P&G reported first quarter sales and EPS exceeded expectations.
* Q1 earnings per share $0.97 from continuing operations
* Q1 earnings per share $1.06 * Q1 sales $19.8 billion
* Sees 2010 core earnings per share $3.47 to $3.59 * Says for 2010 the company increased range of expected organic sales growth by one percent to plus two to four percent
* Says net sales are expected to increase three to seven for October-December quarter
BP Plc beat third-quarter earnings forecasts by a big margin in a sign Chief Executive Tony Hayward’s restructuring plans were delivering results, with cost cuts ahead of targets and oil and gas output up strongly.
BP said third-quarter replacement cost net profit, which strips out unrealized gains or losses related to changes in the value of fuel inventories, fell 50 percent to $4.98 billion, due to lower oil and gas prices.
However, the underlying result was almost 50 percent ahead of average analyst forecasts, lifting BP’s shares to their highest level since June 2008, before easing back to trade up 4.3 percent to 591 pence at 1100 GMT (7:00 a.m. EDT).
Shares in rivals such as Royal Dutch Shell Plc also rose, on hopes they could also mimic BP’s success at cost cutting and weathering the oil price drop. The DJ Stoxx European oil and gas sector index was up 2.3 percent.
Analysts said a lower-than-expected tax rate and positive foreign exchange impacts flattered the figures but could not take away from a strong result.
“It’s just blow-away numbers. It’s good to see them bouncing back,” said Jason Kenney, oil analyst at ING.
BP was helped by production rising in lower-tax areas such as the Gulf of Mexico, where the Thunder Horse platform, one of the largest offshore rigs in the world, ramped up in the first half of this year.
“It shows you the kind of margin coming in from Thunder Horse. Light sweet crude on the doorstep of the U.S., and it’s caught me and a lot others by surprise,” Kenney added.
Brent crude prices averaged $68/barrel in the quarter, 40 percent lower than in the same period of 2008, while gas prices in the U.S. and UK fell around 65 percent.
DIVIDEND SAFE, HIGHER COST CUTS
A slight drop in BP’s debt-to-equity, or gearing, ratio reassured investors that BP’s fat dividends were safe.
Lower earnings meant BP and its rivals had to borrow in the first half of this year to pay dividends, or in some cases, were forced to cut their payouts.
Europe’s second-largest oil company by market value said it had reduced costs in the oil and gas production and refining units by over 15 percent.
This progress has allowed BP lift its cost-cutting target for this year to $4 billion from $3 billion.
“BP is harvesting the fruits of its turnaround program,” Richard Griffith, analyst at Evolution Securities, said.
Treasury Secretary Timothy Geithner’s plans to lock in near record-low borrowing costs in 2010 may mean a second year of losses on longer-term bonds.
After selling $1.9 trillion of short-term securities to finance President Barack Obama’s efforts to end the worst recession since the 1930s, the Treasury plans to lengthen the average due date of its outstanding debt to 72 months from a 26- year low of 49 months. That may mean boosting sales of 10- and 30-year bonds by 40 percent over the next year to $600 billion, according to FTN Financial in Memphis, Tennessee, driving down prices of longer-term securities.
“We should be trying to term it out,” said Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management who oversees $22 billion, and not expose “this burgeoning debt issuance that we’ve got ahead of us to potentially higher interest rates.”
Replacing bills with bonds may drive up the so-called yield curve as the Federal Reserve keeps its target rate for overnight loans between banks unchanged near zero percent until the second half of 2010, according to the weighted average of 67 forecasts in a Bloomberg survey. The gap between yields on 2- year and 10- year notes widened to 2.49 percentage points last week, compared with an average of 0.8 point since 1977.
While a so-called steeper yield curve is usually a sign of diminishing demand from investors anticipating faster economic growth and inflation, coupons on bonds near the lowest on record show there’s no lack of appetite for government debt following this year’s record sales. Bond investors are on track for the biggest annual loss since at least 1978, according to Merrill Lynch & Co. index data.
Falling Interest Expense
Treasury has sold $1.6 trillion in notes and bonds to finance a budget deficit that reached a record $1.4 trillion in fiscal year 2009 that ended Sept. 30. Debt amounted to 9.9 percent of the nation’s economy, triple the size of the 2008 shortfall.
At the same time, interest paid by the U.S. dropped $67.8 billion even as outstanding debt rose 34 percent to $7 trillion from $5.21 trillion, government data shows. Yields on 10-year Treasuries ended last week at 3.48 percent, less than half the average of 7.31 percent over the past 40 years.
The steeper yield curve will help banks recapitalize after $1.66 trillion in losses and writedowns since the start of 2007 as they borrow shorter-term and invest in the longest-maturity debt, profiting from the difference in yields.
Bank Earnings
JPMorgan Chase & Co., the second-largest U.S. bank by assets, said Oct. 14 that third-quarter profit rose almost sevenfold to $3.59 billion from a year earlier, as the New York company’s fixed-income revenue surged. A day later, Goldman Sachs Group Inc., also in New York, said net income more than doubled to $3.19 billion on trading gains and investments with the its own money.
Yields on 10-year Treasuries, up from 2.04 percent in December, will jump to 4.19 percent by 2011, according the weighted average estimate of 57 economists and strategists surveyed by Bloomberg News. Two-year yields are 1 percent, compared with 0.76 percent at the end of 2008.
U.S. government securities due in 10 years or more are on pace to lose 12.7 percent in 2009, compared with a loss of 1.4 percent for shorter-maturity notes, including reinvested interest, Merrill Lynch bond indexes show.
Payden & Rygel, BlackRock Inc. and Fifth Third say the extra supply may cause returns on longer-maturity Treasuries to lag behind shorter-term debt for a second consecutive year, the first time that has happened since at least 1988, according to the Merrill Lynch indexes.
Consumer Borrowing Costs
An investor with $100 million in 10-year notes would lose almost $1 million if yields rise to the survey target by the end of 2010, according to Bloomberg data.
Higher yields may also hinder the Fed Chairman Ben S. Bernanke’s efforts to cap consumer borrowing rates, his goal at the start of 2009 to lift the economy from its worst slump since the Great Depression.
The Libor-OIS spread, a gauge of banks’ lending reluctance, has narrowed to 0.12 percentage point from as high as 3.64 percentage points in October 2008. Borrowing costs for individuals have fallen, too, with 30-year fixed mortgage rates declining to 5.15 percent on Oct. 22 from 5.74 percent in June, according to Bankrate.com in North Palm Beach, Florida.
“Rates moving up dramatically at this time would be the last thing they would want to see,” said James Sarni, senior managing partner at Los Angeles-based Payden & Rygel, which manages $50 billion. “The outlook for rates is higher because of this supply demand issue.”
Difficult to Tighten
Concerns that rising supply will push yields higher are overblown, said Thomas Atteberry, who manages $3.5 billion in fixed income assets at First Pacific Advisors in Los Angeles.
Without economic growth, an improving outlook for employment and rising consumer prices it will be difficult for the Fed to justify raising borrowing costs, he said. Ten-year note yields may stay within their present range of 3 percent to 4 percent, he said.
The U.S. has lost 7.2 million jobs since the recession began in December 2007, including a 263,000 drop in September payrolls. The difference between yields on 10-year notes and Treasury Inflation Protected Securities of the same maturity, which reflects the outlook among traders for consumer prices through 2011, ended last week at 2 percentage points. The rate of inflation rose 2.87 percent on average between 2002 and 2008.
A report from the Federal Reserve Bank of Cleveland last week said the yield curve suggests growth of 2.3 percent over the next 12 months.
Faster Growth
Gross domestic product increased at a 3.2 percent annual rate from July through September, according to the median estimate in a Bloomberg News survey, after shrinking 6.4 percent in the first quarter and 0.7 percent in the second. Growth will slow to 2.4 percent this quarter and 2.5 percent in the first three months of 2010, according to the median estimate of economist surveyed by Bloomberg.
The average maturity of U.S. debt fell to 49 months in the fourth quarter, the lowest since reaching 48 months in the second quarter of 1983. About 23 percent, or $1.63 trillion of the Treasury’s $7 trillion in outstanding public debt, will mature next year, Bloomberg data shows.
“Extending the average length at this time to bear the brunt of longer term structural shifts in the deficit while increasing capacity in the front end of the curve to address unexpected borrowing needs is prudent,” Karthik Ramanathan, the Treasury’s acting assistant secretary for financial markets, said in an Oct. 1 speech in Boston. The average maturity “is expected to stabilize at six to seven years,” he said.
Average Maturity
The government may reach the average maturity of six years by doubling sales of 30-year bonds to $250 billion and raising 10-year notes by a third to $350 billion, according to FTN. Those maturities would need to account for 32 percent of all auctions to achieve an average maturity of 6.5 years, up from 18 percent currently, FTN estimates.
“There’s going to be a lot of Treasury supply,” said Stuart Spodek, co-head of U.S. bonds in New York at BlackRock, which manages $539.6 billion in debt. “The easy money has been made.”
Ingersoll-Rand PLC, a maker of heating and cooling systems for homes, businesses and transport, reported a 5 percent drop in quarterly profit on Friday and said it continued to see challenges in its markets.
Net earnings were $216.6 million, or 65 cents per share, compared with $227.7 million, or 70 cents per share a year earlier.
Excluding restructuring costs, earnings from continuing operations were 70 cents per share. Revenue fell 19 percent to $3.48 billion, below Wall Street forecasts for sales of $3.56 billion.
Ingersoll, which also makes security technology, air compressors and utility vehicles, said it was confident of growing earnings next year even if markets remain weak. It forecast this year’s earnings between $1.60 and $1.70 per share.
(Reporting by Nick Zieminski; Editing by Derek Caney)
Galleon Asia is keeping its $500 million Asia hedge fund highly liquid ahead of likely calls from investors to withdraw money, after the founder of its U.S.-based parent was charged with insider trading.
The comments underscore the uphill task faced by funds under the Galleon group, as managers struggle to convince investors about keeping their money with them after Galleon’s tangle with the law.
“It is reasonable to expect there will be requests for redemptions,” said David Lau, CEO of Galleon Asia, adding so far there had been no such requests. “We are highly liquid. All the prime brokers are reaffirming their support for us (the Asia fund),” Lau told Reuters in an interview on Wednesday.
The U.S. Securities and Exchange Commission has charged Galleon’s founder Raj Rajaratnam, the 52-year-old Sri Lanka-born billionaire, and executives from other U.S. companies with the largest hedge fund insider-trading scheme in the United States.
“There will be pressure from institutions and endowment fund investors as well as regulators for more insights into the way hedge funds are managed and operated,” said Justin Ong, head of wealth management practice for PricewaterhouseCoopers in Asia, about the fallout from the Galleon case.
Galleon Asia’s comments added to concerns in Sri Lanka, where investors dumped stocks on fears there could be more selling from Rajaratnam, who is one of the biggest single investors on the Colombo bourse.
The Sri Lankan stock market fell 4 payday loans no fax.2 percent as of 0518 GMT, before erasing the losses on bargain-hunting.
“Nobody knows what’s happening with stakes that belong to Raj and Galleon Fund,” said Harsha Fernando, CEO at SC Securities in Colombo.
LEVERAGE REDUCED
The Asia fund has reduced leverage in the past few days and is prepared for any requests from investors, said Lau, a former joint head of financial markets at DBS Group who was hired by Galleon in mid-2008 to run its Asia unit.
He said most of the investors in the Asia fund are international institutions.
The Asia fund, which runs a long/short equity and macro strategy, is up over 15 percent since the start of the year, he said. Galleon Asia has a staff of 16 people including analysts and traders.
Lau said the Asia fund is not subject to any investigations by the SEC. “The center of the tsunami is not here,” he said.
“Where we have clear evidence that a financial institution has breached our laws and regulations, we will hold the financial institution to account,” a spokeswoman of the Monetary Authority of Singapore, the country’s financial regulator, said in response to queries.
Lau said Galleon has not put restrictions on investors in the past who want to withdraw money.
U.S. machinery maker Caterpillar Inc posted stronger-than-expected quarterly earnings on Tuesday and raised its full-year forecast, saying it was seeing “encouraging signs that indicate a recovery may be under way.”
The news sent Caterpillar shares up nearly 5 percent in premarket trading.
The world’s largest maker of construction and mining equipment and a closely watched component of the Dow Jones industrial average reported a third-quarter net profit of $404 million, or 64 cents a share, compared with $868 million, or $1.39 a share, a year ago.
Revenue fell 44 percent to $7.29 billion.
Analysts, on average, had expected the Peoria, Illinois-based company to report a profit of 6 cents a share on sales of $7.47 billion, according to Thomson Reuters I/B/E/S.
Caterpillar also provided its first forecast for 2010, saying it expects 2010 sales and revenue will be up 10 percent to 25 percent from 2009 levels.
(Reporting by James B. Kelleher, editing by Maureen Bavdek)
Australia’s economic recovery will be tougher than many expect as government stimulus spending slows, interest rates climb and family savings decline, Access Economics said.
While the nation’s economy “sailed through the worst of the global crisis on a sea of stimulus,” the recovery will be “softer and slower” than some expect, Chris Richardson, head of the Canberra-based research company, said in a report today.
Central bank Governor Glenn Stevens, who this month became the first Group of 20 policy maker to raise borrowing costs, signaled on Oct. 15 he will increase rates again as soon as next month. Rising consumer confidence, a drop in the jobless rate and China’s demand for Australia’s raw materials including iron ore will boost the economy, Access said.
“That doesn’t mean Australia will get off scott free,” Richardson said. “The stimulus is winding back, the cash splash has pretty much passed and the Reserve Bank will soon start to raise interest rates” again.
Australia’s gross domestic product rose 1 percent in the first half of this year, boosted by a surge in consumer spending after the government distributed more than A$20 billion ($18 billion) in cash to households. The government is also spending A$22 billion upgrading roads, ports, railways and schools.
Governor Stevens raised the benchmark lending rate on Oct. 6 by a quarter percentage point to 3.25 percent, after slashing borrowing costs by a record 4.25 percentage points between September last year and April.
‘Too Timid’
The central bank can’t be “too timid” in raising borrowing costs now that the threat of an economic crisis in the nation has passed, Stevens said last week.
“Shoppers are spending 7 percent more than when the crisis hit. Between them, the Reserve Bank and the government gave the average family the equivalent of 10 percent extra income to spend,” Richardson said.
Half of that increase has already disappeared and much of the rest will go over the next 18 to 24 months, Access predicts.
“The implications of that for the recovery are tougher than most realize,” Richardson said.
GDP will climb 0.9 percent this year, 2.7 percent in 2010 and 3.4 percent in 2011, Access forecast.
An index of U.S. manufacturing hit its highest point in a year, an industry survey showed on Thursday, suggesting one of the sectors hit hardest by the recession could improve next year.
The Manufacturers Alliance/MAPI said its composite business index — a weighted sum of shipments, backlogs, inventories and profit-margin indexes — rose to 38 percent in September following a reading of 24 percent in June.
“While many of the individual indexes remain at very low levels, the forward-looking indexes, like that for annual orders, are at much higher levels, indicating that manufacturing activity is expected to increase in 2010,” said Donald Norman, MAPI economist and survey coordinator.
At 38 percent the index still indicates that overall manufacturing activity is expected to contract over the next three to six months, relative to levels one year ago when the economy was entering the severe recession, MAPI said.
The September 2009 index marks the fifth straight quarterly reading below 50 percent, the demarcation point between growth and contraction. The last time the index reached 50 percent was June 2008.
Most forward-looking indexes showed strength.
The annual orders index, based on a comparison of expected orders for all of 2010 with orders in 2009, was 66 percent, while the non-U.S. investment index was 52 percent, with respondents anticipating marginally increased expenditures for capital spending outside the United States, the survey said.
The U.S. prospective shipments index, based on expectations for orders in the fourth quarter of 2009, increased to 30 percent from 4 percent. The non-U.S. prospective shipments index increased to 33 percent from 15 percent.
The U.S. investment index, based on expectations for capital spending for all of 2010 was 47 percent.
However, the survey found signs the recovery still faces some challenges.
The U.S. prospective shipments index, which reflects expectations for fourth quarter 2009 shipments compared with the fourth quarter of 2008, improved to 30 percent in the September survey compared to 4 percent in the June report.
This implies that most companies will continue to see domestic shipments decrease this quarter compared to levels one year ago, MAPI said.
Business investment is seen by economists and Federal Reserve officials as necessary for the recovery to last.
The survey was based on responses from 61 senior financial executives with firms in a broad range of manufacturing industries.
(Reporting by Nancy Waitz; Editing by Kenneth Barry)
Private equity giant Blackstone Group’s chief executive said the worst of the industry’s problems had passed, with improved capital and equity markets finally providing an opportunity to do deals and sell existing investments through IPOs.
Stephen Schwarzman also said on Wednesday he was seeing “more than green shoots” of economic recovery, though the scale of growth through next year was still unclear.
Private equity firms have been hampered since the credit crisis shut off their ability to tap financing for leveraged buyouts; the financial turmoil has also damaged the health of their portfolio companies. Economic recovery and a rebound in financing markets are key for the industry.
“We do not expect the U.S. economy to slip back into recession but we do believe that weak consumer spending and continued constraints on bank lending will dampen the U.S. economic recovery in 2010 and 2011,” Schwarzman said at the Super Return Middle East conference in Dubai.
While it would take several years before “freely flowing but responsible credit” was re-established, the private equity industry was in a “radically different place” than a year ago, given signs of life in the bank financing market, he said.
“We can certainly do transactions in the $3-$4 billion range at this stage in the cycle,” he said on the sidelines of the conference. “And with low leverage involved, deals of that size can use in excess of $1 billion equity.”
Blackstone, one of the world’s biggest private equity firms, struck a deal earlier this month to buy Anheuser-Busch InBev’s U.S. theme parks for up to $2.7 billion, adding to its amusement assets such as the Madame Tussauds wax museums, Legoland and the London Eye Ferris wheel.
Based on recent deals, Blackstone’s implied investment rate is $4 billion to $5 billion a year, Schwarzman said.
He said right now is an excellent time to purchase stable businesses in developed markets, but added it was still too early for cyclical companies. He sees opportunities to buy growth companies in Asia.
Schwarzman said while he expects more deals ahead, Blackstone has been outbid by companies rather than private equity firms on several occasions recently.
Blackstone shares rose 4 percent in morning trade on the New York Stock Exchange, to $16.53 — about half the firm’s June 2007 IPO price of $31 a share.
The shares also rose sharply on Monday, when a letter Schwarzman sent to investors previewing his speech leaked out.
EXIT STRATEGY
He said the route to exiting acquisitions had opened, citing five sales — of which four are complete and one imminent. If all five are completed, Blackstone’s funds will receive about $2.8 billion, he said.
In the letter to investors, obtained by Reuters, Schwarzman said these sales occurred at prices between 140 percent and 240 percent of Blackstone’s year-end 2008 valuations.
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