China’s central bank pledged to maintain loose monetary policy to support economic recovery and ensure sustainable credit growth without resorting to heavy-handed quotas to rein in a surge in lending.
In a statement that analysts said was intended to calm skittish markets, the People’s Bank of China Vice Governor Su Ning said the central bank “will unswervingly continue to apply appropriately loose monetary policy and consolidate the economic recovery momentum.”
The statement was posted on the bank’s website after Wednesday’s 5 percent fall in the Chinese stock market, its biggest daily drop in eight months, which had been sparked in part by worries that Beijing would restrict bank lending.
China has in the past used a quota system to control lending, telling banks not to exceed specific ceilings. This credit management was a key prong of China’s monetary tightening in 2008 and it was subsequently blamed for contributing to the economy’s sharp slowdown in the fourth quarter.
Su’s comments appeared to rule out an imminent return to a strict, central bank-directed quota system.
“They are responding to an incorrect interpretation by the market,” Ting Lu, economist with Merrill Lynch in Hong Kong, said.
“There will not be credit quotas this year, though there could be window guidance,” Lu said, referring to more informal directions that Beijing gives banks to influence their decisions.
The benchmark Shanghai stock index clawed back some of its lost ground, closing up 1.7 percent in topsy-turvy trading business card.
Chinese banks lent a whopping 7.37 trillion yuan ($1.08 trillion) in the first six months, easily topping the full-year figure of 4.91 trillion yuan in 2008 and igniting concern that excess liquidity was leading to stock and property bubbles.
Two initial public offerings in Shanghai soared beyond expectations this week, underlining how speculative fever had returned in full force to Chinese markets.
Beijing has tamped down a little on the tide of money washing through the economy, but it is seen as unwilling to shift to more substantial tightening until a full-fledged recovery is assured.
CREDIT QUOTAS
“We will focus on market tools, not quantitative-style control methods, flexibly using many kinds of monetary policy instruments,” Su said. In this context, market tools likely referred to central bank’s regular selling and buying of bills in the open market to influence liquidity.
“We will guide appropriate monetary and credit growth, strengthen the sustainability and do what is necessary to drive the economic recovery and to ensure stable and quite fast economic growth,” he said.
Dong Xian’an, chief macro-economist with Industrial Securities in Shanghai, said firm lending quotas were still very much on the table, because they are a direct way to manage the underdeveloped and occasionally unruly Chinese financial system.
Securities industry regulators say a St. Peters stockbroker ran an eight-year ponzi scheme in which he swindled brokerage customers, fellow church members and a cousin in order to support a "lavish personal lifestyle" and $4,000-per-month entertainment bills.
The Financial Industry Regulatory Authority announced Monday that broker Kenneth George Neely took $600,000 from at least 25 victims, claiming he would invest it in a fictitious investment club and a nonexistent real estate investment trust.
Without admitting guilt, Neely last week consented to an order banning him from the brokerage business. He could not be reached for comment. FINRA officials said he does not have a lawyer.
FINRA, the self-regulatory arm of the brokerage industry, gave this account of Neely’s activities:
Neely has been a broker since 1987. In 2001, he was working for UBS PaineWebber Inc. when he fell on hard times amid the collapse of the technology investment bubble. His income dropped from $150,000 in 2000 to $30,000 in 2002. He was having trouble paying bills. He ran up some of those debts buying dinners and drinks for clients and friends at his country club.
"It was during this period of personal financial stress that (Neely) conceived and effected his ponzi scheme," FINRA said in its order. He invented the "St. Louis Investment Club" and the equally phony "St. Charles REIT," promising 20 percent returns. He made up investment "certificates" for the club and REIT to give to clients. His first investor was a cousin who invested $30,000, expecting returns of up to 10 percent.
Neely portrayed membership in the investment club as exclusive. He told a retiree, a longtime friend and fellow church member (Neely is a Jehovah’s Witness) that he would tell her when "openings" occurred in the club advance payday loans. "Seven or eight" other church members invested in the scam, said James Shorris, executive vice president at FINRA. "In no sense were these sophisticated investors," he added.
Neely also signed up his brokerage clients, while trying to hide that fact from his employers, regulators said. FINRA records show that Neely moved from UBS to Stifel Nicolaus and finally to AXA in Clayton. In all, at least 25 people eventually invested in the scheme, FINRA said.
A ponzi scheme operates by paying current investors with money from new investors. Neely returned about $300,000 to clients over time, FINRA said.
Neely spent the other $300,000 on his personal expenses including "his lavish personal lifestyle, including entertainment expenses at his country club, sometimes totaling over $4,000 per month," the FINRA order said.
Such schemes depend on a constant flow of new money. By 2007, Neely "desperately" needed funds to repay investors who were demanding their money, FINRA said. He convinced a longtime friend to invest $154,000 in the St. Charles REIT. The friend’s daughter invested $10,000.
According to FINRA, the scheme continued until this month, when FINRA investigators confronted Neely. A spokeswoman for the U.S. Attorney’s office in St. Louis said there are no criminal charges against Neely. The St. Charles County prosecuting attorney could not be reached.
Neely’s disciplinary record shows that UBS paid out more than $240,000 to settle four cases brought by investors claiming they were placed in unsuitable investments.
Less than six months after it raised electric rates by $163 million, AmerenUE is going back to Missouri regulators in search of another, larger increase.
The St. Louis-based utility on Friday sought approval to boost rates by 18 percent, or $402 million, to help compensate for higher fuel prices, financing costs and reliability improvements.
Rate requests are rarely approved in full. The $163 million rate hike it received in late January was about two-thirds of what the utility had requested.
But if AmerenUE got the entire sum it is seeking, the average residential customer bill would rise about $15 a month based on usage of 1,100 kilowatt-hours, the utility said. Exact amounts will vary according to usage.
More than half of the increase, $237 million, would go toward higher fuel costs, including the cost of shipping coal from Wyoming, AmerenUE CEO Warner Baxter said. Also a factor is the drop in wholesale power prices, which means less revenue from sales of electricity to customers outside of the utility’s service area.
The rest of the increase would go to fund reliability projects at power plants and on AmerenUE’s sprawling network of poles and wires, he said.
Consumer advocates had just begun to dig into AmerenUE’s filing Friday afternoon but were surprised by size of the
revenue increase being sought.
"Eighteen percent is a lot," said Lewis Mills Jr., Missouri’s Public Counsel. "And they just got a rate last year and one the year before that."
Of course, AmerenUE’s customers have been hit hard, too, and would have to absorb any increase. Many in the area have seen their investments eviscerated by the decline in stock markets, and metro area unemployment continues to rise.
"We know this is going to create challenges for some of our customers," Baxter said. But "our current rates simply do not reflect the investments we have made and the costs we are incurring."
Prices for all forms of energy have declined because of the recession. But AmerenUE buys coal under three- to five-year contracts and last year’s energy-price spikes haven’t been fully reflected in rates.
AmerenUE’s rates are currently 20 percent below other investor-owned utilities in the state. Even if the full rate increase is granted, rates would remain 10 percent lower, Baxter said.
The Missouri Public Service Commission has 11 months to consider the request, so rates likely wouldn’t change until mid-2010.
AmerenUE has, however, asked for an exception — an interim $37 million, or 1.7 percent, increase to cover investments that are already providing benefits to customers.
Baxter said an interim increase could help offset the gap between its actual costs and the historical costs on which rates are set no fax payday loan. This so-called regulatory lag has been a constant concern for the utility, which has indicated it will file frequent rate increases to compensate.
"In a rising cost environment, you tend to be chasing your tail quite a bit," he said.
Interim increases aren’t unprecedented, but they’re rare and have typically been reserved for instances where utilities face financial distress.
Mills said it was "highly likely" that he would challenge it.
AmerenUE is also asking regulators to approve separate surcharges that would allow speedier recovery of fuel expenses and costs to comply with state or federal environmental mandates. The surcharges are allowed with PSC approval under a controversial 2005 state law.
John Coffman, a consumer lawyer who has previously represented the AARP and Consumers Council of Missouri in rate cases, battled efforts to pass the 2005 bill remains fundamentally opposed to the use of special charges, which can be approved with less up-front scrutiny.
"The fairest way to raise rates is to allow a full audit and a full rate case that looks at all of the investments and expenses and the financial condition of the company," he said.
AmerenUE is asking the PSC for an 11.5 percent return on equity, or profit. That’s higher than the 10.76 percent return allowed by the commission in January, though Baxter said the utility will earn closer to 7 percent this year.
Generally, the lower the return, the more difficult it is for utilities to attract investors. That can lead to higher borrowing costs.
AmerenUE has already seen borrowing costs rise dramatically because of higher interest rates and tighter credit. The utility reported $53 million in interest charges in the first quarter compared with $41 million a year earlier.
Meanwhile, the utility says it’s reducing costs where possible, rolling out campaigns to help customers reduce bills by cutting energy use and continuing to improve reliability.
Executives said they’ve worked hard to restore the utility’s relationship with customers and regulators following a series of widespread power outages after a series of violent storms in 2006 and 2007.
To date, about 60,000 customers have benefited from AmerenUE burying more power lines, and the distribution system is stronger with the addition of 4,700 power poles and more tree trimming, said Richard J. Mark, senior vice president of energy delivery.
The results have been tangible — less frequent service interruptions and a drop in total outages, Mark said. "We are seeing significant improvement in reliability."
Chinese Internet search leader Baidu Inc expects sales to grow faster than market forecasts in the third quarter, helped by rising customer acceptance of its new advertising system.
Already, the roll out of the advertisement keyword bidding system — Phoenix Nest, similar to Google Inc’s AdWords — played a part in Baidu’s better-than-expected second-quarter revenue growth of 37 percent, along with China’s rapidly growing number of Internet users.
For the third quarter, Baidu projected sales of $184 million to $189 million, compared with the average analyst estimate of $178.9 million.
“We expect the benefits of Phoenix Nest to ramp up in the quarter to come, in terms of enhanced monetization and as well as improved ad relevancy,” Chief Executive Robin Li told a conference call.
Phoenix Nest will display paid links and keywords on the right side of Baidu’s search page and will provide clients with statistical functions.
“The new bidding system should lead to more targeted results and higher revenue over time,” Steve Weinstein, an analyst from Pacific Crest Securities said in a note.
Baidu, the No. 1 search engine in China, controlled 61.6 percent of China’s search market in the second quarter, according to Analysys International. The firm is holding off rival Google Inc, which held 29 percent of the China search market.
Baidu, whose shares surged roughly 140 percent since the start of the year, fell 2 life insurance.3 percent to $325.00 in after-hours trade on Thursday, amid a decline in most technology stocks following Microsoft Corp’s weaker-than-expected quarterly revenue.
According to a Deutsche Bank note, web traffic to Baidu increased gradually since late March while traffic to Google China remained flattish.
Analysts expect Phoenix Nest to be a key growth driver for Baidu in the upcoming quarters as China’s search market continues to expand at a rapid pace. The market grew 47 percent year-on-year in the second quarter to 18.1 billion yuan ($2.6 billion), according to data from Analysys International.
RISING COSTS
Baidu reported net income of $56.1 million, or $1.61 a share, for the second quarter, compared with $38.6 million, or $1.11 cents a share, a year ago.
Revenue grew to $161 million in the second quarter from $117 million in the year-ago period, beating analysts’ average forecast of $158 million.
“During the second-quarter, macroeconomic conditions remained challenging even as we began to see some signs of recovery in the Chinese economy,” Li said.
Jennifer Li, Baidu’s chief financial officer, said the firm was expecting higher costs in the third quarter because Baidu was hiring more sales people for Phoenix Nest and hosting a forum in that period.
Monsanto Co. and Dow AgroSciences said it won approval from U.S. and Canadian regulators to begin selling a new biotech corn to help farmers ward off weeds and bugs.
So-called SmartStax corn was jointly developed by Monsanto and Dow under a 2007 agreement. The companies plan to begin commercial sales of 3 million to 4 million acres next year.
Creve Coeur-based Monsanto, the world’s largest seller of biotech seeds, sees SmartStax as a blockbuster that could eventually be planted on 50 million to 65 million acres in the U.S., Chief Technology Officer Robb Fraley said Monday on a conference call with analysts. This year, 87 million corn acres were planted.
It represents Monsanto’s second major product in as many years and the platform for future genetic improvements in corn, the company said. Earlier this year, Monsanto began selling higher-yielding Roundup Ready2Yield soybeans.
Monsanto shares rose $4.20, or 5.5 percent, to $80.76 at 5 p.m. Monday in after-hours trading.
SmartStax is the first genetically modified corn that combines eight herbicide-tolerance and insect-protection genes instant cash.
Because the companies are integrating already-developed traits, the companies will be able to "put SmartStax on a fast-track," said Jerome Peribere, CEO of Indianapolis-based DowAgroSciences, a unit of Dow Chemical Co.
The approval by the Environmental Protection Agency and Canadian Food Inspection Agency is especially noteworthy because regulators agreed to reduce the "refuge area" for SmartStax.
The EPA currently prohibits farmers in the U.S. Corn Belt from planting insect-resistant corn on 20 percent of their acres (50 percent in the Cotton Belt) to guard against developing pesticide tolerance in bugs.
Shrinking the refuge area for SmartStax allows farmers to cut pesticide use and grow higher-yielding corn on more land, improving "whole-farm yield" by 5 percent to 10 percent, Fraley said.
Bloomberg News contributed to this report.
The great crash of 2008 turned Wall Street into a financial disaster zone, as big firms tumbled and employees by the thousands found themselves out of work.
But when the going got tough, Ron Kruszewski went shopping.
Kruszewski is chief executive of Stifel Financial, parent of the Stifel Nicolaus & Co. brokerage. The firm, based in downtown St. Louis, is on a growth spurt at a time when much of the industry is shriveling up, selling out or dying off. The misery of its rivals gave Stifel a chance to pick up people and businesses on the cheap.
In May, Stifel picked up 320 stockbrokers and 54 offices from the struggling Swiss-based giant UBS. Last fall, it bought 23 offices in Ohio and Pennsylvania and hired 75 brokers from Butler Wick & Co. Last month, it hired Victor Nesi, Merrill Lynch’s former head of investment banking for the Americas.
Those moves continue a four-year run of acquisitions that is turning Stifel from an obscure Midwestern brokerage to a firm with national name recognition. Revenue more than tripled in four years to about $889 million.
"His target is pretty obvious — to become one of the big boys," said Juli Niemann, a Stifel analyst in the 1990s who now works at Smith Moore & Co.
Stifel was in the right place at the right moment, analysts say. It avoided bad investments that crippled Merrill Lynch, Wachovia and Citigroup and toppled Bear Stearns, AIG and Lehman Brothers.
When other firms held fire sales, and employees fled for the exits, Stifel’s Kruszewski was standing by with a checkbook.
"I don’t spend a lot of time trying to read the future," says Kruszewski. "I spend time reacting to what comes my way."
Stifel’s stock is up 42 percent since the recession began in December 2007. That’s the sharpest advance among 17 other large and mid-sized publicly traded investment firms.
While Stifel’s stock is up, its profits are down by 8 percent in the first quarter to $13.2 million. Investors seem to be betting that Stifel will come back stronger than the pack when good times finally return.
"Oh, it’s definitely a buy," says Michael Flanagan, an independent brokerage industry analyst in Philadelphia, who says he has no business connections with Stifel.
"Stifel since 2004 has been the best in class."
BOND CONTROVERSY
There have been boos mixed with the applause for Stifel. Much of the booing comes from Missouri Secretary of State Robin Carnahan, the state’s main securities regulator. She blasts the company for refusing to immediately buy back $180 million in "auction rate" securities sold to small investors as a low-risk place to stash cash.
Those investments have been frozen since the auction rate market collapsed in February 2008.
A buyback would stick Stifel with bonds that can’t be sold except at a steep loss. The company says it plans to buy back the bonds over three years, which might be time enough to find a market for them. Carnahan calls that plan "drawn-out and inadequate."
While Carnahan and auction-rate customers complain, financial industry analysts are cheering.
They say Stifel sidestepped the mistakes that brought down the giants. It largely stayed out of the mortgage meltdown, but its saving grace was that it avoided heavy debt.
Wall Street investment firms inflated their balance sheets with borrowed money in the good years. Then, they made big bets on mortgage securities and other risky investments. When the economy slumped and the housing market crashed, those securities plummeted in value and big firms drowned in their debt.
Stifel has an assets-to-equity ratio of 3 car insurance quotes.2, compared with 30 at some larger firms before the crash.
"You have to credit Stifel management with using the most powerful word in business, which is ‘no,’" says Joe Stieven, who worked as a banking analyst for Stifel for 21 years before quitting to start his own firm. "They were disciplined enough to say no when others were jumping off the cliff."
Stifel’s growth began before the recession. In 2005, it bought Legg Mason Capital Markets from Citigroup. The firm, based in Baltimore, quadrupled Stifel’s investment-banking business and gave it a bigger presence in capital markets.
Retail brokerage — Stifel’s traditional bread and butter — dropped from three-quarters to about half of the company’s revenue.
Legg Mason also brought a big stock research operation, which Stifel lacked. The company now has 61 analysts, and Stifel analysts started popping up on CNBC and in the financial press.
STAYING LOCAL
After the Legg Mason purchase, Stifel had as many employees in Baltimore as in its St. Louis hometown. But Stifel opted not to move the headquarters from downtown St. Louis, where it’s been since 1890.
"St. Louis has a natural talent pool of people who know the business," says Kruszewski.
That stems from the large number of brokerage firms operating here, including two big national full-service firms in Edward Jones and Wells Fargo Advisors and national discount broker Scottrade. All those experienced people give brokerage firms a reason to stick around.
Stifel now has 900 employees in St. Louis, up from 480 in 2005.
"I don’t think I have the right to move a St. Louis institution somewhere else," said Kruszewski.
Stifel still plans to move to Ballpark Village, which is now an empty lot next to Busch Stadium. Despite repeated delays, Kruszewski is convinced the project will be built. "If we can’t get it built, we ought to push the city into the Mississippi and let it float to Memphis," he jokes.
Stifel held on to 320 of the 340 UBS brokers at offices it acquired. That 6 percent loss is below the 8 to 12 percent loss common in takeovers.
"They are able to hire excellent people off Wall Street. They come from firms that essentially imploded through the steroid of leverage," says analyst Stieven.
In 2007, Stifel bought tiny FirstService Bank in Crestwood. Stifel probably didn’t need a bank; brokerage houses had been getting along without them for decades.
But many banks were buying brokerage houses in an effort to become a one-stop shop for customers seeking investments, credit cards, bank accounts and loans. They have had only limited success at cross selling, but they keep trying.
"My competition thought they’d sell out to a bank," Kruszewski said. "I thought, ‘Why not buy a bank?’"
Meanwhile, Kruszewski says, he will continue to avoid heavy risk. For instance, he won’t set dollar goals for his employees out of worry that they will take too many chances.
"Once you set quantitative goals in financial services, you’re in trouble," he says.
By keeping the firm healthy, Kruszewski said, he will be ready when opportunity arrives, wherever it happens to come from.
"We’ll be a bigger, more influential firm in the market place," he predicts.
"How we’ll get there, I have not a clue."
Home is where the heart is, but it hasn’t been much of a profit center lately.
Recession and declining property values have hit homeowners hard, which is bad news for investments tied to homes and property. House builders, home improvement centers and real estate investment trusts are left to pin their hopes on an economic revival.
House builder stocks, bounced around on the conflicting signals of foreclosures and rising mortgage rates versus declining inventories and pockets of recovery, are up modestly as a group this year.
"We like the house builder stocks because there’s an upside between now and the end of the year, as losses start to mediate and we see more signs that housing has stabilized," said Megan McGrath, house builder analyst with Barclays Capital, New York. "The time to invest in these stocks is early in the cycle."
For now, easing in the rate of sales decline and fewer reductions in home prices are reasonable expectations, McGrath said, but it may take a quarter or two before the outlook can be described as truly positive.
"The new-home market, with sales at historic lows, is only 10 percent of the total housing market but plummeted faster than existing home sales due to the supply of foreclosed and distressed property," McGrath said. "However, new-home sales have reached a significant low point, and we’ve started seeing stable numbers since the beginning of the year."
Bottoming of the new-home market represents a buying opportunity in house builder stocks, she said.
DR Horton Inc. and Toll Brothers Inc. are stocks recommended by McGrath. DR Horton’s long-time focus on low costs will give it a boost in an economic upturn, while luxury house builder Toll Brothers has always maintained higher profit margins than competitors, she said.
"I’m cautious on the house builders because, while sales over the next few months are going to be good since there is still some momentum, price pressure will continue to squeeze profit margins," warned David Urani, house builder analyst with the Wall Street Strategies independent research firm, New York. "Some of the big impairment charges these firms are taking will likely continue."
Urani doesn’t expect house builders to actually revive until 2010.
Nonetheless, he likes the stock of Lennar Corp., which has boosted its capital position, had some sales improvement and turned in a second-quarter loss smaller than analysts expected.
Ryland Group Inc. is recommended by both McGrath and Urani based on improved sales and a strong cash position that assures it of exiting recession in fine shape.
The two analysts also have definite dislikes. Both are steering clear of Hovnanian Enterprises Inc. because the firm’s uncertain profitability and high debt will make it difficult for it to benefit from an economic recovery no fax payday loan. Urani would avoid Beazer Homes USA Inc. because of a financial position that "isn’t resilient" due to significant exposure to California and other problem real estate regions.
As the housing market goes, so go home improvement centers. Their stocks have managed to rally somewhat from their lows set earlier in the year.
"A major factor that benefits these retailers is that they operate in a duopoly — Home Depot and Lowe’s — and that really helps profit margins," said Michael Souers, home improvement retailer analyst with Standard & Poor’s Equity Research, New York. "They’ve kept rational pricing and strong gross margins throughout the economic decline, though they’ve had negative same-store sales growth."
Souers has a "buy" on stock of Lowe’s Inc., down 11 percent this year, because it is trading at a lower price-earnings ratio than Home Depot and is more of a growth story. He has a "hold" on Home Depot Inc. stock, which has been flat for the year, though it is a "safer story" with higher dividend.
It could be several years before home improvement centers see a significant pickup in remodeling and overall demand, Soeurs said. In the meantime, he finds it commendable that both chains own so much of their own real estate — Home Depot 89 percent and Lowe’s 88 percent.
Real estate investment trusts, dividend-producing investments that use the pooled capital of investors to purchase properties, have been volatile and are down about 20 percent as a group this year.
"REITs are going to be in a trading range for the rest of this year, and their eventual catalyst will be their ability to acquire assets from distressed sellers," said Chris Lucas, senior real estate analyst with Robert W. Baird & Co., McLean, Va.
"The good news for public companies in real estate is that they’ve been able to raise equity and a number of refinances have been done."
Corporate Office Properties Trust Inc. is an REIT recommended by Lucas because 55 percent of earnings are derived from government and government contractors in defense and intelligence that should experience growth.
He likes Federal Realty Investment Trust, a shopping-center REIT with locations in high-density, high-income areas in the Northeast and on the West Coast.
Its high-quality properties are the places retailers find especially attractive, he said.
"REITs are often used as a defensive investment because of the dividends they pay," Lucas said.
"So it wouldn’t surprise me if at some point investors started to look to well-capitalized REITs as a safety play."
The world’s largest oil companies likely had an “ugly” second quarter, with earnings hit by a halving of oil and gas prices, sharply lower refining margins and, worst of all for many, stubbornly high costs.
The oil and gas sector will likely report a 62 percent drop in second-quarter earnings compared to 2008, and a 27 percent decline compared to the first quarter of 2009, analysts at Citigroup predicted.
The quarter-on-quarter decline comes despite a recovery in crude prices to almost $60 per barrel from around $44 in the first quarter, and reflects continued weakness in gas prices and crude processing margins and, for many, lower production.
“Generally, if there is an area where we are going to be disappointed, I’d say it is the integrated oil companies,” said Fred Dickson, market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.
Exxon Mobil, the world’s largest non-government controlled oil company by market capitalization, is expected to report second quarter net income of $4.75 billion, down 59 percent on April-June 2008, according to Reuters estimates.
U.S. No. 2, Chevron is forecast to post a 70 percent drop in net income to $1.82 billion.
Europe’s largest oil company, Royal Dutch Shell Plc, is predicted to report a 70 percent fall in current cost of supply net income, excluding one-off items, with an average forecast of $2.55 billion in a Reuters poll payday loan online.
BP Plc, Europe’s No. 2, was forecast to report a replacement cost net income, excluding one-offs, of $2.81 billion, a 67 percent drop on the year.
Replacement cost and current cost of supply net income exclude unrealized profits or losses related to changes in the value of fuel inventories, making them comparable with net income under U.S. accounting rules.
STICKY COSTS
Soaring oil prices prompted and, for many oil industry investors, disguised a doubling in the cost of producing oil between 2004 and 2008.
Now, after a collapse of crude prices from a record above $147 last July, companies including BP and Shell are pressing suppliers hard for discounts.
Companies have claimed some success in this. In the first half of the year, upstream oil and gas production costs fell 8 percent, according to a survey by industry consultants IHS CERA.
However, many oil executives doubt their profit margin will be boosted by significant cost cuts. Much of the drop in the IHS CERA index is due to a collapse in steel prices, since a peak in mid-2008, and in the cost of hiring rigs.
However, steel prices have started to rise again in recent months and analysts believe rig rates may be nearing a bottom.
Leaders of Japan Inc. believe they have learnt a lesson from the global economic crisis — namely that the U.S. business model with its eye on short-term gains has failed and it’s time to return to longer-term strategies.
Recent remarks by corporate chiefs from companies like Suzuki Motor Corp and Chugai Pharmaceutical Co underscore a desire of Japan’s corporate leaders to reject pressure from what they see as short-term interests to concentrate on more sustainable returns.
In one of the most public displays of the current corporate zeitgeist, Osamu Suzuki, who has steered Suzuki for the last 30 years published an essay in February rejecting what he saw as short-term interests tied to earnings.
His views often attract attention, as analysts credit him for having turned his company into a globally-competitive carmaker by making inroads into India decades before it boomed, and expanding revenue more than tenfold.
Arguing against calls from some securities analysts to depreciate the company’s factories gradually so that near-term earnings would not suffer as much, Suzuki said the automaker’s long-term interests were better served by writing down the cost quickly.
“I have no intention of changing our three-year depreciation policy for our production facilities. We follow the principle of gloom first and ease later,” he wrote.
Suzuki’s stance and those of other corporate chieftains pit them against fund managers, whose industry is welded to producing quarterly returns and who fear corporate Japan may return to its habits of old — ignoring the shareholder.
“There are still many companies in Japan which feel no compunction about hurting shareholder values,” said Takaaki Umezawa, head of the Japanese arm of U health insurance plans.S. consulting firm AT Kearney.
SPECTACULAR FAILURE
Japan only adopted compulsory quarterly reporting five years ago. Some, like Honda Motor Co, introduced the concept as early as 1979, but Toyota Motor Corp — a standard bearer for much of corporate Japan — did not begin until 2003.
The shift brought much grumbling from corporate executives, who worried that the focus on quarterly earnings and share price performance would not reflect the realities of doing business — a view that has never really gone away.
Motoki Ozaki, the head of household products and cosmetics maker Kao Corp makes a similar argument to Suzuki’s, shrugging off calls from investors for the company’s non-Japan Asian operations to start showing a profit.
Its Asian operations could be profitable now, but Kao has chosen to plough huge sums into marketing, aiming for a large jump in revenue and profits long-term, he said.
The emphasis on long-term sustainable returns versus short-term profits comes up time and time again, bolstered by the view that amid the spectacular failure of companies like Lehman Brothers and General Motors Corp GMGMQ.PK, the U.S. corporate model has gone fundamentally wrong.
“At Harvard, people are apparently debating what lessons the U.S. should learn from the ongoing crisis. Perhaps there’ll be a movement to correct the ways of companies, share prices and profits,” Osamu Nagayama, president of Chugai, a unit of Swiss drugmaker Roche, told reporters in March.
Boeing Co told employees it will have to cut around 1,000 jobs in its defense division because of Pentagon budget reductions, the Associated Press said, citing an internal memo from Jim Albaugh, the company’s top defense executive.
Albaugh said the job reductions were needed to keep the company competitive, according to the news agency.
The memo did not give a time for the cuts, the news agency’s report, which appeared on the New York Times website, said.
Boeing spokesman Dan Beck declined to say whether the job cuts were part of the 10,000 company-wide job reductions the company announced in January, the report said us fast cash.
Boeing, the Pentagon’s No.2 contractor, could not be immediately reached for comment by Reuters.
Albaugh had recently rejected speculation that the company, hard hit by U.S. defense cuts announced in April, was being edged out of the military aircraft market.
(Reporting by Ajay Kamalakaran in Bangalore; Editing by Valerie Lee)
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