The Wall Street Journal-20080114-The Afternoon Report- Gold Shines- Online edition
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The Afternoon Report: Gold Shines; Online edition
Talk about a tough spot. While the Fed may be contemplating another rate cut in response to recession worries, its sworn enemy inflation apparently is still stalking the land.
The price of gold, traditionally considered both a safe haven in times of trouble and an important inflation gauge, notched historical highs today, touching $914 an ounce overnight before easing a bit but staying above the $900 psychological barrier. Analysts proffered various rationales for the runup, citing concerns over inflation, the weakening dollar -- gold like oil is denominated using the venerable buck -- and worries that the U.S. economy may be entering recessionary times. Tensions between inflation and recession worries also twisted up the yield curve for bonds early today, with the short side of the curve sinking in response to the looming rate cut by the Federal Reserve. On the other hand, "the long end of the curve is rising [and] that is suggesting that that market is very concerned about inflation," said Lee Olver, fixed-income strategist for SMH Capital this morning.
Shortly after midday, the longer side of the yield curve eased somewhat, suggesting concerns over inflation may be relaxing. But the inflation warning signs this morning likely have many investors wondering what to make of them. Here's one takeaway: Right now, it's good to not to be Fed chief Ben Bernanke, who finds himself having to contend with a mix of price and economic growth data which -- in an a nightmare scenario -- could conceivably coalesce into a stagflationary environment. Still, few see Mr. Bernanke swiveling his white horse to confront the dragon of inflation with recession concerns at their current pitch. Perhaps his best bet for now is to wait for Wednesday's Consumer Price Index reading to filter out of the Labor Department and pray it doesn't fan inflation fears further.
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Big Blue Boosts Stocks
Stocks rose after IBM offered a surprise and upbeat preannouncement of its fourth-quarter results. Shortly before midday, the Dow Jones Industrial Average was up 113.16 points, or 0.9%, at 12719.46, led by component IBM. The company's rally lifted the broader technology sector, and the tech-heavy Nasdaq Composite Index was up 1.1%, or 26.13, at 2466.07. The Standard & Poor's 500-stock index was up 0.6%, or 8.80, at 1409.82. Treasury prices wavered as investors shook off early jitters and returned to stocks. The dollar was weaker against other major currencies. Oil futures rose. Shares in Asia finished mostly lower and European shares rose modestly.
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Overseas Growth Boosts IBM
IBM issued strong preliminary fourth-quarter results, saying revenue will rise 10% lifted by growth overseas and a weak dollar. The report ahead of IBM's scheduled earnings release Thursday eased some investor concerns over how much the slowing U.S. economy had hurt the technology giant. In September IBM sparked some concerns when the company said sales to its biggest customer segment, the financial industry, fell as banks were buffeted by mortgage-related credit problems.
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China Could Hamper Citigroup Deal
Citigroup's plans to raise capital by selling a stake of about $2 billion to China Development Bank could be in jeopardy because of opposition from China's government. Citigroup has been seeking foreign investors, including China Development Bank, to invest in the U.S. lender to boost its balance sheet in the face of mounting write-offs, caused by Citigroup's massive exposure to subprime mortgage debt. Citigroup is hoping to announce a capital injection from investors when it reports fourth-quarter earnings Tuesday.
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Peace, Democracy Top Bush Agenda
President Bush announced a $20 billion arms sale to Saudi Arabia, an important part of the U.S. strategy to bolster the defenses of its Arab allies. The president, who is nearing the end of a trip to the region, has talks with King Abdullah in which they were expected to discuss Mideast peace and democracy.
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Apple, China Mobile End iPhone Talks
China Mobile Communications, the parent of Hong Kong-listed China Mobile Ltd., said Monday it has ended talks for now with Apple over the launch of iPhone handsets in China. Few details were available, but Chinese Internet portal Sina.com reported Monday that China Mobile and Apple couldn't agree on revenue-sharing terms in their preliminary discussions, citing an official at China Mobile's data services department. The breakdown in talks could open the way for China Mobile rival China Unicom to offer the iPhone exclusively in mainland China.
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Zetia/Zocor Study Disappoints
An eagerly awaited study suggested the blockbuster cholesterol drug Vytorin -- a fixed-dose combination of simvastatin and Zetia -- didn't provide any significant benefit versus a statin drug alone in slowing down clogging of the arteries in people with hereditary high cholesterol. The bottom line, via WSJ.com's Health Blog, is that Zetia, or ezetimibe generically, "didn't bring anything important to the cholesterol party. That's bound to be a bummer for sales of Zetia and Vytorin, the drug that combines Zocor, now sold generically as simvastatin, and ezetimibe." Pharmaceutical giants Merck and Schering- Plough have a joint venture that markets both Vytorin and Zetia.
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Harman Slashes Earnings Forecast
Harman International Industries slashed its fiscal 2008 earnings guidance citing recent "significant pricing pressure" on in-car GPS devices, sending shares tumbling more than 25%. In September, Kohlberg Kravis Roberts and Goldman Sachs's equity arm walked away from a planned $8 billion leveraged buyout of Harman, saying they found financial conditions inside the stereo maker to be unacceptable.
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Update on Smaller Banks
Philadelphia's Sovereign Bancorp warned that its fourth-quarter results will be hurt by about $1.61 billion in pretax charges, citing volatility in the financial markets and deterioration in the credit markets. Elsewhere, M&T Bank's fourth-quarter net income fell 70%, as the trust-holding company wrote off nearly all of its collateralized debt obligations backed by subprime residential securities.
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MySpace Adds Protections for Teens
MySpace agreed to add new measures to protect teenagers on the online-social networking site in a deal with a group of attorneys general. As part of the deal, MySpace will include several online protections and participate in a working group to develop age- verification and other technologies. For example, the News Corp. unit will set the profiles of 16- and 17-year-old users so they are private by default. News Corp. also owns The Wall Street Journal.
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The Associated Press contributed to this report.
