Friday PM October 30th, 2008

GDP contracts 0.3 per cent last quarter; consumer spending reduced by 3.1 per cent…ConocoPhillips CEO expects gas prices are to stabilize around $3 per gallon…GMAC Financial Services holding discussions with federal regulators about becoming bank holding company…

“We’re positioned to bounce back.” That’s the White House reaction to news that the economy shrank in the third quarter. In the strongest signal yet that the country is in recession, the Commerce Department report says the gross domestic product contracted at a 0.3 per cent annual rate from July through September. A big cut in consumer spending was a major factor. Consumers reduced spending at a 3.1 per cent pace, the biggest cut since 1980. GDP measures the value of all goods and services produced within the U.S. and is considered the broadest barometer of the nation’s economic health. But the White House is downplaying the significance of the numbers. It says they were not unexpected and notes special circumstances, such as hurricanes and the strike at Boeing. Press secretary Dana Perino says while the country faces “serious challenges,” it “remains the best place to do business.”

The Bush administration is defending giving billions of dollars of federal money to banks that, in turn, are using some of that money to pay shareholders and salaries for top executives. Ed Lazear, chairman of the Council of Economic Advisers, says the government is tracking the way that banks are using taxpayers’ dollars. He said banks have huge incentives to lend and that is the primary way they make money. Members of Congress, Democrats and Republicans alike, have questioned why banks should get federal help if they already have enough money to pay dividends. Lazear said the investment will pay off because it will get the stalled economy moving again.

An oil executive believes gas prices are likely to stabilize around $3 per gallon. Jim Mulva is chairman and chief executive of Houston-based ConocoPhillips. Mulva says gas prices rose too much too fast over the summer and are now dropping too much. He told the Associated Press a $3 price would balance supply and demand, allow oil companies to fund further research and satisfy drivers weary of high prices. ConocoPhillips reported $5.2 billion in profits between July and September. Mulva defended that figure, noting the company paid an average tax rate of 45 per cent that quarter. Mulva attended a luncheon at Marquette University. The Green Bay, Wisconsin, native said his company continues to research renewable energy and ways to reduce the greenhouse gases that contribute to climate change.

After the luncheon, Mulva discussed why he thought gas prices have been so volatile and explained his $3-per-gallon prediction. He says “70 to 80 per cent of the cost to the consumer at the pump is oil price. Several months ago oil was up near $147 a barrel. There were issues and concerns several months ago whether we would have enough supply to meet the world’s requirements for demand. The economies of India and China were using more and more oil all the time. Then there were political issues of whether there would be some downtime as a result of political things that could happen in the Middle East or Africa or the Caribbean. We’re now not looking at growth, we’re looking at a recession. And that has quite an issue now on demand. Demand’s going to be less. And with less demand you’re going to see that there’s more supply. That’s why oil prices have been going down, that’s why the American public has seen the gasoline prices go from $4 a gallon down to $2.50.”

American Express says it will cut 7,000 jobs, or about ten per cent of its work force, as part of an effort to slash costs by $1.8 billion in 2009. The New York-based credit card issuer says it is also suspending management level salary increases next year and instituting a hiring freeze. It plans to scale back investments in technology, marketing and business development and streamline costs tied to some rewards programs. It also expects to cut expenses for consulting and other professional services. As a result, the company expects to take a restructuring charge of $240 million to $290 million in the fourth quarter. American Express earlier this month reported a 24 per cent drop in third-quarter profit as cardholders restrained their spending.

The government says the number of new claims for unemployment benefits last week remained at the same elevated level as the week before. The Labor Department said that new claims for jobless benefits for the week ending October 25th stood at a seasonally adjusted 479,000–the same as the previous week and above analysts’ estimates of 475,000. The four-week average, which smoothes out fluctuations, was 475,500, down 5,000 from the previous week’s total. Jobless claims above 400,000 are considered a sign of a struggling economy.

The government is considering a plan that would help around three million homeowners avoid foreclosure. A final deal has not yet been reached and negotiations could still fall apart, but sources briefed on the matter say government agencies are set to guarantee about $500 billion in mortgages. They would use around $50 billion from the recently passed financial system rescue package. Two people who’ve been briefed on the plan say it could include loan modifications to lower interest rates for five years. The plan would be the most aggressive effort yet to limit damages from the U.S. housing recession, which has shaken global credit markets. As of the end of June, more than four million American homeowners were at least one payment behind on their loans, and a-half million had started the foreclosure process. The mortgage-bailout program would be run by the Federal Deposit Insurance Corporation. Without disclosing details, agency chairwoman Sheila Bair said last week she’s been working “closely and creatively” with the Treasury Department on such a plan.

The Federal Reserve estimates Americans have run up about $900 billion in credit card debt. And the number of those even with good credit who are defaulting on their balances is rising. That has the financial services round-table and the Consumer Federation of America teaming up to find a solution. They’re asking federal regulators to allow lenders to reduce by as much as 40 per cent the amount of credit card debt owed by deeply indebted consumers. The pilot program would target those who don’t qualify for the repayment plans already available. The amount of debt to be forgiven would be decided on a case-by-case basis, depending on the borrower’s financial condition, as banks try to recover at least some of the money they’d otherwise write-off.

GMAC Financial Services says it’s holding discussions with federal regulators about becoming a bank holding company. The move could help it access government funding. GMAC said in a statement it plans to refinance its debt and is in discussions with the Treasury Department, the Federal Deposit Insurance Corporation and other federal regulators. The Treasury Department has outlined plans to use at least $250 billion of the $700 billion bailout of the financial sector to give banks access to capital. GMAC is the financing arm of General Motors, which owns 49 per cent of the company. Cerberus Capital Management owns 51 per cent of GMAC. Cerberus is the majority owner of Chrysler, which is in talks with GM about a potential merger.

The Fed’s move to cut interest rates this week may not be its last this year. Wednesday’s half-point cut in the federal funds rate to one per cent puts it at a level seen only once before in the last half-century. The rate is that which banks charge each other for overnight loans, but is usually reflected quickly in other banking products. The Fed could cut rates again when it meets in December, but such a move comes with some risk. Some economists are leery of going too low, too quickly. If the central bank leaves the rate untouched, it would save an important monetary tool in case the economic trouble gets worse.

The Federal Reserve says commercial banks borrowed in record amounts from its emergency lending program over the past week, while investment banks drew loans at a slower pace. The Fed’s report shows commercial banks averaged a record $111.9 billion in daily borrowing over the past week. That surpassed the old record — a daily average of $105.8 billion — from the prior week. For the week ending Wednesday, investment firms drew $87.4 billion. That was down from $111.3 billion in the previous week. This category was recently broadened to include any loans that were made to the U.S. and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Merrill Lynch.

The Federal Reserve says the amount of commercial paper in the market increased over the past week for the first time since the collapse of Lehman Brothers Holdings. The reversal arrives after the Fed started buying highly rated commercial paper on Monday. Commercial paper outstanding rose by $100.5 billion to a seasonally adjusted $1.55 trillion in the week ended Wednesday. That’s still down from $1.82 trillion seven weeks ago, and down from $2.2 trillion when the market peaked in the summer of 2007. Commercial paper are short-term, unsecured loans companies get to finance their day-to-day operations.

There are a lot more complaints these days about harassment from bill collectors. Nearly 71,000 people filed complaints of harassment and abuse last year with the Federal Trade Commission. That’s about twice as many as did so in 2003. Thousands more complained to the Better Business Bureau, or to state and city officials. Regulators and consumer groups say it’s a reflection of the increasing number of Americans who took on more debt than they could handle before the current economic crisis. They also point to a growing number of companies that buy up bad consumer debt at a discount and try to collect whatever they can. U.S. law lets creditors take aggressive steps to collect a debt. But there are limits. They can’t call in the early morning or late at night, and they can’t repeatedly use the phone to annoy you. They can’t curse you, or threaten to have you arrested — and they can’t lie about the likelihood of legal action. Even when the people who owe money are rude, abusive and threatening — the bill collectors aren’t allowed to respond in kind.

When it comes to holiday travel plans, good things may come to those who waited. That’s because major U.S. airlines have cut many fares for the Thanksgiving and Christmas seasons. The airlines are in the midst of their worst year since at least 2005. They may see the price-cutting as necessary in the face of a slumping economy that could cut into both leisure and business travel. Airfare experts say they typically don’t see this kind of price-cutting until the last couple of weeks before big holidays. But Tom Parsons says that in many cases travelers can still find better deals by shopping around and considering alternate airports. Parsons is chief executive of the Arlington-based discount travel site He says the cuts range up to 25 per cent off the previous price for tickets that must be bought 21 or 30 days ahead of travel. He says travelers using secondary airports that typically have higher prices will get the biggest breaks. He says there are cheaper fares available on routes where the big airlines compete with low-cost carriers such as Dallas-based Southwest, JetBlue and Airtran.


ExxonMobil reports a record profit of $14.8 billion dollars in the third quarter, benefiting from the peak in oil prices seen in the summer. The previous record for U.S. corporate profit was set in the previous quarter by ExxonMobil’s nearly $11.7 billion dollars. Excluding one-time items, the third-quarter earnings were nearly $13.4 billion. Crude prices have dropped about 50 per cent from the record in mid-July.

Marathon Oil says its third-quarter profit more than doubled, lifted by higher oil and natural gas prices and increased sales. The Houston-based oil company said that net income for the three months ended September 30th amounted to $2.06 billion, compared with $1.02 billion during the same period a year earlier. Excluding a gain on overseas natural gas contracts, Marathon’s profit was $1.96 billion. Total revenue rose 38 per cent to $23.45 billion. Analysts surveyed by Thomson Reuters had been expecting revenue of $23.4 billion.

Waste Management, the nation’s largest trash hauler, said its third-quarter profit rose nearly 12 per cent, helped by higher revenue in its recycling business and fuel surcharges. Recycling revenue rose 17 per cent, to $344 million. However, Waste Management warned that the business could push down earnings per share by as much as three cents in the fourth quarter because of volatile recycling commodity markets. Quarterly net income totaled $310 million, up from $278 million a year earlier. Revenue climbed 3.6 per cent $3.52 billion. Analysts surveyed by Thomson Reuters expected revenue of $3.52 billion. Waste Management earlier this month withdrew its $6.73 billion bid to acquire smaller rival Republic Services. The Houston-based company said the move would not be prudent because of the current financial market turmoil. The decision ended a three-month takeover struggle for the nation’s number three trash hauler. Some analysts believed Waste Management tried to derail a deal between Republic Services and Allied Waste Industries, the second-largest player in the industry. Shareholders of Republic and Allied Waste are scheduled to vote November 14th on the deal in which Republic, based in Fort Lauderdale, Florida, is buying Phoenix-based Allied in an all-stock agreement that was valued at $6.07 billion when it was announced in June. If the deal goes through and is approved by regulators, it will emerge as a new and much larger competitor to Waste Management.

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