COLUMBUS, Ohio- Oil prices fell nearly 7 percent Tuesday and gasoline prices fell to levels not seen since 2004 as a raft of lousy news about the economy, housing and the consumer state of mind suggested the U.S. is headed toward the worst recession in decades.
The government reported that the nation's gross domestic product in the United States shrank 0.5 percent in the third quarter, which was worse than expected. It was the worst showing since the economy contracted 1.4 percent in the third quarter of 2001, during the last recession.
Consumers and businesses have pulled back on energy spending, with massive layoffs and cost-cutting across almost every sector. That means less money will go toward powering everything from industrial plants to automobiles.
The Paris-based Organization for Economic Cooperation and Development said Tuesday that economic output next year would likely shrink by 0.4 percent for the 30 market democracies that make up its membership, against the 1.4 percent growth prediction for 2008. That would be the worst global recession since the early 1980s.
After spiking Monday on news that the U.S. would bail out financial giant Citigroup, light, sweet crude for January delivery on Tuesday tumbled $3.73 to settle at $50.77 a barrel on the New York Mercantile Exchange.
In London, January Brent crude fell 6 percent, or $3.57 to settle at $50.35 a barrel on the ICE Futures exchange.
The New York-based Conference Board reported that while consumer confidence in the U.S. rose in November as gas prices fell, Americans' views on the economy remain the gloomiest in decades amid widespread job losses, slumping home prices and dwindling retirement funds.
Gasoline prices nationwide continued to decline, falling 2.3 cents overnight to $1.885, their lowest levels since September 2004 when the average price for three days was $1.886, according to auto club AAA, the Oil Price Information Service and Wright Express. The current price is $1.20 below where it was a year ago and down $2.225 from the peak in July when prices hit $4.11 per gallon.
Meanwhile, a widely watched index showed home prices dropping by the sharpest annual rate on record in the third quarter as foreclosures continued to hammer prices and the tumult on Wall Street kept more homebuyers out of the market.
The Standard & Poor's/Case-Shiller U.S. National Home Price Index tumbled a record 16.6 percent during the quarter from the same period a year ago. Prices are at levels not seen since the first quarter of 2004.
Unlike on Monday, when news of Citigroup's rescue seemed to support oil prices, the announcement that the Federal Reserve would buy up to $600 billion in mortgage-back assets provided little optimism at Nymex.
"This independent weakness is indicative of market yet to achieve a bottom," said Jim Ritterbusch, president of Ritterbusch and Associates.
Ritterbusch said he expects Wednesday's weekly government inventory report of oil supplies could indicate even more of a pullback.
Oil analyst Stephen Schork downplayed claims that the Citigroup bailout led to Monday's rally in oil markets.
"Perhaps it is, assuming all of that Fed money that is now carpeting Wall Street actually begins to free up credit so traders can get back to trading," he said in a note Tuesday. "Otherwise, yesterday's pre-holiday short-covering rally was just that."
Even though gasoline consumption remains below year-ago levels, there are signs that the weakness is beginning to ebb, according to the weekly SpendingPulse report by MasterCard.
The report's four-week moving average shows weekly gasoline sales of 63.3 million gallons were down 3 percent from a year ago, the smallest year-over-year decline since the first week of July, according to the report. The year-ago numbers included the week of Thanksgiving.
"It looks like consumers are moving back toward more normal driving patterns," said Michael McNamara, vice president of MasterCard SpendingPulse.
Investors are eyeing the Organization of Petroleum Exporting Countries, which accounts for 40 percent of global supply, for signs the group may reduce output quotas at an informal meeting Saturday in Cairo.
Venezuelan Oil Minister Rafael Ramirez said Sunday that OPEC should cut oil production by 1 million barrels per day at the Cairo meeting. OPEC President Chakib Khelil said Monday that if the organization met today, a cut of 1 million barrels would not be enough to support oil prices. But Khelil has said in the past that OPEC needs more time to evaluate the effect of previous production cuts.
The group, which cut output by 1.5 million barrels a day last month, will hold its next official meeting on Dec. 17.
In other Nymex trading, gasoline futures dropped 4.76 cents to settle at $1.0949 a gallon. Heating oil slid 8.56 cents to settle at $1.6988 a gallon while natural gas for January delivery tumbled 44.1 cents to settle at $6.386 per 1,000 cubic feet.
Tuesday, November 25, 2008
Oil prices tumble; gas falls to 2004 levels
DR Horton swings to $800 million loss
D.R. Horton Inc.'s chief executive said Tuesday he expects this fiscal year to be even more challenging than 2008, which ended with a nearly $800 million quarterly loss on slower home sales and more than $1 billion in charges.
The Fort Worth, Texas-based homebuilder reported a net loss of $799.9 million, or $2.53 a share, compared to a loss of $50.1 million or 16 cents a share, in the year-ago period. Total sales for the quarter were $1.75 billion, down from $3.12 billion in the fourth quarter 2007.
The company sold 6,961 homes in the fourth quarter, down 41 percent from year-ago levels.
Donald Tomnitz, who is also D.R. Horton's president, said the company was working to reduce inventory of homes and land. He called the housing market "dismal" but said, "we are confident in our abilities to deal with the blows the housing market and the economy will send our way."
The builder's fourth quarter revenue plummeted 44 percent, but that still beat analysts' expectations. Analysts polled by Thomson Reuters had forecast a loss of $1.88 a share on revenue of $1.7 billion.
D.R. Horton said the fourth quarter loss reflected a tax benefit of $365.3 million.
The company is just the latest in a string of builders reporting losses in the hundreds of millions of dollars.
To discuss the industry's plight, the High Production Home Builders Council recently visited members of Congress, Tomnitz said, stressing that something needs to be done.
"The only way people are going to buy homes is when they realize ... the value is not going to erode after they purchase the home," Tomnitz said.
One move Tuesday that will provide some relief: the Federal Reserve said it will buy up to $600 billion in mortgage-backed assets. The news immediately caused the trading range to narrow on certain mortgage-related securities - the first step toward lower interest rates.
D.R. Horton's shares jumped 38 percent, or $1.90 a share, to close at $6.90.
Investor enthusiasm may partly be in response to D.R. Horton's cash reserves.
Anna Torma, an analyst with Soleil Securities Group, highlighted the builder's $1.4 billion cash cushion and an expected federal income tax refund of $622 million in December.
D.R. Horton's management "remains focused on cash generation," wrote Torma, who maintained a "Hold" rating and a $9 price target on the stock.
Indeed, the homebuilder slashed its quarterly dividend to 3.75 cents a share from 7.5 cents.
Meanwhile, the company took nearly $1 billion in charges in the fourth quarter, including $364.7 million for owned inventory, $624.2 million for land and lots sold during the quarter and $85.7 million for write-offs of deposits and costs tied to land contracts the company doesn't plan to pursue.
The backlog of homes under contract to be sold as of Sept. 30 fell sharply from the same time last year. D.R. Horton had 5,297 homes worth $1.2 billion under contract at the end of the quarter. It had 10,442 homes valued at $2.7 billion under contract on the same day last year.
For the full fiscal year, D.R. Horton lost $2.63 billion, or $8.34 a share. The homebuilder lost $712.5 million, or $2.27 a share, during the previous fiscal year.
Full-year revenue fell to $6.52 billion from $11.09 billion during the prior year.
Massive new programs aimed at loosening credit
WASHINGTON (AP) - Rolling out powerful new weapons against the financial meltdown, the Bush administration and the Federal Reserve pledged $800 billion Tuesday to blast through blockades on credit cards, auto loans, mortgages and other borrowing. Total bailout commitments, loans and pledges of backing neared a staggering $7 trillion.
Treasury Secretary Henry Paulson, who has been criticized for constantly revising the original $700 billion rescue program, said the administration was considering even more changes in its final two months in office.
Reports on the nation's economic health weren't getting any better. The Commerce Department said the overall economy, as measured by the gross domestic product, declined at an annual rate of 0.5 percent in the July-September quarter, even worse than the initial 0.3 percent estimated a month ago as consumer spending fell by the largest amount in 28 years.
In Chicago, meanwhile, President-elect Barack Obama named his budget director and said they both will focus on the nation's soaring budget deficit - but only after economic revival is under way. Paulson stressed that Obama's transition team was being kept informed of the government's moves.
(AP) A Sept. 16, 2008 file photo shows General Motors Renaissance Center headquarters building in...
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Investors digested it all and sent the Dow Jones industrials 36 points higher, a modest gain but still the first time the average had risen three straight days in more than two months.
Millions of Americans rely on the kinds of loans that were targeted in one of the new programs announced Tuesday.
The Federal Reserve will purchase $200 billion in securities backed by different types of debt including credit card loans, auto loans, student loans and loans to small businesses. That market essentially froze in October. These types of loans as a result have become harder to obtain and have carried higher interest rates
The Fed also announced that it would spend $500 billion to purchase mortgage-backed securities guaranteed by mortgage giants Fannie Mae (FNM) (FNM) and Freddie Mac (FRE) and another $100 billion to directly purchase mortgages held by Fannie, Freddie and the Federal Home Loan Banks.
This would greatly expand an initial modest effort announced back in September in which Treasury spent $26 billion to purchase mortgage-backed securities. The current credit crisis was triggered by soaring losses on securities backed by subprime loans.
(AP) A Sept. 16, 2008 file photo shows General Motors Renaissance Center headquarters building in...
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The announcement of the new programs had an immediate positive impact on credit markets Tuesday, sending demand up and rates lower. Analysts predicted the program could send mortgage rates down by as much as one-half to a full percentage point in coming months, helping to spur demand in the beleaguered housing market, which is suffering its worst downturn in decades.
The programs to buy mortgage-related assets and securities backed by consumer debt have the same aim: to boost demand for those assets. In doing so, the government hopes to lower the costs being charged for consumer loans. That would make loans on everything from mortgages to cars more available.
"This is one of the key actions we've been advocating," said Charles McMillan, president of the National Association of Realtors, referring to the purchase program for mortgage-backed assets.
The latest federal moves raised U.S. commitments to contain the financial crisis to nearly $7 trillion - though no one thinks the government will actually spend anything like that figure, which would be almost half the nation's total gross domestic product. The figures include loans that are expected to be repaid, loan authorities to back mortgages, purchases of stock in banks, guarantees to support loans among banks and pledges backing other transactions.
In the case of the Federal Reserve, the amount covers huge loans that financial institutions will have to pay back. In the case of the Treasury rescue effort, the government will at some point sell the stock it owns back to the banks, presumably when the banking system is doing better and the stock will be worth more.
As for Tuesday's actions, the mortgage-backed securities the Fed will buy will be investment-grade assets - not the toxic mortgage-related assets that the administration initially had said the $700 billion financial rescue program would buy.
By focusing on investment-grade securities, the Fed will be able to help provide a functioning secondary market. It will pay the prices for these securities that are being set by the market. Had the Fed needed to buy bad assets, it would have had to develop a mechanism to properly price assets that weren't being traded.
The use of Fed resources also gets around another problem Treasury faced: a limited amount of money in the program. The $800 billion being committed to buy mortgage-related assets and other assets backed by consumer loans will come from the Federal Reserve's vast resources. It will not count against the $700 billion rescue program.
The Treasury Department also announced Tuesday that the rescue program had spent another $2.91 billion in direct purchases of stock from 23 regional banks around the country. These institutions ranged from HF Financial Corp. (HFFC) in Sioux Falls, S.D., to Centerstate Banks of Florida Inc. in Davenport, Fla.
The government has now injected $161.5 billion in 53 institutions. The goal is to spend $250 billion of the $700 billion bailout fund to buy bank stock as a way of encouraging banks to resume more normal lending to bolster the shaky economy.
A boost to the overall economy is considered vital at a time when nearly every day has brought further evidence that the country is sliding into a severe downturn.
Nariman Behravesh, chief economist at IHS Global Insight, said he thought the economy would shrink by an even more drastic 4 percent annual rate in the current quarter and keep falling through the middle of 2009.
"We are in the early stages of one of the worst recessions in the postwar period, even factoring in a massive stimulus program," Behravesh.
Obama is putting together a stimulus program with the goal of creating 2.5 million jobs over the next two years. It's an effort that many economists think will need to total between $500 billion and $700 billion to bring the benefits needed to help shore up the economy.
Obama pledged Tuesday to make deficit reduction a goal of his administration - but only after recovery from the financial crisis is well under way. "We are going to have to jump start the economy," he said.
At a news conference, Obama claimed a "mandate to move the country in a new direction," and promised to consult with Republicans as he goes about it.
The effort to restart the frozen market for securities that back consumer debt will get an assist from the government's $700 billion financial rescue fund, which Congress passed on Oct. 3. Paulson told reporters that the fund will supply $20 billion as protection for the Fed against losses in its purchases of securities for the program.
He also signaled that the program could be expanded to include asset-backed paper that covers commercial mortgage loans. Those loans are used to finance shopping malls and office buildings.
Paulson defended the administration against charges that it has made haphazard changes in the financial rescue program, sending confusing signals to markets. Initially, the effort was sold to Congress as a way to buy toxic mortgage-related assets off the books of financial institutions. The idea was to give them the capital needed to resume more normal lending.
When the financial crisis worsened and Paulson decided it would take too long to get the toxic purchase program operating, he switched to making direct purchases of bank stock with the rescue funds. Paulson announced that the first $350 billion installment of the rescue fund probably would not be used to buy any toxic assets.
"It is naive for any of us to think that when you are dealing with a situation of this magnitude that a bill could be passed or a single action taken to make all the issues go away," Paulson told reporters at a briefing.
Paulson declined to say whether the Bush administration would seek authority from Congress to tap a portion of the second half of the $700 billion fund before leaving office. That decision had not yet been made, he said.
Fannie Mae names Johnson chief financial officer
WASHINGTON- Fannie Mae (FNM) (FNM) said Tuesday it named David Johnson to serve as the mortgage giant's chief financial officer and executive vice president, beginning immediately.
Johnson joins the company from Hartford Financial Services Group, where he served as chief financial officer and executive vice president.
His predecessor at Fannie Mae, Stephen Swad, left the company in August and was temporarily replaced by David C. Hisey, formerly Fannie's senior vice president and controller.
Hisey will stay on in his role as executive vice president and deputy chief financial officer. Hisey joined Fannie Mae in January 2005 as senior vice president and controller.
Incoming CFO Johnson has previously held the post at Cendant Corp. and also worked in the investment banking unit at Merrill Lynch.
Fannie Mae and sibling company Freddie Mac (FRE) (FRE) were seized by federal regulators in September. The two companies, which own or guarantee around half of the $11.5 trillion in U.S. outstanding home loan debt, operate in a conservatorship that enables the government to inject up to $100 billion in each company in exchange for ownership stakes of almost 80 percent.
Shares of Fannie Mae jumped 9 cents, or 19 percent, to 56 cents in aftermarket trading. The stock gained 13 cents, or 38 percent in the regular session to end at 47 cents. The stock has traded as low as 30 cents and as high as $40.45 earlier in the year.
