Corn, Soybeans, Wheat Fall as Slumping U.S. Economy Cuts Demand

(Bloomberg) -- Corn and soybeans and wheat fell on speculation the U.S. economy will slide into recession, triggering a global slump and damping demand for grains and other commodities.

The Federal Reserve today cut its benchmark interest rate the most in 23 years in an effort to prevent a recession. Even after the move, U.S. equities and commodities fell. Before today, wheat prices had doubled in the past year and corn and soybean futures reached records last week.

``The projected growth in consumption of grains is in question,'' said Darrell Holaday, president of Advanced Market Concepts in Manhattan, Kansas. ``World economies are going to retract. We thought this could happen, but some thought that the rest of the world is insulated from the U.S. economy. It was a nice theory, but today, you can say that's not true.''

Corn futures for March delivery fell 4.5 cents, or 0.9 percent, to $4.9375 a bushel at 10:58 a.m. on the Chicago Board of Trade, the fifth-straight drop since the most-active futures rose to a record $5.1925 on Jan. 15. Corn gained 17 percent in 2007 after rising 81 percent in 2006 on record demand to produce ethanol and feed livestock.

Soybean futures for March delivery fell 15.75 cents, or 1.3 percent, to $12.4825 a bushel in Chicago, after last week falling for the first time in seven weeks. The price on Jan. 14 reached a record $13.415. Futures gained 78 percent last year after U.S. farmers planted the fewest acres in 12 years to sow the most corn since 1944.

Wheat futures for March delivery fell 7.5 cents, or 0.8 percent, to $9.55 a bushel in Chicago. Even with today's decline, the price has doubled in a year. Wheat reached a record $10.095 a bushel on Dec. 17 as global demand outpaced supply.

Hedge-Fund Bets

Since the end of November, hedge funds as of Jan. 16 increased bets by 44 percent that corn futures would rise, data from the Commodity Futures Trading Commission show. Funds that buy commodities in indexes raised bets 14 percent. Open interest has climbed 8.9 percent to almost 1.41 million contracts since the start of the year, the highest in more than nine months.

Funds that track commodity indexes cut bets on higher soybeans to 176,461 contracts as of Jan. 16, down 5.8 percent from a record net long position a week earlier, according to the CFTC report.

 

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Motorola May Face Razr 2 Flop as IPhone Sales Surge

(Bloomberg) -- Motorola Inc.'s Greg Brown, in his first earnings report as chief executive officer, may post disappointing sales of the Razr 2 phone after holiday shoppers flocked to Apple Inc.'s iPhone.

Motorola probably sold 2 million Razr 2s, the slimmer camera phones Brown is relying on to revive revenue, in the fourth quarter, said Lawrence Harris, a former Oppenheimer & Co. analyst in New York. Steve Jobs's Apple may have sold 2.4 million iPhones.

Harris estimated Motorola sold half as many Razr 2s over a similar period compared with the original model, whose 2004 debut started a craze for ever-thinner phones. Motorola, which fell to third place among global phone makers last year, may drop to fourth in 2008.

``The Razr 2 didn't set the world on fire and it won't be a phenomenon like the original one,'' Harris said.

Motorola, based in Schaumburg, Illinois, may say tomorrow that net income fell 59 percent to $257.9 million in the fourth quarter, according to the average of nine estimates compiled by Bloomberg. Sales probably slid 18 percent to $9.65 billion, the survey showed.

Jennifer Erickson, a spokeswoman for Motorola, declined to comment on sales or earnings before the report.

Motorola shares dropped 22 percent last year on the New York Stock Exchange, while Apple more than doubled. Motorola fell $1.48, or 11 percent, to $11.85 at 9:34 a.m. New York time, the lowest in more than four years. The Standard & Poor's 500 Information Technology Index dropped 4.3 percent.

No. 1 No Longer

The fading popularity of the original Razr probably cost Motorola its position as the top-selling handset at AT&T Inc., the biggest U.S. phone-service company, for the first time since 2004, said Piper Jaffray & Co. analyst Michael Walkley. Motorola probably ceded that spot to Samsung Electronics Co.'s Sync video and camera phone last quarter, he said.

The 47-year-old Brown, who took over as CEO after Ed Zander's Nov. 30 resignation, has to improve marketing to show consumers the new phone is a step up, Walkley said. The $300 Razr 2 is too similar to the first, which is available for free with a contract, said Minneapolis-based Walkley, who called Razr 2 holiday sales ``disappointing.''

Motorola probably sold about 3 million Razr 2s since the debut in the second quarter, Harris said. The original sold almost 6 million over a similar span after its release, and 12 million in the first year, he said.

Too Similar

The Razr 2 is thinner, has a better camera and can store more songs than the original. Consumers haven't bought the phones as quickly as Motorola shipped them, building inventories at carriers and retailers, Walkley said.

``The Razr 2 doesn't stand out the way the original did,'' said Brad Williams, who helps manage $11 billion as an analyst at MTB Investment Advisors in Baltimore. His firm sold its Motorola shares last year. ``You go to a store and there are less-expensive products that look strikingly similar to the Razr 2.''

The $399 iPhone, which blends Apple's best-selling iPod music player with an e-mail-equipped handset, is stealing sales from Motorola. The iPhone broke AT&T's opening-weekend records and sold more in three days after its June 29 debut than the original Razr did in its first month.

Last week, Jobs, 52, said Apple has sold more than 4 million of the phones. Analysts including UBS AG's Benjamin Reitzes in New York said Apple probably sold 2.4 million last quarter.

Nokia Oyj, Samsung and Sony Ericsson Mobile Communications Ltd. also introduced phones superior to the Razr 2 in features, according to a Jan. 4 analysis by Cowen & Co. That may help Sony Ericsson overtake Motorola as the No. 3 handset maker in the world this year, according to Cowen analysts including Matthew Hoffman in Boston.

 

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UBS, Bank of America Recommend Buying U.S. Stocks

(Bloomberg) -- Investors should buy U.S. stocks in the ongoing market selloff, according to UBS AG and Bank of America Corp. strategists, because share prices already reflect a slowdown in earnings growth.

``We understand the macro challenges facing the economy and many uncertainties, but we believe this level of pessimism is unwarranted,'' UBS equity strategist David Bianco wrote in a note to investors today. ``The market is panicked over a substantial and secular drop in earnings power.''

More than half of the world's biggest stock indexes fell into a bear market this week on mounting concern the U.S. is headed for a recession. The Standard & Poor's 500 Index fell 0.7 percent to 1,316.01 as of 11:06 a.m. in New York today, even after the Federal Reserve lowered its benchmark rate in its first emergency move since 2001.

The U.S. index has fallen 16 percent from a record reached on Oct. 9.

``It makes sense for investors to consider increasing their exposure to equities'' after declines in the past 12 months, wrote Thomas McManus, chief investment strategist at Bank of America's securities unit, in a report today. He advised buying ``gingerly or aggressively,'' depending on each investor's goals.

 

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Bank of America, Wachovia Profits Slump on Writedowns

(Bloomberg) -- Bank of America Corp. and Wachovia Corp., the second- and fourth-largest U.S. banks, said earnings plummeted after more than $6 billion of combined mortgage- related writedowns.

Bank of America's fourth-quarter profit dropped 95 percent to $268 million, while net income at Wachovia was almost wiped out, plunging 98 percent to $51 million. Bank of America gained 15 cents to $36.12 at 10:25 a.m. in New York trading. Wachovia declined $1, or 3.3 percent, to $29.78 after the Federal Reserve lowered its benchmark interest rate in an emergency move for the first time since 2001.

Kenneth Lewis, Bank of America's chief executive officer, and Kennedy Thompson, his counterpart at Wachovia, said in separate statements today that the companies were battered by the fixed-income markets. Lewis said he expects economic growth to ``be anemic at best in the first half.'' Bank of America's reserve to cover losses from loans and debt securities doubled to $3.3 billion in the fourth quarter.

Bank of America and Wachovia, both based in Charlotte, North Carolina, reported the lowest quarterly profits in at least six years during the country's worst housing slump in more than two decades. The world's biggest banks and brokerages have disclosed more than $120 billion of writedowns and credit losses since June, mostly caused by the collapse of the subprime mortgage market.

``The revaluation of assets that initially looked like a very exclusive subprime problem is emerging to be something much more,'' Kevin Fitzsimmons, analyst at Sandler O'Neill & Partners in New York, said today in an interview.

Missed Estimates

Bank of America earned 5 cents a share in the fourth quarter, excluding merger and restructuring costs and a gain from the sale of Marsico Capital Management LLC, falling short of the 21-cent average estimate from 21 analysts surveyed by Bloomberg. Wachovia's profit of 8 cents a share, excluding takeover-related costs, also missed analysts' estimates.

National City Corp., Ohio's largest bank, reported a loss, and Fifth Third Bancorp and KeyCorp, the state's No. 2 and No 3 lenders, said profit declined.

``Our fourth-quarter results were severely impacted by ongoing dislocations in capital markets and the slowing economy,'' Lewis said in today's statement. He added that the company is ``cautiously optimistic about 2008.''

Bank of America increased its bet on the faltering U.S. economy earlier this month by agreeing to acquire Countrywide Financial Corp., the largest U.S. mortgage lender, for about $4 billion in stock.

Countrywide Financial

Countrywide would give Bank of America a 25 percent share of U.S. mortgage originations, Lehman Brothers Holdings Inc. analyst Jason Goldberg wrote in a Jan. 11 report to clients. Almost two-thirds of Countrywide's loan originations in 2007 came from mortgage brokers and other third parties, a practice that Lewis has said Bank of America expects to curtail.

The corporate and investment bank lost $2.76 billion, compared with a profit of $1.4 billion a year earlier, and earnings at the consumer and small-business banking unit declined 28 percent to $1.87 billion. Lewis has scaled back investment banking by cutting 1,150 jobs since October and putting the hedge-fund brokerage unit up for sale.

First Drop Since 2001

``Investment banking isn't Ken Lewis's core competency and he doesn't need it,'' said Bruce Foerster, a former Lehman Brothers managing director who's now president of the South Beach Capital Markets advisory firm in Miami.

Bank of America's total fourth-quarter revenue fell 31 percent to $12.7 billion, while non-interest costs rose 15 percent to $10.1 billion. Return on equity, a gauge of how effectively the company reinvests profit, declined to 11.1 percent for the year from 16.3 percent in 2006.

Full-year earnings dropped for the first time in Lewis's tenure since the 60-year-old CEO succeeded Hugh McColl Jr. in 2001, with net income sliding 29 percent to $15 billion.

Wachovia's fourth-quarter earnings were the lowest since 2001 after $1.7 billion of writedowns, including $1 billion for subprime mortgage-related holdings. The company's corporate and investment bank had a loss of $596 million after the costs.

``The continued turmoil in the capital markets and the dramatic change in the credit environment diminished our fourth- quarter results substantially,'' Thompson said in the statement.

Fourth-quarter revenue fell 17 percent to $7.2 billion. Return on equity was 0.28 percent, down from 13.1 percent a year earlier. The net interest margin, the difference between what Wachovia pays for deposits and what it charges on loans, narrowed to 2.88 percent from 2.92 percent on Sept. 30.

 

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Corporate Default Risk Soars as Fed Rate Cut Signals Recession

(Bloomberg) -- The risk of companies defaulting soared on concern that an emergency interest rate cut by the Federal Reserve will fail to halt a worsening global economic slowdown, credit-default swaps show.

Contracts on Ambac Financial Group Inc. rose to a record after the second-largest bond insurer reported its biggest-ever loss. Merrill Lynch & Co. increased on concern that ratings downgrades at bond insurers including Ambac will cause losses at financial firms to surge. Benchmark gauges of corporate default risk in the U.S. and Europe climbed to the highest since they were created in 2004.

``The Fed's behind the curve; they had to cut,'' said Mark Kiesel, who oversees $158 billion in corporate bonds as executive vice president at Pacific Investment Management Co. in Newport Beach, California. ``The big question is, `Can the Fed change the willingness to take risk?' I'm not so sure.''

Contracts on the Markit CDX North America Investment-Grade Index, tied to the bonds of 125 companies in the U.S. and Canada, climbed as much as 16 basis points to 126, before falling back to 117 at 10:45 a.m. in New York, according to Deutsche Bank AG. Contracts on the Markit iTraxx Europe index of 125 investment- grade companies rose as much as 10.25 basis points to a record 92.5 today before falling back to 81.75, according to JPMorgan Chase & Co.

``The issues that plague the markets and the economy aren't necessarily fixed by simple rate cuts, but it helps,'' said Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``The overarching issue is the Fed seems extremely responsive to just the markets, which doesn't engender confidence necessarily.''

Stock Markets Tumble

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

The Fed lowered its benchmark interest rate in an emergency move for the first time since 2001 after stock markets tumbled from Hong Kong to London and amid increasing signs the U.S. economy is headed into a recession. The central bank lowered its target overnight lending rate to 3.5 percent from 4.25 percent.

U.S. stocks declined for a fifth day, the longest stretch of declines in 11 months.

Contracts on Ambac climbed 4 percentage points to 32 percent upfront and 5 percent a year, according to CMA Datavision in London. The New York-based company posted a $3.6 billion loss after writing down the value of guarantees on subprime debt by $5.21 billion. Armonk, New York-based MBIA Inc., the largest bond insurer, climbed 3 percentage points to 29 percent upfront and 5 percent a year, CMA prices show.

Risk of Default

Sellers of credit-default swaps demand upfront payments when they see a high risk of default.

Fitch Ratings cut Ambac's top grade last week and Moody's Investors Service and Standard & Poor's are reviewing the company, along with MBIA, for possible downgrade.

Credit-default swaps on New York-based Merrill Lynch, the biggest U.S. brokerage firm, rose 23 basis points to 190 basis points, prices from broker Phoenix Partners Group and CMA show.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Contracts With Insurers

``No one wants to wait to find out how it's all going to end,'' said Nigel Myer, a credit analyst at Dresdner Kleinwort in London. ``They just want to sell, preferably at last week's prices. The general reckoning is that the banks will be taking more charges.''

Banks led by Citigroup Inc. and Merrill Lynch have a net $1 trillion at risk because of contracts with insurers, according to the International Swaps and Derivatives Association.

Contracts on Charlotte, North Carolina-based Bank of America Corp. rose 6 basis points to 100 basis points, CMA prices show. The second-largest U.S. bank said today earnings dropped 95 percent after at least $5.28 billion of mortgage-related writedowns.

Financial firms have already lost more than $100 billion because of the worst U.S. housing slump for 27 years.

New York-based ACA Capital Holdings Inc., an insurer which guaranteed $26.6 billion of collateralized debt obligations backed by subprime mortgages, had its ratings cut to CCC from A by S&P in December. That prompted Merrill Lynch to announce $2.6 billion of writedowns on securities insured by the company.

 

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Ambac Reports Loss, Talks With `Potential Parties'

(Bloomberg) -- Ambac Financial Group Inc., the first bond insurer to be stripped of its AAA credit rating, reported its biggest-ever loss and said it is talking to ``a number of potential parties'' to help overcome a slump in the value of guarantees on subprime-mortgage securities.

New York-based Ambac, the second-largest bond insurer, jumped as much as 37 percent in New York Stock Exchange trading on optimism the company may be sold. Ambac posted a $3.26 billion loss after writing down the value of guarantees on subprime debt by $5.21 billion, according to a statement by the company today.

Ambac said ratings companies are ``underestimating'' its ability to weather the rout in credit markets. Ambac, an underwriter of $556 billion of municipal and structured finance debt, last week scrapped a $1 billion equity sale after a 71 percent drop in the stock and the departure of its chief executive officer, prompting Fitch Ratings to reduce its insurance rating to AA from AAA.

``They can't issue equity and they can't issue debt,'' said Robert Haines, an analyst at bond research firm CreditSights Inc. in New York. ``The new CEO might be prepping the company for a potential sale.''

Michael Callen, who became interim CEO after Robert Genader left last week, said in a statement today that Ambac is ``exploring the attractiveness'' of various alternatives. He wasn't more specific.

The fourth-quarter net loss, which equated to $31.85 a share, took the 2007 deficit to $3.23 billion, the company's first ever annual loss. Ambac on Jan. 16 forecast a fourth- quarter net loss of about $32.83 a share. The company reported an operating loss, excluding writedowns on contracts to guarantee subprime securities, of $6.21 per share.

Hobbled by Expansion

The AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg. The industry guaranteed $127 billion of collateralized debt obligations linked to subprime mortgages that have plunged in value as defaults by borrowers with poor credit soar to records.

Ambac, which pioneered municipal bond insurance in 1971, has been hobbled by its expansion into CDOs, which package pools of debt and slice them into pieces with varying ratings. The CDO declines forced Ambac and others to reduce the value of contracts designed to protect CDO holders from default. Ambac said most of the writedowns aren't necessarily permanent losses and it hasn't paid any claims on its CDO portfolio.

Dividend Cut

Ambac shares rose 99 cents, or 16 percent, to $7.19 at 9:41 a.m. in New York Stock Exchange composite trading. The stock has tumbled 93 percent in the past year, shaving $8.8 billion from the company's market capitalization.

Ambac on Jan. 16 slashed its dividend 67 percent and said it would sell stock or equity-linked notes to bolster its capital, in part to meet Fitch's demand to raise $1 billion by the end of January. Two days later it scrapped the share sale.

The plan provoked a boardroom dispute that led to the departure of Genader, who disagreed with the capital raising, according to the company's regulatory filings.

Ambac's loss reported today followed the company's first- ever loss in the third quarter. Before 2007, Ambac had reported profit increases every year for the past decade.

``In retrospect, insurers wish they'd never heard the term structured finance, much less written the business,'' said Donald Light, an insurance analyst at Celent, a consulting firm in Boston.

Credit-Default Swaps

Prices for credit-default swaps that pay investors if Ambac can't meet its debt obligations imply a 72 percent chance it will default in the next five years, according to a JPMorgan Chase & Co.

Contracts on Ambac climbed 2.5 percentage points to 30.5 percent upfront and 5 percent a year today, prices from CMA Datavision in London show.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

 

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Lekgotla to solve energy crisis

(Fin24) - Eskom CEO Jacob Maroga will face some tough questions from the South African government which will use its two-day Lekgotla, starting January 23, to help solve the country's energy supply shortfall.

Maroga joins the Lekgotla which brings together all ministers and their deputies, premiers, director-generals and representatives of the South African Local Government Association.

Rolling blackouts throughout South Africa have ground business to a halt and severely disrupted roads and other infrastructure, as well as weakened confidence in the country's ability to attract and support future investment.

After the Lekgotla all eyes will be on February 8, when President Thabo Mbeki's state of the nation address in parliament is expected to detail some of the Lekgotla's findings.

A statement released by the cabinet today apologised for the electricity predicament and the impact it has had on the country's citizens, economy and image.
 

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Rand climbs after US rate cut

(Fin24) - The rand has climbed against the dollar on Tuesday, after the US Federal Reserve cut its overnight rate, and global stocks pared their losses.
 

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