A revised reading on gross domestic product announced Thursday showed much better U.S. economic growth than previously reported for the second quarter.
GDP, the broadest measure of the nation’s economic activity, stood at an annual rate of 3.3% in the quarter, adjusted for inflation, the Commerce Department said.
Economic growth between 2.5% and 3.5% is typically viewed as the norm for a healthy economy.
The revised result surpassed last month’s initial estimate of 1.9%. It also surprised economists surveyed by Briefing.com who expected a revision to 2.7%.
Stimulus works: The $90 billion in economic stimulus payments that reached taxpayers during the quarter helped boost GDP up from just 0.9% growth in the previous quarter.
Personal spending helped add 1.2% to the second-quarter preliminary GDP reading released Thursday, up from the advanced reading of 1% for the quarter and just 0.6% in the first quarter.
But many economists say the boost in consumer spending is a temporary factor attributed to the tax rebate checks, making the jump in the second quarter an anomaly.
"We got a decent boost from the stimulus, which hit the economy at a time when we really needed it," said Wachovia senior economist Mark Vitner. "It will have less of an impact going forward, though and we may even have a payback in the fourth quarter."
Trade helps too: The increase from the initial estimate was also partially due to June’s U.S. trade gap reading, which was not available until after the advanced GDP numbers were reported easy payday loans. Much improved demand for U.S. exports added 3.1% to GDP, compared to just 0.8% in the advanced reading.
"We would have had growth even without the stimulus, as much of the rise in GDP had to do with the trade deficit," Vitner added.
A pickup in government spending, particularly a 0.4% rise in defense spending by the federal government, also boosted GDP.
But imports declined over the period, meaning lower inventory levels for retailers, which account for more than half of all GDP. Changes in non-farm inventories subtracted nearly 1.3% from overall growth.
Inflation: The government report also showed mixed readings for inflation in the previous quarter.
The GDP price index, the so-called "price deflator," which measures prices overall, rose at a 4.2% annual rate.
But the core PCE deflator - a more closely watched inflation reading that measures prices that individuals pay excluding volatile food and energy prices - rose 2.1%, the same as was reported in the first GDP report.
Inflation is still just barely above the perceived comfort zone of central bankers. The Federal Reserve is generally believed to want to see the 12-month change in core inflation readings remain between 1% and 2%.
"Without a price spiral, the Fed won’t have to squeeze the life out the economy, which should help sustain modest economic growth," Vitner said.
U.S. agricultural income is the highest in three decades after corn and soybeans rose to records. The risk for farmers is that costs are rising even faster, increasing concern of a profit squeeze.
A U.S. Department of Agriculture report tomorrow may show costs are accelerating as revenue growth slows, similar to a pattern that led to a 1980s farm crisis that was the worst since the Great Depression, said Gary Schnitkey, a University of Illinois farm economist. Corn, wheat and soybean prices are all at least 18 percent below their peaks.
Fertilizer costs doubled from a year ago, while fuel increased 62 percent, USDA data show. Expenses probably will surpass the $279.2 billion that the USDA estimated in February, eroding net income the government pegged at a record $92.3 billion for 2008, farmers and economists said.
“Income peaked this year,'' said Kurt Line, who owns or manages more than 6,800 acres of farmland near Momence, Illinois. “We should see a significant drop in 2009. For the number of dollars we will be risking the next two years, profit margins are not going to be robust.''
The department's first forecast of farm income for 2009 will be made in November.
While income is up from last year, the price rally that began in 2006 for the nation's biggest crops has sputtered since late June and early July, on signs that Midwest flooding may have caused less damage to corn and soybean plants than analysts had predicted.
Fertilizer, Oil
Corn, the most-valuable U.S. crop at a record $52.1 billion last year, dropped 26 percent from its June 27 peak of $7.9925 a bushel on the Chicago Board of Trade. Soybeans, after jumping 78 percent in 2007, plunged 18 percent from a high of $16.3675 a bushel on July 3. Wheat, up 77 percent in 2007, slumped 37 percent from its record $13.4925 a bushel March 12.
Growers will probably spend one-third more to plant their fields next year, Schnitkey estimated.
Fertilizer, the second-biggest expense for corn and soybean farmers after land, is tied to spiraling energy costs, said Bob Young, chief economist for the American Farm Bureau Federation.
“It will take $5 corn next year just to break even,'' said Young, who represents the largest U.S. farmer group. “People think they're standing at the edge of a chasm.''
Corn futures for December delivery closed at $5.94 a bushel on Aug. 26 on the CBOT, and the price of grain for delivery a year later fetched $6.31.
Tractor Prices
The lower price outlook may trim funds available for purchasing new farm equipment, threatening a two-year jump in sales for agricultural manufacturers, Young said freecreditreport.
Moline, Illinois-based Deere, the largest U.S. maker of farm equipment, said Aug. 13 agricultural sales in the U.S. and Canada will rise up to 25 percent this year. No. 2 supplier Agco Corp., based in Duluth, Georgia, said July 29 that second- quarter North American machinery sales increased 36 percent.
Deere said it will raise prices for large, wheeled tractors by as much as 7 percent and combines by as much as 10.5 percent next year to cover rising materials costs. Spokesman Kenneth Golden declined to comment further.
Diesel fuel is up 46 percent in the past year at $4.283 a gallon on Aug. 25, according to the American Automobile Association.
Decade of Woe
Ammonium used as fertilizer sold out at $750 a ton for the rest of this year is now being sold at $1,000 a ton next year, said John Lipinski, chief executive officer of CVR Energy Inc., an oil refiner and fertilizer company based in Sugar Land, Texas, during a conference call with investors Aug. 13.
Falling crop prices coupled with higher costs would create a situation similar to 1980, when expenses fell 1 percent while income fell 9.2 percent, Agriculture Secretary Ed Schafer said Aug. 6. Adjusted for inflation, farm profits fell 46 percent, beginning a decade in which annual agricultural net income averaged less than half what it was in the previous 10 years, according to USDA data.
“We don't want to get into a situation in which farmers are squeezed,'' Schafer said.
Less Debt
What may help this time around is that many farmers have less debt than they did three decades ago, the American Farm Bureau's Young said.
Farmer debt-to-equity and debt-to-asset ratios are both at their lowest levels since statistics began being kept in 1960, although the data doesn't adequately reflect the finances of farmers who rent land, Young said.
For Line, the 34-year-old Illinois grower, the possible decline of the farm boom means tougher times may lie ahead.
“2008 is going to be a windfall profit if you bought your inputs ahead and made some forward sales to lock in high prices,'' Line said. “2009 should be back into fair profits with the cost surge, and if commodities prices stay high. But 2010 will be the year of survival.''
Apparel retailer Gap Inc. said Thursday that its second-quarter profit rose 51%, despite a sales decline, helped by cost cutting and tight control on inventory.
The San Francisco-based company said profit for the 3 months ended Aug. 2 rose 51% to $229 million, or 32 cents per share, from $152 million, or 19 cents per share, a year earlier.
Analysts polled by Thomson Reuters predicted a profit of 30 cents per share, and the company had forecast earnings of 30 cents to 31 cents per share.
Revenue fell 5% to $3.5 billion from $3.69 billion last year; analysts had expected revenue of $3.52 billion.
Sales in stores open at least 1 year - a key retail metric known as same-store sales - fell 10%. In North America, same-store sales declined by 6% at both Gap and Banana Republic, and fell 16% at Old Navy. International same-store sales also fell 6% free credit report instantly.
Inventory per square foot fell 17% year-over-year.
Gap (GPS, Fortune 500) reaffirmed earnings guidance of $1.30 to $1.35 per share for the year, while analysts expect a profit of $1.34 per share.
The company said it will open 15 fewer stores, mainly Banana Republic stores, than previously expected during the year, and now expects to open a total of 100 stores.
Earlier on Thursday, Gap named Tom Wyatt, a 30-year retail veteran, as president of its struggling Old Navy chain.
Wyatt, 53, had served as acting president of Old Navy since February, when Dawn Robertson stepped down after struggling for 16 months to turn the division around.
Democrats’ stance against offshore drilling shifted more Saturday, with House Speaker Nancy Pelosi signaling she was willing to consider opening up more areas off the nation’s coastlines to oil and gas exploration.
In her party’s weekly radio address, Pelosi said opening portions of the Outer Continental Shelf for drilling would be a part of energy legislation House Democrats will put forward in coming weeks to address the country’s dependence on foreign oil and high gasoline prices.
House members will be able to "consider opening portions of the Outer Continental Shelf for drilling, with appropriate safeguards, and without taxpayer subsidies to Big Oil," said Pelosi, a California Democrat.
Just weeks ago Pelosi seemed resolved to block any votes to allow offshore drilling, in part because Californians have opposed drilling off their coasts since an oil spill off Santa Barbara in 1969. New oil drilling is only allowed now in federal waters in the western Gulf of Mexico and off Alaska.
Pelosi’s radio remarks were the latest to hint that the energy debate in Congress is still evolving, and that Democrats are budging on the issue.
Congress left for the August recess deadlocked over how to address $4-a-gallon gasoline. Democratic proposals to tap the nation’s petroleum reserve, curb oil speculation and force oil companies to drill on already leased federal lands were blocked by Republicans trying to force votes on offshore drilling.
Yet any vote on drilling is likely to force the Republicans’ hand, since it will likely be packaged with unpopular proposals to tap the petroleum reserve and recoup unpaid royalties from the late 1990s to pay for renewable energy projects.
"This comprehensive Democratic approach will ensure energy independence which is essential to our national security, will create millions of good paying jobs here at home in a new green economy, and will take major steps forward in addressing the global climate crisis," said Pelosi, who criticized Republicans’ "drill only" plan.
Republican leaders called Pelosi’s proposal a ruse.
"It is solely intended to provide political cover to Democrats that are losing more ground by the day on this issue," said Kevin Smith, a spokesman for House Republican Leader John Boehner of Ohio cash advance usa. Boehner and more than a hundred other House Republicans have refused to depart for recess in protest of Democrats’ refusal to have a vote on their proposals.
The pressure to expand offshore drilling intensified last month when President Bush lifted an executive prohibition on drilling for oil and gas on the Outer Continental Shelf. A congressional ban remains in place.
Polls have shown that voters have grown more supportive of more domestic oil production as fuel prices have climbed.
Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) increased its previously reported second-quarter loss to $9.11 billion to cover costs to settle a probe of auction-rate securities sales, and said it will cut more jobs as the housing market deteriorates.
The fourth-largest U.S. bank is now reporting a loss of $4.31 per share, up from the $8.86 billion, or $4.20 a share, it reported on July 22, according to its quarterly report filed on Monday with the U.S. Securities and Exchange Commission.
Wachovia also now plans to cut 6,950 jobs, 600 more than it had disclosed, with the additional cuts coming from mortgage operations, spokeswoman Christy Phillips-Brown said. The cuts affect about 5.8 percent of Wachovia’s 120,000-person workforce. Wachovia also is also eliminating 4,400 open positions.
Separately, Wachovia said the SEC may recommend civil charges against its main banking unit in connection with municipal derivatives transactions. It also said various state attorneys general have issued subpoenas over that matter. The bank said it was cooperating with the probes. Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) reported receiving its own subpoenas last week.
The quarter marks the second in a row when Charlotte, North Carolina-based Wachovia revised results to increase the size of its reported loss payday advance lenders. Wachovia increased its first-quarter loss to $708 million from an original $393 million because of a write-down tied to life insurance policies.
Auction-rate debt has interest rates that reset through periodic auctions, typically held every seven, 28 or 35 days. Once thought safe, much of the market has been frozen since brokerages in February stopped supporting the debt.
Wachovia said it added $500 million to legal reserves to cover a possible settlement. It is in talks with regulators to resolve matters related to auction-rate debt, after regulatory settlements last week by Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz). Missouri is leading the multi-state probe. Wachovia’s brokerage unit, Wachovia Securities, is based in St. Louis.
The bank has been among the lenders hardest hit by the U.S. housing crisis, following its $24.2 billion purchase of California mortgage specialist Golden West Financial Corp in October 2006, just as the mortgage market was peaking.
Democrats shaped a set of principles Saturday that commits the party to guaranteed health care for all, heading off a potentially divisive debate and edging the party closer to the position of Barack Obama’s defeated rival, Hillary Rodham Clinton.
The party’s platform committee moved smoothly through a range of issues for the fall campaign and approved a document that will go to the Democratic convention in Denver later this month for adoption.
There was little dissent — or room for it — in the day’s meeting and a compromise on health policy took one flash-point off the table.
Obama, soon to be the Democratic nominee, has stopped short of proposing to mandate health coverage for all. He aims to achieve something close to universal coverage by making insurance more affordable and helping struggling families pay for it.
Advisers to Obama and Clinton both told the party’s platform meeting they were happy with the compromise, adopted without opposition or without explanation as to how health care would be guaranteed.
In return for the guarantee, activists dropped a tougher platform amendment seeking a government-run, single-payer system and another amendment explicitly holding out Clinton’s plan as the one to follow.
The party now declares itself "united behind a commitment that every American man, woman and child be guaranteed to have affordable, comprehensive health care."
Under any system in play, most people would still put out money for health insurance as they do now, but they would get help when needed.
That was a common feature of the plans put forward by Obama and Clinton in the primaries. But she would have required everyone to get insurance while his plan makes it mandatory only for children.
Democratic Party Chairman Howard Dean praised "the spirit of this compromise." Judith McHale, a Clinton supporter who helped to lead the platform meeting, said Obama and Clinton advisers worked collegially throughout the process.
For the 186-member platform committee, one imperative Saturday was to satisfy Clinton loyalists still sore from the often acrimonious primary fight while keeping policy firmly in sync with Obama’s campaign.
Democrats made mostly cosmetic changes to a platform draft prepared for the meeting, a process designed to showcase unity more than to air differences in the party at large on hot-button issues such as the Iraq war, abortion and health care.
Party platforms are a statement of principles that are not binding on the candidates or the next president and they are typically given little attention after they are adopted.
Even so, the party’s decision to embrace guaranteed health care is bound to become a leading yardstick by which Obama’s presidency will be measured if he wins in November.
On Iraq, the platform states that Democrats "expect to complete redeployment within 16 months," reflecting Obama’s time frame but not the tone of certainty he brought to it when he was running in the primaries.
The 51-page platform draft showed the influence of Clinton’s supporters not only in the extensive section on health care but in its assertions about the treatment of women cash advance. Some of her backers believed sexism dogged her campaign for the nomination.
An extensive section on women’s rights is included and the votes she received in the primaries are described as "18 million cracks in the highest glass ceiling."
Even so, the platform is thoroughly tuned to Obama’s proposals.
It reasserts his promise of energy rebates to struggling families, pension subsidies, a crackdown on predatory lenders, higher taxes for families earning over $250,000, tax breaks for others, billions for economic stimulus and "direct high-level diplomacy, without preconditions," in the case of Iran.
On trade, it promises a multilateral approach to improving the North American Free Trade Agreement, without saying specifically what those changes should be. Obama criticized NAFTA when campaigning in states that felt disadvantaged by it, but the platform offers no suggestion he would take unilateral action against the deal.
Instead, it says: "We will work with Canada and Mexico to amend the North American Free Trade Agreement so that it works better for all three North American countries."
Democrats typically have a strong plank in favor of abortion rights; this year’s version is stronger than usual. "The Democratic Party strongly and unequivocally supports Roe v. Wade and a woman’s right to choose a safe and legal abortion, regardless of ability to pay, and we oppose any and all efforts to weaken or undermine that right," it says.
Gone is the phrase from the past that abortions should be safe, legal and "rare."
The party also pledges to ensure access to adoption programs, prenatal and postnatal care and income support programs for expectant mothers who need the help.
The party also:
–Promises "tough, practical, and humane immigration reform in the first year of the next administration."
–Favors restoration of the ban on assault-type weapons and other "reasonable regulation" that recognizes the constitutional right to own and use firearms.
–Favors helping religious groups provide social services as long as "public funds are not used to proselytize or discriminate."
–Promises to close the Guantanamo detention center.
–Promises to double the Peace Corps.
Time Warner Inc.’s second-quarter earnings fell 26% on declining subscriber fees at its AOL online unit and lower ad revenue at the Time publishing business, the media conglomerate said Wednesday.
Time Warner (TWX, Fortune 500) affirmed its full-year financial targets after revenue rose at its film, cable and networks segments.
The company also took legal and tax steps that make it possible to split its AOL online business and sell it in parts.
The New York-based media conglomerate said net income fell to $792 million, or 22 cents per share, from $1.07 billion, or 28 cents per share, a year ago.
Excluding one-time items, profit rose to 24 cents per share from 22 cents per share last year, when gains from the sale of assets bolstered results.
That result was a penny better than analyst expectations, according to Thomson Financial.
Revenue rose 5% to $11.6 billion, surpassing Wall Street’s estimate of $11.46 billion.
AOL remained a burden on the company’s results. Subscription revenue fell 29%, pushing operating income down 36%. AOL scrapped fees for its e-mail service in favor of an ad-supported revenue model, but ad revenue rose only 2% in the quarter. The service still has 8.1 million subscribers.
The company has made no secret of its plans to sell the ailing business to focus on content production. Chief Executive Jeff Bewkes said Time Warner has "made the key decisions that will enable us to run AOL’s access and audience businesses separately beginning in 2009."
Internet service provider EarthLink Inc. (ELNK) has been named as a potential bidder for the dial-up access business. Both Yahoo Inc. (YHOO, Fortune 500) and Microsoft Corp. (MSFT, Fortune 500) are considered to be interested in AOL’s Web sites, which would boost either company’s viewer traffic and ad revenue.
Time Warner previously announced it would sell the 84% of its cable operations that it still owns to shareholders later this year no teletrak payday loans. That unit delivered 7% higher revenue on increases in cable, Internet phone and video-on-demand fees. Basic cable subscribers were flat during a quarter that traditionally sees a drop-off.
Home video sales of "I Am Legend" and "The Bucket List" helped the Warner Brothers film unit post 14% higher revenue. The unit’s blockbuster Batman film, "The Dark Knight," did not hit theaters until after the quarter ended.
Higher cable subscription fees and advertising revenue pushed the Turner Broadcasting networks unit, which includes TNT and CNN, to a 9% rise in revenue.
Time Inc., the publishing unit, continued to straggle, as ad revenues fell 10%, mostly at magazines such as Time and Sports Illustrated. The magazine industry is contending with the same shift in ad spending online that has gutted the newspaper sector in recent quarters. Time Inc.’s Internet properties reported revenue growth, but online ads sell for only a small fraction of what a print ad costs.
Looking ahead, Bewkes said the company faces a "challenging economic environment," but is pleased "we’re on track to achieve our business outlook."
Time Warner still expects earnings from continuing operations between $1.07 and $1.11 per share. That forecast does not include any impact that may occur from the sale of a unit.
Democratic presidential candidate Barack Obama said Monday that he feels Americans’ pain from rising energy costs and laid out his plan to break the country’s "addiction" to oil.
Much of Obama’s energy plan had been outlined before. But some of his ideas - such as tapping the Strategic Petroleum Reserve and allowing a "limited amount" of offshore drilling - were new to his campaign.
Overall, analysts welcomed Obama’s plan, which included both short-term and long-term proposals. But they stressed that for the plan would need bipartisan support to succeed.
Obama said a short-term proposal, like selling crude oil from the Strategic Petroleum Reserve, "has lowered gas prices within two weeks" in the past.
For his proposed 10-year, $150 billion overhaul of the nation’s energy system to get bipartisan support, he’s willing to compromise on his earlier stance against offshore drilling by allowing a "limited amount" of drilling.
His proposal also includes retooling the U.S. auto industry to build more fuel-efficient cars, doubling the use of renewable resources by 2012, improving the safety and environmental impact of nuclear power and reducing the use of electricity, among other ideas.
In order to quickly bring down the price of oil and provide relief for American drivers, Obama wants to sell 70 million barrels of crude from the SPR.
Currently, the U.S. strategic reserves stand at more than 700 million barrels of oil in giant salt caverns along the Gulf of Mexico. The reserve was established in the 1970s after the first oil embargo to provide a buffer against future disruptions. Since 2001, the Bush administration has poured 70,000 barrels a day into the reserve, with the intention of expanding it to its full capacity of 727 million barrels, and possibly expanding the reserve to 1.5 billion barrels.
Peter Beutel, an analyst with energy risk management firm Cameron Hanover, downplayed the impact that Obama’s SPR release would have on oil prices. Beutel said that 70 million barrels represent only about three-and-a-half days of U.S. fuel consumption and would have a limited impact on prices, driving them down by $5 to $10 a barrel.
However, Beutel also suggests that the government could have a dramatic impact on consumer prices if it sells its oil at a substantially lower price to the refineries - in a type of deal known as a "netback."
In netback deals, the price of crude is calculated by subtracting the costs of refining, marketing, and transportation, along with profits, from the market price of the end products guaranteed approval cash advance loans.
"If he sells it under a netback deal, it would fall under $100 [a barrel] very quickly, and maybe under $80," said Beutel. That kind of reduction could lead to a decline of up to 80 cents per gallon of unleaded gasoline.
Fadel Gheit, a senior energy analyst for Oppenheimer, projected a more dramatic reduction in oil prices, noting that Obama’s SPR plan could "cut prices in half."
Gheit said that prior releases from the SPR during the administrations of former Presidents Bush and Clinton during the 1990s were "knock-out punches" that caused oil prices to drop dramatically. He said that to maximize the impact, which is primarily psychological, Obama should not provide hard numbers to make it harder for speculators to project future prices.
"We should not have a limit on what we will release," said Gheit. "That is the best way to keep speculators off balance."
Analysts had a tougher time gauging the impact of Obama’s sweeping proposal to overhaul the nation’s reliance on non-U.S. fossil fuels by investing in alternative fuels. But they did praise the plan as a positive step forward.
"I think we need to implement everything [from Democrats and Republicans]," said Beutel of Cameron Hanover. "If we pick a plan and stick with it and devote ourselves to it for more than a headline cycle, then we’re going to move forward."
Analysts agreed that the best way to overhaul energy creation and consumption in America is to not abandon the long-term plan as the situation changes in America.
"We never had an energy policy," said Gheit of Oppenheimer. "We talk about [it] when energy prices are high, but we clog the highways with SUVs when energy prices are low."
Obama’s Republican rival, Sen. John McCain of Arizona, is set to discuss his energy plan on Tuesday.
The credit crisis is far from over, star analyst Meredith Whitney tells Fortune magazine in its upcoming issue.
Whitney, who audaciously - and correctly - predicted last October that Citigroup (C, Fortune 500) would have to cut its dividend, tells the magazine that banks in general today are still facing much bigger credit losses than what they’ve reported so far.
The Oppenheimer & Co. analyst warned last year - and continues to warn today - that the "incestuous" relationship between the banks and the credit-rating agencies during the real estate bubble will have a long-lasting impact on banks’ ability to recover.
For years the ratings agencies, which are paid by the issuers of bonds, gave high marks to securities backed by subprime mortgages. Many of those bonds, of course, turned out to be anything but safe.
With Moody’s (MCO) and Standard & Poor’s (MHP, Fortune 500) now trying to make up for past wrongs, the pace of downgrades on mortgage securities is quickening.
This is a problem, because every time their portfolios are hit by significant credit downgrades, banks are forced to improve their capital ratios. Often that means issuing reams of new stock, which leads to serious dilution, as shareholders at Citi, Merrill Lynch (MER, Fortune 500), and Washington Mutual (WM, Fortune 500) now know.
"You’re going to have this stealth pressure on bank balance sheets until you start to see the ratio of downgrades to upgrades change," Whitney tells the magazine. (This is an excerpt from "The Woman Who Called Wall Street’s Meltdown and What She Sees Next" in the August 18 issue of Fortune. Read the complete story.)
Whitney’s bearishness has deep roots. In fact, she was the first analyst to sound the alarm loudly about subprime mortgages, predicting back in October 2005 that there would be "unprecedented credit losses" for subprime lenders. The problem, as she saw it, was that loose lending standards and the proliferation of teaser-rate mortgage products had artificially inflated the U.S. home-ownership rate.
A lot of the new homeowners were in over their heads, she believed, and would have trouble making their monthly payments when home prices started to fall and their teaser rates got bumped up.
Whitney’s current concern is that banks aren’t slashing costs and cutting losses in their loan portfolios fast enough. On the cost side, she says, banks have yet to come to terms with the disappearance of the securitization market, which she believes will stay in hibernation for the next three years fast cash advance loan.
Why does this matter? From 2001 through 2005, for every dollar of bank capital used to make mortgage loans, ten were supplied via investors in mortgage securities. All that secondary-market capital is now sidelined, but the staffing levels of bank lending departments don’t yet reflect it.
By Whitney’s reckoning, banks have laid off about 7% of their employees; she thinks the cuts need to reach 25%.
She also argues that banks need to "get real" about how they’re valuing their problem mortgage-related debt, much as Merrill Lynch has now done. Merrill recently sold a large package of toxic mortgage debt for just 22 cents on the dollar.
Whitney’s idea of "real" is pretty drastic. Whereas most banks are estimating 20% to 25% peak-to-trough declines in housing prices, the Case-Shiller housing futures traded on the Chicago Mercantile Exchange portend a much steeper 33% decline, she points out.
In fact, Whitney thinks the actual declines will be worse - closer to 40% - because of the loss of the securitization market and the paucity of mortgage credit available. And that means more defaults: "The consumer’s ability to refinance his way out of trouble has diminished greatly."
Whitney’s critics, and there are many among bankers and analysts, contend her bearishness at this point shows she simply doesn’t know how to measure the remaining downside risk.
Her response: If she has no idea how to properly value bank stocks now, it’s because the metrics don’t work. Price-to-earnings ratios are useless when earnings are nonexistent. And valuing banks on price-to-book ratios is just as futile. Those book values - which reflect underlying assets and liabilities - are moving targets.
"Citibank has lost 50% of its book value since last year," says Whitney, who is married to pro wrestler John Layfield.
"I do not think we are near the end of write-downs," she tells Fortune, "so I continue to see capital levels going lower, capital raises diluting existing shares further, and stocks going lower."
Standard & Poor’s Ratings Services on Thursday cut its ratings for all three of the U.S.-based automakers further into junk status, citing worries about their mounting cash losses and the continued deterioration of the U.S. auto market.
S&P lowered its ratings for General Motors Corp. Ford Motor Co. and Chrysler LLC all to "B-" from "B." It also lowered its ratings on the trio’s respective financing arms - GMAC LLC, Ford Motor Credit Co. and DaimlerChrysler Financial Services Americas LLC - to "B-" from "B."
In addition, the ratings service cut its corporate credit rating on FCE Bank PLC, Ford Credit’s European bank, to "B" from "B+."
"We believe sharply lower U.S. light-vehicle demand and the recent dramatic shift in demand away from large pickup trucks and SUVs amid higher gas prices will complicate the turnaround efforts of all three automakers and reduce their currently adequate liquidity considerably over the next year and a half," S&P Credit Analyst Robert Schulz said in a statement.
"This will leave them more vulnerable to already adverse industry, economic, and credit market conditions."
S&P said it expects U.S payday loan. vehicle sales, especially those of trucks and SUVs, to continue to weaken and result in higher cash losses for all three automakers in the second half of 2008.
The outlooks on all the companies are negative.
S&P said it does not expect to change the outlooks or raise the ratings for any of the companies within the next year, in light of the current economic outlook, risks associated with their restructurings and potential pressure on their available cash.
In afternoon trading, GM (GM, Fortune 500) fell 15 cents to $11.25, while Ford (F, Fortune 500) rose 9 cents to $4.93.
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