Finance and Economic

European and Chinese industry activity slumped in November, Japanese officials said their economy was slowing rapidly and euro zone finance ministers gathered on Monday to discuss plans to curb recession.

The Bank of Japan called an emergency meeting for Tuesday to find ways to help corporate finance. BOJ Governor Masaaki Shirakawa warned access to funding was becoming increasingly tough for Japanese firms, to an extent comparable with a debilitating credit crunch a decade ago.

“Sluggishness in economic activity has increased rapidly. Overseas economies are experiencing the same kind of rapid change,” Shirakawa said of the broader Japanese economy.

Euro zone manufacturing activity sank to a record low in November and the outlook was equally grim.

The Markit Eurozone Purchasing Managers Index (PMI) for the manufacturing sector slumped to 35.6 in November, a low not seen in the survey’s 11-year history and way below the 50 mark that separates expansions from contraction.

“The extremely weak … survey intensifies fears that the euro zone’s recession will be deep and prolonged,” said Howard Archer, economist at IHS Global Insight.

The euro zone was officially declared in recession this month following a second quarterly contraction in economic output. Analysts do not see the economy growing again until the third quarter next year — and then only marginally.

The financial crisis that began with a U.S. housing market collapse last year has already knocked several big economies into recession, including the euro zone same day payday loans. Most economists believe the United States and Britain will soon follow.

Similar surveys from China showed its manufacturing industry slumped in November as new orders tumbled, showing the world’s fourth-largest economy being sucked deeper into the global maelstrom.

Japan’s economy minister was gloomier even than Shirakawa.

“We are moving to the next phase of shrinking consumption — some call it deflation — production going down and prices going down,” Economy Minister Kaoru Yosano told the Financial Times in an interview published on Monday.

RATE CUTS COMING

Central banks in Britain, the euro zone, Australia and New Zealand are expected to cut borrowing costs sharply this week in response to the crisis. Politicians are also poised to weigh in.

Euro zone finance ministers meet later on Monday to pick over a menu of economic measures drawn up by the European Commission, which could inject up to 200 billion euros ($258.8 billion) of government spending, although that figure includes national schemes already announced.

Agreement may prove elusive. German Chancellor Angela Merkel told her party on Monday the government, which has unveiled a 32 billion euro plan, would not take part in a “senseless” competition to spend billions more. 

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North American stock markets fell sharply again today as investor confidence was eroded by bad economic data and pessimism over the prospects of a U.S. bailout for the Big Three automakers.

Wall Street stocks were slammed the hardest, hitting levels not seen since 2003. In Toronto, all of the sectors were lower, led by diversified metals and financials stocks.

The main S&P/TSX composite index fell by 345.17 points to 8,490.56, a drop of nearly four per cent.

On Wall Street, the Dow Jones industrial average shifted down 427.47 points to 7,997.28. The Nasdaq composite index lost 6.5 per cent, or 96.85 points to 1,386.42 and the S&P 500 tumbled 52.54 to 806.58, the lowest close for that index since March 2003.

TSX financials stocks took a beating, down 4.9 per cent, after the Bank of Nova Scotia (TSX: BNS) warned Tuesday of a bigger-than-expected $595-million hit to its quarterly earnings caused by financial-market upheaval.

The other banks are expected to suffer similarly to Scotiabank when they issue their fourth-quarter results, starting next week. Scotia’s shares were down $1.93 to $35.24.

The Canadian dollar was at 79.83 cents US, down 1.48 cents, and the TSX Venture Exchange lost 20.16 points to 730.09.

Top Senate Democrats said today that Congress is unlikely to reach a quick bailout for the Big Three Detroit automakers, who are pleading for $25 billion in cash to stave off bankruptcy.

Congressional Democrats have proposed using part of the $700 billion financial bailout package to pump into the ailing auto industry, but the White House opposes such an approach.

Investors are concerned at the repercussions should any of the three automakers collapse, an event that could ripple through an already battered North American economy.

"There’s a general malaise among investors right now," said James Cox, managing partner of Harris Financial Group. "Everybody is in wait-and-see mode of what is going to happen with these big three automakers."

Bank of Canada governor Mark Carney strongly indicated today that the central bank will cut interest rates further next month in an effort to stimulate the economy. Carney told a luncheon in London that the economy is slowing more than previously thought, and inflation is less of a concern cash advance in one hour.

The TSX diversified metals sector slid 11.5 per cent, and Teck Cominco Ltd. (TSX: TCK.B) slid 15 per cent to $5.22.

Energy stocks were down 3.8 per cent as crude oil lost 77 cents to close at US$53.62 a barrel on the New York Mercantile Exchange.

The gold sector trekked 2.8 per cent lower as gold futures ended ahead for the first session this week on U.S. dollar weakness.

The December bullion contract closed up $3.30 to US$736 an ounce.

In economic news, Statistics Canada’s composite leading index – an indicator of future activity – fell 0.4 per cent in October. It was the biggest decline since the early-1990s recession, after a 0.3 per cent drop in September.

New American data showed deepening weakness. Construction of new homes plunged 4.5 per cent last month to the lowest level on government records. The Commerce Department said residential construction fell to an annualized rate of 791,000 units.

U.S. consumer prices, meanwhile, fell by the largest amount in records dating back to 1947, down one per cent last month as gasoline prices receded sharply. Core prices, excluding volatile food and energy costs, were down 0.1 per cent – the first decline in more than a quarter-century.

In earnings news, supermarket operator Metro Inc. (TSX: MRU.A) rang up $72.3 million in summer-quarter profit, up 25.5 per cent from year-ago earnings that were reduced by the integration of A&P stores. Sales were up 1.8 per cent from a year ago. Metro shares were at $33.

The Resolve Business Outsourcing Income Fund (TSX: RBO.UN) is suspending distributions to investors. The trusts units plunged 55 per cent, or $1.94, to $1.56.

Norsemont Mining Inc. (TSX: NOM) says its board has set up a special committee to deal with "recent unsolicited expressions of interest to acquire the company" and shares were ahead 15 per cent, or 25 cents, to $1.95.

Forestry company Tembec Inc. (TSX: TMB) fell to a quarterly loss of $4 million from year-earlier profit of $22 million, as sales declined to $629 million from $675 million. Shares dropped a penny to $1.56.

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Has your latest brokerage statement got you down? Maybe it’s time to try something completely different: a $96 billion market built entirely on the certifiable absence of a colorless, odorless gas.

That would be the curious and high-growth business of carbon finance. Its primary purpose is to curb global warming by stimulating the trade of a new commodity known as a carbon-emissions reduction credit. Scoff if you like, but know this: During 2008 (through Oct. 15), the value of an index of carbon credits - which you can now purchase on the New York Stock Exchange - grew 5.4%. Can you say that about anything in your portfolio?

What’s more, almost everyone expects carbon trading to really take off once the U.S. government regulates greenhouse gases, as both presidential candidates promise to do. Of course, if Washington doesn’t act, the market could vaporize. "These are political markets, and you can’t take the politics out," says V

Pakistan must secure a loan from the International Monetary Fund within a week, the German foreign minister said Tuesday, as the country scrambles for aid to avert a run on its currency and a default on its international debt.

Without help, the fight against terrorism in the nuclear-armed nation could be complicated by out-of-control price increases, fewer jobs and rising public anger in the country of 160 million people.

German Foreign Minister Frank-Walter Steinmeier said Tuesday that Pakistan’s problems were so urgent it had no choice but to seek an IMF loan.

"I can only hope that the decision is taken quickly, because a loan in six months or six weeks will not help, but only if it is approved within the next six days," Steinmeier told reporters after talks here with Pakistani officials. "Then one can perhaps avoid the most difficult situation in Pakistan."

While Pakistan has already approached the IMF to help solve its balance of payments crisis, it has held out hope that it can raise about $5 billion from other lenders — avoiding an IMF austerity program.

Steinmeier said Germany, Europe’s biggest economy, and other countries were discussing a separate package of assistance for Pakistan to boost faltering economic growth.

"That is the only way to stabilize the situation," Steinmeier said. Pakistani Foreign Minister Shah Mehmood Qureshi said Steinmeier had been "very supportive" of Pakistan in talks with its foreign backers one hour cash loan. He did not mention the IMF.

High oil prices and dwindling overseas investment have left Pakistan with a yawning balance of payments deficit. The gap is draining its foreign currency reserves and pushing it toward a default on its international debt.

Pakistani officials had hoped to persuade allies such as the United States and Saudi Arabia, as well as institutions including the World Bank, to provide soft loans or accelerate pledged development aid.

But with many governments preoccupied with the global banking crisis, Pakistan has received no firm public commitments of assistance. An IMF program would be politically unpopular in Pakistan because it likely will come with tough conditions.

The government insists it already has taken action to slash unsustainable subsidies on food and fuel — measures that hurt in a country where about three-quarters of the population live on no more than $2 a day.

There is speculation that an IMF loan might come with demands to slash the government’s own budget, including defense spending. In a sign of the times, the army on Tuesday halted work on a new general headquarters in the capital, saying it "shares the nation’s quest for economic stability through a spirit of sacrifice."  

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CarMax Inc. said Wednesday it is laying off more than 600 employees, or about 4% of its total work force, as the auto retailer tries to cut costs due to a decline in car and truck sales.

The Richmond, Va.-based company said the reductions are in its service operations departments at a majority of its production superstores, where it reconditions vehicles. The production superstores make up 60 of the company’s 99 retail locations.

"Since Memorial Day, we have taken significant steps forward in aligning our costs with current sales levels," said Chief Executive Tom Folliard in a news release. "Since that time, we have achieved our store staffing objectives in most departments, but it was necessary to make further reductions in service operations in order to reach these staffing goals."

"This was a difficult but necessary decision for us to make."

The reductions were part of the company’s long-term initiative to decrease costs in the reconditioning area wile maintaining vehicle quality, Folliard said.

Employees were notified on Wednesday and were offered severance packages, said CarMax spokeswoman Trina Lee. The company, which has about 15,250 employees, said it expects about $7 million in severance costs will be included in its results for the third quarter ending Nov paydayloans.com. 30.

Its shares fell 64 cents, or 4.6%, to close at $13.36 in trading Wednesday.

Last week, CarMax (KMX, Fortune 500) said its second-quarter earnings plunged 78% due to a weak economy, high gasoline prices and losses in its financing arm. The company said earnings for the quarter ended Aug. 31 fell to $14 million from $65 million in the same quarter last year.

Total sales fell 13% to $1.84 billion from $2.12 billion a year ago. CarMax said same-store sales, or sales at stores open at least a year, tumbled 17% during the quarter.

Folliard said last week the company is taking the necessary and appropriate steps to navigate through the difficult financial environment. Those steps had included a hiring freeze at its home office and a decrease in labor hours.

The company said new vehicle sales fell to $77.8 million from $104.8 million for the quarter, while the average selling price of its used vehicles declined 6% due to industrywide decreases in used-car prices.

As gas prices have climbed, people have been abandoning once-popular trucks and sport utility vehicles in favor of fuel-efficient small cars. That has driven used-truck and SUV values lower. 

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The Federal Reserve and other countries’ central banks announced new steps Monday that makes billions of dollars available to squeezed banks here and abroad to battle a worsening credit crisis that threatens to unhinge the U.S. economy.

The Fed said the action is intended to "expand significantly" the cash available to financial institutions in an effort to relieve to the worst credit crisis since the Great Depression. In taking the action, the Fed cited "continued strains" in the demand for short-term funding.

Central banks will continue to work closely and are prepared to take "appropriate steps as needed" to ease the crisis and get banks lending again, the Fed said.

Under one new step, the Fed will boost the amount of 84-day cash loans available to U.S. banks. The Fed is increasing the amount to $75 billion, up from the current $25 billion starting on Oct. 6. Banks bid on a slice of the loans at an auction.

That move will triple the supply of 84-day loans to $225 billion, from $75 billion, the Fed said.

Meanwhile, the Fed will continue to make $75 billion worth of shorter, 28-day loans available to banks.

All told, the total amount of cash loans - 84-day and 28-day - available to banks will double to $300 billion from $150 billion, the Fed said.

Moreover, the Fed will make a total of $620 billion available to other central banks, expanding ongoing currency "swap" arrangements with them where dollars are traded for their currencies cash advance loans. That’s up from $290 billion previously in such arrangements.

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Swiss National Bank and the central banks of Denmark, Norway, Australia and Sweden are involved in those swap arrangements.

The move comes as the U.S. financial meltdown’s tendrils have ensnared banks in Britain, the Benelux and Germany. 

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Wall Street is a long way from St. Louis, in more ways than one.

So it’ll take some time to sort out just how the financial turmoil that shook lower Manhattan on Monday will play out in our local economy.

But one effect from the collapse of Lehman Bros. will happen fast, experts say: Borrowing money will get harder.

Mortgage credit already has been tight for months, as big banks unwind years of risky lending. That tightness likely will spread further into business lending, experts say, as the pool of money available at the top of the system shrinks, and borrowing becomes more expensive.

Banks are already paying more to borrow from each other. LIBOR, the interest rate they pay other banks, jumped nearly a full percentage point overnight Monday on the news of Lehman’s imminent bankruptcy filing. And several experts Monday said they expect the interest rates banks charge borrowers will go up, too.

Meanwhile, there will be less money to go around, said Todd Gormley, an assistant professor of finance at Washington University, as not just Lehman but every bank with a similar portfolio watches its assets lose value, giving it less to lend out. The risk is that credit markets grind to a halt.

"You just keep going down and down and down," Gormley said. "It sort of creates this cycle, and what’s happening with Lehman has the potential to push this even further."

It likely will do just that, said Scott Colbert, director of fixed income investments at Commerce Trust Co. in Clayton. Lehman supported some $600 billion in lending, most of which will be wiped out in its bankruptcy. But it’s a direct result of the over-expansion of borrowing that fueled much growth over the past decade.

"We have to cleanse ourselves of the excess in the financial market," said Colbert, who noted that the cleansing began with the forced merger of Bear Stearns to JPMorgan Chase & Co., continued last week with the takeover of mortgage giants Fannie Mae and Freddie Mac, and expanded with Lehman’s collapse no checking account payday advance. "It’s only through what is basically financial credit destruction that we get this back on track."

Along the way, small businesses will suffer, said Jack Strauss, an economics professor at St. Louis University. It’ll be harder for them to borrow, and thus to hire people and buy materials and expand.

"A lot of entrepreneurs are going to be hurt," Strauss said. "They’re not going to be able to get credit from a bank. Small business owners and large businesses are going to find their cost of capital increase, and maybe even dry up."

But there is still growth, said Chuck Leuck, regional vice president for Enterprise Bank & Trust Co. in Clayton. Deals are still getting done, banks are just being more cautious about them.

"For people who are doing their homework, access to capital is there," Leuck said.

A lot depends on the type of business, and how well-established it is, said Bob Cockrell, a commercial relationship manager with Montgomery Bank in Des Peres.

Most money doesn’t come from Wall Street, he noted. There’s still plenty of cash flowing through local banks that take in deposits from local customers and lend it to local businesses. And solid local companies can still access it.

"If you’re a strong borrower with (good) credit you’re not going to have any trouble getting a loan," Cockrell said.

"Will you have to shop around a little? Maybe. But I don’t think Lehman Bros. is going to have any impact at all on that market."

tlogan@post-dispatch.com | 314-340-8291

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Australian retail sales rose in May at the fastest pace in six months, sending the currency higher on speculation the central bank will boost borrowing costs again this year.

Sales climbed 0.7 percent from April, when they fell a revised 0.1 percent, the Bureau of Statistics said in Sydney today. The increase beat the median estimate of 24 economists surveyed by Bloomberg News for a 0.1 percent gain.

Spending has increased on food, recreational goods, cosmetics and jewelry, suggesting households are weathering 12- year high interest rates and record gasoline prices. Tax cuts introduced yesterday that boost average incomes by A$20 ($19) a week may drive spending in coming months, increasing pressure on central bank Governor Glenn Stevens to cool the economy further.

“We're calling another rate hike this year, probably in November,'' said Matthew Johnson, a senior economist at ICAP Australia Ltd. in Sydney. “If consumers can increase discretionary spending when fuel prices are high, then they will most probably spend the tax cuts.''

The Australian dollar climbed to 95.85 U.S. cents at 12:33 p.m. in Sydney from 95.47 cents before the figures were released. The two-year government bond yield rose 7 basis points, or 0.07 percentage point, to 6.93 percent.

Spending at recreational goods retailers gained 2.2 percent in May, while food sales increased 1 percent, the report showed.

Rate Increases

Australia's central bank has been trying to curb consumer spending, which accounts for about 60 percent of the economy, to cool inflation that has accelerated above its target range of between 2 percent and 3 percent.

Stevens and his board left the benchmark interest rate at 7.25 percent yesterday, saying the economy will moderate this year. The bank increased rates in March, February, November and August.

Last month, Stevens signaled that the bank is prepared to boost borrowing costs again if consumer and business spending rebounds.

Today's report suggests hiring by mining companies such as BHP Billiton Ltd., which is expanding to meet demand from China for iron ore and coal, is shoring up spending. The jobless rate was 4.3 percent in May, close to the lowest in more than three decades internet payday loans.

Export Boom

The central bank expects Australia's terms of trade, a measure of income from overseas sales, to surge 20 percent this year. The increase “will add substantially to national income and ability to spend,'' Stevens said yesterday.

Also, some A$33 billion ($32 billion) in income-tax cuts over four years took effect from yesterday.

Households also appear to be weathering this year's surge in the price of crude oil, which hit a record $143.67 a barrel this week.

“So much for higher petrol prices affecting households discretionary spending,'' said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne. “Today's data raises doubts over the Reserve Bank's apparent view that household spending was slowing abruptly.''

The surge in retail spending means an August increase in the central bank's cash rate target can't be ruled out, Dean added.

Conflicting Reports

Investors increased bets on the size of future increases in borrowing costs after today's report. Stevens will boost the benchmark rate by 25 basis points in the next 12 months, according to a Credit Suisse Group index based on trading in interest-rate swaps. Yesterday, they forecast 19 basis points of gains.

Still, some economic reports signal household spending will slow in coming months. Consumer confidence slumped to the lowest level in almost 16 years in June, and a separate release today showed home-building approvals fell 6.5 percent May, the fourth decline in the first five months of this year.

Just Group Ltd., Australia's largest specialty clothing retailer, cut earnings forecasts today because of a “further weakening in consumer sentiment.''

“Anecdotes about spending remain very weak,'' said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. “For that reason, we think policy makers will view today's retail sales report with a large dose of salt.''

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Workers returned to the Grangemouth oil refinery in central Scotland on Tuesday after a 48-hour strike that forced the closure of a major North Sea pipeline system.

UNITE, Britain’s largest union, said further industrial action remains possible unless refinery owner Ineos backs down in a dispute over pensions.

Power and steam were restored to the Forties Pipeline, but BP spokesman Richard Grant said it would take several days to safely get it back up to its capacity of 700,000 barrels of crude a day.

Management at the Grangemouth Refinery said it would take two to three weeks to bring the plant up to its full capacity of processing 210,000 barrels of crude per day.

"For safety reasons we say it will take two to three weeks to safely get the plant up and running. The union is saying it will take a week. We will see," said Ineos Group Ltd. spokesman Sion Taylor.

Oil prices fell Tuesday amid expectations that the supply disruption would soon be resolved.

Light, sweet crude for June delivery fell 79 cents Tuesday from the day before to $117.96 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe.

Business Secretary John Hutton, who was in Scotland on Tuesday, said he was glad the union and the company planned to meet later in the day.

"There is a gap between the two sides that has got to be bridged - only the two parties themselves can reach an agreement instant cash advance. No one can do that for them," Hutton said.

The strike at the refinery led to the closure of the Forties Pipeline System, which brings oil from the North Sea to BP PLC’s (BP) Kinneil plant. Kinneil is powered from the Grangemouth site. 

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Despite complaints that rules requiring companies to value assets at current prices has worsened the credit crisis, U.S. accounting rule-makers appear unwilling to do any backpedaling.

New rules on mark-to-market, or “fair value” accounting, took full effect this year, forcing companies to use a new framework to value their hardest-to-price assets.

In a best-case scenario those values are based on price quotes in an active market, but often companies have to rely on management’s best estimation using mathematical models.

Companies believe the new rules have increased volatility in financial statements and led to a downward spiral, where every write-down of their asset-backed securities met shocked investors who stopped trading, leading to further writedowns.

But the Financial Accounting Standards Board feels investors are benefiting from more information about the riskiest assets no teletrack payday loans.

“We at the FASB, sometimes like to view ourselves as in the communication business — we like to make sure that investors are getting what they need,” said Russell Golden, director of FASB’s technical application and implementation activities, during a Thursday panel discussion in New York.

In fact, a March survey of more than 2,000 investors from the CFA Institute found that 79 percent feel the new fair value requirements improve transparency and investor understanding.

Although FASB has budged on other rules in the past, last year it refused requests to delay implementation of the new fair value rules for financial assets and seems unlikely to change anything now. 

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