Archive for April, 2009

Fed sees economy sliding further (Reuters)

Wednesday, April 8th, 2009 | Finance News

WASHINGTON (Reuters) –
Federal Reserve policy-makers, faced with bleaker forecasts for a rapidly worsening recession, decided to buy a "substantial" amount of U.S. Treasury and mortgage debt to halt the slide, minutes of their most recent meeting showed on Wednesday.

Staff economists for the Federal Open Market Committee lowered projections for U.S. real gross domestic product in the second half of 2009 and 2010, indicating a more gradual recovery. However the minutes, which were from the central bank's March 17-18 meeting, did not offer any revised figures.

"The deterioration in labor market conditions was rapid in recent months, with the steep job losses across nearly all sectors. Industrial production continued to contract rapidly as firms responded to the falloff in demand and the build up of some inventory overhangs," the Fed said in the minutes.

The Fed had already given up on any growth in 2009 when it released its last quarterly forecasts in February, saying that the U.S. economy would shrink 0.5 percent to 1.3 percent for the year. At that time, it anticipated a 2010 rebound to growth of 2.5 percent to 3.3 percent.

But the Fed staff forecasts indicated the GDP decline would flatten out gradually over the second half of 2009 and then turn to expansion "slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through and the correction in housing activity comes to an end."

The revisions caused the Dow Jones industrial average to turn negative and other indexes to pare gains amid renewed worries about the health of the economy. The dollar extended its drop against the yen, while longer-dated U.S. Treasury debt held onto price gains.

"The assessment of the economy is very bad. This is clearly a big problem that they are worried about," said Robert Brusca, chief economist at Fact and Opinion Economics in New York, adding that he saw very little encouraging language.

The Fed minutes said FOMC members particularly noted a sharp fall in foreign activity that was reducing exports as a key development since their January meeting.

WHAT TO BUY?

At the conclusion of the March 17-18 meeting, the Fed announced plans to buy up to $300 billion of longer-term U.S. Treasury securities and an additional $850 billion of agency mortgage debt to deal with the weak economic outlook. It agreed to keep its benchmark federal funds rate in a zero to 0.25 percent range.

But there was some division among members over which securities to buy and the appropriate amount, given the expansion of the Fed's balance sheet through a new securities loan program.

"One member preferred to focus on additional purchases on longer-term Treasury securities, whereas another member preferred to focus on agency MBS (mortgage-backed securities). However, both could support expanded purchases across a range of assets, and several members noted that working across a range of assets and instruments was appropriate when the effects of any one tactic were uncertain,"

Fed policy-makers saw little chance of a pickup of inflation as rising unemployment and falling capacity utilizations were holding down wages and prices.

"Several expressed concern that inflation was likely to persist below desired levels, with a few pointing out the risk of deflation," the minutes said.

RECOVERY TIMING UNCERTAIN

The Fed participants expressed a wide variety of views about the strength and timing of recovery, and did not interpret an uptick in housing starts as the beginning of a new trend, although there was only "limited scope for housing to fall further."

They noted some signs of stabilization in consumer spending in January and February, but said the fear of unemployment could damp consumption growth in the near term.

FOMC members said they anticipated demand for funds from the Fed's new Term Asset-backed Securities Loan Facility would be modest initially, and some firms might be reluctant to borrow from TALF out of concern about potential future changes in the government's policies for financial rescues.

Some members also expressed concern about risks that expansion of the Term Asset-backed Securities Loan Facility would raise if it were expanded to include older and lower-quality assets.

The U.S. Treasury a few days later announced plans to expand the TALF to include older commercial and residential mortgage-backed securities as a way to help clear problem assets off bank balance sheets.

(Additional reporting by Richard Leong in New York, Editing by Chizu Nomiyama)

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Treasury may aid some life insurers, shares rise (AP)

Wednesday, April 8th, 2009 | Finance News

WASHINGTON – Shares of large U.S. life insurance companies initially surged Wednesday following news they may receive aid from the government's $700 billion financial industry rescue program. But the Treasury Department said only life insurers that own banks or saving and loans qualify for assistance, and that no new programs for the industry were being considered.

Shares of Hartford Financial Services Group Inc., which spiked 35 percent to $11.40 minutes after the market opened, closed at $9.59, a gain of 13.5 percent.

Hartford and Lincoln National Corp., two of the nation's largest life insurers, and several others applied to become thrift holding companies last fall. Regulators approved applications earlier this year from those two firms, as well as Prudential Financial Inc., Genworth Financial Inc., and Aegon NV, a Dutch company that owns U.S. insurer Transamerica.

Life insurers, which have more than $5 trillion in assets and invest some of the premiums received from customers, play an important part in consumer confidence and security.

"These companies are among the hundreds of financial institutions in the ... pipeline that will be reviewed and funded as appropriate on a rolling basis," Treasury spokesman Andrew Williams said.

Hartford said in January that it expected to be eligible for between $1.1 billion and $3.4 billion in bailout money.

The bailout fund approved by Congress last year, known as the Troubled Asset Relief Program, or TARP, was intended to help banks weather the credit crunch, though it has also been used to make loans to auto companies and insurance giant American International Group Inc.

Shares of insurance companies rose after The Wall Street Journal reported that Treasury would announce a bailout for the sector in the next several days. But only the companies that got in line last fall will be eligible for government money, Williams said. He did not provide a timeline for any aid announcements.

Shares of Lincoln National jumped to $10 earlier Wednesday, but ended at $9.15, a gain of 32.8 percent. Prudential stock climbed as high as $25.30, but closed at $23.81, a 7.7 percent increase.

The government's decision leaves many large companies in the cold, facing deteriorating financial conditions and new competitive challenges.

Life insurers own 18 percent of all corporate bonds so aiding them is consistent with the bailout program's goal of unclogging credit markets, said Frank Keating, president of the American Council of Life Insurers.

Insurers have been under pressure to maintain solid capital positions to avoid damaging downgrades by ratings agencies. Keeping high ratings is key for insurers because lower ratings can mean higher costs or a loss of business.

If every life insurer holding a federally chartered bank does get aid, that could remove "conceivably all" of the mounting uncertainty in the industry, said Robert Litan, an economist and senior fellow at the Brookings Institution.

It also should resolve industry fears about "bank run" scenarios in which the companies don't have the ready cash to pay out policies for people who have lost confidence in the system, Litan said.

But other experts warn that instability in the passed-over companies could endanger the industry — a staple of consumer confidence and security — and pose grave threats to the broader financial system.

"It is fairly likely ... that we will see a few major life insurers that don't qualify for aid either fail or enter state receivership," said Kent Smetters, an insurance expert and professor at the University of Pennsylvania's Wharton School.

The industry's major financial challenges include balance sheets clogged by illiquid assets and escalating liabilities to policy holders who bought in to this decade's explosion in the variable annuities market.

Variable annuities pay out according to market performance, but often include guarantees of minimum payouts. That means declining stock markets can put a cash pinch on insurance companies that wrote too many of the policies.

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AP Business Writer Ieva M. Augstums contributed to this report from Charlotte, N.C.

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Pulte to buy rival Centex for $1.3 billion (Reuters)

Wednesday, April 8th, 2009 | Finance News

NEW YORK (Reuters) –
Pulte Homes said it would buy rival Centex Corp in a $1.3 billion all-stock deal to create the largest U.S. homebuilder, in what may be the first big merger in the consolidation of the badly beaten up sector.

The deal between No. 2 U.S. homebuilder Pulte (PHM.N) and No. 3 Centex (CTX.N) will help the companies to better survive one of the deepest housing recessions in U.S. history and to save money.

Pulte and Centex have reported net losses for 2007 and 2008. The merger would allow the combined company, which would called Pulte, to return to profitability sooner than they could as stand-alones, the chief executives of both companies said on conference call with analysts.

Alpine Mutual Funds senior analyst Stephen Kim said he thought the deal was very good. "You're talking two companies that are both very large. This is a deal that is going have a pretty significant impact."

The U.S. housing market has been in a steep decline for about three years, which has contributed to the deep recession in the United States.

Home prices in some markets are down more than 40 percent. Although new home sales rose 4.7 percent in February, they did so from low levels, foreclosures are still rising and financing remains tight.

"We know that the housing market will rebound at some point and ... we are cautiously optimistic that we are beginning to see the early signs of housing stabilization," Pulte Chief Executive Richard Dugas said in a conference call. "However, it's not enough for us simply to wait for the recovery to occur."

Dugas said that traffic of perspective buyers in the first quarter was up from the prior quarter.

Shares of Pulte were down 11.6 percent, or $1.25, at $9.52 in late afternoon trade on the New York Stock Exchange. Centex shares were up 18.4 percent, or $1.40, at $9.02.

The deal prompted Fitch Ratings to affirm Pulte's BB-plus rating, the highest junk grade, and placed Centex' debt on Rating Watch "positive", saying the company would ultimately benefit from Pulte's credit profile.

The merger would result in about $350 million in annual savings from job cuts, other cost reductions and debt relief, the companies said. They expect to retire more than $1 billion of debt maturities by the end of the year.

Based on 2008 closings, Builder magazine ranked Pulte No. 2 and Centex No. 3. The combined company would control 189,452 lots.

"Essentially, what they bring to one another is the ability to scale back," University of Maryland economics professor Peter Morici said in an interview with National Public Radio. "Homebuilding is not a terribly complex business, and there's too much capacity."

Centex has a strong position in the first-time buyer and second-time home buyer market. Pulte is strong in upgrades from first homes, and, through its acquisition of Del Webb in 2001, builds "active adult" communities for younger retirees.

Geographically, the merger melds Centex's strength in the Dallas and Carolina markets with Pulte's position in the Northeast and Midwest. It would put Pulte in the top three position in 25 of the top 50 U.S. markets.

DEAL OFFERS LARGE PREMIUM

The deal calls for the exchange of 0.975 common shares of the combined company for each share of Centex, valuing the acquisition at $10.50 per share.

The companies said that represented a premium of 32.6 percent over the stock's 20-day average price and 37.8 percent above Centex's closing price on Tuesday.

"It's a pretty normal consolidation in a very troubled industry," said Gary Shilling, president of investment research firm A. Gary Shilling & Co. "It's exactly what you'd expect. These companies are obviously in big trouble."

Some experts predict more strategic stock-for-stock deals this year in distressed sectors. With such transactions, companies could grow without depleting much-needed cash or trying to raise financing in a tight credit environment.

"You have both weakness in sales and writedowns on land and existing inventory of houses," Shilling said. "All these things are putting pressure for consolidation in the industry."

But Kim said the merger was unique because Centex was undervalued. He does not think that a rash of mergers will follow.

Pulte, which would take on $1.8 billion of Centex's debt, would own about 68 percent of the new company.

Based on current prices, the combined company would have a market capitalization of $4.1 billion and a presence in more than 59 markets across the United States, Pulte said.

Last year, Pulte and Centex delivered more than 39,000 closings with combined proforma revenue of $11.6 billion. The combined company would have had more than $3.4 billion of cash as of March 31, 2009.

Dugas will be chairman and CEO of the company, which will be based in Bloomfield Hills, Michigan, where Pulte is headquartered.

The boards of both companies have approved the deal, which is expected to close in the third quarter.

(Additional reporting by Christopher Kaufman, Paritosh Bansal and Ed Krudy and Ilaina Jonas; Editing by Lisa Von Ahn)

(Reporting by Ilaina Jonas; Editing by Toni Reinhold)

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