Archive for May, 2009

GDP hints recession is moderating (Reuters)

Friday, May 29th, 2009 | Finance News

WASHINGTON (Reuters) –
The U.S. economy shrank slightly less in the first quarter than initially estimated, while corporate profits rebounded, according to government data on Friday that pointed to moderation in the recession.

Perceptions that the worst of the 17-month-old downturn was over pushed consumer confidence to its highest in eight months in May, and a report showing business activity in New York City expanded in May for the first time since January 2008 offered a further hint the recession was abating.

Gross domestic product, which measures total goods and services output within U.S. borders, contracted at a 5.7 percent annual rate in the first quarter, the U.S. Commerce Department said, less than the initial 6.1 percent estimate. This followed a 6.3 percent fall in the fourth quarter.

While the drop was still steep, recent data, such as housing and new filings for unemployment benefits, have hinted at an easing in the rate at which the economy was tumbling and many economists expect growth to resume by year-end.

Still, output has declined for three straight quarters for the first time since 1974-1975 in a contraction that is the deepest since at least the 1950s. Already, the recession is the longest since the Great Depression, although much less severe.

"The recession is easing. The second quarter is shaping up to be a smaller decline of about 3.0 to 3.5 percent. It should be the last of the negative quarters," said Christopher Low, chief economist at FTN Financial in New York.

But the positive outlook for the economy was tainted by a report showing business activity in the country's Midwest unexpectedly fell sharply in April, likely reflecting troubles in the automotive sector.

U.S. stock indexes ended more than 1 percent higher as the rebound in corporate profits and the upbeat consumer confidence report helped to underpin investor morale. A rally in commodity prices lifted shares of natural resource companies.

Longer-dated government bond prices jumped, with investors wading back into the market after a sharp two-month sell-off that drove yields to six-month highs this week.

The report on GDP suggested sharp belt tightening by business was paying off as corporate profits after taxes rose 1.1 percent in the January-March quarter, the first increase in a year. In the fourth quarter, profits had plummeted 10.7 percent, the biggest decline since the start of 1994.

LESSENING INTENSITY

"It provides some hints that maybe corporations might have the ammunition to put some money to work in the economy. We are seeing some signs that the intensity of the recession is lessening," said Michael Strauss, chief economist at Commonfund in Wilton, Connecticut.

Economic activity in the first quarter was dragged down by cutbacks in spending by businesses and the government, a further retrenchment in homebuilding and a drop in business investment spending, as well as a slump in exports.

Business inventories fell $91.4 billion after slipping by $25.8 billion in the fourth quarter. Last month, the department estimated the drop in inventories at a record $103.7 billion in the first quarter.

Inventories subtracted 2.34 percentage points from the overall GDP figure. Excluding inventories, GDP would have contracted 3.4 percent.

While the less steep fall in the stock of unsold goods helped to lessen the severity of the economy's contraction in the first quarter, analysts said this suggested inventories would remain a drag on growth in the second quarter.

Exports fell at a 28.7 percent pace, the largest decline since the fourth quarter of 1971, after dropping at a 23.6 percent rate in the fourth quarter.

The drop in exports lopped off a record 3.86 percentage points from GDP, and reflected the slump in global demand. Sluggish domestic demand saw imports plunging 34.1 percent, adding a record 6.05 percentage points to first-quarter GDP.

Business investment spending tumbled a record 36.9 percent and homebuilding activity fell 38.7 percent, the biggest decline since the second quarter of 1980.

Consumer spending, which accounts for over two-thirds of U.S. economic activity, rose 1.5 percent -- slower than the 2.2 percent rate estimated last month -- but still a turnaround after a sharp plunge in the second half of last year.

This was also viewed as another factor that could weigh on the economy in the second quarter.

"The lower consumption figure is a reminder of the fundamental problems that households are facing, and the slower inventory run-down means that there is more to come in the current quarter," said Harm Bandholz and economist at Unicredit Markets & Investment Banking in New York.

But spending could pick up in the third quarter as households grow more optimistic about the economy and the government's $787 billion package of spending and tax cuts filters through.

The Reuters/University of Michigan Surveys of Consumers' sentiment gauge rose to 68.7 in May from 65.1 in April. That was the highest reading since September.

Separately, the National Association of Purchasing Management-New York's local business conditions index rose to 361.6 in May from 356.0 the previous month.

(Additional reporting by Richard Leong and Ellen Freilich in New York and Ros Krasny in Chicago; Editing by James Dalgleish)

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Stocks jump on commodity boost, Coca-Cola (Reuters)

Friday, May 29th, 2009 | Finance News

NEW YORK (Reuters) –
Stocks rose on Friday, capping their third straight monthly advance, as rising commodity prices lifted shares of natural resource companies, while a sliding dollar boosted the allure of multinationals, including Coca-Cola Co (KO.N).

Investors were encouraged by a report showing in May consumer confidence hit its highest in eight months, while the run-up in commodities fueled bets that overseas demand would underpin a recovery in the global economy.

U.S. front-month crude oil futures rose $1.23 percent, or 1.8 percent, to $66.31 a barrel, supporting gains in such stocks as Chevron (CVX.N), Exxon Mobil (XOM.N) and ConocoPhillips (COP.N). The S&P energy index (.GSPE) rose 1.2 percent.

Shares of Coca-Cola, which gets the bulk of its sales from abroad, jumped almost 5 percent after the dollar slid to five-month lows against a basket of currencies.

The beverage maker was the Dow's top boost, followed by technology services company International Business Machines Corp (IBM.N), up 1.5 percent to $106.28.

"It's clear to me, based on the market action, that we've turned a corner in this economy," said Sasha Kostadinov, portfolio manager and research analyst at Shaker Investments in Cleveland.

"The question that I have is, when we get a clear view of what's around the corner, is it going to be better growth and moderate inflation, or is it going to be slow growth and bad inflation?"

The Dow Jones industrial average (.DJI) gained 96.53 points, or 1.15 percent, to 8,500.33. The Standard & Poor's 500 Index (.SPX) climbed 12.31 points, or 1.36 percent, to 919.14. The Nasdaq Composite Index (.IXIC) rose 22.54 points, or 1.29 percent, to 1,774.33.

Since hitting a 12-year low in early March the S&P 500 has risen 35.9 percent. The third straight monthly advance is the index's longest monthly winning streak since fall 2007.

In May the S&P 500 rose 5.3 percent, the Dow gained 4.1 percent and the Nasdaq advanced 3.3 percent.

While rising oil prices are a boon for energy companies and a harbinger of improved worldwide demand, a jump in energy costs could present a significant headwind for consumers and businesses at a time when investors are looking for a spending recovery to fuel an economic revival.

In addition, a surge in commodity prices heightens the specter of inflationary pressures in the long run.

The slumping dollar lifted prices of other commodities, sending August gold futures as high as $982 an ounce, the highest since late February. Shares of miner Freeport-McMoran Copper and Gold Inc (FCX.N) were up 4.3 percent to $54.43 and the gold BUGS index (.HUI) gained 3.3 percent.

Chevron shares finished up 1.3 percent at $66.67, while ConocoPhillips climbed 0.5 percent to $45.84, and Exxon Mobil gained 0.2 percent to $69.35.

Shares of Caterpillar Inc (CAT.N), a maker of bulldozers and excavators, whose customers include mining companies, jumped 2.5 percent to $35.46. On Nasdaq, shares of software maker Microsoft Corp (MSFT.O) were a top boost, rising 2.2 percent to $20.89.

Among declining stocks, General Motors Corp (GM.N) plunged 33.04 percent to 75 cents as the beleaguered automaker drew closer to filing for bankruptcy protection. While the bankruptcy has been expected, analysts say there are worries about the implications for jobs, business and consumer sentiment in the months ahead.

In the bond market, the benchmark 10-year Treasury note capped its worst two-month sell-off since 2003 despite recovering slightly on Friday.

(Editing by Kenneth Barry)

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Magna nears deal for GM’s Opel (Reuters)

Friday, May 29th, 2009 | Finance News

BERLIN/DETROIT (Reuters) –
Canadian auto parts group Magna has reached a preliminary deal with General Motors Corp to invest in Opel, boosting hopes for a deal to save the German unit as its U.S. parent prepares to enter bankruptcy.

Sources close to the negotiations told Reuters on Friday that Magna and GM were working out the final details of an agreement before a meeting with Chancellor Angela Merkel and senior ministers set for the evening.

"We have an agreement in principle between GM and Magna," one of the sources said.

As the clock ticked down to a Monday restructuring deadline for General Motors, widely expected to lead to a bankruptcy filing for the U.S. automaker, GM's Saab unit -- whose future also hangs in the balance -- was granted more time to restructure by a Swedish court.

Back in Detroit, ground zero in the global car industry's downturn, the United Auto Workers union overwhelmingly ratified a new cost-cutting labor agreement with GM, clearing a major hurdle in the automaker's restructuring efforts.

Under the deal, the union would receive a 17.5 percent stake in a restructured company in return for retiree healthcare concessions.

The agreement comes as GM races to slash debt and labor costs ahead of a government-imposed deadline of June 1. The No. 1 U.S. automaker is widely expected to follow smaller rival Chrysler into bankruptcy protection with the financial backing of the U.S. Treasury.

GM said late on Friday that President and Chief Executive Fritz Henderson will hold a media briefing on Monday.

Chrysler LLC, meanwhile, neared approval for its sale to a group led by Italy's Fiat SpA after three days of court testimony -- although opponents are likely to file immediate appeals.

Chrysler wants to sell most of its assets to a "New Chrysler" owned by Fiat, labor unions and the U.S. and Canadian governments, in exchange for $2 billion paid to its lenders.

Approval would be a victory for the White House, which had been criticized by many bankruptcy specialists for setting a seemingly unrealistic goal of bringing the automaker's operations through Chapter 11 in less than 60 days.

Opponents of the sale who have filed the objections -- which include debtholders, suppliers and dealers that will be closed -- have been using testimony from executives of Chrysler to show that they could have avoided bankruptcy or offered more to creditors.

HOPE FOR OPEL

In Germany, efforts to forge a rescue for GM's European unit continued despite tensions.

Magna appeared to have overcome earlier frustration with new demands from GM to secure a preliminary deal, sources said.

Fiat Chief Executive Sergio Marchionne, a rival bidder for Opel who earlier insisted his company would not take "extravagant risks" for Opel, said life would go on if Magna managed to buy Opel. Fiat would continue to seek a Saab deal, and Chrysler was its main focus, he said, adding that he was not interested in a partnership with Magna.

The bidders faced a deadline of 1200 GMT on Friday to submit preliminary contracts setting out plans for bridge financing and a temporary trustee scheme to protect Opel's assets. A first round of talks earlier this week between the German and U.S. governments, the bidders and GM collapsed amid mutual recriminations.

MORE CANNOT BE ASKED

Fiat's Marchionne spoke out on Friday morning in a move one analyst said was the first step in Fiat pulling out of the running.

Marchionne said he was still interested in Ruesselsheim-based Opel, which employs 25,000 staff in Germany, but "more cannot be asked.

Marchionne said "the emergency nature of the situation cannot put Fiat in a position to take extravagant risks." Marchionne said it was "unreasonable" to expect Fiat to provide funds to a group whose finances remain unknown.

The Agnelli family, which controls Fiat, "totally" supports Marchionne's plans and would continue to do so even if a capital increase were needed to fund them, the chairman of the family holding company said on Friday.

Elsewhere, French carmaker Renault and its Japanese partner, Nissan Motor Co, pledged to squeeze out more cost savings from their partnership as the automotive industry worldwide battled a deep crisis.

In Sweden, loss-making Saab, which first sought protection from its creditors in February, was granted an extension until August 20 to line up a new owner and restructure its business.

Swedish business daily Dagens Industri reported late on Thursday that the two front-runners to buy Saab were Swedish luxury carmaker Koenigsegg and U.S. financier Ira Rennert and his Renco Group, with Italy's Fiat in third place.

Saab and GM are due to name a preferred candidate among three remaining unnamed bidders in the coming weeks.

(Reporting by Reuters bureaus across the world; Writing by Helen Massy-Beresford and James B. Kelleher; Editing by Marcel Michelson, David Cowell and Matthew Lewis)

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