Tuesday, November 27, 2007

Oil wealth to the rescue

Citigroup is receiving a $7.5 billion capital infusion from the investment arm of the Abu Dhabi government, intended to help rebuild it's capital levels. As a result of the deal, the investment authority known as ADIA will become one of Citigroup's largest shareholders, with a stake of no more than 4.9%. The stake will exceed that of Saudi Prince Alwaleed bin Talal, long known as one of Citigroup's largest shareholders. The investment underscores the growing role that Middle Eastern investors are taking outside their home turf. Separately yesterday, an investment company owned by Dubai's ruler, Sheikh Mohammed bin Rashid al-Maktoum, bought a stake in Sony. ADIA, which has almost $1 trillion under management, this summer bought a small stake in Apollo Management. Japanese stocks erased a morning fall of more than 2% after the Citigroup news was announced, on hopes that support for the company will ease fears about fallout from subprime problems.

The EZB and FED have again injected extra liquidity into the markets and pledged to keep overnight lending rates close to their targets. In the meantime banks are struggling to get funding for their off-balance sheet investment vehicles. National Australia Bank, the country's biggest, said last week it may have to hold short-term debt of Sydney-based Rams Home Loans Group on its own balance sheet if the mortgage company fails to secure refinancing. Yesterday HSBC became the first bank to bail out troubled SIVs by taking it on their balance sheet.

Barclays, UK's third-biggest bank, said writedowns in its securities unit will end four years of earnings growth. Barclays said its pretax profit in 2007 will be "broadly in line'' with analysts' average estimate of about 7.1 billion pounds, the same as 2006. Credit-default swaps on the London-based bank dropped 1.5 basis points to 61 today, down from a record 72 basis points on Nov. 22.

The Markit CDX North America Investment-Grade Index Series 9 fell 2.5 basis points to 82.75 basis points today. The Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies, dropped 1 basis point to 59 basis points today. Contracts on the Markit iTraxx Crossover Series 8 Index of 50 European companies with mostly high-risk, high-yield credit ratings was little changed at 382 basis points to 375.

Prices of existing U.S. single-family homes slumped 4.5 percent in the third quarter from a year earlier, matching a record decline from the previous period as the housing downturn deepened, according to a national home price index on Tuesday. The S&P/Case-Shiller National Home Price Index fell 1.7 percent since June, marking the largest quarterly decline in the index's 21-year history, S&P said in a statement. The composite month-over-month index of 20 metropolitan areas fell 0.9 percent to 195.62 in September from August, bringing the measure down 4.9 percent from a year earlier.

Rising foreclosures will lead to billions of dollars in lost economic activity next year in the nation's major metropolitan areas, according to a report compiled for the U.S. Conference of Mayors. The biggest losses in economic activity are projected for some of the nation's largest metropolitan areas. New York is expected to lose $10.4 billion in economic activity in 2008, followed by Los Angeles at $8.3 billion, Dallas and Washington at $4 billion each, and Chicago at $3.9 billion. The report estimates U.S. gross domestic product growth in 2008 will be 1.9 percent, coming in about $166 billion, or one percentage point, lower as a result of mortgage problems.

Surprisingly given all the bad news on the housing front some have a rather upbeat view of the future in the industry. Pulte Homes reaffirmed its Q4 guidance Monday despite poor demand and elevated supply levels for homes. A month ago, the homebuilder stood by its earlier forecast of income from continuing operations in the range of $0.10 per share to breakeven.

Global losses related to the U.S. subprime mortgage sector problems are significant but bearable, European Central Bank governing council member Christian Noyer said on Tuesday, as the dollar and stocks rallied on hopes that financial firms are recovering from its effects. Current estimates put the direct cost of subprime defaults at around $250 billion, Noyer told a forum in Tokyo at which Bank of Japan Governor Toshihiko Fukui said his central bank was still on guard against market turbulence.

Some monetary authorities are not as sanguine about the future inflation outlook. The BOE’s Chief Economist Charles Bean issued hawkish commentary, saying, “The backdrop to our attempts to keep inflation in line with target is less favorable than it has been. If the imported component of inflation is somewhat higher, the domestically generated component needs to be somewhat lower to compensate, and that may mean we have to run a tighter monetary policy for a while to get that domestic inflation down.”
Traders are betting that the FED will lower interest rates several times in the months ahead, and hope that other central banks will follow.
Goldman Sachs said it expects the Federal Funds rate to bottom out at 3 percent in the next six to nine months, down from an earlier forecast of 4 percent. Goldman also said chances of a recession are pushing up to between 40 percent and 45 percent. German November preliminary inflation data point to the upside and German IFO business climate survey surprisingly rose in November to 104.2 from 103.9, putting an end to six consecutive months of declines, making it harder for the EZB to slash rates.

The US consumer was out shopping in droves over the Thanksgiving weekend mainly lured by bargain hunting. The average amount spent by shoppers actually decreased compared to last year. Nevertheless retailers are upbeat about tje outlook for the holiday season. The International Council of Shopping Centers-UBS Retail Chain Store Sales Index decreased by 0.1% in the week ended Nov. 24 from its level in the week before, on a seasonally adjusted, comparable-store basis. This result Tuesday followed a 0.8% increase in the prior week. On the year, chain store sales were up 2.5% in the week ended Nov. 24, compared with a rise of 2.2% in the prior week. Online retailers were set to break one-day records for traffic and sales, as consumers hunted down Cyber Monday bargains. By 2 p.m. ET, more than 300 retailing Web sites tracked by Internet monitoring firm Akamai were drawing 4.6 million visitors per minute, a three-year record for most traffic in a single day to retail Web sites. Cyber Monday sales are estiamted to surpass $700 million, which would make it the heaviest online spending day on record.

In other news Goldman Sachs on Tuesday downgraded the U.S. automobile sector to "cautious," in part due to growing concerns about the U.S. macro outlook and its implication for auto sales. The earning season is winding down. Staples, the world's largest office-supplies retailer, said quarterly profit fell for the first time in more than four years after North American consumers and small businesses bought fewer computers. Profit decline was less than analysts anticipated on increased international sales. The shares climbed 8.8 percent in early U.S. trading. American Eagle Outfitters, the U.S. retailer of clothing for 15- to 25-year-olds, said third- quarter profit fell as it increased discounts to clear out unsold merchandise. The company forecast fourth-quarter profit that trailed some analysts' estimates.

Crude oil fell for a second day on speculation OPEC will increase production as record prices threaten to stifle economic growth. Saudi Arabia is pumping 9 million barrels a day, October production averaged 8.75 million barrels a day. European stocks extended losses on Tuesday afternoon as oil shares tracked crude prices lower and banks trimmed gains made after Barclays reassured investors on its outlook. After rallying in early trade, the DJ Stoxx European bank index fell back in the red, down 0.2 percent, though Barclays was still up 2.6 percent. At 1311 GMT, the FTSEurofirst 300 index of top European shares was down 1.2 percent at 1,450.66 points, with techs and miners also prominent losers. In Asia stock markets ended mixed with the Nikkei gaining 0.5%, reversing morning losses after Citigroup news put confidence back into the banking sector. In Hong Kong the Hang Seng index lost 1.5% and on the mainland the Shanghai Composite lost almost 2%.

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