higher in faster-growing regions than in the United States and Western Europe, everyone feels the pain because of the globalization of trade, says Stephen Roach, Asia region chairman of Morgan Stanley.

“The risks of a new stagflation are mounting,” he said in an article earlier this month. “Like nearly everything else in the world these days this one is likely to be made in Asia.”

Average annual inflation rates in the developing world were about three times those of industrialized economies last year, and that overrun will widen in 2008, according to figures from the International Monetary Fund.

IMF forecasts, published last April and perhaps in need of upward revision, foresee world inflation rising from an average of 3.9 percent for 2007 to 4.7 percent in 2008 credit scores. Revealingly, the IMF sees the inflation rate nearly doubling to just short of 12 percent in the emerging and developing world, as opposed to rising from 2.2 to 2.6 in advanced economies.

In rich and poor countries, fuel and food prices surges have sparked wave after wave of protests by truckers, taxi drivers, fishermen and farmers demanding government action, increasing fears of political instability and economic downturn. 

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Belgian brewer InBev NV (INTB.BR: Quote, Profile, Research, Stock Buzz) on Sunday cautioned U.S. rival Anheuser-Busch (BUD.N: Quote, Profile, Research, Stock Buzz) that it should fully explore its $46 billion takeover offer before striking out to do any potential deal with Mexico’s Modelo (GMODELOC.MX: Quote, Profile, Research, Stock Buzz).

InBev, whose beers include Stella Artois and Beck’s, on Wednesday made a $65-a-share unsolicited bid to buy Anheuser-Busch, which brews the popular Budweiser brand. A deal would create the world’s largest brewer. St Louis, Missouri-based Anheuser-Busch responded that its board would evaluate the proposal carefully.

On Friday, The Wall Street Journal, citing people familiar with the matter, reported that Anheuser-Busch had begun talks with Mexico’s No. 1 brewer, Grupo Modelo, about a possible combination of the two companies that could help it thwart the Inbev bid.

Anheuser-Busch owns a 50 percent stake in Modelo, maker of Corona beer, which is emerging as a critical power broker in the battle for control of Anheuser-Busch payday loan cash advance loan.

In a letter dated Sunday, Inbev’s Chief Executive Carlos Brito told Anheuser-Busch’s CEO August Busch IV that he was committed to a “friendly combination.”

But he said: “We have read the recent press reports suggesting that you may have approached Grupo Modelo regarding a possible transaction between Anheuser-Busch and Grupo Modelo or affiliated entities.”

He said it was important that Anheuser-Busch understood that Inbev’s offer was “made on the basis of Anheuser-Busch’s current assets, business and capital structure.”

“Accordingly, we would expect that prior to proceeding with any alternative transaction, especially if your shareholders will not be given the opportunity to vote on it, you would first fully explore our offer and the potential adverse consequences any such transaction could have on the ability of your shareholders to receive our premium offer,” he said. 

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