Archive for May, 2009

U.S. new home sales edge up, jobless claims ease (Reuters)

Thursday, May 28th, 2009 | Finance News

WASHINGTON (Reuters) –
Sales of new U.S. single-family homes rose slightly in April, while fewer workers filed for first-time jobless aid last week, raising hopes the worst of the deep economic recession was likely over.

The Commerce Department said on Thursday that new home sales climbed 0.3 percent in April from March to a 352,000 annual unit pace, while prices rose 3.7 percent, the biggest monthly advance since November.

While the sales pace was not as brisk as financial markets had anticipated, analysts were encouraged by a drop in the stock of homes available for sale, which reached the lowest level in nearly eight years.

A separate report from the Labor Department showed initial claims for state unemployment insurance benefits dropped by 13,000 to 623,000 in the week ended May 23, a second straight weekly drop.

The reports were the latest in a series suggesting the intensity of the 17-month old downturn, characterized by severe job losses and plunging asset prices, was losing momentum and the economy could return to growth later this year.

"The data are consistent with the notion that the worst of the recession is behind us. We haven't hit bottom yet, but seem to be nearing it. ... I see positive growth in the fourth quarter," said Mark Vitner, a senior economist at Wachovia Securities in Charlotte, North Carolina.

U.S. stocks indexes ended up more than 1 percent, buoyed by energy shares as oil prices rose and results of a Treasury note auction calmed fears over demand for government debt.

Longer-dated U.S. Treasury debt prices also rose following the seven-year note sale, with yields retreating from six-month highs scaled on Wednesday.

HOUSING BOTTOM

The inventory of homes available for sale in April fell 4.2 percent from the prior month to 297,000, the lowest level since May 2001. At April's sales pace, that represents a 10.1 months' supply, the smallest backlog in nine months.

Sales, however, were down 34 percent compared to April last year, a reminder of how steeply the market had been falling. The sales pace appears to have bottomed in January when it hit a record low 329,000 unit pace.

"Together they draw a picture that tells us that the housing market is finally bottoming out and that conditions are beginning to improve," said Bernard Baumohl, chief global economist at The Economic Outlook Group in Princeton.

While the housing market may finally be finding its feet, one out of eight U.S. households with a mortgage ended the first quarter late on loan payments or in the foreclosure process, the Mortgage Bankers Association said on Thursday.

That is largely attributable to rising unemployment. While the pace of layoffs has eased and initial claims appear to have peaked, people who have lost their jobs are finding it difficult to re-enter the labor market.

The Labor Department said the number of people still on unemployment benefit rolls after an initial week of aid rose 110,000 to a record 6.79 million in the week ended May 16, and analysts expect a report on June 5 will show the jobless rate shooting to 9.2 percent in May from 8.9 percent in April.

A second report from the Commerce Department on Thursday also offered some hope for the economy.

The department said new orders for long-lasting U.S. manufactured goods rose 1.9 percent in April from March, the biggest gain in 16 months. But the report was tempered by a sharp downward revision to March orders, which fell 2.1 percent.

In addition, a closely watched gauge of business spending plans fell 1.5 percent after slipping 1.4 percent in March, an indication that manufacturers were still working to reduce their stock of unsold goods choking their warehouses.

(Additional reporting by Glenn Somerville in Washington and Lynn Adler in New York; Editing by Chizu Nomiyama)

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Greenlight’s Einhorn shorting Moody’s (Reuters)

Thursday, May 28th, 2009 | Finance News

NEW YORK (Reuters) –
Shares of Moody's Corp (MCO.N) fell sharply on Thursday after hedge fund manager David Einhorn, who correctly questioned the health of Lehman Brothers four months before its collapse, disclosed he was shorting the venerable ratings agency.

Einhorn, whose Greenlight Capital managed $5 billion, said on Wednesday the parent of Moody's Investors Service undercut the value of its primary business -- assigning grades to bonds -- after giving AAA ratings to insurer AIG (AIG.N), mortgage banker Fannie Mae (FNM.N), bond insurer MBIA Inc (MBI.N) and other companies later revealed to be badly overextended.

Moody's has also come under fire for granting its top rating to mortgage-backed securities and derivatives later found to be built on sketchy, subprime loans.

"If your product is a stamp of approval where your highest rating is a curse to those that receive it, and is shunned by those who are supposed to use it, you have problems," Einhorn told some 1,200 hedge fund executives at the annual Ira Sohn Investment Research Conference.

Moody's shares fell as low as $25.69, its lowest in more than a month, before trading down 5.5 percent at $26.58 on Thursday afternoon. Options traders also reacted to the bearish comments.

"Given the nature of our business, which is to offer forward-looking opinions about future credit risk, the role of independent public opinions about market participants such as Moody's is well understood by us," said Moody's spokesman Tony Mirenda. "Moody's opinions are a valuable source of information and continue to be widely sought by market participants of all kinds."

DAVID VS WARREN

The bearish view sets up a battle between Einhorn and legendary investor Warren Buffett, whose Berkshire Hathaway Inc (BRKa.N) is Moody's largest shareholder. For now, the market is lining up behind the boyish hedge fund manager with a growing reputation for spotting overvalued companies.

"Investors are piling up bets that shares in Moody's will fall at least 22 percent over the next six weeks," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group.

Wilkinson said buying in July $20 strike puts more than doubled to 65 cents per contract. Overall, puts have outpaced calls by 4.5 to 1 during the first half of Thursday.

"Investors appear to be taking their cue from his theory that the ratings business model is flawed and the services of these companies are redundant, Wilkinson said.

Einhorn contends that investors have learned not to rely on Moody's, which for years has been criticized because it earns fees from the companies it rates. And after the mortgage market melted down in 2007, Moody's came under fire for giving top grades to bonds and derivatives backed by subprime loans.

"The truth is that nobody I know buys or uses Moody's credit ratings because they believe in the brand," he said at the conference, which raises funds for the treatment and cure of pediatric cancer. "They use it because it is part of a government-created oligopoly and, often, because they are require to by law."

Even Buffett, Einhorn added, has said he does not rely on credit ratings when making investments.

OVERVALUED?

Yet Einhorn noted that equity investors still believe in the agencies. Moody's shares trade at a rich 19 times estimated earnings, he said, though he said the company has a negative net worth of $900 million.

Moody's had long been a favorite among investors because the limited number of firms approved by the U.S. government to rate debt lets these firms generate fat profit margins. McGraw-Hill Cos Inc's (MHP.N) Standard & Poor's and Fimalac SA's (LBCP.PA) Fitch Ratings are Moody's rivals.

Immediately after his presentation, Einhorn told Reuters he began thinking about Moody's and the quality of credit ratings in 2002, when fellow activist William Ackman started shorting MBIA. He declined to say when he began shorting Moody's, only noting it was a "considerable" amount of time ago.

Regulators and lawmakers for years talked about reforming the ratings system, questioning the issuer-funded business model that critics say conflicted with the interests of investors who buy company debt, municipal bonds or asset-backed securities. Einhorn called for sterner measures.

"Why reform them if we can get rid of them?" he said. "Are we waiting for then to blow up the Lunar economy as well?"

Einhorn used the Ira Sohn event seven years ago to announce a short position on business lender Allied Capital Corp (ALD.N), questioning the values it assigned to assets and sustainability of its dividend. Allied, which in February defaulted on a credit line and in March suspended its dividend, recently announced its fifth straight quarterly loss.

And at last year's conference, Einhorn set off a firestorm when he boldly accused investment bank Lehman of understating its losses on real estate assets and for not holding enough equity capital.

After weeks of heated denials, Lehman raised $6 billion of capital to offset mounting write-offs. Within four months it filed the biggest bankruptcy in U.S. history.

In related news, Einhorn closed the book on his Allied transaction and made good on a promise to donate the firm's profits from the trade to charity.

He announced that Greenlight would donate $2.5 million to Tomorrows Children's Fund, on top of $1 million donated to the charity four years ago, as well as $1.8 million each to two government watchdog groups: the Center for Public Integrity and the Project on Government Oversight.

(Reporting by Joseph A. Giannone; Additional reporting by Doris Frankel in Chicago and Jon Stempel in New York; Editing by Richard Chang, Dave Zimmerman, Tim Dobbyn)

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Time Warner to separate AOL near year end (Reuters)

Thursday, May 28th, 2009 | Finance News

NEW YORK (Reuters) –
Time Warner Inc on Thursday made official plans to separate its AOL division sometime around the end of this year, a widely expected move that sheds one of the media company's weakest divisions.

For Time Warner, the move represents a return to its roots as a pure content company with a focus on its cable channels, film studios and publishing businesses and unwinds a massive merger in 2000 that failed to live up to its promise.

The struggling AOL, for its part, will once again be an independent company left to seek its fortunes in an Internet landscape dominated by Google Inc and smitten with social networks like Facebook and Twitter.

Time Warner, which for months has signaled such a plan was in the works, said the deal has been approved by the board and would be structured as tax-free to its stockholders. It still needs regulatory approval.

Time Warner recently spun off Time Warner Cable Inc and is bent on becoming a pure content company that concentrates on brands like CNN, HBO and Warner Bros. Its shares were steady in midday trade, having climbed 40 percent in the last month.

"Overall, we are encouraged by the pace of change at Time Warner and management's move to deconsolidate," Credit Suisse analyst Spencer Wang said in a report.

In the last three years alone, AOL's share of the U.S. search market has dropped from nearly 12 percent to around 4 percent. Its dial-up web access business continues to shrink. And a broader pullback in spending by marketers is hurting its web advertising business, Platform A.

Still, analysts say AOL could find its footing as an independent company under Tim Armstrong, the former Google executive tapped in March to head the company.

Analysts also point out that an independent AOL could pursue a combination with Yahoo Inc or Microsoft Corp's MSN in hopes of taking on Google. Most value AOL between $3 billion and $5 billion.

"I wouldn't be surprised if we see a consolidation," said Collins Stewart analyst Thomas Egan. "It's easier for Time Warner if that happens as a separate stock because Time Warner doesn't want shares of any of the companies that AOL could merge with as currency."

At Time Warner, plans to become a content company left AOL increasingly out of place. Time Warner wrote down the value of AOL several times.

Time Warner also tried a number of efforts to help the struggling unit, including splitting it into two units, with one focused on audience and advertising, the other on a shrinking dial-up web access business.

But as those failed to turn AOL around, Time Warner came under increasing pressure to shed the business either through a spin off or a deal with Yahoo or Microsoft.

As part of the plan announced on Thursday, Time Warner will buy out Google's 5 percent stake in AOL -- which it bought 2005 in a deal that valued AOL at $20 billion -- before the separation.

(Reporting by Paul Thomasch; Editing by Derek Caney)

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