St. Louis’ economy shrank faster than almost any other region in the country in the second quarter, according to a new report out today from the Brookings Institution.
Only beleaguered Detroit saw its economic output fall faster than St. Louis’ in the three months ending in June, a time when Chrysler’s Fenton truck plant limped into shutdown and U.S. Steel’s massive Granite City Works sat quiet.
Those sort of cuts contrasted with a relatively stable housing sector and a job market that’s less gruesome than some, keeping St. Louis mired in the middle of the pack among 100 large metropolitan areas that Brookings has been tracking through the recession. It’s better off than housing crisis hot spots like Las Vegas or factory towns like Dayton, Ohio, but worse off than energy hubs in Houston and Dallas, the same as it was three months ago.
With its broad base of industries, St. Louis’ $120 billion regional economy tends to track the nation as a whole. But this spring’s factory cuts took an outsized toll here because they eliminated jobs with better-than-average wages, said Jason Kunkel, an economist who tracks St. Louis for Moody’s Economy.com. That translated into a 1.5 percent decline in output, though that figure may be revised upward a bit. Since the recession began, output is off 6.1 percent.
"The manufacturing sector there has been hit very hard," he said. "That certainly has a big effect on why (output) in the first half of 2009 will be worse than average."
The good news, said Howard Wial, who co-authored the Brookings report, is that things appear to be getting a little better. The pace of job cuts is slowing. Auto sales have leveled off, a good sign for the car-making that remains here. The big plant in Granite City is pumping out steel again.
"You can see the light at the end of the tunnel," he said. "But you’re not there yet."
Comments from two senior Federal Reserve officials on Monday touched on what could become a struggle in the coming months and years over how and when to unwind the bank’s dramatically accommodative policy.
The line between policy hawks and doves on the Federal Open Market Committee on the inflation outlook will likely become more pointed now that the U.S. recession appears to be over and the world’s largest economy embarks on a tentative recovery.
“In my career, I have never witnessed a situation like the one that exists now, when views about inflation risks have coalesced into two diametrically opposed camps,” said Janet Yellen, San Francisco Fed President.
Speaking in San Francisco, the 2009 FOMC voter put herself in the ranks of those still worried about disinflation or outright deflation in the U.S. economy as high unemployment looks set to drag on for years.
“Our foot is down on the pedal of stimulus as far as we can possibly go,” Yellen said after a speech to the San Francisco Society of Certified Financial Analysts and that stance is still right for now, she added.
The U.S. central bank has set its official interest rate near zero since December and created a number of unorthodox programs to reopen incapacitated credit markets. As the recovery progresses, the timing and velocity of interest rate increases and other measures to wind down accommodative policy — the so-called exit strategy — will be a key factor for U.S. Treasury markets and investors across a range of assets.
The recovery is likely to be “tepid” even if the long recession seemed to end during the summer and the economy is set to grow in the second half of 2009, she said. Like other Fed officials recently, she cited inventory investments, not job creation, as the major catalyst for growth at this point.
Even gross domestic product growth of 3 percent to 4 percent in the next few quarters, should it occur, would do little to dent the ranks of the unemployed, said Yellen, suggesting a certain circularity to the possible jobless recovery.
“Weakness in the labor market is another factor that may keep the recovery in low gear for a while,” she said. “My business contacts indicate that they will be very reluctant to hire again until they see clear evidence of a sustained recovery.”
U.S. consumers, often counted on to power economic growth following a downturn, are still smarting.
“The destruction of their nest eggs caused by falling house and stock prices is prompting them to rebuild savings,” said Yellen.
Yellen acknowledged, but downplayed, current worries that vast expansion in the Fed’s balance sheet could fuel rising inflation over the long haul.
“My personal belief is that the more significant threat to price stability over the next several years stems from the disinflationary forces unleashed by the enormous slack in the economy,” she said.
“It seems likely that core inflation will move even lower … we need to defend our price stability goal on the low side, and promote full employment.”
RICHMOND’S LACKER: RECOVERY ON TRACK
At 16, and with $640 billion in assets, the U.S. exchange-traded fund industry isn’t exactly wet behind the ears.
ETFs still lag far behind U.S. mutual funds’ more than $10 trillion in assets. But ETFs are gaining on their more established rivals, due in part to a selling point that’s been a big draw in volatile markets. ETFs can be traded like stocks throughout daily trading sessions, unlike mutual fund shares that change hands at end-of-the-day prices.
Clearly, investors are getting the ETF bug. Nearly $184 billion flowed into U.S. ETFs during the 12 months ended July 31, while stock and bond mutual funds saw $81 billion go out, according to the Investment Company Institute.
With more than 700 ETFs in the U.S., the offerings have become so diverse that you can gain exposure to everything from oil industry equipment suppliers to the movements of foreign currencies like Sweden’s krona. Most ETFs track a market index and focus on stocks, but actively managed ETFs and bond ETFs have also entered the fray.
Michael Latham is at the center of it all as U.S. head of Barclays’ iShares business, which commands about half the U.S. ETF market.
IShares’ leadership in a growing industry is a key reason why New York-based asset manager BlackRock Inc. is acquiring Barclays Global Investors, the investment arm of London-based Barclays. BlackRock announced plans three months ago to snap up BGI in a $13.5 billion deal expected to close by year end.
In a recent interview, Latham, 43, discussed growth prospects and challenges for San Francisco-based iShares and the ETF industry. Here are excerpts:
Do you expect any big changes after BlackRock becomes iShares’ new owner?
We really don’t expect any major change at all free online credit report. We are going to continue to focus on educating financial advisers and investors about how ETFs work.
Many newer ETFs are narrow, tracking the performance of a single industry, overseas market or commodity. Do you see the niche trend continuing?
Some folks are getting into the market and realizing it’s not as simple as maybe they thought, and then are exiting.
We’re not looking for an investment fad. We’re looking to provide the building blocks of different asset classes for long-term investing.
In June we launched an ETF that focuses on Peru, the iShares MSCI All Peru Capped Index. It already has $70 million in assets. But we don’t evaluate product development based on assets gathered in the first year.
Any other new growth areas you see?
We’ll also be doing more bond ETFs because we think the fixed-income market is underserved. And we’ll be looking at more strategy-based products — it might be asset-allocation products, or more complex products.
What about actively managed ETFs?
We’re looking at it. But I think there is a lot of complexity around what you define as an active product. If you start with a true active stock selection, I find it hard to see how that works in a fully transparent ETF.
Lindell Bank says it is buying some St. Louis area branches from Kansas City-based Bank Midwest. Lindell Bank will buy branches at 15500 Olive Boulevard and 169 Long Road in Chesterfield, 10018 Manchester Road in Glendale and 4521 Highway K in O’Fallon, Mo.
The Bank Midwest branch at 1 North Brentwood Boulevard in Clayton will be closed because it is not far from the Lindell Bank branch at Clayton Road and Skinker Boulevard in St. Louis. The transaction is expected to close by the end of the year.
Dealmakers are not known for their patience. Yet that’s what’s needed more than anything else a year after Lehman’s collapse.
It takes months longer to close a deal, the number and size of transactions has shrunk, and mergers and acquisitions fees have plummeted. Much of the M&A work now is either advising failed companies on restructurings or organizing fire sales.
“The nature of M&A has changed fundamentally,” said Antonio Weiss, Lazard global head of M&A. “On one end of the spectrum, there’s an increase in volume of distressed activity and on the other, well-capitalized corporations have a chance to revisit acquisition ideas at lower values.”
Transformational deals have been few and leveraged buyouts are just not there — yet. But there are bright spots, such as this week’s unsolicited bid by U.S. firm Kraft Foods Inc for the UK’s Cadbury Plc, and confidence has started to return.
“Many CEOs feel we’ve bottomed,” said James Stynes, global chairman of M&A at Deutsche Bank. “We are starting to see a pickup that could make 2010 more positive than people originally thought.”
That’s a sea change from last year.
“There were certain points over the last year when it was equifax free credit report… so incomprehensible to go talk to a board about a deal,” said one senior dealmaker who declined to be named. “It was just not a topic that belonged in the board room.”
CEOs had bigger fish to fry — plummeting share prices, hard-to-get credit and ballooning inventories.
“Last year was a very significant event that caused everyone to be very cautious, said Robert Kindler, global head of M&A at Morgan Stanley. “The real focus that companies have had this year hasn’t been M&A, but looking at their balance sheets.”
The transformed deals landscape caused a musical chair dance in the all-important “league tables” or deal rankings. The four top banks so far this year are Morgan Stanley, Goldman Sachs, Citigroup and JPMorgan: the same four as in 2008 but in a different order.
For graphics on the top 20 M&A advisors and fees:
here
here
BACK TO BASICS
Before the crisis hit, Wall Street was in “product mode,” said John Studzinski, global head of the advisory group at private equity firm Blackstone.
Contrite U.S. Securities and Exchange Commission officials apologized for bungling five probes that should have uncovered Bernard Madoff’s $65 billion fraud and pledged to overhaul the way the agency operates.
A scathing report issued last week by SEC Inspector General David Kotz found that the agency missed numerous red flags, did not properly follow up on leads and dismissed tips and complaints that might have uncovered Madoff’s investment sham.
At a congressional hearing to examine the SEC’s shortcomings, top SEC officials said that in the Madoff case the agency failed in its “fundamental mission to protect investors.”
“It is a sobering and humbling experience,” said the SEC’s director of enforcement Robert Khuzami and John Walsh, the agency’s acting director of exams and compliance, in joint testimony to Congress.
“We deeply regret our failure to detect the Madoff fraud and pledge to continue to fix the problems that contributed to this failure,” said Khuzami and Walsh, both of whom described reforms underway.
Madoff pleaded guilty in March and is now serving a 150-year prison term.
Lawmakers expressed outrage over the SEC’s missteps. Richard Shelby, the top Republican on the Senate Banking Committee, threatened the agency with legislation if it refused to reform itself.
Democratic Senator Robert Menendez asked who should be held accountable and suggested that staffers who dropped the ball on the Madoff case be fired. “Where there is gross incompetence… the first thing you have to do is clean house,” Menendez said.
An SEC spokesman said the agency will thoroughly examine all of the conduct and take appropriate action”
Senate Banking Chairman Christopher Dodd said the SEC’s culture needs to be reformed to encourage aggressive investigations and said the agency should hire staff with real-world experience.
Khuzami and Walsh said this was underway and agreed with Democratic Senator Charles Schumer’s proposal to give the SEC a bigger budget and allow the agency to keep the fees it collects. Currently Congress appropriates the SEC’s budget.
Thursday’s hearing was in sharp contrast to a February hearing when a House of Representatives panel excoriated five closed-lipped SEC officials. Four of the five SEC officials that testified at that hearing have since left the agency.
REFORMS AFOOT
Kotz outlined dozens of recommendations to improve SEC procedures for handling tips and examining individuals and companies.
He urged the SEC to make sure that complaints were properly vetted, saying tips and complaints had to be reviewed by staff who had related experience.
Fears of a new Great Depression, all too real after Lehman Brothers collapsed a year ago, have abated as the global economy emerges from the depths of recession with the help of massive government intervention.
Nothing so dire has materialized and forecasters believe the economy is already growing once again after a recession that may well enter the record books as the worst since the depression of 1929-33, but a very distant second.
Cross-border trade is showing renewed signs of life, regular business surveys have been suggesting stabilization since March, triggering a sharp rise in stock markets, and now forecasters such as the OECD are saying the downturn is coming to an end.
Marc Touati, economics research chief at Global Equities, a French financial services brokerage, says fears of a 1929 rerun, like swine flu, will soon join SARS and the Y2K computer bug in the annals of economic calamities that never materialized.
There is a big catch though. The economy is recovering thanks to trillions of dollars of central bank and government intervention and remains dependent on that public life support.
The next challenge will be when and how fast to remove the fiscal and monetary stimulus that broke its fall, and doing so without causing a relapse or stoking excessive inflation.
“Right now the recession doesn’t feel so bad,” said Deutsche Bank’s chief European economist, Thomas Mayer. “But the day of reckoning is still ahead.”
Finance ministers from the world’s largest economies agreed on September 5 that now was no time to withdraw stimulus amounting to the equivalent of two percent of global GDP this year and 1 free credit report online.6 percent in 2010, according to IMF estimates.
SHOCK
Last September, the world was already struggling with a credit freeze stemming from a collapse in the U.S. housing market. The demise of Lehman — viewed as one of those banks that was too big to be allowed to fail — triggered a far deeper global economic crisis and left markets temporarily paralyzed.
Federal Reserve Chairman Ben Bernanke said later that the markets went into “anaphylactic shock”.
A year on, while experts disagree about relapse risks that lie ahead, the worst of the downturn seems to have passed as far as global trade and industrial activity are concerned.
The MSCI global share price index has been rising since the lows of March and has recovered about two thirds of the ground it lost since the Lehman bankruptcy filing on September 15 2008.
U.S. Yale university economist Robert Schiller said in an end-August article in the New York Times that the renewal of confidence was now becoming infectious.
Truly global statistics are hard to come by but according to the Dutch Bureau for Economic Policy Analysis, which aggregates official data for some 70 countries, worldwide industrial output rose 2.0 percent from May levels, more than in any month on records going back to 1991.
The board of General Motors Co GM.UL began meeting in Detroit on Tuesday as the German government stepped up pressure on the automaker to clarify its long-term plans for its European Opel operations.
The board meeting coincided with a warning that the cost of keeping Opel could run $1.45 billion higher than an “overly optimistic” projection prepared by GM in June GM, which emerged from bankruptcy under U.S. government ownership in July, has been in intensive negotiations with two bidders to sell control of Opel and its British affiliate, Vauxhall, since May.
But last month the newly appointed GM board declined to endorse a plan to sell the operations to a group led by Canadian auto-parts group Magna International that has the backing of Germany’s government.
Instead, the 13-member board asked GM management led by Chief Executive Fritz Henderson to return with more information on two alternatives to the Magna deal.
Specifically, the board asked for renewed consideration of a sale to Brussels-listed RHJ International or a third option that would see GM keep Opel by raising the billions of dollars needed for its restructuring, sources familiar with the deliberations have said.
In a report presented to the GM board, adviser KPMG said that GM would face “an additional cash need of up to $6.1 billion” to keep Opel.
GM had previously estimated that it would need $4 payday loans with no fax.65 billion in cash to keep Opel and repay a roughly $2 billion bridge loan from the German government, the report said.
A copy of the report was obtained by Reuters.
KPMG had no comment. A GM spokeswoman could not be reached for comment.
With some 25,000 German jobs directly at stake and an election looming at month end, the slow progress toward a resolution of the Opel situation has been met with mounting frustration by German government officials.
“‘We are keeping Opel’ is not a strategy yet,” German Deputy Economy Minister Jochen Homann said on the sidelines of an energy conference in Munich on Tuesday.
GM’s board of directors began a two-day meeting on Tuesday to discuss Opel, which ranks as the second-largest brand behind only Chevrolet for the still-struggling automaker.
Berlin wants a decision ahead of the Frankfurt car show starting next week, where Opel will unveil the latest version of its most important model, the Astra compact.
MAGNA CONCERNS LOOM
GM consented in May to a Magna deal but gradually retreated from that position after emerging on July 10 from a fast-track bankruptcy funded and sponsored by the U.S. Treasury.
The Vancouver Winter Olympics are proving a tough sell to the business world which seems willing to pass on an advertising bonanza that promises to deliver billions of TV viewers worldwide and an avalanche of good will.
Just how tough? The roster of companies that have decided to forego sponsorship deals for the February 2010 games reads like a who’s who of advertising, among them Bank of America Corp, General Motors Co GM.UL and Home Depot Inc who all dropped out as U.S. team sponsors.
These deals add up. The International Olympic Committee, for instance, raises about $4.5 billion from the combined sponsorship and global TV rights deals for every four-year period, analysts estimate.
“You have a confluence of many factors happening here. One, winter versus summer. Two, a hangover from Beijing. And three, the economic times,” said Andrew Benett, the global chief strategy officer of Euro RSCG, part of advertising services company Havas SA.
“All of that together means it will not be as big of a bang — even as past winter Olympics.”
The overriding issue is the recession, forecast to cut worldwide ad spending by 8 to 12 percent this year as companies avoid splashy new campaigns. The Olympic Games are hardly safe from those kinds of budget pressures, even if they do hold up better than other top events like the National Football League’s Super Bowl or the Academy Awards.
Kelly Crabb, a partner with the law firm of Morrison & Foerster who previously worked for the Beijing Olympic Organising Committee, said “none of these companies miss a chance to put the five rings by their name and associate with the goodwill and the values of the Olympic movement” under normal circumstances.
But with corporations slashing expenses, Crabb concedes “there may be some sponsors that are going to bail out.”
In doing so, they would step away from a coveted chance to showcase their products to a blockbuster TV audience. Some 4.7 billion viewers, or 70 percent of the world’s population, watched the Beijing Olympics, according to Nielsen.
What audiences see when they watch the Olympic Games is equally appealing to advertisers — who love to be associated with the sort of feel-good stories and hard-fought competition that often come out of the Olympics.
“When looking for a sponsorship that can really elevate their brand, there are few opportunities out there like the Olympics,” said Gary Pluchino, senior vice president with sports, entertainment and media company IMG.
ARROGANCE, COMPETITION AND SALES
For all that appeal, the Olympic Games face challenges that stretch beyond the current economic collapse. Topping the list is the familiar problem of how to win the attention of younger audiences more interested in texting, gaming and web surfing than watching bobsledding or the decathlon on TV.
It is a particularly vexing issue for the Winter Olympics, according to marketing experts. Those 20-somethings that actually do watch winter sports on TV are often more taken with extreme sports like the ones on display in ESPN’s X Games than many of the more traditional sports to be featured in Vancouver next year.
“Marketers can spend a lot less for an X Games package than a Winter Olympics package,” said Larry Vincent, a Group Director of Strategy with branding firm Siegel+Gale, a unit of Omnicom Group.
Seniors battered by the tough economy are selling their life insurance policies to replenish their retirement nest eggs.
Unlike younger investors, older adults may not have time to wait for the market to recover their losses, so they’re turning to this previously overlooked asset to see whether they should sell it and use the money to pay medical bills or other expenses.
Seniors sold life insurance policies with a face value of $11.8 billion last year, almost double the value of policies sold just two years earlier, according to the U.S. Senate’s committee on aging, which recently held a hearing on such transactions.
A "life settlement," as a sale is called, may be an attractive option for seniors who determine they no longer need their life insurance policy, said Doug Head, executive director of the Life Insurance Settlement Association, an industry group.
Policyholders typically sell their insurance through life settlement brokers to investment companies for lump sums that are usually several times greater than they would receive if they surrendered the policies to the insurance companies, he said.
The new owners pay the remaining premiums and become the beneficiaries when the original policyholders die.
But a life settlement doesn’t always make sense, experts caution, and seniors considering such a sale should consult with an independent financial adviser to figure out whether it’s the best move.
"If you’re thinking about selling your life insurance mostly because you’re strapped for cash, there may be other ways to tap the value of your policy without losing your coverage," said lawyer and insurance expert David McDowell.
"You may be able to take out a loan against your policy or receive a partial payout through an accelerated death benefit," he said. "It’s worth visiting with your life insurance agent and exploring the option."
"The best candidates for a life settlement are now people in their 70s or older who have a life insurance policy valued at $500,000 or more that they no longer need, perhaps because their spouses have passed away," said Scott Gibson of Lewis and Ellis, an actuarial consulting firm make quick cash.
Though the amount that seniors receive for their life insurance will vary depending on their age, gender and health, the average payout today is slightly less than 20 percent of the policy’s death benefit, said Russel Dorsett, co-managing director of the Select Life Settlement Corp. in Houston.
"That’s still three or four times more than they’d get if they simply surrendered their policies to the insurer," he said.
Still, selling a life insurance policy is often a complex transaction involving time and paperwork, so consumers should turn to financial advisers who know the risks, said Ana Smith-Daley, a deputy insurance commissioner for Texas.
"An independent adviser can help you decide whether selling your policy is in your best interest," she said. "If it is, the adviser will probably call on a broker to shop around your policy to determine what kind of price it will fetch."
Seniors also need to understand that their medical records will be examined as part of the sales and that the buyers of their policies will occasionally check on them to determine when to collect the death benefits, she said.
Smith-Daley said sellers may also pay taxes on the proceeds from a life settlement and lose their eligibility for Medicaid or other government benefits, so anyone contemplating a sale should consult a tax adviser or lawyer.
But even with those considerations, industry officials expect life settlements to exceed $100 billion over the next couple of decades as boomers convert unwanted or unneeded life insurance to cash to bolster their lagging savings.
"Under the right circumstances, it’s a viable and valuable option that will only become more popular," Gibson said.
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