Treasuries Rise as Service Industries Contract, Stocks Decline

(Bloomberg) -- Treasuries rallied, pushing two-year note yields close to a four-year low, on growing speculation the Federal Reserve will cut interest rates further after a report showed service industries unexpectedly contracted last month.

Two-year notes gained the most in a week as traders bet the central bank will slash its benchmark rate by a half-percentage point next month, the third reduction this year. Yields have tumbled about 2 percentage points since mid-September, when the Fed started lowering rates to avert a recession amid a slumping housing market.

The report ``strongly corroborates people who have already been saying we're in recession,'' said T.J. Marta, a fixed- income strategist at RBC Capital Markets in New York. ``We're going to retest the lows in yields.''

The two-year yield fell about 11 basis points, or 0.11 percentage point, to 1.94 percent at 10:20 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield touched 1.837 percent on Jan. 23, the lowest since April 2004. The price of the 2 1/8 percent security due January 2010 rose about 1/4, or $2.50 per $1,000 face amount, to 100 11/32. Ten-year note yields fell 11 basis points to 3.54 percent.

The Institute for Supply Management's non-manufacturing index, which reflects almost 90 percent of the economy, fell to 41.9, the lowest since October 2001, the last time the U.S. was in a recession, from 54.4 the prior month, the Tempe, Arizona- based ISM said. A reading below 50 signals contraction.

100 Percent

Traders now see a 100 percent chance that policy makers will cut their lending target a half-point to 2.5 percent at their next scheduled meeting on March 18, compared with a 68 percent chance yesterday, according to futures on the Chicago Board of Trade.

The gap between two- and 10-year note yields widened to about 1.6 percentage points, the most since September 2004, from 1.58 basis points yesterday. Shorter-maturity notes are more sensitive to Fed rate changes, while debt maturing in 10 years or more is influenced more by inflation expectations.

U.S. stocks fell, increasing demand for the fixed payments on government debt. The Standard & Poor's 500 Index dropped 1.6 percent in early trading.

 

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U.S. Stocks Fall After Service Industries Unexpectedly Shrink

(Bloomberg) -- U.S. stocks fell for a second day after American service industries declined to the lowest levels since 2001, reinforcing speculation the economy has tipped into a recession.

Exxon Mobil Corp., General Electric Co. and AT&T Inc. led declines in New York trading, and all 10 industry groups in the Standard & Poor's 500 Index dropped, after the Institute for Supply Management's index fell more than forecast in January. Goldman Sachs Group Inc. posted its biggest two-day drop since November on Oppenheimer & Co. analyst Meredith Whitney's downgrade of the largest securities firm.

``As the recession unfolds, then profits will disappoint,'' Stuart Schweitzer, who helps oversee $420 billion as the global markets strategist at JPMorgan Private Bank, said in a Bloomberg Television interview from New York. ``It's already under way.''

The S&P 500 lost 23.77, or 1.7 percent, to 1,357.05 at 10:24 a.m. in New York. The Dow Jones Industrial Average decreased 209.81, or 1.7 percent, to 12,425.35. The Nasdaq Composite Index slipped 32.45, or 1.4 percent, to 2,350.4. Shares also fell in Asia and Europe.

About six stocks dropped for every one that rose on the New York Stock Exchange after the ISM's non-manufacturing index, which reflects almost 90 percent of the economy, fell to 41.9 from 54.4 the prior month. A reading of 50 is the dividing line between growth and contraction.

GE, the second-largest U.S. company by market value, dropped 59 cents to $34.78. AT&T, the nation's biggest phone company, declined $1.09 to $37.07.

Energy Shares Slump

Crude oil for March delivery fell 1.7 percent to $88.47 a barrel in New York after the ISM report bolstered speculation fuel demand will slow in the U.S., the world's biggest energy consumer. Gold and copper prices also declined, dragging down shares of mining companies.

Exxon Mobil Corp., the biggest U.S. energy company, lost $1.49 to $83.95. Chevron Corp., the second-largest, declined $1.74 to $80.28. Freeport-McMoRan Copper & Gold Inc. retreated $3.85 to $87.33. Newmont Mining Corp. fell $1.04 to $49.87.

Goldman dropped $6.17 to $194.63. The firm was cut to ``perform'' from ``outperform'' by Oppenheimer's Whitney. The stock's valuation ``will not be sustainable in a year when Goldman Sachs will probably deliver results that will not be substantially better than its peers,'' Whitney wrote in a note dated Feb. 4.

Citigroup Inc., the biggest U.S. bank by assets, lost 73 cents to $28.49. Merrill Lynch & Co., the nation's third-largest securities firm, dropped $1.79 to $55.94. The S&P 500 Financials Index retreated 2.7 percent.

Ratings Watch

Banks and brokerages also retreated after Fitch Ratings said collateralized debt obligations may be downgraded as many as five levels. The biggest cuts will be to AAA rated CDOs that are based on credit-default swaps and aren't actively managed, according to ratings guidelines proposed by Fitch today. CDOs that package high-yield assets may be cut as many as three levels for the portions first in line for losses.

National Semiconductor Corp. fell 72 cents to $18.30. The maker of chips for devices such as Apple Inc.'s iPhone said revenue this quarter will be as much as $455 million. That's below the $484 million average estimate of analysts in a Bloomberg survey. The company on Dec. 6 forecast sales of $474 million to $495 million.

Texas Instruments Inc., the biggest maker of mobile-phone chips, dropped 88 cents to $30.28. Intel Corp., the world's largest chipmaker, lost 40 cents to $20.67.

Fed Bets

Traders boosted bets on Federal Reserve interest-rate cuts after the ISM report. Fed funds futures indicate a 98 percent chance policy makers will lower the target for overnight loans between banks by 0.5 percentage point to 2.5 percent by its March 18 policy meeting. That compares with 68 percent odds yesterday. The rest of the bets are for a quarter-point reduction.

General Motors Corp. slipped 66 cents to $26.91. GMAC LLC, the lending company that General Motors Corp. sold to a hedge fund manager, lost $724 million in the fourth quarter because home buyers didn't keep up with their mortgage payments. A group led by Cerberus Capital Management bought a 51 percent stake in GMAC in 2006.

NYSE Euronext slipped $4.06 to $78.67. The owner of securities exchanges on both sides of the Atlantic said fourth- quarter earnings more than tripled on record equity trading and new listings. Excluding merger costs and one-time charges, profit was in line with the average estimate of 12 analysts surveyed by Bloomberg.

 

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Societe Generale Shares Rise on Takeover Report

(Bloomberg) -- Societe Generale SA, France's second-biggest bank, rose the most in five years in Paris trading on speculation that BNP Paribas SA is considering a takeover.

BNP, the country's largest bank, is holding preliminary internal discussions about a possible bid after Societe Generale's announcement last week of 4.9 billion euros ($7.2 billion) of losses from unauthorized bets, the Wall Street Journal reported. BNP said it does not comment on market rumors.

Traders speculated that President Nicolas Sarkozy's government is seeking a French partner for the bank to ward off any potential foreign bids. Prime Minister Francois Fillon told Parliament today that the government will ensure that Societe Generale remains in French hands.

``There's rumor of a bid by BNP on Societe Generale for 92 euros,'' said Constantin Salagaras, a trader at Aurel Leven Securities in Paris. ``The market is speculating on the will of Sarkozy to create a national champion.''

Societe Generale rose 10 percent to 78.45 euros in Paris, marking its biggest gain since Dec. 16, 2002 and valuing the bank at 36.3 billion euros. Societe Generale shares, down 21 percent since the start of the year, yesterday had a lower market value than Credit Agricole SA before rebounding today.

``Societe Generale is a great French bank and Societe Generale will remain a great French bank,'' Fillon told lawmakers in Paris today.

Trading Losses

Societe Generale's employee Jerome Kerviel, 31, was charged yesterday with falsifying documents, computer hacking and breach of trust by French judges.

Kerviel's unauthorized bets led to the biggest trading losses in banking history. Societe Generale said Kerviel amassed 50 billion euros in positions in European stock index futures, an amount that exceeded the company's market value.

``A takeover of Societe Generale is not impossible,'' Guillaume Tiberghien, an analyst at Credit Suisse, said in a report to clients. ``Any potential bidder would have to assess Societe Generale's risk control, assess the risk that the equity derivatives business might be damaged for the long term, assess the political and regulatory consequences of recent events for the entire banking sector.''

 

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Bank of America Affirms Plan to Acquire Countrywide

(Bloomberg) -- Bank of America Corp. said its purchase of Countrywide Financial Corp. is proceeding and the bank doesn't need more capital after last week's preferred stock sale raised almost $13 billion.

``Everything is a `go' to complete this transaction,'' Bank of America Chief Executive Officer Kenneth Lewis said at an investor conference today, referring to Countrywide. The Calabasas, California-based mortgage company rose as much as 8.6 percent today in New York Stock Exchange composite trading.

Chief Executive Officer Angelo Mozilo agreed Jan. 11 to sell Countrywide, the biggest U.S. mortgage lender, for about $4 billion in stock to Bank of America, the nation's second- biggest bank by assets. Investors have speculated the bid might be revised if Countrywide didn't fulfill Mozilo's October vow to restore profit by year-end.

Countrywide posted a fourth-quarter net loss of $422 million, or 79 cents a share, compared with a profit of $621.6 million, or $1.01 a share, in the year-earlier period, the company said in a statement today. The loss was more than twice the 28 cents predicted in a Bloomberg survey of analysts.

The home lender rose 20 cents to $6.15 in 12:03 p.m. composite trading on the New York Stock Exchange as investors concluded Bank of America won't renege on the purchase. Bank of America, based in Charlotte, North Carolina, added 67 cents, or 1.6 percent, to $41.87.

Bank of America could have raised 2 1/2 times as much as it sought in last week's share offerings, Lewis told the New York investor conference today. The sale came with some of the highest yields in 15 years.

 

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U.S. Stocks Rise After Earnings, Durable Goods Top Forecasts

(Bloomberg) -- U.S. stocks rose for a second day, led by telephone companies and utilities, on better-than- forecast durable goods orders and earnings that topped estimates at two dozen members of the Standard & Poor's 500 Index.

Dow Chemical Co., American Electric Power Co. and Valero Energy Corp. led gains among the 30 companies in the S&P 500 that reported results since markets closed yesterday. Boeing Co. and Caterpillar Inc. climbed after the Commerce Department said orders for U.S. durable goods rose the most since July.

The S&P 500 added 1, or 0.1 percent, to 1,354.97 at 1:06 p.m. in New York. The benchmark for U.S. equities is still down 7.6 percent in 2008 on concern the collapse of the subprime mortgage market will drag the economy into recession. The Dow Jones Industrial Average rose 25.04, or 0.2 percent, to 12,408.93. The Nasdaq Composite Index decreased 6.52, or 0.3 percent, to 2,343.39, dragged down by a 2.1 percent drop in Google Inc.

``When you see a durable goods number like this and then earnings outside of the financial sector doing quite well, people are beginning to realize that perhaps the contagion effect may be somewhat limited,'' said Damon Barglow, who helps oversee $1.9 billion at Eastern Investment Advisors in Boston, in an interview with Bloomberg Radio.

Durable Goods

Index futures doubled their advances after the 5.2 percent gain in durable goods orders last month highlighted how growing overseas demand may spur manufacturing as the U.S. economy slows. The Federal Reserve is to expected to cut interest rates tomorrow in an effort to spur growth.

The S&P 500 has gained 3.5 percent from its 16-month low on January 22 after falling as much as 15 percent from its Oct. 31 record.

Fourth quarter earnings advanced 20 percent on average for the 155 non-financial companies in the S&P 500 that have reported results so far, according to data compiled by Bloomberg. Analysts expect the entire index to post an 18 percent average decline in profit.

Dow Chemical rose 43 cents to $38.02. The maker of 3,200 products ranging from synthetic latex to pesticides posted profit excluding some restructuring costs and other items of 84 cents, topping the 80-cent average estimate of 14 analysts surveyed by Bloomberg.

Valero, American Electric

Valero Energy Corp. climbed $5.22 to $60.12. The largest U.S. refiner posted fourth-quarter profit of $1.02 a share, topping the 59-cent average analysts' estimates compiled by Bloomberg. Earnings were buttressed by a cut in Valero's tax rate and increased use of low-grade crude oil.

Sunoco Inc., the largest oil refiner in the U.S. East, added $2.20 to $63.35. Tesoro Corp., the largest refiner in the U.S. West, gained $2.90 to $41.29. ConocoPhillips, the nation's second-biggest refiner, increased $1.18 to $77.59.

American Electric Power Co. gained 59 cents to $42.82. The biggest U.S. producer of electricity from coal said fourth- quarter profit rose 28 percent on higher power sales and a gain from the sale of a stake in a power plant. Sales rose 10 percent to $3.3 billion on higher utility rates and colder weather that increased use of electricity for heating.

Boeing, the world's second-biggest commercial airplane maker, climbed $2.34, or 3 percent, to $79.94. Caterpillar, the largest maker of bulldozers and excavators, added 72 cents to $68.93.

The dollar strengthened and yields on Treasury notes rose after the durable-goods report. Economists had forecast orders would increase 1.6 percent in December, according to the median of 64 estimates in a Bloomberg News survey.

Eli Lilly & Co. rallied 94 cents to $52.34. Excluding certain items, Lilly earned 90 cents a share, a penny higher than the average estimate of 17 analysts surveyed by Bloomberg.

 

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Durable goods orders jump, house prices slump

(Reuters) - Stronger-than-expected orders for U.S.-made durable goods in December suggested the economy retained some life and might not need a heavy dose of interest-rate cuts, even though house prices fell a record amount in November.

New orders for long-lasting goods rose 5.2 percent last month, a Commerce Department report showed on Tuesday, well above the 1.5 percent increase forecast by economists in a Reuters poll.

The surprise surge in durable goods orders helped offset a report that showed home prices in 10 major metropolitan areas fell a record 8.4 percent in the year through November.

U.S. Treasuries fell after the durables report, which contradicted weakness in other areas of the economy and undermined the argument for more aggressive interest rate cuts by the Federal Reserve. Stocks rose.

A consumer sentiment survey, meanwhile, showed confidence fell in January but by slightly less than economists had expected. The Conference Board's index of consumer sentiment fell to 87.9 from an upwardly revised 90.6 in December.

"Consumers are on the edge but haven't packed it in yet. They are worried about the up-and-down stock market, falling house value and high gasoline prices. But they still have jobs," said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania.

 

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IMF to world economy: no one escapes U.S. slowdown

(Reuters) - When the U.S. coughs, the whole world still catches cold.

"No one is exempt from a global slowdown. That is why you call it global," International Monetary Fund chief economist Simon Johnson said on Tuesday as he updated the IMF's World Economic Outlook.

"It will be very hard for even the most effective counter-cyclical policy to keep any country from having some slowdown in these circumstances," he said.

The IMF has trimmed its estimate for world growth this year to 4.1 percent from its prior outlook of 4.4 percent, with still-resilient emerging economies seen growing at a rate of 6.9 percent from 7.8 percent last year. Even growth in China will moderate from a thumping 11.4 percent in 2007 to 10 percent.

"There are obviously linkages. I think that reports of decoupling have been greatly exaggerated. It is a question of what kind of linkages," Johnson told a media briefing.

World stock markets have swung wildly since problems in the U.S. subprime mortgage market surfaced in August, sparking a global credit crunch that has yet to fully abate. Investors have bet heavily that the United States will tip into recession and drag other economies in its wake.

 

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