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Wednesday PM October 8th, 2008

Pending home sales rise 7.4 per cent…Federal Reserve cuts key rate by half-point to 1.5 per cent in move coordinated with other major central banks…Retailers report weak sales figures for September as financial meltdown forces shoppers to cut back further…

The National Association of Realtors says pending home sales rose 7.4 per cent from July to August, an unexpected piece of positive news for the battered U.S. housing market. The group said its seasonally adjusted index of pending sales for existing homes rose to 93.4 from an upwardly revised July reading of 87. The reading was the highest since June 2007. Wall Street economists surveyed by Thomson/IFR had predicted the index would fall to 84.9. The index, which sunk to a record low of 83 in March, stood at 85.8 in August 2007.

The Federal Reserve announced it was cutting its key rate by a half-point to 1.5 per cent, in a rare coordinated move with other major central banks. The Bank of England also cut its rate by a half-point to 4.5 per cent, as did the European Central Bank, to 3.75 per cent. Canada, Sweden and Switzerland also cut rates. The Bank of Japan is also expressing its strong support of these policy actions. China’s interest rates were cut for a second time in less than one month to stimulate slowing economic growth amid the global credit crisis. The government says it also will increase the pool of money available for lending by reducing the amount that Chinese banks must hold in reserve, the central bank said. The interest rate on a one-year loan will fall by 0.27 percentage points, the bank said. That would make the rate 6.93 per cent, following an earlier cut on September 15th that was Beijing’s first rate cut in more than six years. The cuts come as markets in Asia and Europe sink amid waning confidence, Britain steps in to support banks, and Russia closes its main stock market for two days. Russian news agencies say Moscow’s MICEX exchange has been shut down until Friday after opening with steep losses today. The exchange where most of Russia’s trading takes place dropped more than 14 per cent in the first half hour. The RTS Exchange Index, which is widely considered the benchmark of Russia’s markets, fell around seven per cent in the first half hour. Russian news agencies say it suspended trading for one hour. Monday, the Russian exchanges suffered their worst-ever one-day losses and ended yesterday with minor losses. That was after President Dmitry Medvedev’s announcement of new measures to improve liquidity in the banking system.

The Fed’s latest move to thaw frozen credit is being welcomed by the White House and the two major party presidential candidates. The White House calls it “important and helpful” that the central banks worked together to address the credit crisis. Barack Obama says “this is a global crisis that requires a global solution” and he supports the coordinated action, but he adds that “more urgent and vigorous action is necessary to stem” the crisis. Meanwhile his Republican rival John McCain is expressing hope the action will contain the “financial crisis spreading across the globe.” Fed Chairman Ben Bernanke defends the most aggressive federal intervention in the financial system since the 1930s. And he says regulators are looking for other innovative ways to try to stabilize markets.

A bank rescue plan and interest rate cuts have sent British banking stocks soaring. Prime Minister Gordon Brown called the $88 billion plan for stabilizing banks “radical.” It would partly nationalize at least eight of the country’s largest banks, giving taxpayers a stake and, Brown says, earning a “proper return” for them. The prime minister adds “we expect to be rewarded for the support we provide.” In addition, the British government is promising to guarantee more than $400 billion worth of bank loans and the Bank of England has made at least $350 billion worth of short-term loans available to banks to help thaw frozen credit.

Prime Minister Brown says it’s not a time for conventional thinking and that’s why the government will partly nationalize major banks. The plan is a bid to shore up a financial sector that many investors fear can’t survive the global turmoil without government help. Britain’s treasury said it would invest up to $87.5 billion in exchange for preference shares in eight of the county’s largest banks and building societies. Treasury Chief Alistair Darling says the government is responding to exceptional circumstances and “absolutely not” seeking to take control of the banks. Darling also announced that the government would guarantee British savers’ accounts in Icesave. That’s the Internet operation of a bank in Iceland which was nationalized this week. Icesave has suspended operations. Brown says the government will sue to recover deposits.

House Speaker Nancy Pelosi says a second economic stimulus plan is needed now because of the faltering economy and she puts the price at $150 billion. The House did pass a $61 billion economic aid proposal last month before lawmakers left Capitol Hill ahead of the November 4th election. But a similar plan failed to pass the Senate. Pelosi says the economy is weakening and more help probably is needed. But President Bush has promised a veto. The Senate is expected to be back at work after Election Day to complete a public lands bill and other matters. The House also could return to consider a stimulus plan and additional issues. The first economic plan this year cost $168 billion and sent tax rebate checks to most individuals and couples and awarded tax breaks to businesses.

Treasury Secretary Henry Paulson says global financial markets remain severely strained, underscoring the need for quick action to implement the government’s $700 billion rescue program. Paulson said all the financial market turmoil has seriously affected the economy, but he said the administration is moving quickly to begin the largest government rescue effort in history. He said even with this program to buy bad assets from financial institutions, some banks will fail. He also called for patience saying “the turmoil will not end quickly and significant challenges remain ahead.”

The International Monetary Fund says the world economy will slow sharply this year and next. It expects the United States will likely slide into recession reflecting mounting damage from the most dangerous financial jolt in more than a half-century. The IMF has slashed growth projections for the global economy and predicted the United States—the epicenter of the financial meltdown–will continue to lose traction. In its report, the IMF called the current situation “the most dangerous shock in mature financial markets since the 1930s.” It projects that the global economy, which grew by a hardy five per cent last year, will lose considerable speed, slowing to 3.9 per cent this year. It is forecast to weaken even more–to just three per cent–next year, marking the worst showing since 2002. In the past, the IMF has called global growth of three per cent or less the equivalent to a global recession.

The World Economic Forum, based in Geneva, says the U.S. economy remains the world’s most competitive–a survey taken before last week’s big financial rescue package. Nonetheless, the group defends the accuracy of the survey, designed to measure the ability of an economy to bounce back from unplanned economic events. Switzerland, Denmark, Sweden and Singapore round out the top five. Less impressive to the forum: the Bush administration’s repeated deficits, which are seen as a sign that the U.S. is failing to prepare for its future liabilities. The economies of Britain and France were not even among the top ten.

A Saudi official says the oil-rich kingdom is facing no liquidity problem and rules out negative effects on its economy from the global credit crisis. The official news agency, SPA, has quoted Mohammed Al-Jasser, deputy governor of the Saudi Arabian Monitory Agency, the country’s central bank, as saying the bank is capable of dealing with any liquidity need. In late Tuesday night’s statement, Al-Jasser says bank deposits are safe and economic growth healthy. Al-Jasser also has assured borrowers that banks will continue usual lending operations. Like elsewhere in the Middle East, shares in Saudi Arabia’s exchange plunged Tuesday, falling seven per cent a day after hitting a four-year low with a 9.81 per cent drop.

The nation’s retailers are reporting weak sales figures for September as the financial meltdown forced already skittish shoppers to cut back further. As retailers report their sales figures, it’s clear that shoppers stuck to buying the essentials and looked for bargains. Among the best performers were Wal-Mart and Costco. But many mall-based apparel stores, including wet seal, are reporting big declines in same-store sales, or sales at stores that have been open at least a year. Wal-Mart saw same-store sales rise 2.4 per cent, just under the 2.5 per cent expected by analysts polled by Thomson Reuters. Hurricanes that caused stores to close hurt the result by 0.4 percentage point.

There are major worries in New Orleans over what a prolonged recession and tight credit market will do to the city’s long and arduous recovery from Hurricane Katrina. The big loser would be the city’s commercial sector, not the projects slated for federal funding. A lack of sufficient credit would smother not just companies trying to start up or expand, but also any new jobs that would come about. That would cut off the flow of cash that developers need to build new homes and first-time homeowners need to buy them. And it would make it tough for the city to sell bonds to finance rebuilding projects on its appointed timeline. A real estate expert calls the idea “terrifying.”

More than 76,000 damage claims from Hurricane Ike losses have been filed so far with the Texas-backed Windstorm Insurance Association. The claims have been slowing to 700 to 1,000 each week day, according to association general manager Jim Oliver–down from about 6,000 daily in the two weeks after the September 13th storm. If the total number of claims reaches 92,000, that could mean total losses of $2.7 billion, Oliver said. But he cautions that is preliminary. The association is the wind damage insurer for 14 coastal counties and part of Harris County. It’s funded in part by insurance companies, which can recoup some of their payments to the fund through state tax credits.

The Federal Reserve has agreed to provide American International Group with a loan of up to $37.8 billion, on top of one made to the troubled company last month. Under the new program, the Federal Reserve Bank of New York will borrow up to $37.8 billion in investment-grade, fixed income securities from AIG in return for cash collateral. These securities were previously lent by AIG’s insurance company subsidiaries to third parties. Last month, the Fed provided an $85 billion loan to the company, which was on the brink of bankruptcy.

Citigroup and Wells Fargo have agreed to extend their legal standstill in the fight for Wachovia until Friday morning. After the battle for Wachovia moved to both state and federal court over the weekend, the parties had agreed to a cease-fire at the urging of Federal Reserve officials. But that agreement expired at noon Wednesday without a resolution on the fate of Wachovia. Citigroup agreed last Monday to buy Wachovia’s banking operations for $2.1 billion in a deal brokered by the Federal Deposit Insurance Corporation. Four days later, San Francisco-based Wells Fargo stunned Citigroup by announcing that Wachovia’s board had agreed to a $15.1 billion deal to acquire Wachovia. Wells Fargo’s deal did not require any government assistance.

Congressional investigators are looking at the Federal Bureau of Land Management’s quick approvals for oil and gas drilling in Utah. Two Government Accountability Office investigators are probing the agency’s practice of approving some drilling projects without a full environmental study of the consequences. The practice was authorized by the 2005 Energy Act. The GAO says it’s been used thousands of times in Utah, New Mexico and Wyoming. An executive for Bill Barrett Corporation, which is fighting environmentalists over a site now being looked at, reacted angrily. Duane Zavadil says Congressmen who know nothing about oil and gas, “and even less about land management,” has people investigating who know “less than nothing” about the subject. Environmentalists are applauding the move.

Recurrent violence in oil-rich parts of Nigeria may provide a sobering lesson for oil companies hoping to work in Iraq. Even with attacks at their lowest level in more than four years, Iraq is a much more dangerous place than Nigeria. Representatives of 34 international oil companies will meet with Iraqi government officials in London on Monday to discuss the bidding process for eight enormous oil and gas fields. If the contracts are approved, they could lead to the biggest foreign stake in Iraq since the industry was nationalized more than 30 years ago. About 4,000 miles from Baghdad, oil companies are doing damage control in Nigeria, a hotbed of rebel attacks on oil facilities. There, firms like Royal Dutch Shell and Irving-based ExxonMobil currently operate. Three years of attacks in the country’s Niger delta have cut oil production from 2.5 million barrels per day to around 1.5 million. That’s demoted Nigeria to Africa’s second largest oil producer behind Angola. Meanwhile, the risk of death while pursuing oil in Iraq comes with the potential for rich rewards. Current estimates put Iraq’s proven oil reserves at 115 billion barrels. That’s more than three times the 36 billion barrels held by Nigeria.

Britain’s largest union says more than 3,000 government computer jobs will be cut over the next two years. The Public and Services Commercial Union says the cuts are a result of the takeover of Electronic Data Systems by Hewlett-Packard. The union said that EDS has contracts with government departments such as the Ministry of Defence and the Department for Work and Pensions. Hewlett-Packard said in September it would cut nearly 25,000 jobs over three years as it combined operations with EDS. Hewlett-Packard did not immediately comment on the union report.

The nation’s second-largest sugar refinery is being rebuilt in Georgia after a deadly dust explosion in February killed 14 workers. Imperial Sugar, based in Sugar Land, broke ground Wednesday on three storage silos near Savannah. The silos were demolished after fire fueled by millions of pounds of sugar burned inside them for several days after the blast. Dozens were injured. The new silos will have special vents designed to minimize damage from dust explosions. Officials say the refinery will start producing liquefied sugar again in November and crystallized sugar by February. Federal officials say the explosion was likely caused when a bucket hauling sugar in a silo broke loose and hit metal siding, causing a spark that ignited accumulated sugar dust below.

Federal regulators say Bank of America has agreed to buy back as much as $4.7 billion in auction-rate securities to settle charges that it misled thousands of customers about the risky investments. The Securities and Exchange Commission announced the preliminary settlement with the Charlotte, North Carolina-based bank. Bank of America joins eight other big investment banks that have agreed to buy back a total of more than $50 billion of the securities. Bank of America also agreed to “use its best efforts” to provide as much as $5 billion in liquidity to other businesses that bought them, according to the SEC.

The Treasury Department, facing huge borrowing needs because of the government’s $700 billion rescue program, says it will increase the size of treasury securities being sold to the public. The treasury said it will expand the number of treasury securities which are currently being traded as a way to boost borrowing and fund programs such as the $700 billion financial bailout plan. In a statement, the department said this will also deal with what it called “severe dislocations in the market.” The demand for safe treasury securities has soared during the current credit crisis.

NFL Commissioner Roger Goodell says the economic downturn remains a challenge for the league, despite the popularity of football. He spoke to San Antonio business and university leaders during a luncheon to celebrate the upcoming launch of a collegiate football team at the University of the Incarnate Word. Answering a question from the audience, Goodell said professional football is not recession-proof. He cited stadium financing and struggling sponsors as challenges in an economy where borrowing has become expensive and difficult and many sponsor businesses are struggling.


Wal-Mart says hurricanes hurt its September results, causing same-store sales to miss analyst expectations. The world’s largest retailer said that same-store sales rose 2.4 per cent during the five-week period ended October 3rd. Analysts polled by Thomson Reuters had expected a 2.5 per cent rise. Including fuel, same-store sales rose 2.8 per cent. Wal-Mart said hurricanes caused 341 stores to temporarily close and hurt same-store sales — or sales at stores open at least one year — by 0.4 percentage point. Total September sales rose six per cent to $36.23 billion. The company expects October same-store sales to rise one to two per cent.

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