Financial News

Say this for the economic-policy trappings of John McCain: he travels light.

Unlike fellow United States presidential hopefuls Hillary Clinton and Barack Obama, the Republicans’ all-but-official presidential nominee does not offer an anti-poverty program or a universal-health plan to cover the 47 million Americans who are uninsured.

The Arizona senator has no proposal for arresting the growth in America’s national debt, much of it owed to China and other foreign creditors, which has nearly doubled under President George W. Bush, to almost $9 trillion (U.S.).

McCain offers no plan for financing the $3 trillion in costs for the U.S. wars in Afghanistan and Iraq, which will further increase in a McCain presidency, because he pledges to continue those conflicts indefinitely.

McCain has no interest in overhauling the regulation of a grossly undersupervised Wall Street, the recklessness of which triggered the current global credit crisis. He has no program for rescuing the two million to five million Americans threatened by the loss of their homes by foreclosure. (Headline in the liberal Nation: "McCain to home owners: Drop dead.")

Why is that, when America is sliding into recession and concerns about job losses and declining personal incomes will probably dominate the U.S. general election this fall?

Partly it’s that McCain, by his own admission, is an economics dunce. As McCain confessed to The Wall Street Journal in a 2005 interview, "I’m going to be honest: I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated."

More recently, McCain allowed in December that "The issue of economics is not something I’ve understood as well as I should … (but) I’ve got Greenspan’s book."

That was a reference to the memoir of Ayn Rand acolyte Alan Greenspan, a McCain mentor and the most overrated chair in the history of the U.S. Federal Reserve.

Partly it’s the company McCain keeps no teletrack payday loans. The public face of McCain’s economic brain trust is Carly Fiorina, a champion of unrestrained capitalism who made such a botch of Hewlett-Packard Co.’s $19 billion takeover of Compaq Computer Corp. that H-P ousted her as chief executive officer in 2005.

The intellectual flywheel of McCainonomics, former U.S. senator Phil Gramm of Texas, spearheaded the ill-conceived deregulation of Wall Street in the late 1990s. And as vice-chair of UBS AG, Gramm pleads he was "totally unaware" of the $37 billion worth of soured U.S. subprime loans the Swiss banking giant has written off so far. Last year, Gramm helped resuscitate a presidential campaign that McCain had mismanaged into the ground.

Gramm is an "advocate of every predatory and rapacious element that the financial sector has," James K. Galbraith, an economist at the University of Texas, told the Washington Post last week.

And partly it’s ideological. McCain remains captive to the shamanistic "supply side" economics of the Ronald Reagan era. McCain wants to make permanent Bush’s fiscally ruinous tax cuts skewed to the affluent, and pledges still more tax cuts, under the mistaken impression they alone stimulate the economy. With McCain’s undisguised insensitivity to Main Street, he would seem to have a November-election death wish.

Noting Herbert Hoover’s programs for curtailing home foreclosures, Susan Dunn, co-author of The Three Roosevelts, wrote in a March letter to The New York Times that "It is a remarkable feat for a politician running for president to be even more out of touch and indifferent to the economic distress of Americans than President Hoover."

McCain is to be lauded for honesty in confessing his ignorance on economics.

Logically, his next step should be removing his name from the ballot.

dolive@thestar.ca

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WASHINGTON – An industry group's tally of American home sales fell in February to the lowest reading since the index began eight years ago, signalling that housing market distress is not yet over.

The National Association of Realtors' index of pending sales of existing homes fell to 84.6 from January's upwardly revised reading of 86.2.

The index stood at 107.6 in February 2007.

Wall Street economists surveyed by Thomson Financial had predicted the index would inch up to 86.3.

A reading of 100 is equal to the average level of sales activity in 2001, when the index started. The previous low was August's reading of 85.8 as the credit crunch took hold.

With house prices falling and credit continuing to tighten, many economists say the housing market is likely to worsen, though some remain hopeful about a recovery in the second half of the year.

"The question was whether things were starting to stabilize," said Global Insight economist Patrick Newport.

"Apparently they're not."

Newport predicts home sales will fall by another five to 10 per cent before picking up at the end of the year, while the realtors group forecasts sales will remain flat before

"Despite recent steps to provide more liquidity to the mortgage market and ease financing constraints for potential buyers, access to credit remains restricted, especially for marginal buyers," commented Aaron Smith, senior economist at Economy.com same day payday loans.

If job losses prove worse than expected as the economy slows, Smith added, "the floor forming under home sales could begin to cave in."

Lawrence Yun, chief economist at the National Association of Realtors, said the decline in pending home sales "implies we're not out of the woods yet, though an era of successive deep sales declines appears to be over."

Some analysts say lower home prices encourage bottom-fishers to look for cheap deals; however, it remains unclear how much of a boost that will provide.

"We'll have to see if these pending transactions can actually close," Mike Larson, a real estate analyst with Weiss Research, said in an e-mail.

"My concern is that stingier lending standards are leading to more deals falling apart."

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There is probably no more hated clichГ© in business than the adage: From challenges come opportunities.

There’s nothing more frustrating than when someone expects you to produce when you’re down. But BjГ¶rn Alfredsson actually made it happen.

First, a little backstory: Alfredsson came to Canada from the tiny town of Ytterby, Sweden, in the 1980s. The talented, hulking defenceman was playing semi-pro in Sweden, but wanted more exposure, so he took an opportunity to play for the University of Toronto Varsity Blues. Shoulder and knee injuries derailed what could have been a long and productive NHL career, so he decided to go into the family trade – furniture.

Years later, he found himself in Lindsay, Ont., importing parts from places like Romania and Bulgaria for Canadian factories to manufacture into furniture.

"I really had no money when I started in 1990," he said, so he relied on commissions to buy more stock. Before long, he was making a decent living, but had invested much of his capital into one big shipment. And when he got to the factory, the owner apologized and told him he just couldn’t pay. And this is where Alfredsson transformed from getting by to being very successful.

Rather than lose his investment, and potentially his company, he rented a warehouse, spent the night assembling the parts into chairs and drove them to the factory’s customers.

"It was the only way to get my money," he said. "And how I got into the chair business."

He calls the fact that the factory owner couldn’t pay him a "lucky break." After that, he made his own luck, although he likes to credit much of his success to forces beyond his control.

"I was forced to focus on the U.S. market for finished chairs because I was still selling components to Canadian manufacturers and I didn’t want to compete with my Canadian customers," he said.

"As it turns out, we had very favourable manufacturing conditions in Ontario for the 3-4 years when we really needed it in order to get ourselves established."

At the time, the loonie bought just 64 cents U.S., so manufacturing in Canada for the U.S. market presented a significant cost advantage.

"We outgrew our Canadian customers by having had the `foresight’ to go after the U.S. market at the right time," he recalled.

As the years passed, Alfredsson’s company – Holsag Canada – became the place to get chairs. And, as it turns out, only chairs. At first he made all kinds of furniture, but later concentrated on chairs for strategic reasons.

"We didn’t have the financial resources to grow all areas of the business at the same time, so we decided to go with chairs," he said. "Because that is the most difficult product group, and we hoped that would limit our competition."

And, as he limited his competition, he expanded his markets cash till payday. While all his competitors were begging for the same accounts at Applebees and Denny’s, Holsag was putting high-quality chairs into strip joints, old folks’ homes, the student lounges at colleges and universities – anywhere people needed to sit.

"Our main marketing strategy has been to exhibit at trade shows; we have picked a lot of different market segments and many times we have been the only furniture vendor at these shows," he said.

"We exhibited at restaurant shows, hotel shows, eldercare shows, library shows, bowling shows, billiard shows, coffee shows, cruise ship shows, bar and nightclub shows, university housing shows and many more."

And it’s worked.

"The main difference between us and our competitors is that we focus on a small product line of good chairs, but we cross-market these chairs into many different market segments," said Alfredsson. "All our known competitors try to offer as many products as possible to their existing customers."

But Alfredsson understands that targeting a market isn’t enough, you have to service it too. He tells a story of how he and his staff were at a trade show in Minnesota when two young women walked by his display without giving it a glance. Offended and unwilling to give up a potential sale, Alfredsson stood up, got out from behind his display, followed the women and tapped one of them on the shoulder.

"You didn’t even look at our booth," he scolded them.

"Please, if you walk by again, take a quick look."

Not only did they walk past; they looked and liked what they saw. This year, the company they represented will be Holsag’s biggest customer.

While Alfredsson’s guts and creativity have made him a big success at business, he may not have been so lucky if he’d taken another, more commonplace route.

"I’ve never actually had a job, he said. "I probably couldn’t get one; and if I did get one, I would likely get fired."

Luckily for him, it’s very unlikely he’ll ever need one.

Holsag has become very successful over the years, despite the fact that the weak U.S dollar has made manufacturing in Ontario a difficult proposition. He could move, but Alfredsson has succeeded by defying conventional wisdom.

While he admits that commodity-driven distortions of the market have made things somewhat difficult for him, he’s staying put.

"We are not going anywhere," he said.

"We will sink-or-swim here."

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NEW YORK–A private equity group said Friday it has terminated its agreement to invest $2.55 billion in auto parts supplier Delphi Corp., which has been trying to emerge from bankruptcy protection.

The hedge fund Appaloosa Management LP made the announcement as Delphi, a major parts supplier to General Motors Corp., faced a Friday deadline to raise $6.1 billion in loans to help it out of bankruptcy.

Appaloosa said Delphi has breached an agreement it had with the investor group.

The Appaloosa-led investment was an essential pillar in Delphi's reorganization, which has been held up because of a tight credit market. The loss of the deal puts Delphi's plan to exit bankruptcy at risk.

GM depends heavily on a steady supply of parts from Delphi, which was its former parts subsidiary until a 1999 spin-off and remains the automaker's biggest supplier.

A message seeking comment was left Friday morning with GM spokeswoman Renee Rashid-Merem.

Appaloosa asserted Friday that it is now owed an $82.5 million fee, because Delphi breached their agreement by seeking an alternative transaction paydayloans. It referred in its filing to Delphi's effort to take more loans from GM, a move that threatened the power of the investor group.

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VANCOUVER–The committee trying to repair Canada’s market for non-bank asset-backed commercial paper is working on a financial "top-up plan" to help small retail investors whose money is frozen, the panel’s head says.

"The reality is that we are talking of a top-up plan," Purdy Crawford told reporters yesterday after a presentation to about 200 mostly retail investors in Vancouver.

"I think there is sunshine over the hill for you investors," Crawford also said.

He declined to elaborate on the top-up but some sketchy details emerged during the meeting when Crawford responded to a question.

"What about the retail investors just getting back whatever you guys can sell this paper for and the banks chip in and take care of the retail investors, the ones who are desperate and put their money in and didn’t know the deal.

"Is that fair?" asked the investor.

"That’s what I’ve been trying to tell you all day," said Crawford, a veteran Bay Street lawyer.

"That’s what’s going to happen." The $32 billion market for asset-backed commercial paper issued by groups other than Canada’s big banks has been frozen since August fast cash loans.

Issuers could no longer find investors willing to buy the short-term securities as fears grew about the ties between the commercial paper and the imploding subprime-mortgage market in the United States.

Investors are scheduled to vote on a complicated restructuring plan for the commercial paper on April 25.

Retail investors, by their sheer number, hold the balance of power in the vote, even though they own only about 1 per cent in value.

Individual investors have strongly indicated at five meetings held across Canada this week that they will vote against the plan unless they get all their money back. That is not certain under the current plan, which envisages turning their short-term investments into longer-dated notes.

By voting "yes" to the plan, investors would also give up their right to sue any of the players in the asset-backed commercial paper market, including brokers.

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ZURICH, Switzerland – UBS AG's chairman abruptly resigned Tuesday as the Swiss bank reported a first-quarter loss of $12.1 billion (all figures U.S.) and said it would seek $15.1 billion in new capital.

UBS revealed more serious damage from exposure to the U.S. subprime crisis and said it expects writedowns of approximately $19 billion.

As UBS Chairman Marcel Ospel stepped down, Deutsche Bank AG, Germany's largest bank, announced similar write-downs of about $4 billion.

It was the latest indication of how far the severe plunge in U.S. housing prices and a credit crisis triggered by rising mortgage defaults has reached.

UBS write-downs have reached a staggering $40 billion in the past nine months, the largest reported by any bank to date.

Standard & Poor's cut the bank's credit rating one notch to AA-, citing "risk management lapses, earnings volatility and need for new capital.''

UBS said that after it raises new capital, its Tier 1 capital ratio, a key indicator of a bank's ability to absorb losses, would be about 10.6 percent. That is well above minimum European requirements of 4 percent and bank shares rose 8.66 percent to 31.36 francs ($31.53).

Ospel said he was ultimately responsible for the bank's health as he stepped down.

"My willingness to stand for re-election for a further one-year term was based on my desire to lead UBS out of its current difficult situation," Ospel said. "We have worked very hard and have been able to address the firm's most pressing problems, thereby laying the foundation for the long-term success of the bank.''

The bank said its move to raise capital through a rights issue that would be fully underwritten by four leading international banks and would enable it to remain "one of the world's strongest and best capitalized banks.''

"In the first quarter, UBS substantially reduced its real estate related positions through both valuation adjustments and significant disposals," the bank said.

It said it would create a new unit to "hold certain currently illiquid U.S. real estate assets.''

"UBS is confident that these measures will deal effectively with the firm's real estate exposures and allow the bank to focus on strengthening its core operations," the statement said.

Chief Executive Marcel Rohner said, "We believe this capital increase and the creation of a vehicle to separate problem assets from the remainder of our businesses will allow us to return to sustainable value creation over time.''

He said profits from most of the bank's businesses "remained acceptable in challenging conditions" during the first quarter.

"We have made further prompt writedowns and sales of our impaired U.S pay day loans. real estate-related positions," Rohner said. "We have reduced risk weighted assets and implemented measures to control costs and strengthen the structure of the firm.''

However, he said, UBS wants to avoid selling at "severely distressed levels.''

"With these measures we have created the basis to weather one of the most difficult periods in the history of the industry,'' Rohner said.

The measures show the bank continues to trim risky assets. The bank said its exposure to U.S. subprime mortgage related positions declined to approximately $15 billion from $27.6 billion on Dec. 31.

The exposure to Alt-A positions – which are less risky than subprime loans – was reduced to $16 billion (10.1 billion euros) from $26.6 billion, it said.

The efforts at minimizing exposure will be accompanied by an undisclosed number of job cuts and a further tightening of risk.

The measures mean that UBS is now a restructuring stock, analysts at JP Morgan wrote in a note to investors.

"We conclude UBS is aiming to put a line below its risk-exposure problem and refocus on operational business," JP Morgan's Kian Abouhossein said.

But Octavio Marenzi, head of financial consultancy Celent, said the UBS disclosures were "a clear indication that we are not out of the woods yet in terms of the credit crisis.''

"Indeed, the storm clouds are gathering ever more rapidly over the banking industry and, in particular, the U.S. banking industry, where most of UBS's losses originated from," Marenzi said.

He predicted the U.S. banking industry is set to see its first contraction in overall revenues in more than forty years. "This will inevitably lead to staff reductions, and we expect to see the U.S. banking industry shed about 200,000 jobs in the coming 12 to 18 months," Marenzi said.

Earlier this year UBS posted a 12.45-billion franc loss for the fourth quarter of 2007, after writing down 15.6 billion francs tied to U.S. subprime mortgages, and said it expected another difficult year ahead.

The bank posted a net loss of 4.38 billion francs for 2007, its first annual loss.

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Despite a "perpetual storm" in the automotive industry that’s killing off many suppliers, auto-parts maker Martinrea International Inc. sees plenty of opportunity to expand its business and customer base in the years ahead.

"In 2008 to date, we have won $80 million of incremental business launching in 2009 and 2010, including approximately $3 million of new metallic business on Ford’s new Transit," CEO Fred Jaekel said during a conference call yesterday.

The upbeat message, after the company reported a fourth-quarter profit of $11.3 million late on Thursday, was in contrast with the bleak future for the company’s Kitchener Frame plant, which is slated to close in 2010.

The Kitchener Frame factory, acquired by Martinrea in 2006 from ThyssenKrupp Budd, produces frames for General Motors sport utility vehicles. It has 800 active employees and 400 on layoff.

Overall, Martinrea has 7,000 employees at 30 locations in Canada, the U.S., Mexico and Europe.

Jaekel said Martinrea’s deal with Ford includes an additional $18 million on the next generation of Ford’s Super Duty pickup. The new business, he said, comes after Martinrea achieved record revenues and profit in 2007, boosted by the addition of ThyssenKrupp Budd’s North American automotive body and chassis operations.

Chief financial officer Nick Orlando warned there could be storm clouds ahead online payday advance. The strike at auto-parts supplier American Axle "has reduced our production of product on many programs" and the bottom line’s been hurt by the soaring loonie.

As a result, he said, "our revenues for Q1 2008 will be lower than for Q1 2007 by a significant amount."

Orlando also said earnings levels will be down for fiscal 2008.

Martinrea said its $11.3 million profit for the three months ended Dec. 31 amounted to 16 cents per share, compared with profit of $8.7 million or 13 cents per share in the year-earlier period. Revenue in the quarter was $462.5 million, up from $299.4 million.

For the year, Martinrea earned $60.5 million or 90 cents per diluted share on $2 billion in revenue. That compared with a profit of $38.3 million or 62 cents per diluted share on $871.5 million in revenue in 2006.

Martinrea shares closed down 82 cents at $7.60 on the Toronto Stock Exchange yesterday.

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