The Wall Street Journal-20080116-The Afternoon Report- Bills Due- Online edition
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The Afternoon Report: Bills Due; Online edition
Quarterly reports from big banks indicate they're betting consumers will fall behind on bills. And adding injury to insult, inflation data today show basic consumer prices are climbing fast.
This morning, J.P. Morgan Chase and Wells Fargo posted lower fourth- quarter earnings, and both jacked up their credit-loss provisions, implying that they expect consumer credit to fray further in 2008 as housing values fall and foreclosures rise. J.P. Morgan more than doubled its provision to $2.5 billion, helping erode the bank's return on equity to 10% from 16%. On the bright side, its subprime-related write-downs of $1.3 billion were modest compared to those of some peers. Wells Fargo, the U.S.'s second-largest mortgage lender behind Countrywide, tripled its credit-loss provisions to $2.61 billion, leading to a 38% decline in profit. Citigroup yesterday announced $4 billion in credit costs, mostly set-asides against expected future losses on car loans, credit cards and mortgages. J.P. Morgan CEO Jamie Dimon sounded glum today, warning that the bank was "extremely cautious" about 2008, and that a weaker economy would raise credit costs. "Companies are going to be running so fast to keep up with these losses that [they] can't be conservative enough," said Meredith Whitney, senior financial analyst at CIBC World Markets, noting credit losses and delinquencies as themes among bank earnings.
Prices on consumer goods, meanwhile, rose faster in 2007 than they had in any other year since 1990, according to the Labor Department. Consumer prices rose 4.1% last year, while the core index, which strip out volatile food and energy costs, advanced 2.4%. December's result looked less severe: the CPI rose 0.3%, compared with a 0.8% advance in November. The data join with signs of an economic slowdown to paint a stagflationary picture, but that won't deter the Federal Reserve from cutting short-term interest rates this month, economists say. It just means the central bank must pick its poison, choosing first to tackle either inflation or growth. "Inflation may not be too hot, but it is hardly cold," wrote Joel Naroff, of Naroff Economic Advisors. Mr. Naroff -- like most observers -- believes growth will come first. "Price pressures may be a little greater than the Fed would like, but with the economy hitting the skids, inflation is not so high as to stand in the way of aggressive action." The general expectation is now for a half-percentage-point cut at the Fed's end-of-month meeting.
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Stocks Are Weak
J.P. Morgan's shares bounced, as its earnings met expectations, and as of the late morning was the Dow's top gainer, up 4.2%. Intel, which issued a cautious outlook after the market close yesterday, was the Dow's worst performer, down 13.1%. The struggle between the two left the Dow modestly in the red, down 41.94 points at 12459.17. The Nasdaq Composite Index fell sharply, down 1.7% at 2376.42, while the Standard & Poor's 500 Index posted more-moderate losses, falling 8.68 points to 1372.27 points. Treasurys gained, moving inversely to stocks. Oil traded below the $90 mark, shedding $2.10 to $89.80 a barrel. The U.S. dollar rallied against both euro and yen. Asian markets plummeted after yesterday's U.S. rout, with Hong Kong's Hang Seng losing 5.4%, and European indexes followed suit.
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Presidential Campaigning
The Republican race remains wide open after former Massachusetts Gov. Mitt Romney won last night's GOP primary in Michigan, where his father was governor. After losses in Iowa and New Hampshire, the win keeps the Romney candidacy going. Arkansas Gov. Mike Huckabee won the Iowa Caucus, Sen. John McCain won the New Hampshire primary. "Everyone gets to be hero of the day," said Fred Thompson (R., Tenn.), who hopes to take the prize in South Carolina after weak showings so far. Democratic candidates didn't compete in Michigan, after the Democratic party stripped the state party of nominating-convention delegates, penalized for scheduling a primary ahead of Feb. 5.
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Oracle Gets Even Bigger
Software giant Oracle agreed to buy BEA Systems in an $8.5 billion deal, just a few months after BEA had rebuffed a previous Oracle offer of $6.7 billion. It continues a trend of Oracle's gobbling up smaller business-software companies, including PeopleSoft and Siebel Systems. Also in technology deal news, Sun Microsystems agreed to buy open- source software maker MySQL AB for $1 billion -- $800 million in cash and $200 million in options. Sun has a history of pursuing open-source development.
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Boeing Delays Dreamliner
Boeing announced that 787 Dreamliner customers won't get their orders filled until early 2009, as the aircraft manufacturer falls further behind on the ambitious program. The further delay, which The Wall Street Journal reported yesterday, isn't expected to be a "significant" impact to 2008 earnings guidance, the company said. Should the Dreamliner program fall further behind schedule, it may risk having its customers defect to a competing airplane being developed by rival Airbus, which has had its own production problems. Boeing shares, which sank yesterday, were ahead 1.5% around midday.
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Bush Visits Egypt
President Bush wrapped up his Mideast tour in Egypt today, following stops in Israel, the West Bank, Kuwait, Bahrain, the United Arab Emirates and Saudi Arabia. His Egypt stop was his shortest -- a few hours in the Red Sea resort of Sharm El-Sheik. Relations between the U.S. and Egypt, a historical ally, are relatively cool. Washington has moved for the first time to put conditions on the $2 billion the U.S. gives Egypt annually. Frustration has been growing over Egypt's inability to rein in the Palestinian militant group Hamas and prevent weapons from being smuggled via border tunnels to the Gaza Strip, as well as a lack of democratic reforms.
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EU Probes Drug Companies
European Union investigators raided drug companies in several countries as the bloc's antitrust watchdog began an industrywide investigation. The probe's aim is to determine whether large companies are abusing their market power to prevent competitors from bringing new drugs to market, or colluding to restrain competition, said Neelie Kroes, the EU antitrust chief. AstraZeneca, GlaxoSmithKline, Sanofi- Aventis, and Pfizer said they were among companies contacted, though the EU commission didn't name their targets.
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Court Backs Judge-Selection Process
The U.S. Supreme Court unanimously upheld New York's system of choosing trial judges, reversing a lower court ruling. Primary voters elect convention delegates who choose candidates for the judgeships. Critics had voiced concerns that political party bosses control the system. But "a political party has a First Amendment right to limit its membership as it wishes and to choose a candidate-selection process that will in its view produce the nominee who best represents its political platform," Justice Antonin Scalia wrote for the court.
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AMR Posts Loss
At AMR, parent company of American Airlines, high fuel prices ate into the company's bottom line, driving AMR to a fourth-quarter loss. AMR reported a net loss of $69 million, or 28 cents a share, compared with a net income of $17 million, or seven cents a share, a year earlier. Revenue rose 5.3% to $5.68 billion. Per-gallon fuel costs averaged $2.40 a gallon, versus $1.88 a year earlier.
