The Wall Street Journal-20080111-The Evening Wrap- Competing Stimuli- Online edition
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The Evening Wrap: Competing Stimuli; Online edition
Lawmakers don't like to make waves during an election year, but as recession fears grow there may be just be some furious paddling ahead.
Congress returns from its holiday break next week, and the economy is clearly leading the agenda. Federal Reserve Chairman Ben Bernanke is scheduled to testify about the economic outlook at the House Budget Committee on Thursday, and Sen. Charles Schumer announced that a Joint Economic Committee hearing on Wednesday will be titled "What Should the Federal Government Do to Avoid a Recession?" Clinton Treasury Secretary Lawrence Summers will testify before the panel. Mr. Summers has been leading the call for fiscal stimulus from the government to head off a U.S. recession, and both parties have been warming to the idea. However, they remain divided over how to boost the economy, and the debate is likely to have major ramifications for the presidential elections.
President Bush is considering a tax rebate of perhaps $500 for individuals to encourage spending and a change in tax laws that would allow companies to deduct from their taxes a substantial portion of investments in equipment, similar to moves made during his first term. In contrast, Democrats have floated proposals to extend unemployment benefits and increase food stamps, while favoring targeted tax rebates. Of course any stimulus package also will face opposition from deficit hawks, who may oppose more spending even as the Treasury Department reported the budget deficit totaled $106 billion in the fiscal first quarter ended in December, 31% higher than the $80 billion deficit in the same period in fiscal year 2007.
Each party risks angering some part of its base with a compromise, but also faces the specter of angering the electorate as a whole by doing nothing. The potential pitfalls are especially concerning to presidential candidates. Sens. Hillary Clinton, Barack Obama and John McCain may all be held responsible if the president and Congress can't make a timely deal, setting up challenges from candidates who don't have a current vote in the Senate. Today, Sen. Clinton released her own stimulus package that could cost as much as $110 billion to help low-income families keep their homes, to subsidize heating costs this winter and perhaps refund some taxes. Of course, at the end of the day all of the hand-wringing and rancor generated by the debate may not have much meaning for the economy. The White House isn't likely to make a proposal before the State of the Union address on Jan. 28, and it would probably be March before any legislation were passed and later still before any effects might surface. And, who knows, by then the economy may already be back on the upswing.
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Consumer Fears Send Stocks Lower
Concerns about consumer weakness after a warning from American Express late yesterday and one from Tiffany this morning pushed down stocks. The Dow Jones industrials closed 1.9%, or 246.79 points, lower at 12606.30, while the Nasdaq declined 2%, or 48.58, to 2439.94 and the S&P was down 1.36%, or 19.31, to 1401.02. Treasury bonds were higher, with the 10-year yielding 3.808%. Oil slipped $1.01 to $92.70 a barrel on the thinking that slowing growth will weigh on prices. The dollar was weaker against both the euro and the yen. European stocks fell, and Asian indexes ended the day lower.
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Buttressing Citi
Late in the day, The Wall Street Journal reported that Saudi Prince Alwaleed bin Talal is expected to be joined by other investors, including the China Development Bank, in putting more money into Citigroup. While it isn't clear how much Prince Alwaleed will invest, the Chinese entity is expected to invest roughly $2 billion, one person familiar with the matter said. Prince Alwaleed's total stake in Citigroup is likely to remain below 5% in order to avoid regulatory scrutiny. However, given that Citi has a stock market value of $140 billion, even a 1% stake would end up being a significant sum of money, and a potential vote of confidence in the struggling bank.
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Retail Weakness Persists
Tiffany trimmed its fiscal-year outlook after reporting weak same- store sales growth in November and December. The weak U.S. holiday sales results break from a longstanding trend for upscale retailers. Elevated gasoline prices and weakness in the housing market hadn't affected the company's wealthy customers' spending habits, but Chief Executive Michael J. Kowalski indicated that may be changing. He noted "a recent pullback in U.S. spending likely reflected a more cautious attitude among customers about the near-term direction of the economy and related factors." Meanwhile, Best Buy's same-store sales rose 1.5% in December. The best-performing product group was entertainment software, including videogaming hardware and software. The worst performing was consumer electronics, which had a 3.1% decline. Sales drops for projection and tube televisions and MP3 devices more than offset gains by flat-panel TVs and GPS devices.
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Countrywide, Bank of America Confirm Deal
Countrywide Financial's shares dropped over 15% as Bank of America confirmed that it is buying the tottering mortgage giant in a $4 billion all-stock deal, while Bank of America were up and down throughout the day, but finished lower. Investors went home yesterday welcoming reports of a pending deal as an indication that there are companies ready to help troubled lenders. However, the subprime pall moved back in this morning after a published report said Merrill Lynch, the nation's largest brokerage firm, is expected to report losses of $15 billion on soured mortgage investments. In other signs of mortgage-related troubles CIT Group indicated it would post a fourth-quarter loss as it boosts loan-loss provisions by $300 million, and UBS, as expected, reached out to shareholders to win support for a planned capital increase in the wake of massive cuts on its subprime holdings.
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Starbucks Shuffles Management
Starbucks shuffled several top management positions as part of Chairman Howard Schultz's plan to turn around the struggling coffee giant. The moves are likely the first in a series of management changes at Starbucks. In announcing his return to the CEO position on Monday, Mr. Schultz said he will streamline management as Starbucks throttles back on its aggressive U.S. store openings, improves the customer experience inside its stores and funnels resources toward faster growth overseas. Mr. Schultz indicated earlier this week that the bureaucracy Starbucks created to handle its fast growth had stifled the organization.
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Trade Deficit Swells on Record Oil
The trade deficit surged by 9.3% to $63.12 billion in November from October's revised $57.77 billion on record oil prices. That marked the biggest gap in 14 months even though exports rose and the volume of crude imports shrank. The U.S. bill for crude oil imports rose to $24.17 billion, from $22.92 billion in October, as the average price per barrel jumped to $79.65 from $72.49. However, the U.S. deficit with China narrowed to $23.95 billion, from October's $25.93 billion. Meanwhile, Beijing reported that China's global trade surplus surged 48% to a new record in 2007, an explosion that has boosted the nation's already booming economy to its fastest growth in a decade.
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Bush to Return to Israel This Year
As President Bush ended his first trip to Israel, the president said he would return to the Middle East in May to continue pushing the Israelis and Palestinians toward a peace treaty and celebrate Israel's 60th anniversary. "There's a good chance for peace and I want to help you," Mr. Bush told Israeli Prime Minister Ehud Olmert and Israeli President Shimon Peres as he boarded Air Force One. From Israel, Mr. Bush was headed to Kuwait, a tiny oil-rich nation his father fought a war over and one of only two invited guests to skip the Annapolis, Md., peace talks the president hosted.
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Jones Sentenced to Six Months in Jail
Disgraced Olympian Marion Jones was sentenced to six months in prison for lying to investigators about performance-enhancing drugs and a check-fraud scam. The judge sentenced Jones despite her plea that he not separate her from her children, "even for a short period of time." "I ask you to be as merciful as a human being can be," she said. The sentence completes a stunning fall for a woman who was once the most celebrated female athlete in the world. A runner and long jumper, she won three gold and two bronze medals at the 2000 Olympics in Sydney.
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Nigerian Rebels Step Up Oil Attacks
A prominent rebel group in Nigeria said it detonated explosives aboard an oil tanker in an important petroleum-exporting port in the country, ratcheting up the level of oil-targeted violence in the big producer. There was little information about the attack from Port Harcourt. But the Movement for the Emancipation of the Niger Delta, a prominent group responsible for a series of increasingly sophisticated attacks on oil infrastructure, said an allied group, working with insiders, detonated "a remote explosive device" that caused the tanker fire.
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Infosys Looks for Acquisitions
Indian technology giant Infosys Technologies is flush with cash and on the acquisition trail. But nailing down friendly deals is proving to be a tough task, according to chief executive and managing director S. Gopalakrishnan. "[It's] hard to get everything aligned and satisfied," Mr. Gopalakrishnan told The Wall Street Journal. "There are companies out there, the only thing is they may not want to be acquired or the valuation may be too high." Mr. Gopalakrishnan's comments came as Infosys reported a better-than-expected 25% increase in its fiscal third-quarter profit and raised its outlook.
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Giuliani May Be Strapped for Cash
About a dozen senior campaign staffers for Rudy Giuliani are forgoing their January paychecks, a sign of possible money trouble for the Republican presidential candidate and last year's national front- runner. "We have enough money, but we could always use more money," said Mike DuHaime, Giuliani's campaign manager and one of those who now is working for free. At the end of December, the campaign had $12.7 million cash on hand, $7 million of which could be used for the primary, Mr. DuHaime said. He disputed the notion of a cash-strapped operation and said Giuliani continues to bring in money; several fundraisers are scheduled this week in Florida.
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Oh Brother
Lord David Alton thinks that more information should be provided on birth certificates for adopted children, and in arguing his case in Britain he found the most extreme case possible. Twins who were separated at birth got married without realizing they were brother and sister, he said. They were never told that they were twins. They met later in life and felt an inevitable attraction, and the judge had to deal with the consequences of the marriage that they entered into and all the issues of their separation. A court annulled the British couple's union after they discovered their true relationship. "Everyone has a right to knowledge about their lineage, genealogy and identity. And if they don't, then it will lead to cases of incest," Lord David said.
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The Associated Press contributed to this report.
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Write to Phil Izzo at [email protected]
