September 17, 2019

Slim Gains in Markets Ahead of Earnings Reports

Stocks gained for a second straight week as companies began releasing earnings reports, keeping the Standard Poor’s 500-stock index within a fraction of its highest level in five years.

The S. P. 500 was little changed Friday, gaining 5 points during the week to close at 1,472.05. On Thursday, the index was at 1,472.12, its highest level since December 2007.

The Dow Jones industrial average rose 17.21 points, to 13,488.43. The Nasdaq composite index rose 3.87 to 3,125.63. For the week, the Dow rose 53 points and the Nasdaq rose 24 points.

Companies have started to report earnings for the fourth quarter of 2012, but no clear pattern has emerged as yet. The aluminum company Alcoa gave stocks a lift after it reported earnings late Tuesday that matched analysts’ expectations and said that demand was increasing. Investors were unimpressed by Wells Fargo’s record profits Friday, choosing instead to focus on the sustainability of those earnings.

“You’ve been hearing comments that earnings season is going to show a continued contraction in the rate of growth,” said Robert Pavlik of Banyan Partners. “People are conflicted, they are worried, but at the same time they don’t want to be missing out on the action” in the market.

Analysts expected fourth-quarter earnings for S. P. 500 companies to grow by 3.3 percent, according to the latest data from SP Capital IQ. That was a better growth rate than the previous quarter, but it was considerably weaker than the 8.4 percent rate in the same period last year.

Stock in Wells Fargo, the first major bank to report earnings, dropped after it reported a 25 percent increase in fourth-quarter earnings. Its shares fell 30 cents, or 0.9 percent, to $35.10. JPMorgan Chase, Goldman Sachs, U.S. Bancorp, Citigroup and Bank of America were among the financial companies set to report earnings next week.

Financial stocks were the best-performing group in the S. P. 500 last year, gaining 26 percent. Other companies reporting next week include eBay and Intel.

The Treasury’s benchmark 10-year note rose 9/32, to 97 27/32, and the yield fell to 1.87 percent from 1.90 percent late Thursday.

Article source:

Corporate Japan Rocked by Scandal at Olympus

But Olympus categorically denied the rumor and went on to post record profits. All was well in the house of Olympus, the newly installed president, Tsuyoshi Kikukawa, assured investors.

That story came back to haunt the company this week after a shocking revelation, prompted by accusations by Michael Woodford, its ousted British chief executive turned whistle-blower: The company admitted it had hidden losses from the early 1990s using a series of inflated acquisition payments of over $1 billion, much of it made through obscure overseas funds, in a bid to clear its balance sheet.

Mr. Kikukawa has resigned in disgrace as chairman, along with two of his lieutenants, and could face criminal charges over the cover-up if securities laws were violated, analysts say. The company has lost three-quarters of its value, faces the possibility of delisting from the Tokyo Stock Exchange and may have a large financial hole to climb out of after all the losses are accounted for.

The Tokyo Metropolitan Police has begun an investigation into the cover-up, people familiar with the matter said Thursday. The investigation is led by the section of the force that handles financial crimes, and it will focus on charges of aggravated breach of trust, the people said, speaking anonymously because they were not authorized to speak with the media.

A Tokyo police unit that handles organized crime is also involved with the investigation, the people said. Media reports have suggested that Olympus worked with people with links to the Japanese mafia to help set up the transactions that masked losses.

The scandal is rocking corporate Japan not least because of the company’s succession of firings, denials and admissions; it is also certain to expose weaknesses in Japan’s financial regulatory system and corporate governance, analysts said.

Analysts also warned that more Japanese companies could be hiding losses they incurred in the country’s asset-and-stock-price bubble economy of the late 1980s. Companies routinely poured billions of yen into speculative trades — moves called “zaitech,” or “financial techniques” — that turned sour when the bubble burst in 1990.

“This has been two lost decades for corporate accounting. It’s easy to imagine companies hiding losses for years, waiting for financial markets to recover,” said Hideaki Kubori, a lawyer in Tokyo who specializes in corporate governance and compliance. “But the recovery never came.”

Exporters like Olympus were especially eager to prop up their earnings to counter a surge in the value of the yen after 1985, which crimped overseas profit.

“In that era, companies found they could make more money investing in land or stocks than you could in your main business,” said Hiroshi Osano, a professor at the Institute of Economic Research at Kyoto University.

But after the bubble burst, Japanese companies entered a painful decade of writing off losses. “Those that dealt with the problem straightaway struggled through the 1990s and pulled through,” Mr. Osano said.

The losses Olympus incurred, however, appear to have been so big that the company decided some finessing was in order. It was an enthusiastic investor in derivatives and other risky investments under Toshiro Shimoyama, president from 1984 to 1993, who told the Nikkei industrial daily newspaper in 1986: “When the main business is struggling, we need to earn through zaitech — though doing too much is no good.”

Though it is still unclear how, and how much, Olympus lost from its bubble-era investment spree, there are hints of excessive risk-taking. Until 1990, returns on investments propped up its profit; by 1991, it had written down 2.1 billion yen in securities valuation losses, the first of many write-downs.

In September 1998, three months after the rumors of the colossal trading losses, Olympus said it had written off part of a 45 billion yen investment in emerging market bonds. In its midterm earnings statement in October 1999, the company said it had booked a loss of almost 17 billion yen from trades including interest rate and currency swaps. The company also recorded a loss on a 2.9 billion yen investment in what turned out to be a Ponzi scheme run by the New Jersey firm Princeton Economics International.

Those write-downs, however, were the exception, not the norm, and Olympus now admits that it hid investment losses; a third-party panel of legal experts is still assessing how much.

“It is possible that if Olympus had booked all its losses, it would have become insolvent,” said Tsutomu Yamada, a market analyst at Securities in Tokyo. “So Olympus management decided to handle the losses off the books. They did it for the sake of the company.”

Martin Fackler and Taro Umemura contributed reporting.

Article source:

South Korean Chaebol Under Increasing Pressure

SEOUL — In Parliament, lawmakers call them “beasts.” Newspaper editorials liken them to unfettered predators robbing ordinary people of their livelihood. President Lee Myung-bak, once an ally, has withdrawn his promise to cut taxes for them, instead urging them to win “respect from the people” by doing more to help the poor.

This is not a happy time for the chaebol, the family-controlled conglomerates of South Korea.

Abroad, they may finally be getting the recognition they have so long striven for, with their cars and cellphones competing in global markets. But at home, as one conservative mass-circulation daily, the Chosun Ilbo, noted in a recent editorial, they are attacked “like public enemies.”

Koreans have grown more uneasy as increasing consumer prices and rising household debts have squeezed their standard of living. Meanwhile, the big conglomerates have generated healthy profits for their owners and expanded their international reach.

“People got disillusioned when they saw big businesses make record profits and roar in the global markets but their own lives got worse,” said Kim Byoung-kweon, an economist at Corea Institute for New Society.

The chaebol and the government are grappling with the rising discontent.

“If you are successful abroad but fail at home, you can’t call that a success,” Chung Mong-joon, one of the country’s leading business magnates, said in a telephone interview, referring to the image problem the chaebol face in South Korea. “Our businesses need to build ties with ordinary citizens.”

Mr. Chung’s Hyundai Heavy Industries, the world’s largest shipbuilder, offers a typical chaebol success story of a family business built up into an industrial giant. Now, he and his peers are trying to show their social conscience.

Last month, Mr. Chung, also a national legislator with presidential ambitions, and his brothers, all owners of Hyundai subsidiaries, made donations worth 1 trillion won, or $930 million, to help needy students and young job seekers.

Even though a sizable amount of the money donated had been pledged years earlier to atone for corruption scandals, Mr. Lee lauded the acts of charity as “a cultural change” in a country where rich businessmen are often accused of bequeathing their fortunes to their children, rather than sharing them with the general populace.

In a further attempt to woo the broader public, Mr. Lee’s government and the governing Grand National Party said last week that they would suspend tax cuts for big businesses, increase subsidies for low-wage temporary workers and reduce college tuition.

Those measures were criticized as “utter populism” by the daily newspaper Munhwa Ilbo. But Mr. Lee was seeking to counter successful efforts by his political opponents to tap the discontent over income disparities.

Since last year, the governing party has lost a series of local and parliamentary special elections. The opposition has seized on the perceived economic “polarization” to galvanize voters.

“It has become a fashion among politicians to bash the rich and chaebol to win votes,” said Kwon Hyuk-cheol of the pro-business Center for Free Enterprise.

The conglomerates are in some ways victims of their own hard-driven success.

While struggling to rebuild the economy after the 1950-53 Korean War, the military dictators of South Korea favored a handful of families with tax benefits, special loans, anti-labor policies, cheap electricity and other subsidies. They grew into industrial giants, each commanding a fleet of subsidiaries. The policy also left South Koreans with a belief that they had participated in and made sacrifices for the achievements of the chaebol, said Mr. Kim of the Corea Institute.

Today, conglomerates like Samsung, Hyundai and LG ship more than 70 percent of the country’s exports, which in turn account for half its gross domestic product. They also dominate domestic markets for cars, TV sets, credit cards and cellphones.

Article source:

On The Road: Airlines Recovering From 9/11 With Extra Fees

Airlines in the United States lost $55 billion and shed 160,000 jobs during that decade. But the industry has worked through the economic tumult. A decade later, the system is smaller in terms of capacity, but it’s still in good working order. Last year, for example, 720.4 million people boarded airplanes in the United States, slightly higher even than the 719.1 million passengers in 2000.

Two weeks ago, at the annual convention of the Global Business Travel Association in Denver, Michael W. McCormick, the executive director of the group, hinted at a recovery.

“We’re not seeing record profits, but we’re also not seeing the end of airline travel as we know it,” he said. “So have things changed for the better?”

Good question. Planes are more crowded than ever, but fares remain near historically low levels. Other than the airport security challenges, however, the one major difference from 10 years ago is all the extra fees airlines have added to base fares, charging for things that used to be part of the ticket price.

Last year, for example, domestic airlines raised $3.4 billion just from charges for checked bags. In 2007, the year before most airlines started charging extra for checking a bag, the comparable figure was $464.2 million.

“Some would argue that you make more money from ancillary fees than you do operating the airplane, and that you’d like to figure out a way to sell us pillows and things while keeping the plane on the ground,” Peter Greenberg, the CBS News travel editor, joked to airline executives during a panel discussion at the business travel convention.

“It’s the right way to price the product,” replied Doug Parker, the chief executive of US Airways. Like other airline executives, Mr. Parker is adamant that ancillary fees have become a permanent part of the fare structure — and that they actually make a lot more sense than, say, the fees that many hotels charge customers.

“Last night, I stayed at a hotel down the street and I wanted to get a bottle of water and it cost $6,” Mr. Parker said as someone on the stage passed him a free bottle of water. Airlines, he noted, do not charge anyone for a drink of water.

Not that the idea hasn’t come up.

In 2008, he said, US Airways “actually instituted charging for all drinks on board, including sodas and water,” he said. The idea was dropped a few months later because of passenger resistance.

“Six bucks in my hotel room last night for water!” Mr. Parker repeated as the audience laughed. “We just wanted to charge a dollar!”

While airplanes that have been flying mostly full for over two years as capacity has been reduced to cut costs, another inconvenience has arisen. To avoid paying to check a bag, more passengers have been lugging more belongings onto already crowded planes. Some industry analysts have estimated that as many as 59 million extra bags are now being carried onto planes each year.

“It’s much harder to find space for your bag now on the airplane,” Mr. Parker said. He said the trend hasn’t created actual departure delays, “but the boarding process takes longer. We’re starting the boarding process sooner.”

Among the changes he predicted that all passengers can expect to see is a limit on extra checked bags, by airlines and also by the Transportation Security Administration at its checkpoints. “It’s becoming a huge problem for them. When you stand in line at the T.S.A., you see that the line is because of all those bags going through, not because of the people themselves being processed,” Mr. Parker said.

Also ahead is even further contraction in the domestic commercial aviation system. Delta Air Lines, for example, recently announced that it would drop service to 24 small and midsize airports, and US Airways said last week it was reducing service in Las Vegas by an additional 40 percent. At the same time, airlines have been mothballing many 50-seat regional jets, long the backbone of service at midsize airports.

Over the last decade, Mr. Parker said, the domestic airline business came to terms with the reality that it “had gotten way overbuilt, with too many hubs and too many airplanes.”

“We’re being much more rational, not trying to chase market share wherever we can but instead doing what we do well and sticking to that,” he said.

Asked about complaints from travel managers that airlines don’t provide enough “transparency” in showing optional fees clearly along with base fares, Mr. Parker said that business travelers were well aware of the panoply of extra charges, especially those for checked bags. Alone among the major carriers, Southwest Airlines does not charge for checking a bag.

“To suggest that people don’t know about baggage fees is hard to embrace,” he joked. “Because if you haven’t heard about them, Southwest will run an ad every couple of minutes to make sure you do.”


Article source:

U.S. Inquiry Eyes S.&P. Ratings of Mortgages

The investigation began before Standard Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.

In the mortgage inquiry, the Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S. P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S. P.’s longstanding claim that its analysts act independently from business concerns.

It is unclear if the Justice Department investigation involves the other two ratings agencies, Moody’s and Fitch, or only S. P.

During the boom years, S. P. and other ratings agencies reaped record profits as they bestowed their highest ratings on bundles of troubled mortgage loans, which made the mortgages appear less risky and thus more valuable. They failed to anticipate the deterioration that would come in the housing market and devastate the financial system.

Since the crisis, the agencies’ business practices and models have been criticized from many corners, including in Congressional hearings and reports that have raised questions about whether independent analysis was corrupted by the drive for profits.

The Securities and Exchange Commission has also been investigating possible wrongdoing at S. P., according to a person interviewed on that matter, and may be looking at the other two major agencies, Moody’s and Fitch Ratings.

Ed Sweeney, a spokesman for S. P., said in an e-mail: “S. P. has received several requests from different government agencies over the last few years. We continue to cooperate with these requests. We do not prevent such agencies from speaking with current or former employees.” S. P. is a unit of the McGraw-Hill Companies, which is under pressure from some investors and has been considering whether to spin off businesses or make other strategic changes this summer.

The people with knowledge of the investigation said it had picked up steam early this summer, well before the debt rating issue reached a high pitch in Washington. Now members of Congress are investigating why S. P. removed the nation’s AAA rating, which is highly important to financial markets.

Representatives of the Justice Department and the S.E.C. declined to comment, as is customary for those departments, on whether they are investigating the ratings agencies.

Even though the Justice Department has the power to bring criminal charges, witnesses who have been interviewed have been told by investigators that they are pursuing a civil case.

The government has brought relatively few cases against large financial concerns for their roles in the housing blowup, and it has closed investigations into Washington Mutual and Countrywide, among others, without taking action.

The cases that have been brought are mainly civil matters. In the spring, the Justice Department filed a civil suit against Deutsche Bank and one of its units, which the government said had misrepresented the quality of mortgage loans to obtain government insurance on them. Another common thread — in that case and several others — is that no bank executives were named.

Despite the public scrutiny and outcry over the ratings agencies’ failures in the financial crisis, many investors still rely heavily on ratings from the three main agencies for their purchases of sovereign and corporate debt, as well as other complex financial products.

Companies and some countries — but not the United States — pay the agencies to receive a rating, the financial market’s version of a seal of approval. For decades, the government issued rules that banks, mutual funds and others could rely on a AAA stamp for investing decisions — which bolstered the agencies’ power.

A successful case or settlement against a giant like S. P. could accelerate the shift away from the traditional ratings system. The financial reform overhaul known as Dodd-Frank sought to decrease the emphasis on ratings in the way banks and mutual funds invest their assets. But bank regulators have been slow to spell out how that would work. A government case that showed problems beyond ineptitude might spur greater reforms, financial historians said.

Article source:

Nervously Watching as the Economy Churns

But how has Main Street reacted to all of this and to renewed talk of a double-dip recession? The New York Times asked small-business owners around the country whether they were feeling the effects of the economic turmoil and whether they were still trying to build — or just to hang on.

Here are their comments, which have been condensed.

TOM HOEBBEL, photographer and videographer; Ithaca, N.Y. “Most people are not hiring professional photographers and video producers with their stock dividends, but the psychological impact affects how people view their current budgets. If we are headed to another recession, then nearly everyone will be closing their wallets and cutting projects. I fear that that would lead to one more person — me — entering the statistics of the unemployed.”

JACK STACK, chief executive of SRC Holdings, which makes racecar engines, home furnishings and many other products; Springfield, Mo. “We’re making moves trying to figure out what the policy makers are doing rather than based on what we should be doing for our customers. Are they going to extend the tax cuts or not? Are they going to implement changes in the estate tax or not? How will changes in health care affect capital gains? I mortgaged plants and put $11 million in the bank, paying 5 percent interest, as an insurance policy because I don’t know if there is going to be another credit crisis. I need to add another building, but I don’t know if I should lease it or buy it. I’ve also been staying up all night watching what’s going on in the Asian and U.K. markets, trying to figure out what it’s going to mean. Given what has happened over the past eight days, you can predict that consumer spending will be affected. All this despite the fact that we still have record profits.”

ELIZABETH LUNNEY, co-founder and chief executive, ABC Language Exchange, which offers group and private language lessons; New York. “I’m looking at my numbers every single day and going through the list figuring out what I’d get rid of first. So far, we’re having our best year ever, but if I see that sales start to drop 10 to 15 percent in a week and see that it’s a trend over the next two or three weeks, I’ll start cutting. The water cooler, and other extras like employee lunches, will be the first to go. After that, I’ll consider asking the staff to take pay cuts, which I prefer to layoffs. Last time, I was the first to take a pay cut. I brought my salary down to what I needed to pay rent and eat bologna.”

BILL LAMPSON, president of Lampson International, which builds and rents heavy-lift construction cranes; Kennewick, Wash. “We’ve sold a couple of big machines that we manufacture to the Chinese, for their nuclear program, and we’re presently constructing a very large machine for the Japanese for their nuclear program. But here in the United States, business has of course been down for essentially the last three years, since the late fall of 2008. We serve the general construction industry that builds nuclear power plants, bridges, stadiums. When those major projects are not going forward, there’s very little demand for our equipment. There’s just not a lot of confidence in the economy, and that, coupled with the regulatory program that’s going on and the taxes that corporations are charged at, makes it less attractive to make investments. People that have money, such as the oil companies and the mining companies and utility companies, they’re hesitant to invest in major projects.”

ELIZABETH CHARNOCK, founder of Cataphora, which makes software that analyzes Internet activity; Redwood Shores, Calif. “As economic news worsens, a small business tends to get paid later and later, if at all. I’ve learned that when the going gets tough, you’ve got to stand up for yourself and show that you’re the least likely person to be bullied — not the most, even if you’re wearing a pretty dress. We took two steps. First, we hired an ex-Army Ranger who had served in Iraq to chase down receivables — he’s got a finance degree, too. The second thing we did was let it be known that we’ll fight over a $100 invoice. We’ll call up and ask, ‘is there a reason this hasn’t been paid?’ In this economy, you have to get your teeth out and fight.”

Darren Dahl and Adriana Gardella contributed reporting.

Article source:

Shares Decline as Wall Street Waits on Washington

Wall Street stocks fell Tuesday as Washington lawmakers remained in a bitter stalemate over how to resolve the nation’s debt problems.

Republican and Democratic leaders have offered competing proposals to avoid a catastrophic default on the government’s debt. But a resolution still appeared a long way off. President Barack Obama called for a compromise in a televised address late Monday, but House Speaker John Boehner said efforts to negotiate with the White House had been futile.

By mid-morning, Dow Jones industrial average was down 89.04 points, or 0.71 percent, to 12,503.76.

The Standard Poor’s 500-stock index 6.70 points, or 0.50 percent, to 1,339.73, and the Nasdaq composite index lost 8.62 points, or 0.30 percent, to 2,834.18.

“Right now, everybody’s just on pause, waiting to see what happens with the debt ceiling,” said Dan Neuger, head of American and European active equities at PineBridge Investments.

Worries about debt problems in the United States and Europe have caused the VIX, a measure of the stock market’s volatility, to rise 17 percent in July. But stocks are still up for the month. Through Monday, the Dow was up 1.4 percent, while the S.P. 500 was up 1.3 percent. The Nasdaq composite was up 2.5 percent.

One reason for the gains: stronger earnings. Companies in the S.P. 500 are on track to report record profits in the second quarter. Earnings are expected to rise 12.5 percent compared to the same period a year ago, according to FactSet. Revenue is expected to jump 8.3 percent.

Ford rose about 2 percent after the company’s sales rose more than analysts expected. Its profit fell 8 percent, though, as it spent more on raw materials like steel and copper.

Lockheed Martin rose nearly 3 percent ahead of the opening. The military contractor raised its 2011 earnings forecast after reporting that its profit dipped, in part, because of charges tied to job cuts.

United Parcel Service said its earnings rose 26 percent, helped by continued strength in Asian and European exports. But its stock slipped about 1 percent after its revenue came in lower than analysts had anticipated.

JetBlue also fell about 1 percent after its earnings dropped 19 percent because of higher costs for fuel and maintenance.

Bond yields fell slightly, pushing prices higher. The yield on the 10-year Treasury note fell to 2.99 percent from 3.00 percent late Monday.

Article source: