British inflation will be well below the 2% target in two years if interest rates rise in the first quarter, the Bank of England said on Wednesday, suggesting markets are pricing in rate hikes too early.
In its quarterly Inflation Report, BoE projections showed CPI inflation at around 1.4% in two years’ time if rates follow the path implied by market expectations — rising to 0.7% in the first quarter of 2010 and going up thereafter.
But assuming interest rates stay at a record low of 0.5% and the BoE reaches its 175 billion pound quantitative easing target, "the risks of inflation being above or below the 2% target at the two year horizon are broadly balanced, albeit that the path of inflation is rising."
The latest forecasts are likely to raise expectations that the Bank will keep interest rates where they are for some time to come or even have to further expand its quantitative easing program to get the economy growing strongly again fast cash personal loans.
While the inflation profile was similar to that published in May, the outlook for growth was "somewhat stronger" given the extra stimulus penciled in.
The BoE charts show growth returning at the turn of the year and getting close to a rate of 3% in two years’ time.
"The stimulus should lead to a slow recovery in economic activity, but the timing and strength of that recovery remains highly uncertain," the BoE said.
Oil prices plunged 6% Wednesday after the government reported a surprise increase in oil stockpiles, U.S. and Asian stock markets fell, and a report on durable goods came in much weaker than expected.
"We had the perfect storm happen to the bulls today," said James Cordier, founder of OptionSellers.com. "People are betting on future demand for energy and a lot of investors came to the realization that this demand is not right around the corner by any means."
U.S. light crude for September delivery settled down $3.88 to $63.35 a barrel, after dipping as low as $62.76. Tuesday, oil shaved off $1.15 after a report showed consumer confidence fell more than expected in July.
Supply report: In its weekly inventory report, the Energy Information Administration said that crude stocks jumped by 5.1 million barrels to 347.8 million barrels in the week ended July 24. Analysts were looking for a more modest build up of 1.1 million barrels, according to a consensus estimate from Platts, an energy research firm.
Oil inventories are above the upper boundary of the average range for this time of year, according to the report.
"Today’s report continues to show that demand by the U.S. — which by far is world’s largest consumer of oil — is just so stagnant," said Cordier. The low season for demand is ahead, too. Demand typically dips in the coming months, between the summer driving season and the winter heating season.
Distillates, used to make heating oil and diesel fuel, increased by 2.1 million barrels and are also above the upper boundary of the average range for this time of year online cash advance. Analysts were looking the supply to be 1 million barrels.
Gasoline supplies, meanwhile, decreased by 2.3 million barrels last week, according to the report. Analysts were looking for a decline in gasoline stockpiles of 1.1 million barrels. Even as gasoline stocks decreased in the most recent week, the level of inventories remain in the upper half of the average range for this time of year, according to the report.
Overall, the amount of product supplied in the past month is 4.1% lower than the same time last year.
Stock markets: A down day on Wall Street also pushed oil prices lower because investors read a stock sell-off as an indication of a weakening economy, which demands less oil.
U.S. durable goods orders plunged 2.5% in June, a much bigger decline than economists were expecting. The drop was another sign that the economy is not stabilizing as quickly as expected.
Chinese stock markets tumbled, too, adding to pessimism in the oil market. The Hong Kong Hang Seng fell 2.4% and the Hong Kong HSCC Red Chip fell 2.7%.
Hopes for a recovery in the oil market have been partially based on a recovery in Asian developing markets. "Especially in Asia, the stock markets have been on a tear and people are pointing towards that for future demand of energy," said Cordier.
However, if the rally in emerging markets doesn’t pick back up, the price of oil could have further to fall, he said.
A key index of consumer confidence fell more than expected in July as the dismal job market continued to darken the outlook for household spending.
The Conference Board, a New York-based business research group, said Tuesday its Consumer Confidence Index fell to 46.6 in July from a reading of 49.3 in June.
Economists had expected the index to decline to 49, according to a consensus forecast gathered by Briefing.com.
The measure’s present situation index fell to 23.4 from 25 last month. The expectations index slipped to 62 from 65.5.
The overall index, which fell to an all-time low in February, had recovered earlier this year as consumers were heartened by a rally on Wall Street, lower energy prices and new government programs to aid the economy.
But that optimism was premature and has given way to concerns about the weak job market, according to Adam York, an economist at Wells Fargo Economics Group.
"Now it seems we have a renewed sinking feeling," York said in a research report.
In June, the economy lost 467,000 jobs and the unemployment rate rose to 9 business
Ken Lewis should get out his checkbook. The Bank of America boss never signed the deal he cut in January for the U.S. to backstop some $118 billion in Merrill Lynch assets. But that didn’t become known until May, when the firm announced it wouldn’t be taking the guarantee.
In the interim, BofA (BAC, Fortune 500) benefited from investors’ belief that it had government backing. It owes U.S. taxpayers something for that.
The question is, how much? The bank is trying to wriggle out of paying anything, saying the deal was never consummated, according to Bloomberg. But the widely held understanding that the backstop was in effect probably had a calming influence on investors that helped the Charlotte, N.C.-based bank weather the worst of the first-quarter tumult.
So the government is pushing back, arguing that it is owed at least some of the $4 billion fee that the bank had provisionally agreed to pay in preferred stock and warrants.
Some have argued that BofA should pay a third of the original fee, or $1.3 billion, since the bank benefited from the arrangement for a third of the year online cash advance. That may be too steep - not least since the preferreds and warrants were to pay for 10 years’ coverage.
There are a couple of other options: One would be to charge BofA an M&A-like break fee of, say, 5% of the consideration that would have changed hands — or $200 million. Another would be to charge the bank a fee for having what was effectively a $100 billion undrawn line of credit.
At the full annual rate of around 20 basis points, that too would put the bill at $200 million. That seems a tad cheap for what might have been life-saving U.S. government help. Perhaps a better answer for the government is to split the difference, sending BofA a bill for nearer $750 million.
That would let the bank off relatively easily, provide some compensation for the risk shouldered by taxpayers — and send a message that Uncle Sam’s warm embrace comes with a price.
General Motors Corp, which filed for bankruptcy protection a week ago, said Monday that it would cease production of medium-duty trucks by July 31 after attempts to sell the operation failed.
"After four years of working with multiple potential buyers, General Motors has decided to wind down its medium-duty truck operations," the automaker said in a statement.
GM (GMGMQ) plans to cease production of Chevrolet Kodiak and GMC Topkick medium-duty trucks by July 31. The automaker sold about 20,000 of the vehicles last year, down from roughly 30,000 in 2007, as the U.S. economy sank into a deep recession.
Chief Executive Fritz Henderson told reporters at an event in Warren, Michigan, that the medium-duty truck the business had not been successful for years and workers would be deployed to other facilities or offered an attrition program.
GM has moved quickly since it filed for bankruptcy on June 1 to disclose plans for brands and operations not part of its long-term strategy. GM plans a quick sale of its profitable assets by the end of August to a new company affordable health insurance.
Last week, GM said it had reached preliminary agreements to sell its Saturn brand to dealership group Penske Automotive Group and its Hummer brand to little-known Chinese heavy equipment maker Sichuan Tengzhong Heavy Industrial Machinery.
About 400 hourly and salaried workers are involved in the production of the medium-duty trucks at a GM plant in Flint, Michigan, spokesman Jim Hopson said.
The Flint plant has more than 2,100 employees overall and also builds light pickup trucks for GM. The automaker plans to continue production of the pickup trucks at the plant.
Navistar International Corp had been one of the potential buyers for the GM medium-duty truck operation. GM and Navistar had reached a tentative agreement on a sale, but the pact expired in August 2008 without a deal being reached.
Once the bankruptcy process at General Motors plays itself out, what will the company be worth?
It’s more than an academic question of interest only to Wall Street traders. It will determine how much money taxpayers can expect to recoup from multiple bailouts of GM. When all is said and done, the Treasury Department is likely to pump more than $50 billion into GM (GM, Fortune 500) — including loans made to the automaker last year.
It is also key to determining the level of future health insurance benefits for hundreds of thousands of GM retirees and how much money holders of $27 billion on GM bonds, including pension funds and individual investors, will be able to recover.
GM is widely expected to file for Chapter 11 bankruptcy protection on Monday. As a result, the government, bondholders and a trust fund controlled by the United Auto Workers union will wind up owning virtually all the stock in a reorganized GM. (Current GM shareholders will essentially have their holdings wiped out through bankruptcy.)
So taxpayers, retirees and bondholders need for shares of a new, leaner GM (GM, Fortune 500) to start trading for them to stand any chance of benefiting from the company’s emergence from bankruptcy. Unfortunately, these new owners probably won’t know until at least 2010 just how much money, if any, they will recover.
GM’s most efficient plants, dealerships, brands and other assets could exit bankruptcy within two to three months.
However, it will take at least 6 to 18 months for the bankruptcy court to wade through the company’s unprofitable plants, most of its debts and other liabilities, according to a senior Obama administration official. During that time GM stock is unlikely to be publicly traded.
But even once shares of GM do begin trading again, it’s highly uncertain what the company could be worth.
$25 billion: too high or unreasonably low?
According to a filing by General Motors late last month, the company estimated the equity value of its common stock would be about $25 billion once it completed a reorganization.
That’s substantially higher than the market value of about $450 million that GM was worth based on Friday’s closing stock price of just 75 cents a share. But the last time GM was worth as much as $25 billion was late 2007.
A new company, with a greatly reduced debt burden, fewer plants and lower labor costs, could end up being an attractive investment. But auto analysts and other experts are reluctant to speculate on exactly what GM’s value could be following bankruptcy.
Len Blum, managing director of Westwood Capital, an investment bank, said he thinks there’s a better chance for taxpayers to recover money from their investment in GM than with insurer AIG. Taxpayers also have a majority stake in that company, and the government has kicked in more than $180 billion so far to keep AIG afloat.
Blum said that given the reduction in GM’s debt level and operating costs that are being planned, there could be "some real value" in a new GM, but that there was still great risk for all shareholders.
"If it was a slam dunk, the union would have wanted more common equity," he said cash loans. The UAW wound up agreeing to a 17.5% stake.
Other experts question whether cost cutting and a lower debt load are enough to make the company attractive to investors, even if it they enable GM to earn its first profit on its auto operations since 2004.
"Back in 2007 GM was being valued on its future prospects and its assets, not its profitability," said Chris Jadro, an equity strategist focusing on distressed companies for Jefferies & Co. "But it’s just hard to imagine that GM will be worth what it was a year ago coming out of this down cycle."
The two biggest shareholders of the new company also expressed doubts about how quickly the stock will recover.
A senior Obama administration official speaking to reporters Thursday conceded it is unlikely that the government can get back its entire investment in GM. The official said the government hopes "to recover as many taxpayer dollars as we can," and that it expects to sell the shares as soon as possible.
UAW President Ron Gettelfinger, who also said he would like to sell the union’s stake in GM as soon as possible to have money available in the trust fund, downplayed expectations about the company’s value going forward.
Although he said Friday that the union believes "the stock should be worth a lot more a lot quicker," he added that "right now, we realize the value is zero."
Some auto industry experts believe that the changes made by GM could position it for a level of profit it hasn’t earned in decades. David Cole, chairman of the Center for Automotive Research, said GM is well-positioned for even a modest rebound in industrywide sales.
Carr said the $25 billion market value estimate "is pretty reasonable and it could even be conservative." He said that profits for GM and the rest of the industry could be robust in the next few years due to reductions in capacity and pent up demand for autos.
But a number of experts doubt that GM’s market value will get anywhere near the $25 billion figure in the next few years. They point out that GM will face a difficult competitive position compared to cash-rich Toyota Motor (TM) and even U.S. rival Ford Motor (F, Fortune 500), both of which could pass it in terms of U.S. sales in the coming years as GM sheds brands and dealers.
Sean Egan, managing director of rating agency Egan-Jones Group, said he’s not sure GM can generate a profit even with all the cost concessions they’ve received from the union.
"In almost every competitive front, GM is being beaten. People who see strong profits for GM are being delusional," Egan said.
But Susan Helper, an economics professor at Case Western Reserve University in Cleveland and expert on the auto industry, worries that even if GM does return to profitability following bankruptcy, investors could penalize the stock due to the company’s previous problems and doubts about its future.
"It’s tough to see there being a line of investors looking to get into the stock," Helper said.
It’s been a relief while it has lasted. Lower oil prices, that is. But the days of cheaper oil are numbered.
The brief respite from last summer’s record-high crude prices, which aggravated the global economic slump, will soon give way to another oil-price spike that may be more painful than the last one.
"The stage is currently being set for oil prices to skyrocket," says U.S. energy analyst David Fessler in the online investment newsletter Investment U. Fessler cites the decline of such super fields as the North Sea, Alaska’s North Slope, Mexico’s Cantrell Field and Saudi Arabia’s Ghawar Field – largest in the world – along with the extraordinary cost of producing crude from the few remaining newer crude sources such as Alberta’s Athabasca tarsands and reserves six or seven kilometres below sea level off the coast of Brazil.
That’s a view shared by most of the world industry’s veteran experts.
"As the economy picks up, spare capacity will start to erode, and the oil market could tighten up again in the first half of the decade," Daniel Yergin, dean of world oil economists, said in U.S. congressional testimony May 21.
At the same hearing economics professor James Hamilton of the University of California at San Diego added: "If demand in China and elsewhere returns to its previous rate of growth, it will not be too long before the same calculus that produced the oil-price spike of 2007-08 will be back to haunt us again."
Under the worst-case scenarios the experts envision, you can take your pick between $100 (U.S.) per barrel oil in the near term and double that amount by 2014 or sooner.
The recent oil-price recovery to a six-month high of $62 (U.S.) per barrel earlier this month, up from a nadir of about $35 (U.S.) per barrel early this year, is "impressive given the severity of the downturn in global industrial production," says long-time investment analyst Ed Yardeni, chief strategic analyst at Yardeni Research.
"It suggests that oil traders are expecting that once the global economy recovers, supplies will tighten up quickly relative to demand," Yardeni says.
"It will be back to the future."
Then there’s T. Boone Pickens, legendary oilman turned champion of alternative energy sources.
Pickens told Fox News earlier this month, "You’re going to be back to $75 (U.S.) oil by the end of the year, and $200 (U.S.) per barrel within five years."
It’s no less true for being obvious: When oil collapsed more than 70 per cent from its July 2008 record high, many major oil firms slashed their exploration budgets because the lower prices did not cover the expenses of today’s high-cost reserve plays.
The worldwide credit scarcity didn’t help.
In nations within the Organization of Petroleum Exporting Countries (OPEC), as many as 35 new projects have been delayed to 2013. About $100 billion worth of Alberta tarsands expansion projects are on hold. Civil wars continued to rage in Nigeria, America’s fifth-largest source of oil imports free instant credit reports. Conflict has taken the lives of hundreds of people in the west African nation this month. Major disruptions in production in the oil-rich Niger Delta have been routine for the past five years.
All of this means that when global demand comes roaring back – as it will in China, India and other emerging economies –and returns to its pre-recession levels in mature economies in North America and Europe, the needed additional supply won’t be there to satisfy the resurgent demand except at exorbitant prices.
"I’ve often described unsustainably low oil prices as carrying the seeds of future spikes and volatility," Ali al-Naimi, the Saudi oil minister, said recently. "If we place a low priority on preparing for the future, that lack of action can come back to haunt us through supply shortages and another round of high prices."
Officials at the International Monetary Fund are especially concerned about the impact of an oil-price rebound on impoverished economies. They regret that the current period of lower drilling costs was not seized upon as an opportunity to get long-term projects underway.
"The lower that oil prices drop now the greater the negative impact on future supply," John Lipsky, first deputy managing director of the IMF said at an OPEC summit in Vienna in March.
As oil prices were peaking last spring, Yergin’s firm was projecting an increase in world oil capacity to 109 million barrels a day.
The subsequent "capital strike" by exploration companies has forced Yergin to revise that figure down to a current 101.4 million barrels a day. That’s a "squeeze" scenario similar to the recent years of escalating prices, when the gap between supply and demand became been razor-thin.
French oil producer Total S.A., one of the few companies to maintain an aggressive exploration program, including efforts to build a large presence in the Athabasca tarsands, is gloomier still. Christophe de Margerie, Total’s CEO, said the proliferation of project cancellations means the world’s producers will be struggling by the middle of the next decade to keep supply at even 90 million barrels a day.
Noting that oil still accounts for 40 per cent of U.S. energy supplies, Yergin told the U.S. congressional panel that: "We should give clear signals to Canada to develop its oilsands and to Brazil to develop its offshore oil. We should do more research on cleaner uses of coal. We should encourage more domestic natural gas production through hydraulic fracturing. And we should be prepared to use more of our offshore oil and gas deposits by encouraging their development in an environmentally intelligent manner."
Those are fighting words to most environmentalists, who believe no amount of research will yield "clean coal and despair at the pollution risk of U.S. offshore drilling.
The environmentalists are pitted against North American consumers, who promptly lost their ballyhooed interest in small cars once oil prices fell.
dolive@thestar.ca
PICKERING–Warren Beacom may tell you that he’s "just an electrician," but there’s much more to him than that.
The company Beacom founded in 1991, Intellimeter Canada Inc., happens to be around the corner and down the street from Ontario Power Generation’s massive Pickering generating station. It’s also at the heart of Durham Region’s renewed hopes for the future.
Intellimeter has just 26 employees, ranging from office staff to manufacturing workers, engineers and researchers. But it has won over some big Canadian and international customers with its unique energy meters.
These devices, when used with sophisticated Internet-based software, also developed by Beacom’s company, can instantly show customers exactly how much electricity they’re using, information that helps them conserve energy and cut costs.
Intellimeter’s customers include Siemens Canada, Brookfield Properties and Manulife Financial, with addresses as far away as Hawaii, Las Vegas, Houston, St. Lucia and Barbados. "We have not only the hardware but sophisticated software that’s Web-based. That provides them with a total solution," Beacom says. "That has made the product line strong."
Durham, which includes Oshawa, Whitby, Pickering and Ajax as well as smaller surrounding townships, is at the epicentre of the quake that has rocked Ontario’s manufacturing sector. Steady, well-paying jobs that once seemed to pass without question from generation to generation are evaporating.
Unemployment in Oshawa and the surrounding region hit 8.2 per cent in February, above the national average. The area has lost 2,500 manufacturing jobs in the past year, with the most high-profile cuts coming from the ailing automotive sector, including General Motors of Canada Ltd.
Local economic development officials insist they are not just sitting on their hands or keeping fingers crossed for a recovery, but are instead working hard to foster growth in other areas and diversify the region’s economy.
The cuts in the auto sector are devastating, but they represent a small percentage of the area’s overall manufacturing. While there are about 50 suppliers tied to the automotive supply chain, the region is home base for about 800 manufacturers in areas such as aerospace, pharmaceuticals and IT.
As companies such as GM cut jobs, others are expanding. Three recent examples, all from Pickering: SNC-Lavalin Nuclear Inc. opened a new satellite office last month; Norwegian engineering firm Aker Kvaerner is relocating one of its facilities from Toronto and will expand its local workforce; and Purdue Pharma Canada has broken ground on a $32 million expansion. Purdue will create 100 jobs for skilled trades as well as 53 positions in research and development as well as advanced manufacturing.
Collectively, these big firms, along with hundreds of smaller ones such as Intellimeter, may represent the next generation of employers and possibilities for growth for Durham municipalities.
A transition on this scale would be difficult at the best of times. Durham is having to embark on this task during what may be the biggest economic upheaval since the Great Depression. Yet, region officials express optimism.
"This meltdown has happened at the worst possible time when it comes to transitioning your workforce," said Doug Lindeblom, Durham’s director of Economic Development and Tourism. "But we will recover from that. Once that happens, people will find that we are very well positioned to absorb a lot of this transitioning labour force."
Energy companies, transportation and manufacturing, information technology, bioscience, agriculture and the health industry have been identified as the important sources for new employment in the next three to five years and beyond, according to a recent study commissioned by Durham officials.
They shy away from predicting how many new jobs might result, however. "It’s just too early to know that, just as on the flip side it’s difficult to predict just what job losses we’re going to see in the region this year," said Rick Lea, executive director for the Durham Region Local Training Board. "The landscape keeps shifting."
For now, construction will give the region its best new opportunities for employment, stemming in particular from two big provincial projects: a proposed extension of Highway 407 and new nuclear plans, currently out to tender, which will add two new reactors to OPG’s Darlington operations payday loans.
The latter alone is expected to create as many as 3,500 jobs in just three years. "We will need welders to build a nuclear facility. Those skills may rest with people who are at GM today," or one of the threatened local auto-parts suppliers, Lindeblom said.
"Nobody’s suggesting that somebody on the line in GM is going to become a nuclear physicist, but we see a lot of strengths in our economic base here that, in some cases, allow for a short transition time for other industries."
The University of Ontario Institute of Technology (UOIT) is developing training programs that would enable engineers in the automotive sector to reapply their skills in the nuclear industry, UOIT president Ron Bordessa said.
His school already offers Canada’s only undergraduate degree program in nuclear engineering. "In the long run, we are going to be responsible for training a lot of nuclear engineers," he said.
As home to the Pickering and Darlington nuclear stations, Durham already produces more than 30 per cent of the province’s power. Amid growing interest in the environment and the province’s Green Energy Act, locals believe the region is poised to become a leader as well in alternative energy.
That’s the goal of the Durham Strategic Energy Alliance, a not-for-profit group whose members include businesses, government and UOIT. Many are alternative energy companies that benefit from the local cluster of energy expertise.
"We’re trying to foster an environment that will create collaboration, and ultimately generate more ideas and more products and services that will be commercialized and help these companies grow," said Michael Angemeer, founding chair of the group. He is also president and chief executive of the Durham electrical utility Veridian Corp.
An initiative along those lines is the automotive centre of excellence at UOIT, slated to open this fall. It’s meant to function as a research and development ground for new materials and alternative fuels such as electricity or hydrogen.
"We’re not going to stop driving vehicles," Lindeblom said. "But we’re going to start driving different kinds of vehicles. Durham is extremely well positioned to design, test and make those vehicles."
Officials concede the local information technology, biosciences and health sectors are still in their infancy, but demographics and wider trends are on their side. "As the population ages and grows, we’re going to need more food and health care and (Durham companies) are well positioned to grow in those areas," Lindeblom said.
Oshawa has its own reasons to be optimistic. In 2008, the city had its best-ever year for government, institutional and commercial building. Construction activity topped $171.6 million in government and institutional sites and $60.8 million in commercial projects.
"There are good things happening here," said Cindy Symons-Milroy, Oshawa’s director of economic development services. "There’s public sector growth occurring in the city that offers just as well paying jobs if not better."
The new downtown courthouse, due to open next January, will employ about 550 and attract as many as 1,500 visitors each working day – a boon to surrounding businesses. "Workers and people visiting who are shopping and eating nearby will be a great economic benefit to downtown merchants. It’s going to have significant impact," Symons-Milroy said.
As well, renovations at Lakeridge Health Oshawa, the local hospital, that have a 2011 completion date are expected to nearly double the number of beds to 637, raising the requirements for doctors, nurses and other health-care workers.
Durham council recently endorsed a community adjustment study, and the training board’s Lea will meet with educators, government and industry to settle on what jobs will be most in demand and how to focus retraining programs.
"In some respects we’re just scratching the surface," Lea said. "It’s going to be a very tough year (economically) so it’s going to require all of us to work together to map out what is possible, and be able to open all those doors."
General Electric stock has fallen 72% over the past year amid concerns about rising losses at its finance arm, GE Capital. In an attempt to reassure investors, the company will deliver a detailed, five-hour presentation on GE Capital to investors in New York this Thursday.
In an interview on CNBC that aired March 5, GE’s chief financial officer Keith Sherin acknowledged that GE (GE, Fortune 500) has a credibility problem with investors. "We’ve got to earn that trust back." he said.
"We recognize that we’ve made statements about both not raising equity and about not cutting the dividend and we’ve had to backtrack on those," Sherin said. He blamed these reversals on the uncertain economy.
He said that the best way to regain trust is to be as transparent as possible, and that Thursday’s presentation about GE Capital should help provide that clarity.
"This meeting is clearly an attempt to lessen investor worries about rising credit losses, asset write-downs and dilutive equity raises," wrote Sanford Bernstein analyst Steve Winoker in a research note. "GE Capital has always been a ‘black box’ in terms of disclosure relative to its banking peers. CFO Keith Sherin has promised more detailed disclosure of GE Capital’s assets and loss estimates at this meeting, and we applaud the move, but our opinion is that GE must disclose nearly everything investors demand or else risk exacerbating investor doubts about credibility and transparency."
The big questions
Some analysts believe credit losses at GE Capital will be greater than the company says it expects, specifically in commercial real estate, U.S. credit cards, and U.K. residential real estate. In his CNBC interview, Sherin said that these segments would all be discussed during the presentation.
Analysts also have questions about GE Capital’s earnings. Citigroup analyst Jeffrey Sprague believes that it is unlikely that GE Capital (referred to in his note as GECC) will meet the company’s previous guidance. He writes: "S&P noted that management’s GECC earnings guidance of $5 billion is unlikely and even has the potential to be negative in ‘09 same day payday loans. We are currently modeling GECC net income at [about] $3 billion."
Deutsche Bank sees GE Capital earning $2.9 billion for 2009. Citi’s Sprague adds that large tax credits could offset losses at GE Capital, but that "the reliance on big tax credits underscores the erosion of GECC’s earnings power. That said, it is clear management’s outlook remains substantially too optimistic."
Sanford Bernstein’s Winoker says he wants more clarity around GE exposure to what he calls "at-risk geographies," including Eastern European banking and real estate exposure in Florida, California, and Nevada.
He also wants to know whether the industrial side has the capacity to inject more money into GE Capital and, if so, how much more. He also wants to know under what circumstances the company would raise common equity or consider using TARP, or even spin off GE Capital.
The company has on several occasions said that it has no plans to separate GE Capital from GE. In his CNBC interview, Sherin said that an "incredibly disastrous economic situation" would have to unfold before GE would use TARP funding, and it would only do so if all other backup plans would not work.
Sherin also said that the speculation about GE Capital is overdone, that the company is in an "incredibly strong liquidity position" that includes $45 billion in cash, and that GE Capital will be profitable in the first quarter.
Much is riding on Sherin’s ability to back up these statements. As Winoker said in his note, "After numerous quarters and years of disappointments, with GE, investors have adopted a ’show me’ attitude to the company and are now punishing the stock with the same pressures faced by financial institutions over the last year."
The global financial crisis slashed the value of financial assets worldwide by $50 trillion last year, a study commissioned by the Asian Development Bank (ADB) said on Monday.
Financial asset losses in developing Asia, which suffered more than other emerging markets, totaled $9.6 trillion, or just over one year’s worth of developing Asia’s gross domestic product, the study said.
“The previous sense of strength and invulnerability is now gone,” said the ADB-sponsored study, noting that “there were concerns about the effect of a shallow recession in the United States, but the general perception was that Asia, the largest regional emerging market group, was doing well.”
“The loss of financial wealth is enormous,” said the study entitled, “Global Financial Turmoil and Emerging Market Economies: Major Contagion and a shocking loss of wealth.”
“As noted earlier, the loss of wealth at a world-wide level may amount to an astounding $50 trillion, or one year’s worth of GDP. Such losses will have an enormous impact on domestic expenditure.”
Haruhiko Kuroda, ADB president, said Asia was hit harder than other parts of the developing world because its markets have expanded more rapidly.
The ratio of financial assets to GDP rose to 370 percent of GDP in developing Asia in 2007 from 250 percent in 2003, the study said.
In comparison, Latin America’s ratio only rose by modest 30 percent with the result that estimated losses on financial assets were a much lower $2.1 trillion, or 57 percent of GDP.
Based on the study, the estimates measure the losses in equity and bond markets, including those based on mortgages and other assets, and the depreciations of currencies against the U same day payday loans.S. dollar.
The estimates did not include financial derivatives such as credit default swaps that further multiplied the size of the financial markets.
The data provides clear proof of the close connections between the markets and economies around the world, leaving few, if any, countries immune to financial or economic fallouts elsewhere, the study said.
“This is by far the most serious crisis to hit the world economy since the Great Depression,” Kuroda said at the opening of the two-day forum on the impact of global economic and financial crisis at the ADB headquarters in Manila.
Another ADB-commissioned study said South Asian countries could weather the financial crisis by taking both short- and long-term measures to stimulate their economies.
The subregion has been hit by capital outflows and weaker commodity prices, and faces a sharp slowdown in exports and remittances as global troubles worsen.
The ADB study suggested a number f measures to cushion the impact of the crisis, including rate reductions in India and Sri Lanka.
It also urged India and other countries in the subregion to consider incentives to encourage overseas workers to remit money home, such as special savings instruments and possible currency swap arrangements to keep financial systems stable.
(Reporting by Manny Mogato; Editing by Jan Dahinten)
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