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Chevron Corp. said Friday its third-quarter profit more than doubled on the back of record crude prices this summer, though worldwide production fell during the period.
The San Ramon, Calif.-based company, the second-largest U.S. oil company, said it made $7.89 billion, or $3.85 a share, in the three months ended Sept. 30, versus $3.72 billion, or $1.75 per share, at the same time last year.
Analysts were expecting average earnings of $3.25 per share based on a survey by Thomson Reuters.
Revenue shot up 43% to $78.87 billion from $55.2 billion.
Shares in premarket trading slipped 19 cents to $73.99.
Chevron (CVX, Fortune 500) capped off a continued string of robust quarterly profit reports from the world's major oil companies, including another U.S. corporate profit record for No. 1 Exxon Mobil Corp. (XOM, Fortune 500)
Crude prices peaked at $147 near the start of the quarter in mid-July before embarking on a dramatic slide that has continued into the fourth quarter. When the third quarter ended Sept. 30, benchmark crude prices were still around $100 a barrel. In early trading Friday, they slipped below $64 a barrel.
"Our disciplined capital spending and tight control over costs remain extremely important in today's uncertain economic climate," said Chevron chairman and chief executive Dave O'Reilly. "Our strong balance sheet enables Chevron to continue investing in attractive projects that increase the production of oil and gas and improve the efficiency of our refinery network."
Chevron said earnings from its exploration and production, or upstream, business rose about 80% in the quarter to $6.18 billion, buoyed by crude prices.
However, global production fell nearly 6% to an average of 2.44 million barrels of oil equivalent a day, hurt in part from late-summer hurricanes that shut down output in the Gulf of Mexico.
At its U.S. upstream arm, Chevron said the average sales price for a barrel of crude and natural gas liquids was $107 in the third quarter, up from $67 a year ago.
Stocks ended a choppy session lower Friday - at the end of a turbulent week - as ongoing recession fears vied with Google's earnings and bullish comments from Warren Buffett.
Treasury prices advanced, lowering the corresponding yields, and the dollar gained versus other major currencies. The credit market showed some signs of loosening, as several key lending rates declined.
The Dow Jones industrial average (INDU) fell 127 points, or 1.4%. The Dow fell as much as 261 points in the morning and rose as much as 301 points in the afternoon.
The Standard & Poor's 500 (SPX) index lost 0.6% and the Nasdaq composite (COMP) lost 0.4%.
Stocks seesawed Friday as a report showing housing starts fell to a 17-year low was countered by Google's earnings and bullish comments from influential investor Warren Buffett.
Markets were also impacted by the monthly options expiration, which can cause increased volatility in the underlying equities.
Despite the extremely volatile week, stocks managed to end with gains for the five-session period, which included the Dow's biggest one-day point gain ever on Monday and the second-biggest point loss ever on Wednesday. For the week, the Dow and S&P 500 both added 4.7% and the Nasdaq added 3.6%.
The advance this week added $500 billion in market value, according to gains in the Dow Jones Wilshire 5000, the broadest measure of the stock market.
Overall, the tone of the market seems to be better this week, compared to last week, with perhaps the exception of Wednesday's big slump, said Ron Kiddoo, chief investment officer at Cozad Asset Management.
"I think we've been helped by the government not coming out with a new program every day and by people starting to accept that the credit market will improve over time," Kiddoo said.
However, the volatility isn't likely to disappear anytime soon, he said.
Looking for a bottom: Friday's session caps off an especially volatile week on Wall Street, which started with the Dow's 936-point rally on Monday - its best day ever on a point basis and best on a percentage basis since 1933. That rally was in anticipation of Tuesday's announcement that the government will inject $250 billion directly into banks.
But the announcement sparked a sell-the-news response, with equities slipping modestly Tuesday. On Wednesday, recession talk sent the Dow down 733 points. On Thursday, the Dow rallied 401 points late in the session after slumping in the morning. And Friday's market saw a 127-point Dow loss.
Although stomach churning for investors, this week was at least better than last week - Wall Street's worst ever - as the Dow capped an eight-session selloff that cut 2,400 points and 22% off the blue-chip indicator.
On the upside, many market pros are cautiously optimistic that last week's lows for the three major gauges represent a bottom for the current bear market. In this week's tilt-a-whirl, the major gauges got close to those lows, but managed to bounce back - another indication that a bottom may have been set.
"There's no doubt the selling activity was a bottom, the question going forward is whether it was the bottom," said Jim Dunigan, chief investment officer at PNC Wealth Management.
Home construction tumbles: Housing starts fell to a 17-year low in September, according to a government report released Friday before the market opened. Starts fell to a seasonally adjusted 817,000 in the month from 872,000 the previous month. Economists were expecting a smaller decline.
Applications for building permits, considered a good indicator of future activity, fell to a seasonally adjusted rate of 786,000 in September, down from a revised 857,000 in August. Economists were expecting a smaller decline. (Full story)
Another economic report, the University of Michigan's consumer sentiment index, fell to 57.5 in October from 70.3 at the end of September, the biggest month-over-month slide in the history of the report. Economists surveyed by Briefing.com thought it would slide to 65.
Company news: Google (GOOG, Fortune 500) reported higher-than-expected third-quarter earnings Thursday night, on revenue that was in line with forecasts. The search engine's shares rose 5.5% Friday. (Full story)
Also late Thursday, Advanced Micro Devices (AMD, Fortune 500) reported a narrower quarterly loss, while IBM (IBM, Fortune 500) reported higher profit that beat estimates, after pre-announcing the results last week. AMD shares rose 2% while IBM shares ended a bit lower.
In financial services news, AIG (AIG, Fortune 500) said late Thursday that it has tapped another $12 billion in emergency government funding, bringing its total to $82.9 billion as it struggles to stay afloat. AIG fell 13.6%. (Full story)
Other financial sector decliners included Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and Wachovia (WB, Fortune 500) and Wells Fargo (WFC, Fortune 500).
Dow stock Merck (MRK, Fortune 500) rose after UBS upgraded it to "neutral" from "buy," Briefing.com reported.
Market breadth was mixed. On the New York Stock Exchange, winners beat losers by nine to seven as 1.74 billion shares changed hands. On the Nasdaq, decliners topped advancers four to three on volume of 2.77 billion shares.
Bush and Buffett: President Bush, speaking early Friday, reiterated the steps that the government has taken to try to stabilize roiling financial markets. (Full story)
While investors have welcomed many of the steps to get money flowing again, stocks have remained volatile and mostly negative. Year-to-date, the Dow, S&P and Nasdaq are all down at least 30%.
On Friday, Berkshire Hathaway (BRK.A) head honcho Warren Buffett said in a New York Times commentary that he is moving to stocks from Treasurys in his personal portfolio.
The influential investor said business activity will continue to dwindle as the economy struggles. But the fear surrounding the economic slowdown and the credit crisis has left stocks with attractive valuations. (Full story)
Credit market: Lending rates have improved this week, as the government initiatives have started to have an impact. (Full story)
Libor, the overnight bank-to-bank lending rate, fell to 1.67% from 1.94% late Thursday, according to Bloomberg.com, a more than four-year low. But longer-term rates have fallen more slowly. The three-month Libor, what banks charge each other to borrow for three months, fell to 4.42% from 4.50% Thursday.
Another indicator, the Libor-OIS spread, a measure of cash scarcity, fell to 3.31% from 3.39% Thursday.
The TED spread, which is the difference between what banks pay to borrow from each other for three months and what the Treasury pays, narrowed to 3.63% from 4.11% late Thursday. The spread hit a record 4.65% last week. The wider the spread, the more reluctant banks are to lend to each other.
Credit froze up in the wake of the housing market collapse, the subsequent subprime lending fallout and contraction in the bank sector. The lack of available credit has punished the already weak economy, making it difficult for businesses to function on a daily basis and for consumers to get loans.
The Federal Reserve has made potentially trillions of dollars available to banks. Earlier this week, the U.S. government said it would invest at least $250 billion in the nation's banks as part of the $750 billion bank bailout plan.
Treasury prices rose, lowering the yield on the 10-year note at 3.97%. Treasury prices and yields move in opposite directions.
The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, rose 0.80% from 0.48% late Tuesday, suggesting investors are still willing to take a meager return on their money rather than risk the stock market.
However, it was an improvement from last month, when the yield on the 3-month bill skidded to a 68-year low around 0%.
Other markets: U.S. light crude oil for November delivery rose $2 to settle at $71.85 a barrel on the New York Mercantile Exchange after ending the previous session at a 13-month low.
Bets that demand is slowing have sent oil prices lower since crude hit an all-time high of $147.27 a barrel on July 11. So far, instead of providing relief to investors, the decline has been seen as another indication of the global economic slowdown.
Gasoline prices fell another 4.4 cents overnight, to a national average of $3.04 a gallon, according to a survey of credit card activity by motorist group AAA. It was the 30th consecutive day that prices have decreased - in the past month alone, they're down more than 81 cents a gallon.
COMEX gold for December delivery slumped $16.80 to settle at $787.70 an ounce. A variety of other metals declined as well.
In currency trading, the dollar rose against the euro and the yen.
Nervous investors fled hedge funds as the market meltdown got underway, setting records for investor redemptions and asset declines in the third quarter, according to a report from an industry research firm issued Friday.
Hedge Fund Research, a Chicago-based firm, said investors took out more than $31 billion in the quarter, the largest net capital redemption in the industry history.
That contributed to a record $210 billion decline in industry assets in the quarter, most of it from investment losses, the firm said. The quarterly drop was more than last year's total record inflow of $194 billion.
For the first nine months of 2008, funds have registered a net capital decline of $2.5 billion.
The firm said September, which saw such events as the Lehman Brothers bankruptcy and government intervention in Fannie Mae, Freddie Mac and American International Group, was the second worst month in industry history. It said funds lost 5.5% last month, second only to the 8.7% drop in August 1998.
Total capital in the entire industry shrunk to $1.72 trillion at the end of the third quarter, down from $1.93 trillion at the end of the second quarter.
An index developed by Hedge Fund Research indicates that this year could result in the first annual hedge fund performance decline since 2002.
"With losses continuing through October, it appears that 2008 will be the worst year on record for both hedge fund performance and industry asset flows," said Kenneth Heinz, Hedge Fund Research's president, in a statement.
Oil prices sank Wednesday as investors saw further signs of economic weakness and worried that a U.S. recession could kill demand for fuel.
U.S. crude for November delivery ended the day down $4.09 to $74.54 a barrel, the lowest settlement since Aug. 31, 2007 when the front-month contract closed at $74.04 a barrel.
Oil investors have been concerned about falling demand since crude futures peaked at a record $147.27 a barrel in mid-July.
As the economy slows energy spending is often among the first areas where consumers and businesses cut back, according to analysts.
"Indeed, the U.S. economy appears to be in a recession," San Francisco Fed president Janet Yellen told financial executives on Tuesday night.
"If you go back over the last 30 or 40 years, you see no example of a recession without lower oil prices," said James Williams, energy economist with WTRG Economics in Arkansas.
Some of that demand loss may be permanent, according to Williams.
"If you traded in your 10-year-old SUV for a Prius (hybrid), you can drive the same amount, and you're going to use less gasoline and thus less oil," he said. "Consumption is reduced for the lifetime of that Prius."
Economic worries: A report released Wednesday showed that U.S. retail sales fell 1.2% in September, nearly twice the 0.7% decline economists expected, and the largest drop in three years.
The retail sales report, which accounts for about half of all consumer spending, the other half being spending on services, will weigh heavily on the current quarter's gross domestic product (GDP), according to Robert Brusca, economist with FAO Economics in New York.
The GDP, the sum of all goods and services produced, is calculated each quarter by the Commerce Department. A recession is loosely defined as two or more consecutive quarters in which the country's GDP contracts.
"It looks like we're going to get a pretty negative GDP number in the quarter," said Brusca.
The economic slowdown is spreading to Europe and Japan as well, he added.
In her Tuesday speech, Yellen pointed to economists surveyed by the Blue Chip Economic Indicators, who predicted three consecutive quarters of negative GDP readings starting with the third quarter.
On a brighter note, U.S. and international efforts to shore up the ailing banking system and keep money flowing through the economy appear to be having an impact as credit markets continue to thaw.
However, Fed chairman Ben Bernanke warned Wednesday that even if bank confidence returns to normal, the economy will take a while to recover.
Predicted surplus: Investors were also concerned about a possible build-up in crude supplies - an indicator of lower crude demand from refineries in the U.S.
The official government report that details crude, gasoline, and distillate inventories, as well as demand, is scheduled for release Thursday at 11 a.m. ET. The report is delayed due to the Columbus Day holiday.
Analysts polled by Platts, the energy research division of McGraw-Hill, expect to see a 3.1 million barrel build-up in crude stockpiles, even though more than half of production in the Gulf of Mexico remains offline in the wake of this year's hurricane season.
Democratic presidential candidate Barack Obama on Friday proposed emergency assistance for small business endangered by America's financial crisis, calling for a "small business rescue plan" of tax incentives and loans.
"Small businesses employ half of the workers in the private sector in this country, and account for the majority of the job growth. But we also know that a credit crunch has dried up capital and put these jobs at risk - shops can't finance their inventories, and small firms can't make payroll," Obama said at a rally in Chillicothe, Ohio. "If we don't act, we'll be looking at scaled back operations, shuttered shops, and laid-off workers."
Obama's campaign platform already featured pledges aimed at small businesses, including proposals for eliminating capital gains tax on gains from investments in startups and for a tax credit for businesses that offer workers health care. What's new is his call for an emergency lending facility run by the Small Business Administration to shore up struggling companies imperiled by the credit crunch.
A paper detailing Obama's proposed "Small Business Emergency Rescue Plan," released by his campaign on Friday, expands on the remarks Obama made in Chillicothe.
Obama's new plan calls for the SBA's loan guarantee programs to temporarily eliminate the fees they charge lenders, and for the agency to increase the guarantees it offers to banks that lend to qualifying small companies. Additionally, he wants the SBA to expand its facility for directly lending money to small companies through its Disaster Loan Program.
How disaster loans work
The SBA Disaster Loan Program usually assists businesses affected by natural disasters: Its recent disaster declarations have covered floods, wildfires and an earthquake. But the program does occasionally offer loans to help with nontraditional disasters. For example, it offers loans to companies unable to meet operating expenses because an essential employee who serves in the military reserves has been called up to active duty.
For companies that can't get credit anywhere else, interest rates for the SBA's disaster loans are capped at 4%, and the loan term can stretch as long as 30 years. Those are lower interest rates and longer terms than are offered through the SBA's much bigger and better known 7(a) loan program. Also, the SBA directly funds its disaster loans; under the 7(a) program, businesses need to secure loans from banks, with the SBA offering a guarantee for part of the loan.
The Disaster Loan Program is significantly smaller than the 7(a) program. Last year, the SBA backed $12.7 billion in small-business 7(a) loans, while its disaster program granted $825.8 million in loans to 15,128 applicants. However, only $289.5 million of that total went to businesses - the loans are also extended to homeowners and renters affected by disasters. Home disaster loans accounted for 65% of the total lent through the program in the 2008 fiscal year, which ended last month.
Echoes of Sept. 11
Obama compared his "rescue plan" to steps the government took after Sept. 11 to rush financial assistance to affected small companies.
"Main Street needs relief and you need it now," Obama said. "It's what we did after Sept. 11, and we were able to get low cost loans out to tens of thousands of small businesses."
The government's primary small business relief program after Sept. 11 was the Supplemental Terrorist Activity Relief (STAR) loan program enacted in January 2002. That STAR program reduced the fees paid by lenders who made SBA-backed 7(a) loans to companies adversely affected by the terrorist attacks, and set aside a special pool of cash to fund STAR loans. During its yearlong existence, the program made 7,000 loans, totaling $3.7 billion.
But the STAR program later drew widespread criticism for its flawed structure and insufficient oversight. A 2005 review found that many of the loans went to businesses with little apparent connection to the terrorist attacks in Washington, D.C. and New York City. Only 15% of the cases reviewed by the Senate Committee on Small Business & Entrepreneurship showed evidence of adverse effects from the attacks; the rest had insufficient or questionable documentation. Recipients included a Nevada tanning salon, a liquor store in Georgia and a golf course in Texas.
Auditors pinned the blame not on the companies, many of which were unaware they'd been given loans categorized as STAR loans, but on weak SBA supervision of how lenders implemented the program.
An Obama campaign spokesman said Obama's program would not be susceptible to the ills that plagued the STAR program because it would have much broader eligibility requirements. Unlike the Sept. 11 attacks, the current financial crisis is hitting small companies in all locations and industries; any business struggling for working capital has a legitimate claim of being adversely affected by the crisis.
Obama's spokesman estimated the program's price tag at $5 billion. Eliminating loan fees for the SBA's guarantee programs would cost $1 billion, he said, and $4 billion would go toward direct funding of disaster loans.
Would it work?
Obama's plan relies on lower fees and higher guarantees to entice banks to open their vaults and lend more cash. But it's unclear if those inducements would make a difference. As financial conditions worsen, banks have grown more reluctant to offer financing to small companies.
The Federal Reserve's July Senior Loan Officer Opinion Survey found that 65% of banks polled had tightened their lending standard for small-business loans within the past three months, and the SBA said last week that the number of loans made through its 7(a) program in the 2008 fiscal year dropped 30% from 2007. As global financial markets continued roiling over the past few weeks, financial institutions clamped down further on their lending.
Obama's proposal also calls for more direct lending through the SBA's Disaster Loan Program. That program has a flexible budget, and the SBA consistently gets as much money for it as it requests from Congress.
But a rash of disaster-loan requests could overwhelm the SBA; after Hurricane Katrina, the agency staggered to keep up with an onslaught of more than 400,000 disaster applications. The SBA has since drafted new plans for dealing with a major nationwide disaster, training reserve staffers and strengthening its technology systems.
So far, the SBA's new disaster readiness capacity has not been tested. If the financial crisis continues spreading and Congress heeds Obama's call, the agency and Acting Administrator Sandy Baruah, who joined the SBA three months ago, would face a dramatic test of their readiness to step in and shore up thousands of the nation's struggling small businesses.
House Democratic leaders are putting together a second economic stimulus package costing as much as $150 billion and are likely to call Congress back shortly after the election to vote on the measure, according to several Democratic leadership aides.
The details are still in flux, but one aide said the price tag would be "somewhat north of $100 billion" and would include "a heavy emphasis on help to state and local governments." One way to help states would be to fund the mandatory state match for Medicaid programs so that states would not have to slash education and other programs to cover it.
Before Congress recessed last week for the election, the House of Representatives passed economic aid measures totaling $61 billion to fund infrastructure projects, money for states' Medicaid costs, and unemployment assistance. But these bills failed to attract enough support in the Senate and the White House opposed them.
Speaker Nancy Pelosi, D-California, traveling in Denver, Colorado, on Wednesday, said, "With all that happened in the past few weeks, it probably has to be more like a $150 billion to invest in our economy, to create jobs, to help the states, to help men and women across the country."
Pelosi and other House Democratic leaders are scheduled to meet with a group of economists on Monday in Washington to discuss the size and the components of a stimulus plan, the Democratic aides said. These aides indicated that in addition to aid to states struggling with their own budgets, the package could include things similar to what the House passed before, such as infrastructure money, an extension of unemployment benefits, food stamps, and more money for low-income energy assistance.
House Republican leadership aides said that GOP members have not been consulted on the details of a second stimulus. One of these aides said, "We're not necessarily opposed to it out of hand. We would ask, is it truly stimulative? Is it really going to help stimulate the economy?"
A Senate Republican leadership aide said Republicans are skeptical of a second stimulus but did not suggest there is outright opposition to another package.
Jim Manley, a spokesman for Senate Majority Leader Harry Reid, D-Nevada, left the door open to the Senate taking up a bill.
"Senator Reid tried to pass a second economic recovery bill last month, only to be obstructed by Senate Republicans," Manley said. "Recent developments only reinforce the need for additional action to reinvigorate the economy. We will work with the House of Representatives and leave all options open to address this issue."
How bad is it going to get for automakers? Worse, much worse.
Investors made a shocking vote of no confidence in the future of U.S. automakers Thursday. GM (GM, Fortune 500) stock was down more than 14% to $5.92 a share, while Ford (F, Fortune 500) fell 7.5% to $2.46. That gave GM a market capitalization of $4.3 billion - chump change for this industrial behemoth - while Ford stood only slightly better at $6.6 billion.
The stock selloff effectively puts these companies on death watch and it is easy to see why. A new report by Global Insight, the economic forecasting and consulting firm based outside Boston, shows U.S. auto sales hitting recession levels this year - and then sinking lower in 2009.
"We won't get back to where we were in 2006 until 2013," said George Magliano, director of forecasting for North America. Global Insight is forecasting sales of 13.8 million units this year and only 13.4 million in 2009, compared with 16.1 million last year.
The impact of oil prices at the beginning of the year was mild compared to the squeeze from the credit crunch. As Nigel Griffiths, Global Insight's managing director of global forecasting, points out, expensive oil merely meant that wealth was being transferred to oil-producing countries like Russia from oil-consuming ones like the United States. Now, the credit crunch is destroying wealth and making it impossible for customers to buy.
"The impact is worse than if the price of oil had been sustained at $200 a barrel," he said.
No help from foreign markets
It turns out that auto finance companies were as guilty as mortgage lenders in providing loans to subprime borrowers - and their generosity is coming back to haunt them. Lenders dramatically cut standards for credit worthiness at the beginning of 2008 and now delinquency rates have been shooting up to levels not seen in 30 years.
"Some 18% of sales volume came from people with bad credit scores," said Magliano. "Now the subprime buyer has been squeezed out."
There is little relief overseas. According to Global Insight, at least half a dozen countries in Western Europe experienced greater house-price appreciation over the last 10 years than did the United States. Ireland led the way with a nearly 250% rise and the United Kingdom was not far behind. With that kind of wealth accumulation unlikely to be repeated, sales experienced a "total collapse" in July and have gone into a "violent downshift."
Nor is Asia likely to provide a safety net. Sales growth in China is slowing markedly and vehicle demand in India is also ebbing. Even the much publicized $3,000 Nano car developed by India's Tata Motors is off to a slow start. Plans for an assembly plant in India have been scuttled by local opposition and Global Insight says Nano "will only see a big build-up in volumes from 2010."
"When will the credit crunch free up enough to allow consumers to finance again?" asked Griffiths. "That is the several-trillion-dollar question. It is the core assumption on which all forecasts will be based and it is unforecastable."
To combat this flood of negative news, GM has adopted the Sarah Palin approach: bypassing the media by communicating directly with customers and investors. GM executives can now be seen in videos posted on its Fast Lane Web site talking about the company.
In the first video, posted Sept. 22, chairman and CEO Rick Wagoner responds to the question "What's GM's future look like?" by saying "GM's future is actually quite bright." After ticking off progress on new models, technology and sales in developing markets," he concluded by saying, "though times are challenging, we're really making sure that we keep planting the seeds for what we think should be a very exciting future for General Motors."
Three weeks later, you have to wonder what he'd be saying today?
Oil prices fell below the $90-a-barrel level Wednesday after the government reported a sharp increase in the nation's supplies of crude and gasoline, in another sign that demand for energy remains weak.
Light, sweet crude for November delivery was down $3.11 to $86.95 a barrel on the New York Mercantile Exchange. Oil had traded down about 75 cents just before the government figures were released. Prices have been under pressure amid anxiety over a global slowdown in demand.
Wednesday's report "feeds into the sense that the consumer is flat on their back," said John Kilduff, energy analyst at MF Global in New York. And with the global economic outlook darkening, "demand for energy is not going be perking up any time soon."
In its weekly inventory report, the Energy Information Administration said the nation's stockpiles of crude oil surprisingly rose by 8.1 million barrels last week. Analysts were expecting crude stocks to have dropped by 1 million barrels, according to a survey of industry experts by energy research firm Platts.
Gasoline supplies also increased by a bigger-than-expected 7.2 million barrels. Estimates had called for a more modest 2-million-barrel rise.
Also missing forecsasts, supplies of distillates - used to make heating oil and diesel fuel - fell unexpectedly by 500,000 barrels. Analysts expected supplies to rise by 1 million barrels.
EIA noted in its report that demand for gas over the last four weeks dropped 5.3% from a year ago, to average nearly 8.8 million barrels per day.
Meanwhile, refineries operated at 80.9% of their operable capacity last week, up from 72.3% the week before.
The price of oil edged above $90 earlier Wednesday after the Federal Reserve lowered its benchmark interest rate to 1.5% from 2%. The surprise emergency move was part of a coordinated effort by central banks worldwide to combat the credit crisis.
Oil prices have been closely following the U.S. euqity markets recently as investors look for signs of economic recovery that could signal renewed demand for oil and gas.
Stocks seesawed in the early going, with the Dow industrials trending in a range of 180 points higher and some 200 points lower, as investors digested the rate cuts.
The crisis on Wall Street hasn't hit the high cost of Manhattan real estate, but the economic slowdown has curbed the number of deals in the Big Apple, according to reports out Friday.
Sales figures from four major New York real estate agencies showed the average price for a Manhattan apartment rose in the third quarter over last year. At the same time, the number of apartments sold in the quarter declined sharply.
"The events of the second half of September in the financial markets and Washington have not shown up in the market data for the quarter, aside from the lower level of sales activity compared to last year's record levels," said Jonathan Miller, president of New York real estate firm Miller Samuel.
The average price of a Manhattan apartment ranged from $1.4 million to $1.48 million in the third quarter of 2008, according to separate reports released Friday by Brown Harris Stevens, the Corcoran Group, Halstead Property and Prudential Douglas Elliman. That represents an increase of anywhere between 8% and 12% over average apartment prices in the third quarter of 2007.
But the rise in third quarter sale prices was skewed by a large number of deals in new luxury buildings, which went into contract as much as a year or two ago, before economic conditions deteriorated, but only closed recently, according to Corcoran Group CEO Pamela Liebman.
"The average sales price is going to trend down," Liebman said. After soaring to unprecedented heights in 2007, "we're going to get back to a more normal range," she added.
Dwindling deals
Already the number of properties sold during the quarter saw a steep decline from the record highs hit in the third quarter of last year.
Corcoran sold fewer than 3,000 properties last quarter, down 45% from the nearly 5,500 properties the agency sold in the third quarter of 2007.
At the same time, the number of properties on the market is increasing. Listing inventory rose 34% during the third quarter, according to Miller's research.
"Clearly, inventory is moving higher as sales activity has fallen," said Miller, who attributed the slowdown at least in part to the fact that mortgages have become more expensive and harder to get.
And economic turmoil in Europe has crimped the flow of overseas buyers to the city. Miller estimates that foreign buyers made up one-third of all purchases in new developments in New York last year.
While the labor market in New York has remained relatively stable, the fallout from the crisis on Wall Street, and the corresponding rise in unemployment in the financial sector, will probably further undermine the city's real estate market.
"We're going into an uncertain economic period with volume at low levels and a low likelihood of new development," Miller said.
Miller said the direction of the real estate market could hinge on Washington's proposed financial intervention, which is currently being debated in Congress and the outcome of this year's presidential election.
One of the main goals of the bailout plan is to free up the frozen credit markets, which have been a major drag on economic activity - particularly in the housing market.
"The question of housing is almost moot unless you get a handle on where credit is going," Miller said.
The $700 billion bailout plan signed into law Friday may get banks to start lending to each other again. But it remains to be seen how long that will take to jumpstart an ailing economy.
The goal is to unfreeze the credit markets. Financial institutions have become paralyzed with fear and though they have plenty of cash on hand, they've been hoarding it. Without this intra-bank lending, businesses are having trouble getting the financing they need even for daily operations, much less loans for longer-term projects.
"Hopefully, this will lend a calming effect to the markets," said Joe Belew, president of the Consumer Bankers Association. "We need to take a deep breath, relax and start doing business again."
Don't expect lending to ramp up overnight, however. It may take weeks for confidence to return, experts said. Or even longer.
The centerpiece of the bill allows the government to eventually buy up to $700 billion in assets tied to shaky mortgages. Getting the bad paper off banks' balance sheets hopefully will give institutions more confidence to start lending again.
Treasury Secretary Henry Paulson has up to 45 days to devise a plan to purchase the assets.
But one big question is what the Treasury Department will pay for those assets. Too low a price - which is good for taxpayers - and banks may find they still need to take steps to shore up their balance sheets. Some may have to raise additional capital, which has been scarce in this tumultuous market. Investors may remain on the sidelines for a while until things shake out, experts said.
The plan's passage did little to allay fears in the stock market, which sold off once the House approved the bill. Investors, who remain skittish that the bailout plan will achieve its goals, sent the Dow Jones industrial average down 1.5%.
"Thaws take time," said Diane Casey-Landry, chief operating office of the American Bankers Association, noting that the bailout plan won't instantly eliminate all concerns. "We'll be in the Ronald Reagan mode of 'Trust but verify'."
Even President Bush told Americans to have patience. "Americans should also expect that it will take some time for this legislation to have its full impact on the economy," he said. "With a smoother flow of credit, more businesses will be able to stock their shelves and meet their payrolls. More families will be able to get loans for cars and homes and college education. More state and local governments will be able to fund basic services."
Plenty of other problems
Many economists, however, say the president and other supporters of the bailout were painting too rosy a picture.
Until the tidal wave of foreclosures ends and home values stop their stomach-churning drops, banks will remain reluctant to lend and the economy won't improve, experts said.
"This bill doesn't contain any element of stability for the housing market or the real economy," said Christian Menegatti, lead analyst for economic research firm RGE Monitor. "The problems are going to come back and the lack of confidence will come back."
In fact, nearly one in three financial services executives said they expect credit standards to continue to tighten even if the bailout plan is approved, according to a Deloitte poll taken Thursday. So it will still be tough to get a mortgage or small business loan.
"We're back to more normal underwriting standards," Casey-Landry said. "People will need to have good credit to get a loan."
Consumers, business won't want to spend
As long as the constant drumbeat of bad economic reports continues, consumers and businesses may not be so eager to borrow money anyway even if banks start extending more credit. Friday's dismal jobs report, showing that 159,000 people lost their livelihoods, did little to inspire people to spend.
"You tell me I can have the credit, but I don't want it," said Amiyatosh Purnanandam, assistant professor of finance at the University of Michigan. "If people are not going to buy cars whether they can get credit or not, it's not going to help the economy."
This becomes a vicious cycle. If consumers don't spend, the economy fails to improve. The jitters may return to the financial markets, prompting another government intervention.
That's why many fear the $700 billion rescue may not be the last step.
"This is a tremendously expensive stopgap measure," said Adam Levitin, associate professor of law at Georgetown University.
Big life insurance stocks finished the day higher Friday, with MetLife and Hartford Financial Services leading the way after suffering steep losses Thursday.
But the stocks pulled back from their highs along with the rest of the stock market after the House approved the bank bailout bill Friday afternoon.
Shares of Hartford (HIG, Fortune 500) rose 6%, recovering a bit from its 32% plunge on Thursday. MetLife (MET, Fortune 500) gained 2% Friday after dropping 15% Thursday.
Donald Light, senior analyst for the financial research firm Celent, said the passage of the bank bailout bill should help restore some confidence in the health of insurers going forward.
"The major hoped-for impact is that some of the knee-jerk responses that are not really based on any kind of financial reality will...become much more rare," said Light shortly after the bill passed.
Insurance stocks were hit hard Thursday, partly because of investor nervousness about finance stocks in general ahead of the House's vote but also because comments from Senate Majority Leader Harry Reid, D-Nev. about a potential bankruptcy in the industry.
On Wednesday, Reid said he had heard from someone that an unnamed "major insurance company" was "on the verge of going bankrupt."
But a spokesman for Reid backtracked Thursday and said the senator "is not personally aware of any particular company being on the verge of bankruptcy." Spokespersons for MetLife and Hartford both told CNNMoney.com that their businesses were solid and they were not in danger of going bankrupt.
In addition, an analyst upgraded MetLife Friday morning.
Jeffrey Schuman, analyst for Keefe, Bruyette & Woods, raised MetLife to "outperform" from "market perform" and said in a report that the stock, which has plummeted 32% over the past two weeks, is now attractively valued.
Schuman said MetLife has enough money to absorb impending losses. He said the company has about $3 billion in excess capital and another $1.5 billion to $2 billion at the operating level and that the company generates an additional $1 billion in excess capital annually.
"This is more than enough to absorb what we conservatively estimate at $3.9 billion of after-tax credit losses over the next two years," wrote Schuman.
The upgrade also appeared to help boost sentiment for the insurance group.
Light, the analyst for Celent, said that, on average, life insurance companies' holdings in some of the riskier mortgage-related investments may be less than investors thought.
"The amount of subprime real estate is pretty limited on the balance sheet of the industry as a whole," said Light.
Shares of Principal Financial Group (PFG, Fortune 500) and Paris-based AXA (AXA) rose 3% and 4.5% respectively Friday. Prudential Financial (PRU, Fortune 500) and Manulife Financial (MFC), which both fell sharply Thursday, each gave up gains from earlier in the day and finished Friday lower.
Also on Friday, shares of the beleaguered insurance giant AIG (AIG, Fortune 500) fell 3.5% after the company said it would sell part of its business to help pay off an $85 billion loan from the Federal Reserve. The stock was trading higher for most of the day but fell after the House passed the bailout bill.
General Motors Corp. said Friday it will shut down its SUV assembly plant in Moraine, Ohio, on Dec. 23 as the company shifts focus to smaller vehicles.
GM spokesman Chris Lee said employees gathered in the plant Friday afternoon were informed of the closing date. Some 1,100 remaining workers are affected.
The automaker earlier this year announced plans to close the Moraine plant and three others by the summer of 2010, then accelerated shutdown plans as part of companywide cost-cutting moves.
Union leaders have said they were expecting the plant in this southern suburb of Dayton to shut down by January or February. Messages seeking comment were left for the International Union of Electronic Workers-Communication Workers of America.
GM recently reduced operations at the factory to a single shift, eliminating 400 to 500 jobs.
The company had planned a production break in December, but Lee said Friday the plant will keep up operations until the closing date to make sure all remaining customer orders are filled.
A slumping U.S. auto market and a shift from pickups and SUVs to smaller, more fuel efficient vehicles led to the shutdown plans.
The Moraine plant assembles the GMC Envoy, Chevrolet Trailblazer and Saab 9-7X. All three vehicles have seen their sales fall at least 30 percent through September, compared with the same period a year earlier.
GM turned down a $56 million tax credit and grant package from the Ohio Department of Development to keep the plant open.
The other plants GM (GM, Fortune 500) has said it will close are in Janesville, Wis.; Oshawa, Ontario; and Toluca, Mexico. The four closures combined will result in the loss of about 8,350 jobs.
After months of failed attempts in Congress to extend crucial renewable energy tax credits, the end game came with lightening speed Friday afternoon: The House of Representatives passed the green incentives attached to the financial bailout package approved by the Senate Wednesday night and President Bush promptly signed the legislation into law.
There were goodies for wind, geothermal and alternative fuels, but the big winner by far was the solar industry.
“It feels like we should be popping the champagne,” said a Silicon Valley solar exec Green Wombat met for lunch minutes after Bush put pen to paper.
That it took a the biggest financial crisis since the Great Depression to save billions of dollars of renewable projects in the pipeline for the sake of political expediency does not bode well for a national alternative energy policy. But the bottom line is that the legislation passed Friday sets the stage for a potential solar boom.
The 30% solar investment tax credit has been extended to 2016, giving solar startups, utilities and financiers the certainty they need for the years’ long slog it takes to get large-scale power plants and other projects online. The extension is particularly important to those Big Solar projects that need to arrange project financing in the next year or so.
The $2,000 tax credit limit for residential solar systems has been lifted, meaning that homeowners can get a 30% tax credit on the solar panels they install after Dec. 31. That will save a bundle - especially for those who live in states with generous state rebates - and goose demand for solar panels makers and installers like SunPower (SPWRA) and First Solar (FSLR). (If you buy a a $24,000 3-kilowatt solar array in California - big enough to power the average home - you can claim a $7,200 federal tax credit. Add in the state solar rebate and the cost of the system is cut in half.)
Utilities like PG&E (PCG), Southern California Edison (EIX) and FPL (FPL) can now themselves claim the 30% investment tax credit for large-scale solar power projects. That should encourage those well-capitalized utilities to build their own solar power plants rather than just sign power purchase agreements with startups like Ausra and BrightSource Energy.
“The brakes are off,” says Danny Kennedy, co-founder of Sungevity, a Berkeley, Calif., solar installer that uses imaging technology to remotely size and design solar arrays. “In just six months since our launch we’ve sold about a hundred systems. With an uncapped tax credit for homeowners going solar, we expect business to boom.”
While elated sound bytes from solar executives have been flooding the inbox all afternoon - along with invites to celebratory after-work drinks - solar stocks took a drubbing (along with the rest of the still-spooked market) after initially soaring on the news.
SunPower ended the trading day down 5% while First Solar shares dropped 8%. The bright spot was China’s Suntech (STP), which on Thursday announced a joint venture with financier MMA Renewable Ventures to build solar power plants as well as the acquisition of California-based solar panel installer EI Solutions.
Congress didn’t treat the wind energy so generously. The production tax credit for generating renewable energy was extended by just one year, guaranteeing the industry’s will continue to live year by year (at least through 2009). But given that 30% of all new power generation built in the United States in 2007 was wind, and that the amount of wind power installed by the end of 2008 is expected to rise 60% over the record set last year, the wind biz should do just fine.
But Congress did give a break to those who buy small-scale wind turbines. Systems under 100 kilowatts qualify for a 30% tax credit up to $4,000. Homeowners get a $1,000 tax credit for each kilowatt of wind they install.
“This is a huge break through for small wind,” says Scott Weinbrandt, president of Helix Wind, a San Diego-based manufacturer of 2-and-4-kilowatt turbines.
Crude prices didn't move much on Friday after the House of Representatives passed a bailout plan to shore up the nation's financial system, which could help restore demand for oil.
U.S. crude for November delivery settled down just 9 cents to $93.65 a barrel as floor trading closed in New York.
The oil market gave back modest gains after the House approved the plan. The contract was up about $1 before the vote.
The $700 billion rescue plan, designed to free banks from troubled assets and encourage them to lend, was rejected by the House in a Monday vote, but a modified version was approved by the Senate on Wednesday.
After the initial House rejection Monday, crude plummeted $10.52 a barrel, the most in dollar terms since 1991, when Operation Desert Storm was launched.
Demand and bailout: Investors hoped the sweetened bill would have a positive impact on demand, but analysts say the impact would likely be limited, and would take some time to materialize.
The bill is "only one step," said Rachel Ziemba, energy analyst with RGE Monitor, noting that the oil market also failed to react after the Senate approved its version of the bill.
"There are a lot of problems in the U.S. economy it doesn't solve," she said, and suggested the government would come up with more bailout plans to shore up other parts of the economy.
Falling demand for crude has been a major factor in oil's fall from a record high of $147.27 a barrel on July 11.
Oil prices fell more than 12% this week from $106.89 a barrel last Friday. The House's initial bailout rejection and a week of dismal economic news reinforced demand concerns.
Demand growth could take a while to materialize, since the cash released from bank coffers would need to filter down through the nation's lending apparatus in order to reach consumers and businesses, according to Neal Dingmann, senior energy analyst with Dahlman Rose & Co.
"It would take more than weeks, and even months," said Dingmann, "You're probably talking a month at the absolute soonest."
Dollar: The tighter credit markets have also led to a rise in the dollar over the past week. As banks became more and more averse to lending, the supply of dollars available to the currency market shrank, and the dollar gained against other currencies such as the 15-nation euro.
Since commodities such as oil are traded in U.S. dollars, a stronger dollar makes barrels of crude more expensive, which in turn drives down dollar-denominated oil prices.
The dollar actually slipped slightly against the euro Friday as the House debate continued.
Gasoline: As oil prices rose, the average price of gasoline in the U.S. continued to slide, falling overnight to $3.576 a gallon from $3.598 the day before, according to a daily poll from motorist group AAA.
The price of diesel fuel, which affects many businesses, especially those that rely heavily on transportation and shipping, fell to $4.065 from $4.076 a gallon.
Like crude oil, fuel prices have also trended downward since July as demand for energy dried up.
In yet another sign of the economic crisis, the Mortgage Bankers Association said Wednesday that mortgage applications plunged 23% last week.
The MBA said its seasonally adjusted index of mortgage application activity dropped to 455.4 in the week ended Sept. 26, down from 591.4 the prior week.
Turmoil in the banking and finance industries has resulted in a credit freeze, making it difficult for prospective homeowners to take out loans. The market is also experiencing a glut of foreclosures.
In an unprecedented move, the U.S. government in September took over the mortgage giants Fannie Mae and Freddie Mac, with a rescue plan that could inject $100 billion into each of them just to keep them afloat.
The association also reported steep declines in other weekly indexes tracking housing finance.
The refinance index plummeted 34.7% to 1333.9 from the prior week. The seasonally adjusted purchase index fell 10.9% to 304.8.
The average interest rate for 30-year fixed-rate mortgages slipped to 6.07% from 6.08%, the association said.
Wal-Mart Stores Inc., the world's largest retailer, said Wednesday it will lower the price of several toys in 3,500 stores across the U.S. ahead of a holiday season which is expected to be subdued.
Retailers across the board are expecting consumers to rein in spending this season amid rising food and gas prices, turmoil in the financial markets and a prolonged housing slump.
Wal-Mart (WMT, Fortune 500) said it will cut prices on 10 popular toys to $10 each, including certain Barbie Dolls, Play-Doh Ice Cream Shop, some Hot Wheels toys and Bakugan by Spin Master, a game many experts cite as one of the "hot" toys this year.
It will also open Christmas shops within its stores over the next 10 days, which will offer deals such as an ornament value pack for $5.
Wal-Mart said it conducted a survey that showed consumers will start Christmas shopping earlier this year and make other changes to stretch holiday dollars.
In yet another sign of the economic crisis, the Mortgage Bankers Association said Wednesday that mortgage applications plunged 23% last week.
The MBA said its seasonally adjusted index of mortgage application activity dropped to 455.4 in the week ended Sept. 26, down from 591.4 the prior week.
Turmoil in the banking and finance industries has resulted in a credit freeze, making it difficult for prospective homeowners to take out loans. The market is also experiencing a glut of foreclosures.
In an unprecedented move, the U.S. government in September took over the mortgage giants Fannie Mae and Freddie Mac, with a rescue plan that could inject $100 billion into each of them just to keep them afloat.
The association also reported steep declines in other weekly indexes tracking housing finance.
The refinance index plummeted 34.7% to 1333.9 from the prior week. The seasonally adjusted purchase index fell 10.9% to 304.8.
The average interest rate for 30-year fixed-rate mortgages slipped to 6.07% from 6.08%, the association said.
A key measure of the nation's manufacturing activity fell in September to a seven-year low, nearing a benchmark that indicates a recession, a purchasing manager's group said Wednesday.
The Institute for Supply Management's (ISM) manufacturing index fell to 43.5 in September, down from the August reading of 49.9. Economists were expecting a reading of 49.5, according to a consensus estimate compiled by Briefing.com.
The tipping point for the index is 50, with a reading below that indicating contraction in factory activity. A reading below 41 marks a recession. The index has hovered around the 50 mark for the past 12 months, with an average of 49.6.
One of the key components of the index, new orders, contracted sharply, falling to 38.8 from 48.3 the month before. That marked the 10th straight month of decline in that sector.
In what could be a portent of Friday's September employment report, ISM's employment indicator tumbled to 41.8 from 49.7, marking the second month of decline in the sector.
Economists from Briefing.com expect job losses to spike to 105,000 in September and for the unemployment rate to remain steady at 6.1%
ISM's production measure contracted sharply in September to 40.8 from its prior reading of 52.1.
