Friday, November 14, 2008

Wall Street ends turbulent week sharply lower

Friday November 14, 6:19 pm ET
By Joe Bel Bruno and Sara Lepro, AP Business Writer

Stocks tumbles in volatile trade as investors cash in from big rally, refocus on economy

NEW YORK (AP) -- Wall Street ended a turbulent week with another astonishing show of volatility Friday, with stocks plunging, recovering and then plunging again as investors absorbed another wave of downbeat economic news. The Dow Jones industrials fell almost 340 points and the major indexes all fell sharply for the second straight week.

Hedge fund selling in advance of a Saturday deadline contributed to the market's gyrations, and some retrenchment was to be expected following a big rally Thursday, when the Dow rallied more than 550 points after falling near its lows for the year. But there was plenty of discouraging news for investors to focus on, including comments from Federal Reserve Chairman Ben Bernanke that the markets remain under "severe strain" and a sobering report on October retail sales.

Analysts believe the market is still searching for a bottom after last month's huge losses, and that the pattern of volatility will continue for some time -- selling, even on technical reasons like looming deadlines for cashing out hedge fund holdings, is still coming against a backdrop of an extremely weak economy.

"Clearly, the trading crowd like hedge funds can take this market in any direction they want to. Anybody looking to build a position is just not confident," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co.

The session saw another stream of bad news. Bernanke said during a speech in Frankfurt, Germany, that he would work closely with other central banks to try to alleviate the global financial crisis and left open the door to a fresh interest rate cut. The Fed is scheduled to meet Dec. 16 at its last regularly scheduled meeting this year.

While Wall Street would like to see another rate cut, many investors aren't sure, given the litany of bad economic and corporate news, of how effective a rate reduction would be in the near term. Many investors are still trying to assimilate the idea that the economy's downturn will be protracted, lasting well into next year and perhaps longer.

"The economic news continues to be very negative," said Ben Halliburton, chief investment officer of Tradition Capital Management. "The realization that '09 is going to be a very bad year for economic activity is starting to dawn on people and they are starting to digest how bad it's going to be."

The Commerce Department reported that retail sales plunged by the largest amount on record in October as consumers cut back on spending in the wake of the financial crisis. Retail sales fell by 2.8 percent last month, surpassing the old mark of a 2.65 percent drop in November 2001 in the wake of the terrorist attacks that year.

The market got more disappointing consumer news from retailers Abercrombie & Fitch Co. and JCPenney Co. Both warned that profits will come in below Wall Street's already lowered projections as retailers head into a holiday shopping season that could be among the slowest on record.

The great fear on the Street is that Americans' reluctance to spend will extend what is already a serious economic downturn. A barrage of negative consumer news sent stocks tumbling earlier in the week.

The market drew some brief comfort in the afternoon from comments from Treasury Secretary Henry Paulson, who told CNBC that capital injections in the banking sector will help stimulate lending. He also defended the decision to not buy toxic assets from banks, saying that it would not work as quickly; the move helped send stocks falling earlier this week.

There was disquieting news from the tech sector that weighed on the Nasdaq composite index. Sun Microsystems Inc. said it will cut up to 6,000 workers, or about 18 percent of global staff, as part of a massive restructuring plan. And handset maker Nokia Corp. warned the global economic slowdown will weigh on sales next year.

The Dow fell 337.93, or 3.82 percent, to 8,497.31, at its lows of the day. The Dow fell more than 300 in early trading, recovered to a slim advance and then turned sharply lower at the end of the day as hedge funds cashed out. Fund investors had a Nov. 15 deadline for withdrawing their money, which forced the funds in turn to sell stocks.

The Standard & Poor's 500 index fell 38.00, or 4.17 percent, to 873.29, and the Nasdaq stumbled 79.85, or 5.00 percent, to 1,516.85.

The Russell 2000 index of smaller companies fell 34.71, or 7.07 percent, to 456.52.

Declining issues outpaced advancers by about 4 to 1 on the New York Stock Exchange, where consolidated volume came to 5.73 billion shares, compared with 7.67 billion on Thursday.

For the week, the Dow lost 4.99 percent, the S&P fell 6.20 percent and the Nasdaq tumbled 7.92 percent.

The major indexes have fallen dramatically since their highs of October 2007 as the housing and credit crises have taken their toll on the economy. The Dow is down 40 percent from its closing record of 14,164.53, while the S&P 500 is off 44.2 percent from its record close of 1,565.15. The Nasdaq is off 46.9 percent from its then 7 1/12-year high of 2,859.12.

The Dow's surge Thursday was the third-largest single-session point gain on record, following the 889-point rise on Oct. 28 and the 936-point surge on Oct. 13. The rally came after three days of selling that wiped out about $1 trillion in shareholder value.

Wall Street's violent swings in recent weeks are part of the market's ongoing "bottoming" process, analysts say, in which the market retests the lows hit last month. The market is expected to remain volatile, as evidenced by past recoveries from a bear market.

Randy Frederick, director of trading and derivatives at Charles Schwab & Co., said the sell-off could be attributed in part to investors not wanting to hold on to stocks going in to the weekend, particularly ahead of a meeting of Group of 20 international leaders in Washington. The meeting could bring decisions on how to help the troubled global financial system.

"Certainly in this market we've had a lot of late Friday sell-offs," he said. "The government has been very insistent on making major announcements on Sunday nights."

Bernie McGinn, chief executive of McGinn Investment Management, said the market needs to have a sustained rally for a couple of days to lure buyers back into the market. For the moment, he believes the market will continue to fluctuate based on events like earnings or government reports.

"We're in the middle of chaos," he said. "That's what it is, pure and simple."

The volatility helped send government bond prices higher as investors looked for safety. The three-month Treasury bill's yield fell to 0.14 percent from 0.20 percent late Thursday, and the yield on the benchmark 10-year Treasury note fell to 3.72 percent from 3.85 percent late Thursday. Lower yields indicate higher demand.

Meanwhile, the price of a barrel of light, sweet crude fell $1.20 to settle at $57.04 a barrel on the New York Mercantile Exchange. Oil has been falling for the same reason as stocks -- the fear of a deep global recession.

Shares of major retailers fell as the string of disappointing earnings and outlooks continued. JCPenney lost $2.01, or 10.4 percent, to $17.27. Abercrombie & Fitch tumbled $4.65, or 20.7 percent, to a 52-week low of $17.79.

The dollar rose against other major currencies. Gold prices also rose.

Overseas, Japan's Nikkei closed up 2.72 percent and Hong Kong Hang Seng rose 2.43 percent. In European trading, London's FTSE 100 was up 1.53 percent, Germany's DAX rose 1.31 percent, and France's CAC-40 added 0.98 percent.

The Dow Jones industrial average ended the week down down 446.50, or 4.99 percent, at 8,497.31. The Standard & Poor's 500 index finished down 57.70, or 6.20 percent, at 873.29. The Nasdaq composite index ended the week down 130.55, or 7.92 percent, at 1,516.85.

The Russell 2000 index finished the week down 31.73, or 5.90 percent, at 505.79.

The Dow Jones Wilshire 5000 Composite Index -- a free-float weighted index that measures 5,000 U.S. based companies -- ended at 8,721.88, down 636.42 points, or 6.80 percent, for the week. A year ago, the index was at 14,727.28.

Friday, October 24, 2008

Greenspan's Fall: Mistakes Were Made, But Not Just by 'the Maestro'

Posted Oct 24, 2008 12:07pm EDT


Amid the high drama on Wall Street, there was great theater in Washington D.C. this week as Alan Greenspan actually admitted the free-market, anti-regulation ideology that guided his tenure as Fed chairman was "flawed."

With financial institutions worldwide imploding amid what he called a "once-in-a-century credit tsunami,'' Greenspan was surprised to discover banks and brokers failed to regulate themselves.

"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief," he told the House Committee on Oversight and Government Reform.

Greenspan's mea culpa failed, however, to address an even bigger failing: His continued argument that no one could have seen the housing bust and related credit crisis coming, when various and sundry pundits predicted it for years.

From his inability (or refusal) to identify and try to deflate bubbles in tech stocks and then housing, to his blind faith in deregulation and derivatives, as well as generally easy money policies, Alan Greenspan's mistakes as Fed chairman are legion.

We're all paying the price for Greenspan's mistakes and he's yet another "hallowed institution" that's crumbled in recent years.

But to blame Greenspan for everything is wrong. Whether it was Democratic support for Fannie/Freddie, Republican desire for deregulation, Wall Street greed, feckless rating agencies, predatory lenders or irresponsible borrowing by homeowners, there's plenty of blame to go around.

It takes a village to make a financial crisis of such epic proportions. Until policymakers and pundits stop pointing fingers at the "other side," it's unlikely we'll see a resolution of this mess anytime soon.

Tuesday, October 7, 2008

Asian stocks plunge on unabated credit market woes

Wednesday October 8, 2:06 am ET
By Tomoko A. Hosaka, Associated Press Writer

Asian stocks plunge on unabated credit market woes; Nikkei plunges nearly 10 percent

TOKYO (AP) -- Asian stock markets tumbled Wednesday, with Japan's Nikkei index sinking nearly 10 percent, as recent steps by the world's major economies to fortify credit markets failed to stem fears that the spreading financial crisis could spawn a global recession.

After a miserable day on Wall Street when the Dow Jones industrials lost more than 500 points, investors in Asia responded by dumping stocks in a broad regional sell-off.

Japanese shares were hammered hard, with the benchmark Nikkei 225 stock average spiraling down nearly 10 percent to 9,159 in afternoon trading to its lowest intraday level in five years.

Shares of Toyota Motor Corp. sank 12 percent on reports that its operating profit would fall 20 percent in the fiscal year through March.

"Selling seems almost unstoppable because of uncertainty over the crisis," said Kazuki Miyazawa, market analyst at Daiwa Securities SMBC Co. Ltd. in Tokyo. "Investors simply don't find incentives to buy stocks."

The carnage was also brutal in Hong Kong, where the blue chip Hang Seng index plunged 5.6 percent to 15,871.

To ease the credit crunch, Hong Kong's de factor central bank said it will cut the benchmark interest rate by 1 percentage point to 2.5 percent. The move represents a break from Hong Kong's traditional pattern of following the U.S. Federal Funds target rate, which is now at 2 percent. The authority said it has changed its formula to calculate its base rate from 150 basis points above the prevailing U.S. fed funds rate to 50 basis points.

Australia's benchmark S&P/ASX200 shed 5 percent, wiping out a 1.7 percent gain on Tuesday after the country's central bank cut its key interest rate by a larger-than-expected 1 percentage point.

Asian markets were deep in the red: South Korea's benchmark index was down 6.1 percent, Thailand's market was down 6 percent, and Indonesia's stock market halted trading when its key index plunged 10 percent.

Investors in Indonesia seemed to be dismissing comments by the central bank governor Tuesday that Indonesia will avoid the worst of the global credit crisis. On Tuesday, the central bank raised interest rates a quarter percentage point, citing a two-year high in inflation.

"People are very, very nervous that Europe will get belted tonight as they didn't see a lot of the late losses in the U.S. session, and people just think it's going to get worse," said Ric Klusman, an institutional dealer with Aequs Securities in Sydney.

In New York Tuesday, the Dow lost more than 5 percent despite efforts by the Federal Reserve to reinvigorate the dormant credit markets by invoking emergency powers to lend money to companies outside the financial sector and buy up mounds of commercial paper, the short-term debt that firms use to pay for everyday expenses like salaries and supplies.

Federal Reserve Chairman Ben Bernanke warned in a speech Tuesday that the financial crisis could prolong the difficulty the economy is facing. While his remarks were widely regarded as a sign that an interest rate cut could be in the offing, Wall Street appeared little comforted and focused on his downbeat assessment.

In currencies, the dollar weakened slightly to 101.25 yen in Asia early Wednesday afternoon from 101.38 yen late Tuesday. The euro stood at $1.3585 compared with $1.3550.

Monday, October 6, 2008

World stock markets tumble Monday on banking concerns

Monday October 6, 1:12 pm ET

Major markets in Europe, Asia and Latin America sank Monday as traders looked past America's bank bailout bill and focused on Europe's growing financial crisis.

The most influential European markets suffered big losses. London's FTSE 100 ended down 7.9%, the CAC 40 in Paris skidded 9%, and the XETRA DAX in Frankfurt tumbled 7.1%.

Russia's RTS index fared worse, shutting down after it fell more than 20%. The index lost 9% of its value in the first 30 minutes of the trading day.

Iceland halted trading in six bank stocks Monday, as Icelandic banks' assets dwarf the rest of its economy and its currency has fallen sharply in the past week.

The global financial meltdown also hit Latin America, where the economies are reliant on commodity exports.

Brazilian stocks plunged 15%, and trading was halted twice on Sao Paulo's Ibovespa index. Brazil's currency, the real, slumped nearly 7% to a near 2-year low. Mexico's IPC index dropped 9.6%, Argentina's Merval sank 9.4%, Chile's IPSA was down 6.8% and Colombia's IGBC fell 5.3%.

Experts say a worldwide economic slowdown could devastate the economies of Latin America, which have until recently reaped the rewards of historically high global demand for commodities. Falling markets could stem that demand.

Earlier Monday, Asian and Pacific markets ended roundly lower. Japan's Nikkei Exchange closed down 465.05 points, or 4.25%, at 10,473.09, a 4-1/2 year low. South Korea's Kospi index finished the day off 4.3%.

The Australian Securities Exchange plunged about 3.4% to 4,544.70, and Hong Kong's Hang Seng lost nearly 5% of its value, falling to 16,803.76.

In the U.S., the Dow Jones industrials plunged by as much as 587 points, falling below 10,000 for the first time since October 2004.

Meanwhile, the euro slid below the $1.36 mark for the first time in over a year.

Bailouts, deposit guarantees sink markets

The slump followed a weekend in which Germany's private financial sector promised to put up an additional 15 billion euros, in addition to the 35 billion euros already pledged, to help shore up Hypo Real Estate bank, the nation's Finance Ministry said Sunday.

The rescue package will help ailing Hypo, one of Germany's largest housing lenders. Earlier in the day, the German government said it would guarantee all private checking and savings accounts in an effort to abate a growing financial crisis in the country, a government official said.

European countries one after another announced deposit guarantees to relieve financial stress on banks and on their markets. Iceland and Denmark issued guarantees Monday after Germany, Ireland, France, Greece and Sweden did the same Sunday.

The guarantees began with Germany, which said it would guarantee all private bank savings and CDs in Europe's largest economy.

"We want to tell people that their savings are safe," said German Chancellor Angela Merkel on Sunday.

Coordinating a response

Yet investors jeered the guarantees, as they raised questions about their potential impact on government finances. Some analysts say the actions showed European governments could not agree on a unified approach to their financial crisis.

But European governments tried to find a coordinated response to the crisis sweeping financial markets.

European Union finance ministers were to meet in Luxembourg on Monday and Tuesday to discuss ways to boost the battered banking system. Italian Prime Minister Silvio Berlusconi is pushing a bailout similar to the one passed by the U.S. Congress last week and signed by President Bush on Friday.

Some analysts have said they expect the Federal Reserve, the European Central Bank and the Bank of England to orchestrate the first joint action on interest rates since the September 2001 terrorist attacks.

-- The Associated Press and CNNMoney.com staff writer David Goldman contributed to this report.

Monday, September 22, 2008

5 Lessons for the Next Financial Mania

Friday September 19, 3:33 pm ET By Rick Newman
Why do we keep relearning the simplest rules in the world?

Why do we keep relearning the simplest rules in the world?

Buyer beware. Cut your losses. What goes up must come down. If it seems too good to be true, it probably is. No matter how complex the market meltdown of 2008 might seem, all of these simple aphorisms--clichés, really--directly apply.

Of course, in every financial free-for-all--whether it's the S&L crisis, the dot-com bust, the Enron fraud, or today's housing-related meltdown--the chicanery takes a different form. On Wall Street, they call that "innovation." But right now, innovations like credit-default swaps and mortgage-backed securities look more like old-fashioned pyramid schemes: I'll take your money, you take somebody else's, and eventually some guy neither of us knows (or the government) will get stuck holding the bag.

Here's a guarantee: Wall Street will "innovate" again. A lot of guys in expensive suits will make a lot of money for a while. You'll want in, even if you don't completely understand what's going on. The suckers will be the ones who forget what happened in 2008. Smart investors will remember the following lessons:

The fine print matters. One of the most startling developments of the whole debacle has been the vulnerability of money market funds, which most investors consider virtually as safe as a government-insured savings account. Turns out they're not. When a couple of institutional money market funds "broke the buck" and essentially fell below the value of the principal invested in them, the government rushed to set up an insurance fund to back such funds. That's because confidence in the market is rooted in the safety of such basic accounts, where many investors park cash they might need over the short term--assuming the principal is safe.

But money-market accounts generally aren't insured by anybody, as the fine print in the prospectus no doubt points out. That illustrates a problem repeated over and over in the current crisis: A failure to understand the risks of an investment. During the housing boom, everybody focused on how much money they might make--and precious few focused on what could go wrong. Wall Street investors underestimated how risky mortgage-backed securities would be if housing prices fell. A lot of home buyers failed to do the math on their interest-rate resets, assuming it would all work out. Yeah, it's tedious to scour the fine print in such an overlawyered society. But if you don't even know what the worst-case scenario is, you'll be paralyzed if it actually happens.

Don't trust CEOs. Not because they're all liars, necessarily. But because they get paid, among other things, to be energetic cheerleaders no matter how bad their team is losing. The CEOs of Bear Stearns, Lehman Brothers, and Merrill Lynch all assured investors and the public that things were getting better for their firms, when the exact opposite was happening. Shareholders who believed them, and held on to their shares, lost a lot of money as bad investments and losses piled up. Skeptics who doubted the CEOs, and sold, cut their losses--or even made money, if they shorted the stock while the companies were on the way down.

Lehman CEO Richard Fuld wasn't just deceiving shareholders; he may even have been deceiving himself: In retrospect, it appears that Fuld had an unrealistic view of his firm's value, turning down buyout offers he deemed too low while waiting for a better offer--or government bailout--that never materialized. CEOs have an obligation to shareholders, but in reality that's second to their own self-interest--or self-delusion.

Don't trust geniuses. Wall Street is home to some of the brightest minds in the world, math and computer and finance geniuses with advanced degrees from all the best universities. If only they worked for you and me.

What they really do is find ways to make money for themselves and their firms. What they don't do is make sure their schemes serve the public interest. So a new kind of double-secret derivative might look really smart when it taps a new way to boost returns for the Bank of Brilliant People. If it works, everybody else will copy it, perhaps adding their own twists. But odds are, nobody in the system has bothered to run computer models showing what will happen if everybody starts issuing double-secret derivatives--and something goes wrong.

Theoretically, that's what government regulators are supposed to do. But the government is usually way behind the fast-thinking, overconfident gamblers on Wall Street. New regulations will attempt to change that. But the geniuses always find ways to outsmart the government and its flat-footed beat cops.

Don't trust yourself. It might have seemed like a great time to buy a house early in 2006. Interest rates were low and home values had been skyrocketing. Friends and neighbors seemed to be getting rich on real-estate deals and financing Lexuses and swimming pools with home equity. There was no reason to think the party would stop anytime soon.

But if you made your move then, you bought at the peak of the market, and chances are your big investment has lost 10 or maybe 20 percent of its value in less than three years. Yet lots of people who considered their money to be smart bought homes at precisely the wrong time. Now, the soaring foreclosure rate on many of those homes is one of the biggest underlying causes of the entire financial crisis.

People who bought at the peak of the market are generally OK if they bought a house because they needed a place to live--and plan to stay there. But millions who bought to join the craze, make easy money, or live like royalty--natural human impulses--now live in a nightmare, not a dream. And there's no government regulation that will curb greedy me-tooism.

Don't count on a bailout. It might seem like the government's writing a check to everybody with an overdue bill or two. There's federal relief for people behind on their mortgages. New insurance for investment accounts. And, of course, billion-dollar loans for troubled conglomerates.

But there's heavy political pressure to make sure taxpayers get something back, and besides, anybody who qualifies for a government bailout is already in a lot of pain. Mortgage relief, for example, goes only to homeowners who are in such dire shape that a regular bank won't help them out--and you might have to give the feds some of the cash if you sell your home for a profit. The federal loan to AIG is at such a high interest rate that the company's shareholders want to pay off the debt as early as possible. And the government could always say no, just like it did to Lehman Brothers. Whatever you consider the worst-case scenario can always get just a bit worse.

Monday, July 7, 2008

Stocks fall on worries about financial sector

Monday July 7, 5:39 pm ET
By Madlen Read, AP Business Writer

Stock market declines on worries about financial sector even as oil prices pull back sharply

NEW YORK (AP) -- Wall Street lost more ground in extremely volatile trading Monday, as investors recoiled at a cautious economic outlook from a Federal Reserve official and the possibility of more financial troubles of Fannie Mae and Freddie Mac.

The market found only slight solace in retreating oil prices.

San Francisco Federal Reserve President Janet Yellen said in a speech the financial markets remained fragile, and that it will take time for conditions to improve. "My expectation is that market functioning will improve markedly by 2009," she said. "But things could get worse before they get better."

The comments added to concerns raised in a note by Lehman Brothers analysts that Fannie and Freddie may need to raise more capital as the credit crisis continues. Worries about the ailing financial sector deflated a stock rally early in the day that had been fueled by a $4-a-barrel pullback in oil prices.

The market managed, however, to rebound from its lows of the day, when the Dow Jones industrial average sank to its worst level since mid-August of 2006. Some investors bought back into the market to take advantage of the low prices.

"The market is so skittish and so scared that half the people believe that this is just another leg of the down market and the other half believes that we're forming a bottom," said Frank Ingarra, assistant portfolio manager at Hennessy Funds.

The Dow fell 56.58, or 0.50 percent, to 11,231.96. Over the course of the day, the blue chips rallied, tumbled, rebounded, and then fell once more. The Dow fell as much as 167.80 to 11,120.74 -- its lowest trading level since Aug. 15, 2006 -- but was also up more than 100 in early trading.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 10.59, or 0.84 percent, to 1,252.31, and the Nasdaq composite index fell 2.06, or 0.09 percent, to 2,243.32.

The technology-dominated Nasdaq got a modest boost from Yahoo Inc., which rose $2.56, or 12 percent, to $23.91 after Microsoft Corp. expressed support for investor Carl Icahn's effort to oust Yahoo's board next month. Microsoft said a successful rebellion would encourage it to renew its takeover bid for Yahoo, or negotiate another deal.

Light, sweet crude fell $3.92 to close at $141.37 a barrel on the New York Mercantile Exchange, after falling by more than $5 a barrel at times.

The retreat did little to assuage fears about high energy prices, however. Wall Street, which has been hurtling stocks lower for the past few weeks, remains fearful that consumers are trimming their spending to pay for gasoline. With consumer spending accounting for more than two-thirds of U.S. economic activity, a pullback could create big ripples.

Government bonds rose. The 10-year Treasury note's yield, which moves opposite its price, fell to 3.91 percent from 3.98 percent last Thursday.

Volatility on Wall Street, as measured by the Chicago Board Options Exchange's volatility index, on Monday briefly hit its highest point since March, when worries about the financial markets peaked during the buyout of Bear Stearns Cos.

"It indicates that there was more fear entering the market than there had been in previous weeks," said Todd Salamone, director of trading and vice president of research at Schaeffer's Investment Research.

Fannie Mae fell $3.04, or 16.2 percent, to $15.74 and Freddie Mac fell $2.59, or 17.9 percent, to $11.91, after Lehman Brothers analysts said new accounting rules could require Fannie to raise $46 billion more capital and Freddie to raise $29 billion.

Citigroup Inc., JPMorgan Chase & Co., and Bank of America Corp. also saw their shares fall ahead of their earnings reports later this month. Citi fell 42 cents, or 2.5 percent, to $16.40; JPMorgan dropped $1.27, or 3.6 percent, to $34.04; and Bank of America fell 87 cents, or 3.9 percent to $21.53.

In addition to financials, Merck & Co. dragged on the Dow, falling $1.85, or 4.8 percent, to $36.60. A UBS analyst downgraded the drug maker, citing slowing sales of its HPV treatment Gardasil.

Meanwhile, General Motors Corp. is considering cutting more white-collar jobs and getting rid of some brands, according to a person familiar the company's discussions. The person asked not to be identified because no decisions have been made. GM shares, which recently sank to all-time lows, rose 12 cents to $10.24.

Investors haven't been as optimistic lately about the prospects for an economic recovery in the second half of 2008 as they once were. The Dow has fallen the last three weeks while the S&P 500 index and the Nasdaq have logged five straight weeks of declines. With drops of more than 20 percent from their October highs, the Dow and the S&P 500 entered bear market territory last week as rising oil stirred inflation concerns.

Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York, said some negative technical indicators on Thursday presaged the market's weakness Monday. Notably, there were no companies that set 52-week highs on the New York Stock Exchange on Thursday, Fullman said. "It's unusual to see a drop-off like that."

On Monday, the dollar traded mixed against other major currencies, while gold prices fell.

Declining issues outnumbered advancers by more than 2 to 1 on the New York Stock Exchange. Consolidated volume came to 5.21 billion shares, up from 3.19 billion shares on Thursday.

The Russell 2000 index of smaller companies fell 7.52, or 1.13 percent, to 658.26.

Overseas, Japan's Nikkei stock average rose 0.92 percent. Britain's FTSE 100 rose 1.85 percent, Germany's DAX index rose 1.97 percent and France's CAC-40 advanced 1.80 percent.






New York Stock Exchange: http://www.nyse.com/

Nasdaq Stock Market: http://www.nasdaq.com/

Tuesday, July 1, 2008

Starbucks closing 600 stores in the US

Tuesday July 1, 9:23 pm ET
By Jessica Mintz, AP Business Writer

Starbucks closing 600 US stores, most opened in the last 2 years

SEATTLE (AP) -- For a decade it appeared there was no such thing as too many Starbucks for U.S. coffee drinkers, whose willingness to buy its $4 lattes and dark drip brews rationalized a second green-and-white mermaid awning just down the street -- and sometimes even a third.

But in a sign that those days are over, Starbucks Corp. announced Tuesday it will close 600 company-operated stores in the next year, as the faltering U.S. economy hastened the pain caused by the company's own rapid expansion.

Starbucks did not say which stores will be closed, only that they are spread throughout the country. But it did say 70 percent of those slated for closure had opened after the start of 2006.

To put it another way, Starbucks is closing 19 percent of all U.S. company-operated stores that opened in the last two years, Chief Financial Officer Pete Bocian said during a conference call.

About 12,000 workers, or 7 percent of Starbucks' global work force, will be affected by the closings, which are expected to take place between late July and the middle of 2009, spokeswoman Valerie O'Neil said.

O'Neil said most employees will be moved to nearby stores, but she did not know exactly how many jobs will be lost. Starbucks estimated $8 million in severance costs.

In total, the company forecast up to $348 million in charges related to the closures, $200 million to be booked in the fiscal third quarter ended June 30. Starbucks reports third-quarter results at the end of July.

The 500 additional stores set to be closed had been on an internal watch list for some time. They were not profitable, not expected to be profitable in the foreseeable future, and the "vast majority" had been opened near an existing company-operated Starbucks, Bocian said.

Some analysts had wondered whether Starbucks' explosive growth in the U.S. would come back to haunt it as the market became saturated.

But before Tuesday, the company avoided acknowledging that saturation was an issue, and pinned weak financial results and adjustments to new store openings on the economy.

During the call, Bocian said that between 25 and 30 percent of a Starbucks shop's revenue is cannibalized when a new store opens nearby, and that the closures should help return some of that revenue to the remaining stores.

Bocian said there aren't a material number of stores left on the watch list, but that the company will hold remaining stores to the same standards.

Starbucks still plans to open new stores in fiscal 2009, but on Tuesday it cut that number in half to fewer than 200. The company did not adjust its plan to open fewer than 400 stores in 2010 and 2011.

"We believe we still have opportunities to open new locations with strong returns on capital," Bocian said.

During the conference call, the CFO echoed concerns about the economy expressed by Chief Executive Howard Schultz in May, when the company attributed a 28 percent drop in profit to less traffic from U.S. consumers who were feeling the pinch of higher food and gas prices.

At the end of March, there were 16,226 Starbucks stores around the world. The company operates 7,257 of those stores in the U.S. and 1,867 abroad; the remaining 7,102 locations are run by partners who license the Starbucks brand.

Shares of Seattle-based Starbucks jumped 72 cents, or 4.6 percent, to $16.34 in after-hours trading after losing 12 cents to close at $15.62.

http://www.starbucks.com

Friday, June 27, 2008

Bear Market Guide: Relax, make money

Stocks are down about 20% from their highs, and even the bravest investors might be tempted to cut their losses. Here's why that's not a winning strategy.

By Stephen Gandel, Money Magazine senior writer
Last Updated: June 27, 2008: 6:55 PM EDT

NEW YORK (Money Magazine) -- Worst month for stocks since the Great Depression. A bear market. Oil blows past $140. These are the times that try long-term investors' souls.

Consider the response from Ram Ganesh, 31, who started investing in stocks only a year ago. Watching his portfolio rise for most of the year, Ganesh thought he had the market figured out. "All my readings about Warren Buffett were really paying off," said Ganesh, a software engineer who lives in Seattle.

But in the past few weeks, his portfolio is down $3,500, a significant hit to his modest $20,000 account.

Ganesh bought shares of General Electric earlier this week thinking he was getting a bargain. But the stock is down another $2 since then, and that has Ganesh thinking he should sell, not just GE, but his entire portfolio.

"Being in the market feels like gambling now," he said. "Not sure I believe in buy-and-hold anymore. I wish I had gotten out two weeks ago."

Of course, Ganesh's gut reaction - and probably your own - is the exact wrong one.

First of all, it is notoriously tough to get in just before rallies and out before selloffs.

For example, sell out now and you may miss the rebound. In 1974, the Dow Jones industrial average plunged 30% in the first nine months of year, only to rebound 16% in October. Similarly, stocks jumped 21% in 2003, after three years of big loses.

"When markets recover, they recover quickly," said Steve Bleiberg, in charge of investments for the global asset allocation program at Legg Mason.

Second, stocks are actually a better deal - maybe even "safer" - than they were a year ago. And they look exceedingly cheap compared to 1999, the height of the stock-market mania.

The price-to-earnings ratio of the S&P 500, based on corporate bottom lines of the past twelve months, is 20% lower than it was at the beginning of the year, and half of the 31 multiple it was back in 1999.

"In the 1990s, the market had a lot to drop," said Christopher Cordaro, a financial planner in Chatham, New Jersey. "This time we only started at a middle level and are already down."

Still, sticking to stocks can be tough in times like these. Here are four steps you can take to keep you finger off the sell button.

"In hindsight, this is likely to be a buying opportunity," said Harold Evensky, a Coral Gables, Florida financial planner. "What part of the worst case scenario is not already priced into stocks today?"

Remember your investing goals

The problem is big market drops like these make us forget the real goal of all our savings and investing. That's to stash away enough money to maintain your current standard of living in retirement.

Much more important than your monthly balance, is the one you see 10 or 20 or 30 years from now, when you actually need that money. In that time, stocks will go up and down and up again. So the fact that your 401(k) is down 20% from what it was eight months ago may not have much baring on what you will have in retirement.

Put today's economic peril in perspective

Before you panic over today's headlines, and how far stocks could fall, consider the relative health of today's economy.

In the early 1970s, economic output was falling. But today, despite the sluggishness, GDP is still inching ahead.

In the early 1980s, unemployment hit 10.8%. Today, the rate is 5.5%, or about half that.

Inflation topped 12% in the 1970s and 14% in the early 1980s. Today, it's at 4%.

Calculate how much have you really lost

Even if you have all your money in stocks - which probably is not, or shouldn't be, the case - the recent market downturn has really not hurt your savings that much, at least when it comes to how much you will have in retirement.

Consider someone in their 30s making $50,000 a year with that much in savings.

Before the market downturn, that person, with regular deposits in their 401(k) plan, was on track to have accumulated $1.6 million by the time of their retirement at 65.

How much will that person have now that the market has plunged 20% into bear territory? $1.5 million.

Of course, the closer you are to retirement the larger a market downturn hurts you. That's because the market may not recover by the time you need the money.

A recent study by T. Rowe Price showed that the chances of you running through your retirement savings rose from 13% to nearly 50% if the market increased less than 5% during the first 5 years of retirement. Still, we've been in a bear market for less than a year. So you still have four years to recover.

What's more, 5% over five years is not a high bar, and you don't have to sell all of your stocks to lower the ups and downs of your portfolio. T. Rowe recommends you hold 55% of your portfolio in stocks at retirement.

Find something to do

Want to feel like you're at least doing something? Strategist Robert Arnott of Research Affiliates in Pasadena, Calif., says you need to revisit whether you portfolio is really diversified.

And Arnott says diversification doesn't mean 70% stock and 30% bonds. He says you should consider shifting your new deposits into commodities and overseas investments.

He currently thinks emerging markets are a good play. T. Rowe Price International Discovery (PRIDX) invests in countries like Brazil and China, the economies of which are growing much faster than the United States is growing.

Harold Evensky agrees that commodities could be a good addition to your portfolio if inflation continues to rise. The iShares S&P GSSI Natural Resources Index (IGE), which is an exchange traded fund, can give you exposure to the commodities sector for a low management fee.

Another way to protect your retirement portfolio is to buy Inflation Protected Treasuries or TIPs. They are Arnott's preferred inflation defense. And had you bought TIPs a year ago, you would be already counting your gains. The iShares Lehman TIPS Bond (TIP) is up 14.4% in the past year.

Thursday, June 26, 2008

Economic muddle sinks stocks

High oil prices and a still-weak financial sector mean the economy - and the markets - face more pain ahead.

By Colin Barr, senior writer
Last Updated: June 26, 2008: 5:19 PM EDT

NEW YORK (Fortune) -- Thursday's stock market selloff reflects a sobering truth: Nine months of strong medicine have failed to cure the credit crisis and left the economy in a weakened state.

The Dow Jones Industrial Average plunged 3% to a 21-month low on Thursday, a day after the Fed held its key interest rate target steady for the first time following nine months of aggressive rate cuts and loans to financial firms. The central bank said it is concerned about rising inflation but is also watching for signs that tepid economic growth will slow further.

The economy is struggling to muddle through a period dominated by two powerful negative forces. The Fed has cut rates by 3.25 percentage points over the past year in an attempt to shore up a weak, undercapitalized banking system swimming in bad loans tied to the housing bubble, and to cushion the loss of consumer spending power tied to falling house prices. But at the same time, consumers and businesses have been laboring under an increasing burden of surging food and fuel prices.

The problem now, from the point of view of Fed chief Ben Bernanke, is that trying to tackle either problem risks exacerbating the other. So the Fed is probably on the sidelines for the balance of the year - which means investors can look forward to more ugly selloffs like Thursday's, which left the Dow down 20% from last fall's all-time high.

"The resilience of the U.S. economy has been remarkable over the past 12 months as the credit crisis spread beyond the subprime mortgage market and oil prices soared," economist Ed Yardeni wrote earlier this week in his daily newsletter. "Unfortunately, there may not be much more that the Fed can do to stimulate economic growth should the resilience of the economy continue to be tested by the credit crisis and oil prices."

Thursday's big losers included truckbuilder Oshkosh (OSK, Fortune 500), which lost a third of its value - costing shareholders some $830 million - after predicting high commodity costs will lead to a third-quarter loss. Other big decliners included automakers General Motors (GM, Fortune 500) and Ford (F, Fortune 500) the latter of which hit a low last seen back in 1985 as high gasoline prices swamp demand for sport utility vehicles. Also hit hard were financial firms Citi (C, Fortune 500) and Merrill Lynch (MER, Fortune 500), which dropped to new lows after analysts said additional mortgage-related losses could lead to more shareholder-diluting stock sales or, in Citi's case, possible dividend cuts. Bank of America, which dropped 7% and now trades at half its year-ago level, said it will cut 7,500 jobs in its purchase of Countrywide.

Soaring oil prices have led to massive losses at U.S. companies in energy-intensive businesses such as auto production and airlines, and have prompted some commentators to call for the Fed to start raising interest rates. But while consumers and many companies would surely benefit from lower food and energy prices, higher interest rates could put further pressure on growth, by reducing demand for goods and services. With May sales at General Motors, for instance, having plunged 30% from a year ago, lower consumer demand is not something struggling companies are looking for.

"The jury still is out as to whether consumer spending is out of the woods," writes Northern Trust economist Paul Kasriel. "The motor vehicle producers would say 'no.'"

Another factor that's hard to overlook is the ill health of the big U.S. banks. Citi dropped 6% Thursday after analysts at Goldman Sachs put the stock on their "conviction sell" list, predicting second-quarter asset writedowns of almost $9 billion. Analysts at Sanford C. Bernstein downgraded Merrill Lynch to sell as well, saying the firm should take $3.5 billion in writedowns in the quarter that's about to end. Analysts at both firms indicated they have been too optimistic up till now in forecasting a financial sector recovery.

"The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought," Goldman Sachs analyst William Tanona said. "We see multiple headwinds."

Headwinds are the least of it, though. As Bernstein analyst Brad Hintz wrote, the problem for big financial companies is that their most profitable businesses, those tied to the fast and furious debt markets of the earlier part of this decade, have essentially ceased to exist. Brokerage firms have shown some ingenuity over the years in exploiting new opportunities in the financial markets, but it will take a while for those to develop.

"We are not recommending investors buy canned goods and bottled water at this point," Hintz writes, adding that low short-term rates and a steeper yield curve will eventually lay the groundwork for a recovery. "But currently the trend lines of Wall Street's high-margin institutional businesses are pointing south."

Unfortunately, those aren't the only trend lines pointing in that direction.

Tuesday, June 24, 2008

The Blame Game

Tuesday June 24, 6:00 am ET

It's a classic Wall Street “whodunit," complete with a collection of greedy investment bankers, slow-witted policymakers and numbskull Florida home buyers. But with so many suspects, how will Americans ever figure out who killed the once-vibrant and cheery U.S. economy?

"There were a lot of people who contributed to the real estate bubble and the easing of lending standards that led to the subprime debacle," says Ethan Harris, chief U.S. economist at Lehman Brothers. So many, indeed, that he and other pundits find it difficult to point the finger at any single player.

You can, though. Play the Portfolio.com brackets and pick your own culprit.

Real estate speculators took foolish risks because lax lenders such as Angelo Mozilo's Countrywide Financial let them; mortgage bankers and investment bankers allowed greed to override caution; credit-rating analysts and central bankers alike relied on risk-management models that proved inadequate to the task at hand.

"Bubbles grow because nearly every player pitches in to make them grow," argues Tobias Levkovich, market strategist for Citigroup.

Of course, at the core of any bubble is an apparently rational demand for a rational good or service that at some point tips over into irrationality. So the quest to assign blame should start with whomever it is that is demanding the free lunch—the purchasers of tulips, dotcom stocks, or, as is the case today, townhouses in Naples, Florida, or on the outskirts of Phoenix.

"The speculative fever that swept through the ranks of home buyers was quite astonishing," says Jason Trennert, co-founder of Strategas, a market-analysis firm. "Everyone wanted to cash in on what they saw as a one-way ticket to riches by buying real estate."

The problem wasn't just the greed of the buyers, however. Lenders were equally hungry for quick profits and all too willing to satisfy that buyer's need for immediate gratification, waiving the requirements for income or job verification in exchange, of course, for only slightly higher interest payments on the mortgage.

No down payment? No problem. Suddenly, there were few true obstacles to borrowing; after all, minimal percentage points of extra interest would compensate for the added risk of lending to these subprime borrowers, rationalized the banks and other lenders doling out the cash.

But perhaps those lenders wouldn't have been quite as eager to throw their traditional rules out the window if creative savants toiling at investment banks hadn't found a way for them to quickly remove any risk they were taking from their books and dump it into the laps of other investors. Some, like Merrill Lynch's ousted chief, Stan O’Neal, jumped headfirst into the risky business.

The folks who ran those portfolios, says the freshly indicted Ralph Cioffi of Bear Stearns, eagerly snapped up those securities without questioning their outsize yields, all too willing to accept the risks as benign and remote.

After all, analysts at the credit-rating agencies such as Moody's and Standard & Poor's were awarding these collateralized-mortgage obligation securities and other such packages far higher ratings than they ultimately deserved. No one was able or willing to delve far enough beneath the surface to realize how risky the investments actually were, or how much investors stood to lose if housing prices started to dip or interest rates started to climb.

Does the blame spread to Ben Bernanke and the Federal Reserve? Was a lack of vigilance on the part of policymakers responsible for the bubble and thus, ultimately, our current economic plight? What about Hank Paulson at the Treasury? Shouldn't the former Goldman Sachs boss have felt the ill winds blowing?

"Tighter monetary policy would have been helpful," concedes Lehman's Harris, before adding that "it's very hard to identify an asset market bubble, and frankly, this was a big problem that had a lot of participants." Ultimately, though, he's unwilling to pin too much blame on Fed chairman Ben Bernanke or his predecessor, the once-revered Alan Greenspan.

"Everyone was eager to take the risks when things were going well; it isn't until it all starts going wrong that we look for someone to blame," says Levkovich. "But if we're honest with ourselves, it's far easier to have perfect hindsight than it is to buck the trend when a bubble is taking shape."

Friday, June 20, 2008

Gates without Microsoft

Ah, retirement. Time to kick back, relax, and rethink philanthropy, learn biochemistry, eradicate malaria and develop drought-resistant crops.

By Brent Schlender, editor-at-large
Last Updated: June 20, 2008: 5:35 PM EDT

(Fortune Magazine) -- Let me tell you about Bill Gates. He is different from you and me. First off, the billionaire co-founder of Microsoft has always been something of a utopian. In his mind, even the world's knottiest problems can be solved if you apply enough IQ. Accordingly, Gates, who has been spotted on Seattle freeways reading a book while driving himself to the office, covets knowledge. It's as if he's still trying to make up for dropping out of Harvard, as he spends just about any spare waking minute reading, studying science texts, or watching university courses on DVD.

Some say his wealth and famous opportunism are reminiscent of the robber barons of yore. Yet here is a man who has set a goal to eradicate malaria. Rich as he is - his net worth is an estimated $50 billion - you can't call the man greedy when he has pledged to give back to humanity all but a tiny fraction of 1% of that fortune.

These traits only begin to explain why Gates, at 52, has chosen to redirect his efforts toward more altruistic pursuits. On July 1 he will step away from an operating role at Microsoft (MSFT, Fortune 500) to devote more time to philanthropy and other interests. The shift has been on his mind for nearly a decade, and it reflects some important experiences over his lifetime.

Much is expected

Like that seminal time back in 1968 when his mother, Mary, spearheaded an effort to install a used Teletype terminal in his school so that her already autodidactic junior high schooler could teach himself how to program a mainframe. There was his epiphany when he first met fellow billionaire Warren Buffett in 1991 - and realized that it quite literally pays to follow your curiosity beyond your own area of expertise.

And there's the poignant letter his mother wrote in 1993 to his fiancée, Melinda French, cluing her in to the Gates family credo: "From those to whom much has been given, much is expected." (Mary Gates would die the next year.) That letter, in turn, led to the self-conscious irony in the slogan he and his wife hit upon for the Bill & Melinda Gates Foundation: All lives have equal value.

The genes, the IQ, the life of privilege, and the noblesse oblige have always been there. Given that background, it makes sense that he would turn his attention and wealth to the greater good. But there is a more selfish motive in the "retirement" of Bill Gates, and one that no one should begrudge him. For the first time since he quit Harvard to start Microsoft 33 years ago, Gates is going to have the time to indulge what his father calls his "world-class curiosity."

Gates' closest friends wonder how he will exploit this new freedom. "He doesn't know for sure where his mind is going to go," says Buffett, who has donated the bulk of his own $45 billion fortune to the Gates Foundation, largely because he believes his money will be used wisely and effectively. "Not only will it be fascinating, but I think it's going to be, for me, very satisfying to watch."

"He is one of the greatest business minds of all time, and you don't just shut that off," adds Nathan Myhrvold, the former head of Microsoft's R&D labs, who still kicks around ideas with his former boss via e-mail almost daily. "My guess is we have not seen the last business idea out of Bill Gates."

Setting a curious mind free

Bill Gates 2.0 will have three offices: one at Microsoft in Redmond, a second about 15 miles away at the Gates Foundation in downtown Seattle, and a third almost exactly equidistant between the other two (and much closer to home). In typical hyper-systematic fashion, Gates has allocated blocks of time to each location: a day in Redmond, two at the foundation, and two at the personal office, which he suspects will be his real "center of gravity." There will be a lot of overlap among his three roles. That's because the guy's greatest pleasure seems to be in finding connections among things he's interested in.

The biggest change, of course, will be in his workload at Microsoft, which will drop drastically. He'll remain chairman and weigh in here and there. "Other than board meetings and consulting on projects like Internet search technology, the only things I'll do are some company visits when I'm in developing countries," he says. "Or if there's some special award for someone at a company meeting, I'll come and present it. But that's about it." (For more on how Microsoft is coping with Gates' retirement, see the accompanying story.)

The opposite will be true at the foundation. Gates' official title, which he shares with his wife and father, is co-chair, but his real role will be as the organization's chief strategic thinker. And Gates is teeming with ideas, especially about things scientific. Unlike most benefactors, he doesn't merely want to eradicate malaria and AIDS; he wants to understand the nuances of immunology. He wants to learn about what happens on a molecular scale when a plant's genes are altered to improve hardiness. He insists on knowing the precise legal reasons women in developing countries are robbed of their estates when they become widowed.

"Here's how Bill thinks," explains Myhrvold. "He is always interested in looking at big systems in the world and understanding them at every level that he can. As an example, I got this e-mail from him today as part of this whole discussion on corn prices and crop yields and shortages resulting from ethanol production, and at the end Bill says, 'I really need to understand phosphates more.'"

Another big part of his new job will be to make more public appearances and do more arm-twisting of governments and corporations to do more for the world's poor. "I'm uniquely able to reach out to the big companies, to ask them not just to write checks but to offer more of their innovative power," Gates says. "There's a big category of my time for talking to drug companies, cellphone companies, banks, and technology companies, as well as talking with other people who are lucky enough to have superbig fortunes about how they want to give those back to society."

That does not translate to fundraising - on the contrary, the foundation plans to exhaust its $100 billion endowment by the end of the century. Gates is talking about setting an example for the plutocracy. Jeff Raikes, the former Microsoft executive who was just appointed CEO of the foundation, thinks that effort could have as much impact on the world as the works of the foundation itself: "He has an incredible opportunity to help shape the thinking of other multibillionaires by getting them to think about the process, the structure, the best practices."

Gates takes pains to stress that even in his more active capacity, "I'm not the CEO of the foundation. Jeff will be the CEO." That's simply not what he wants to do with his time. "Even today people at the foundation get lots of e-mail from me, but after Sept. 1 they'll get a lot more, because now I'll be able to take courses, read more, meet more smart people, and have better ideas."

Mellowing with age

In his younger years, Gates' gimlet-eyed idealism manifested itself in stubbornness and self-righteousness, an unusual boldness, and a tendency not to suffer fools. Most people who have worked closely with him can recall more than one instance in which he reacted to a comment or idea by standing up and hissing, "That's the stupidest thing I've ever heard in my life."

He hasn't lost that inclination toward intellectual arrogance. But in his philanthropic work, the shoe is sometimes on the other foot. He's not, after all, a microbiologist or a geneticist. Moreover, with age and maturity, Gates has become much better able to acknowledge what he doesn't know or when he's wrong.

"The classic CEO needs to be right, or rather needs to appear to be right more than he needs to actually be right - and that's not Bill," says his pal Myhrvold. "Lewis and Clark were lost most of the time. If your idea of exploration is to always know where you are and to be inside your zone of competence, you don't do wild new shit. You have to be confused, upset, think you're stupid. If you're not willing to do that, you can't go outside the box."

And that explains the third dimension of Bill Gates' new life - giving that "world-class curiosity" some room to run. His reading and learning have always been systematic. It's his nature. His father and sisters recall how young Bill would refuse to leave his room to come to the dinner table because he was too busy "thinking." But for many years, as he built Microsoft, his field of vision was of necessity rather narrow. One of the most important experiences that jostled him out of his single-mindedness was his first meeting with Buffett, on July 5, 1991. As Gates tells the story:

My mom called me at the office to come out to Hood Canal for a Fourth of July barbecue because she wanted me to meet Warren Buffett. And I said, "Mom, I'm working." But she insisted. So I took a helicopter so I could spend my couple of hours there and then get back quickly and work on software.

Then I met Warren, and I thought, "Oh, wow, this guy isn't just about buying and selling stocks and businesses. He is thinking about how the world works." And he asked me questions that I always wanted somebody to ask me, about why hadn't IBM (IBM, Fortune 500) been able to do what we had done, and how software gets priced, and why does one company have a defensible position. He wanted to understand the dynamics of the industry. To me it was way far away from, "What is your company worth?"

Then he explained to me about how Wal-Mart (WMT, Fortune 500) had not only changed things in its business, but how it had an effect on newspapers because they thought of their advertising differently than individual local stores had. And he talked about how banking really worked in terms of credit risk. The whole time all I could think was, "Hey, I'll be smarter about running Microsoft after I talk to this guy." And so I stayed the whole day.

Ever since then, Gates has tried to make more time to broaden his knowledge, and his capacity to absorb ideas has served Microsoft and the foundation well. But now reading, learning, and blue-sky brainstorming will be considered an integral part of his job description, and no doubt they will yield something.

Think of his third office, the one equidistant from Microsoft and the foundation, as the billionaire-adult equivalent of his own room. It's a place for him to spend time exploring his own ideas, and occasionally trying to find an appropriate entity to pursue them, whether it be Microsoft R&D or someone at the foundation or one of the foundation's many corporate and nonprofit partners. He'll focus on ideas related to his philanthropy, but he also will spend a lot of time with the staff of Ph.D.s and inventors at Intellectual Ventures (IV for short), Nathan Myhrvold's Seattle-based skunkworks for discovering patentable new technologies. Previously IV hosted brainstorming sessions for foundation scientists, and Gates is an informal member of a group of IV partners and investors with more general interests that meets regularly. He plans to participate even more frequently after July 1.

"I'm not going to create a company," Gates vows. "The foundation is the top priority. But there are some other things that I might help along. The scientific brainstorming with Nathan's group has led to a new nuclear energy startup, and I'm a funder and advisor to that thing. It won't be a huge amount of time, but the truth is, cheap energy that's environmentally friendly is a breakthrough that is more important for the poor than the rich. And the poor need fertilizer, more reliable seeds, and better agriculture too. They can't cut back their eating, because that's called starvation. So I'm investing in that."

Myhrvold loves the irony of it all: "It's so funny: Here's a guy who never went to class when his poor dad was paying the Harvard tuition, and now the sheer love of learning has sucked him back in, hard-core. It's not like he needs a job. It's not like he's thinking, 'Oh, that would look good on my résumé.'"

His place in history

It's too early, of course, to judge the legacy of Bill Gates. He's only 52. His kids aren't even out of elementary school. And he has only just stepped away from Microsoft, a company that once put IBM in its place, and which some would say is the most significant company to come along since General Electric (GE, Fortune 500).

Nor do we really know what - or even whether - Gates thinks of his place in history. As outgoing Gates Foundation CEO Patty Stonesifer puts it, "The Gateses by nature believe that the unexamined life is the one that's worth living. They don't like to talk about themselves. It's all about rational responsibility, not grand idealism."

Buffett, who knows him as well as anyone, says the notoriously competitive Gates will have to find new ways to judge his accomplishments rather than by market share or in dollars. "He'll be competing with his own standards," Buffett says. "In the end, he is going to want people to look at the Gates Foundation 100 years from now and say, 'This guy did it the way it should have been done.'"

With all he did at Microsoft, Gates has a tough act to follow. "Bringing personal computing to billions has totally changed the world, and it's changed it, net-net, way for the better," says Myhrvold. "So even before you look at what his foundation has done for Africa or for the poor, he's already done more for the good of the world than essentially anyone else in our lifetimes."

Melinda Gates isn't at all surprised by Bill's transformation from feared empire builder to enlightened philanthropist. "I think the foundation, because it's not all about business and competition, allows other dimensions of Bill's personality to come out," she says. "He's incredibly funny and has an unbelievably wry sense of humor. He also can be very emotional when he sees the pathetic living conditions of so many people. He's a genuinely nice guy. I think more of what I see at home and what we see inside the foundation will come out. That will be a really nice thing for him and for the world."

To which her husband would likely say, "That's the stupidest thing I've ever heard in my life."

Just kidding.

Thursday, June 19, 2008

China Shocks With 18 Percent Fuel Price Rise

Thursday June 19, 10:50 am ET

BEIJING (Reuters) - China will announce a surprise increase of about 18 percent increase in retail gasoline and diesel prices effective from Friday, the first increase in eight months, two industry sources told Reuters.

"Yes it's real. They are going to raise the prices. We were told to wait in the office to receive the official notice," said a fuel sales official with top refiner Sinopec Corp (HKSE:0386.HK - News).

The sources said gasoline and diesel prices will rise by 1,000 yuan ($145.5) per metric ton.

China last raised pump fuel prices in November.

The move in November took many market watchers by surprise as Beijing has repeatedly vowed to rule out "near-term" price increases to fight decade-high inflation.

Oil prices fell $3 a barrel on Thursday on the news because demand from China has been one of the main factors driving oil prices to a record near $140.

2 surrender in subprime mortgage collapse case

Thursday June 19, 8:18 am ET
By Tom Hays, Associated Press Writer

2 former Bear Stearns managers surrender in collapse of the subprime mortgage market

NEW YORK (AP) -- Federal authorities say two former Bear Stearns managers have surrendered in New York City to face criminal charges in the wake of the collapse of the subprime mortgage market.

Authorities in Brooklyn are expected to give details later Thursday on the case against Ralph Cioffi and Matthew Tanin, who are ex-managers of Bear Stearns Cos. hedge funds that collapsed last year.

Officials have told The Associated Press that the former executives are suspected of misleading investors about the risky subprime mortgage market. They have been the target of the yearlong probe.

Tannin's attorney has declined to comment and Cioffi's attorney has not responded to a phone message.

Tuesday, June 10, 2008

Stocks Could Be Hostage To Oil Prices All Summer

Tuesday June 10, 1:25 pm ET

For the stock market, this summer is going to be all about oil.

When once the two moved in tandem, equities and energy now are running in opposite directions, a trend most analysts expect to continue until oil finds a more comfortable trading range.

"At this point the market is almost held hostage to oil prices. It's very difficult to envision how the stock market moves appreciably higher with these huge swings we're seeing in oil prices now," says David Twibell, president of wealth management for Colorado Capital Bank.

The trend has been especially acute lately, particularly Friday when U.S. light, sweet crude surged more than $11 a barrel and the major stock indexes each fell about 3 percent. It repeated itself Monday when oil fell and the Dow posted a modest gain, and performed similarly Tuesday as oil lost ground through the morning and stocks gained.

"I think we're going to have, at least for the time being, an inverse relationship," Twibell says. "I don't think historically that's been the case or needs to be the case. But energy prices are so high and have gone up so rapidly that it's really a psychological influence for investors."

Volatility became a watchword in the market when the credit crunch began to take hold in September 2007.

The Chicago Board Options Exchange's Volatility Index (Chicago: VIX) gained about 32 percent from early September to mid-March 2008. But the VIX dropped considerably through April and May, falling well below 20, which is considered the benchmark for a volatile market.

But it is back up since then as oil has skyrocketed and stocks have given back much of their gains. At the same time, the VIX has moved back into volatility ground, and with questionable volume levels ahead for the summer the waters could be choppy.

"People keep saying that one of reasons that oil prices are so high is because global growth is so high, yet everybody seems to be looking for a slowdown in global growth. You can't have it both ways," says Brian Gendreau, investment strategist at ING Investment Management. "I think the market is having trouble sorting it all out. There are a lot of cross-currents."

Of course, not everyone thinks volatility is a bad thing, but investment advisors counsel caution when it comes to playing this type of market.

How to Play the Oil-Stocks Disconnect

Money managers typically like to find market stalwarts like Procter & Gamble during hard-to-predict economic times. The stock has been a favorite lately for market bears, including Rick Pendergraft, editor at Investor's Daily Edge online newsletter.

"Their products are everyday use items that people just don't change up that much," he says of the company.

But Pendergraft also favors a host of bear plays, including shorting an exchange-traded fund for long-term bonds, the iShares Lehman 20+ Year Treasury Bond (NYSE Arca: TLT) fund. He also advocates shorting stocks and buying inverse ETFs. Rydex offers a variety of inverse ETFs, including the ProFunds Bear Inverse (OTC Funds: BRPIX) which tracks S&P 500 movements.

Since oil has surged and caused havor through stocks, investment counselors are advocating traditional down-time sectors.

They include consumer staples and health care, while Pendergraft also thinks tobacco companies could do well now. Utilities also get some mention, particularly those that do business in foreign markets.

But some are looking directly to energy as a way to navigate the turbulent times, though not necessarily in the big producers.

"The energy area is going to be the primary area that is going to benefit," says Richard Sparks, senior analyst at Schaeffer's Investment Research. "Specifically, you want to look at the front end of the pipeline that benefits from that increase in price--exploration and production, rather than the refiners."

Sparks recommends two small-cap exploration firms: PetroQuest and Goodrich Petroleum.

Twibell takes a far more cautious approach to investing right now, and is in fact advising his clients to stay on the sidelines until the oil scenario plays itself out. The only areas he would play now are agriculture, due to soaring grain costs, and believes the community and regional banks will offer solid value over a longer time frame.

"If I had a cash reserve I'd be holding onto that, looking for some resolution one way or the other," he says. "Over the short run I don't even think you're really safe in energy right now."

While it may seem obvious, many analysts are simply counseling diversification and calm in the face of the wild oil and stock swings.

"Investors that have a well-diversified portfolio are probably best off right now hanging in tight," Twibell says. "If we can get some catalyst to move energy prices lower, I think the markets can do just fine."

Friday, June 6, 2008

Stocks fall sharply on surge in oil, jobs data

Friday June 6, 12:01 pm ET
By Tim Paradis, AP Business Writer

Stocks tumble after surge in crude oil prices, suprise jump in unemployment rate; bonds jump

NEW YORK (AP) -- Wall Street plunged Friday on two troubling economic developments: oil prices that surged more than $6 a barrel and a jump in unemployment that was much larger than the market anticipated. The Dow Jones industrial average gave up more than 250 points.

The decline in stocks also helped drive bond prices sharply higher as investors sought a more secure place for their money.

Crude oil has made an aggressive rebound this week, rising more than $7 a barrel in two days after falling amid a drop in demand for gasoline. The jump continued Friday. Light, sweet crude surged $6.37 to $134.16 a barrel on the New York Mercantile Exchange after reports that a Morgan Stanley shipping analyst predicted oil would surge to $150 a barrel by July 4 and as the dollar declined.

Oil's advance unnerved a market already anxious about consumers' willingness to spend; the higher that energy costs go, the more difficult it will become for consumers to justify spending on things that aren't necessities. That kind of reluctance could deal a big blow to the economy as consumer spending accounts for more than two-thirds of U.S. economic activity.

The spike in energy prices comes as the Labor Department said the nation's unemployment rate jumped to 5.5 percent in May from 5.0 percent in April. It was the biggest monthly increase since February 1986 and the rise leaves unemployment at it highest level since October 2004. Wall Street had predicted an uptick to 5.1 percent.

The number of U.S. jobs shrank by a smaller-than-expected 49,000, but that development offered Wall Street little solace given that May marked the fifth straight month of jobs losses. Signs that the U.S. job market is deteriorating more than anticipated could thwart investors' hopes that the economy is poised for recovery later this year. That notion has helped propel the stock market from its mid-March lows.

The sudden rise in oil prices appeared to weigh most heavily on Wall Street, however, as some investors attributed a portion of the rise in unemployment to a rush of teenagers looking for summer work.

"I think the biggest concern right now is oil and it's potential for a stagflationary environment," said Bill Knapp, investment strategist for MainStay Investments, a division of New York Life Investment Management. Stagflation occurs when stalling growth accompanies rising prices.

In midday trading, the Dow fell 252.81, or 2.01 percent, to 12,351.64.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 23.87, or 1.70 percent, to 1,380.18, and the Nasdaq composite index fell 42.16, or 1.65 percent, to 2,507.78.

Friday's pullback comes a day after the Dow jumped nearly 214 points, logging its largest daily point gain since April 18 following better-than-expected sales from retailers and a dip in jobless claims. The welcome economic news helped investors shrug off a more than $5-a-barrel spike in oil prices. But the further advance in oil on Friday was too much for investors to overlook.

Bond prices jumped after the weak jobs data sent investors scurrying for safety. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.94 percent from 4.04 percent late Wednesday.

The dollar declined against other major currencies -- a move that makes each barrel of oil more expensive. Gold prices rose.

Ethan Harris, Lehman Brothers' chief U.S. economist, contends that the employment report helped drive oil prices higher. He said traders are worried that the spike in unemployment would leave the Federal Reserve unwilling to raise interest rates. A notion of a Fed with few options combined with comments from the European Central Bank this week on the possibility of raising rates have hurt the dollar.

"The weaker dollar is pushing up oil prices because oil is denominated in dollars and oil sellers want to be compensated for the weaker dollar," Harris said, adding that he thinks the market's moves have been overdone.

"While I'm skeptical of the whole thing in terms of whether it makes sense logically, this is the way the market behaves. It's like a Pavlovian response. If the Fed looks soft, oil prices go up," he said.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came 523.4 million shares.

The Russell 2000 index of smaller companies fell 13.47, or 1.76 percent, to 749.80.

Wall Street's pullback weighed on Europe. Britain's FTSE 100 fell 1.48 percent, Germany's DAX index fell 1.99 percent, and France's CAC-40 declined 2.28 percent. Japan's Nikkei stock average closed up 1.03 percent.

Wednesday, June 4, 2008

Wachovia's mistake spotlights Countrywide deal

Wednesday June 4, 1:26 am ET
By Ieva M. Augstums, AP Business Writer

Wachovia's Golden West mistake focuses attention on Bank of America's deal for Countrywide

CHARLOTTE, N.C. (AP) -- It's the most basic rule of investing: Buy low, sell high. Former Wachovia Corp. chief executive Ken Thompson couldn't escape his disastrous decision to buy Golden West Financial Corp. for roughly $25 billion at the height of the nation's housing boom. He was pushed out Monday, the same day crosstown rival Ken Lewis was busy defending his deal at Bank of America Corp. to buy Countrywide Financial Corp.

The critical difference: Lewis is paying just $4 billion for his mortgage lending giant.

"I think Lewis might be more imperiled, actually, if he doesn't go ahead and complete the transaction," said Gary Townsend, president of Maryland-based private investment group Hill-Townsend Capital. "The deal has the same perils that Golden West had, except he's not buying Countrywide for nearly the premium that Wachovia bought Golden West at the top of the markets."

The price difference is a little less than $20 billion, if you take into account Bank of America's initial $2 billion investment last summer that helped stabilize the shaky balance sheet of the Calabasas, Calif.-based company. When completed later this year, the transaction will make Charlotte-based Bank of America -- the country's second largest bank by assets -- the nation's biggest mortgage lender.

"Nothing has happened that is out of the boundaries of what we contemplated when we did the deal," Lewis told investors in a conference call Monday.

Nothing could be further from the truth at Wachovia. As the nation's housing market began to stumble, Wachovia's executives continued to defend the purchase and began to incorporate Golden West's business practices into its own. Thompson only later acknowledged the timing of the deal was poor and he was forced to set aside billions of dollars to cover losses from problem loans.

In April, before Wachovia slashed its dividend 41 percent and reported what was to become a $707 million first-quarter loss, it said it would revise the underwriting policies in its mortgage loan business -- a step that could make it harder to take out a home loan at the bank.

At Bank of America, Lewis plans to keep one of his own executives in charge of consumer real estate once the deal for Countrywide is completed next month.

"What Ken Lewis did was look down the street at Ken Thompson and said: 'We ain't going there. We're not going to turn Bank of America into Countrywide. We're going to turn Countrywide into Bank of America,'" said Tony Plath, an associate professor of finance at the University of North Carolina at Charlotte. "They're learning on North Tryon from what's going on down on South Tryon."

Wachovia ousted Thompson less than a month after the bank stripped him of his chairman title. The bank called it a "a step that was taken after very careful consideration" and one that was precipitated by no single event but rather a "series of previously disclosed setbacks."

Investors have pushed Wachovia's stock down almost 60 percent in the past year and it closed Tuesday at $21.92. Shares in Bank of America aren't doing much better. The bank's stock is down more than 37 percent in the past year, and traded at a new 52-week low Tuesday before closing at $33.31.

"Ken Lewis is vulnerable from a standpoint of watching his share price crater to the extent it has," Townsend said.

And there are concerns the ongoing struggles in the housing market and Countrywide's distressed loan portfolio could lead Lewis and Bank of America to costly write-downs and create a drag on earnings. Countrywide lost about $1.6 billion in the last six months of 2007, and the company faces numerous investigations and lawsuits related to its lending practices.

Bank of America has said it will tighten those lending standards, and Lewis predicted Monday that housing conditions will improve by early next year. He also said Countrywide and its professional sales force will give the bank a boost as it pushes to increase market share in the mortgage sector.

"There is a huge sales force already in place that I think could give us a huge head start at a time when the market is ripe for market share gains," he said. "So obviously there is a risk to it, but we are not paying $22 billion either. And so that is the offset."

But Lewis must also be wary of what happened across Tryon Street, and he acknowledged Monday he still has concerns that the housing market still has a "dramatic ways to go before you get to the bottom."

"And obviously we worry about that a lot," Lewis said. "I personally worry about that a lot."

Tuesday, June 3, 2008

Soros sounds alarm on oil 'bubble'

By Joanna Chung in Washington
Published: June 3 2008 05:06 Last updated: June 3 2008 05:06

Billionaire investor George Soros is to tell US lawmakers on Tuesday that “a bubble in the making” is under way in oil and other commodities and that commodity indices are not a legitimate asset class for institutional investors.

He is expected to tell a congressional committee that rising oil prices are the result of a number of fundamental changes and factors in the market, but that the relatively recent ability of investment institutions to invest in the futures market through index funds is exaggerating price rises and creating an oil market bubble.

“I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987,” Mr Soros will tell the Senate commerce committee, according to a draft text seen by the Financial Times.

“In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash.”

The comments by Mr Soros, chairman of Soros Fund Management, a $17bn hedge fund, are likely to fuel a debate about the role of speculators – including hedge funds, pension funds and other institutional investors – in the rising costs of energy and food. The fund declined to comment on its specific market positions.

Regulators and other officials have said surges in oil and commodity prices are mainly due to fundamental supply and demand factors combined with a depreciating dollar, which is used to price and trade commodities.

However, some politicians believe that the new wall of money entering the asset class through commodity indices is a key factor. Tuesday’s Senate hearing into energy market manipulation and federal enforcement regimes is one of a series of held in Washington in recent months examining aspects of the market.

Mr Soros said index-buying was based on a misconception and commodity indices are not a legitimate asset class. “When the idea was first promoted, there was a rationale for it ... But the field got crowded and that profit opportunity disappeared,” his prepared remarks say.

“Nevertheless, the asset class continues to attract additional investment just because it has turned out to be more profitable than other asset classes. It is a classic case of a misconception that is liable to be self-reinforcing in both directions.”

Mr Soros will say a crash in the oil market “is not imminent”. But he says it is desirable to discourage commodity index investing – or the “elephant in the room” in the futures market – though not with more regulation.

Thursday, May 29, 2008

Report: World food prices set to fall

Thursday May 29, 9:24 am ET
By Emma Vandore, AP Business Writer

World food prices set to fall from current record but will remain high, report says

PARIS (AP) -- World food prices are set to fall from current peaks in the coming years but will remain "substantially above" average levels from the past decade, a report said Thursday.

The world's poorest nations are most vulnerable -- particularly the urban poor in food-importing countries -- and will require increased humanitarian aid to stave off hunger and undernourishment, according to a joint agricultural report by the Organization for Economic Cooperation and Development and the U.N. Food and Agriculture Organization said.

"Rising prices now translate, unfortunately, as an increase in hunger and civil strife. Uncertainty rules and our people are worried," FAO chief Jacques Diouf told a Paris news conference.

OECD head Angel Gurria, at his side, added: "The end of cheap food in a world where half the population lives with less than two dollars a day is a source of grave concern."

High oil prices, changing diets, urbanization, expanding populations, flawed trade policies, extreme weather, growth in biofuel production and speculation have sent food prices soaring worldwide, trigging protests from Africa to Asia and raising fears that millions more will suffer malnutrition.

"There is a real need to foster growth and development in poor countries and to assist in developing their agricultural supply base," said the report, based on a forecast of the cereals, oilseeds, sugar, meats, milk and dairy products markets for the period 2008 to 2017. It reflects agriculture and trade policies in place in early 2008 and includes an assessment of the biofuels markets for bioethanol and biodiesel.

Despite the prices hikes, general price levels have remained "remarkably stable," suggesting that inflation in the coming decade will "remain low," the report says.

"We do not expect the current price levels to last. But the average of most agricultural commodity prices over the next 10 years will still exceed the average of the previous decade by 10 to 50 percent, depending on the commodity," Gurria said.

Compared with the previous decade, the report said average prices from 2008-2017 for beef and pork will rise 20 percent; sugar around 30 percent; wheat, maize and skim milk powder 40 to 60 percent; butter and oilseeds more than 60 percent; and vegetable oils over 80 percent.

Besides investing in agriculture, the report recommends helping poorer countries diversify their economies and improve governance and administrative systems.

The two international bodies also urged governments to rethink trade-restricting policies such as protecting domestic producers through high price support, export taxes and trade embargoes.

Gurria also called for the "swift and ambitious" conclusion of the Doha trade talks.

"As yields return to normal and farmers respond to higher prices, supply will expand and bring prices down," he said. "That, in turn, will tone down the panic reactions both by market participants and by some governments, which have contributed to exacerbate prices."

"But after the 'spike in the hike' disappears, the more permanent factors will come into play," he said, noting high oil prices and growing biofuel production.

The report says demand for biofuels has boosted demand for grains, oilseed products and sugar at a time when stocks are lower.

Analysis "suggests that the energy, security, environmental and economic benefits of biofuels production ... are at best modest, and sometimes even negative," the report said, urging "alternative approaches."

Internationally, overall food prices have risen 83 percent in three years, according to the World Bank. Part of the increase is the result of adverse weather in major grain-producing regions, with spillover effects on crops and livestock competing for the same land.

Developing countries such as India and China will dominate production and consumption of most commodities by 2017, the report said.

The report assumes a strengthening of the U.S. dollar against most other currencies, which it said will increase incentives to boost domestic production in some countries.

The report also recommends examining the link between climate change and water availability and the effect on production and yield shortfalls, and developing genetically modified organisms "offers potential that could be further exploited," the report says.

Rising food prices, in the absence of adequate regional markets, are increasing food insecurity in Africa, said Ndiogou Fall, president of ROPPA, a network representing farmers from 10 West African nations.

"Agriculture in our countries has been turned into a mine of raw materials for the European food industry," Fall said in a statement from Rome, where he was attending talks led by Italian farmers' group Coldiretti. "Until this logic changes, we won't be able to step out of the crisis."

Associated Press writer Marta Falconi in Rome contributed to this report.

http://www.oecd.org/

http://www.fao.org/

Yang 'Listening' But Yahoo Caught Between a Rock and Carl Icahn

Posted May 29, 2008 09:54am EDT
by Aaron Task in Investing, Internet, Newsmakers, Venture Capital, M and A, IPOs

At the All Things D conference Wednesday night, Jerry Yang reiterated what Steve Ballmer said the night before: Yahoo and Microsoft are talking, but not about an all-out acquisition of Tech Ticker's parent.

Meanwhile, The Wall Street Journal reports "people close to Yahoo" would "likely entertain an offer" in the mid-$30s range, suggesting the two sides are tantalizingly close to Microsoft's since-pulled $33 bid.

A full buyout is ultimately the most likely outcome, says Dan Colarusso, managing editor of Portfolio.com, but Ballmer is likely to wait a little longer to ratchet up the pressure on Yahoo's board.

Speaking of which, the Journal also says Carl Icahn would prefer Yahoo do an outsourcing deal with Google vs. an alternative transaction with Microsoft.

Colarusso believes this is merely a ploy by Icahn to let Ballmer know the famed corporate raider also has options, even if he's pretty much placed all his chips on a Microsoft-Yahoo deal getting done.

For Yahoo, dealing with Ballmer is better than dealing with Ichan, says Colarusso, but Ballmer needs Yahoo, too, and Portfolio.com provides a roadmap for (finally) getting the deal done.

Saturday, May 17, 2008

Citi Settles Enron Suit for $1.66B

Wednesday March 26, 2:03 pm ET
By Madlen Read, AP Business Writer

Citigroup to Pay $1.66 Billion to Settle Enron Creditors Bankruptcy Lawsuit

NEW YORK (AP) -- Citigroup Inc. agreed Wednesday to pay $1.66 billion to creditors of Enron Corp. who lost money when the energy trader collapsed in 2001.

Citigroup was the last remaining defendant in what was known as the "Mega Claims" lawsuit, a bankruptcy suit filed in 2003 against 11 banks and brokerages. The filer, called Enron Creditors Recovery Corp., alleges that with the help of banks like Citigroup, Enron kept creditors in the dark about the company's financial troubles by using shady accounting.

Wednesday's settlement -- plus previous bank settlements and Enron's subsequent release of $1.7 billion held in reserves -- gives those creditors more than $5 billion, Enron said. That amounts to 37.4 cents on each dollar the creditors had tied up in Enron, according to Enron.

Citi, which denies any wrongdoing, had been trying to get the creditors suit tossed out. Enron's creditors -- which include individual employees and small companies who lent Enron money -- had filed claims against Citi that could have potentially totaled about $21 billion.

The creditors' suit is separate from a $40 billion class-action lawsuit by shareholders, which Citigroup already settled in June 2005 for $2 billion.

That shareholder suit has pulled in more than $7 billion from companies including Citi, Bank of America Corp. and JPMorgan Chase & Co., and as of January planned to pay out stockholders $6.79 per share of common stock and $168.50 per share of Enron's stock-like preferred shares, according to a mailing to Enron investors.

But late last month, a federal judge delayed a decision on whether to approve the plan to distribute the settlements. Meanwhile, there are several companies that remain as defendants in the shareholder case, including Merrill Lynch & Co., Credit Suisse First Boston and Barclays Bank PLC.

For Citigroup, Wednesday's settlement of the creditors' suit has resolved the bank's two largest remaining claims. The settlement arrives a month ahead of a scheduled April trial.

Still, the $1.66 billion settlement wipes out more than half of the $2.8 billion in litigation reserves Citi held as of Dec. 31, 2007, according to a regulatory filing. Citi said earlier this year those reserves are sufficient to cover all pending suits.

Several years after the Enron collapse, Citi is wrangling with its own financial problems. A plunge in demand for assets backed by mortgages caused the bank to suffer a nearly $10 billion loss in the fourth quarter of 2007, its biggest loss ever.

Citigroup shares fell $1.25, or 5.3 percent, to $22.17 by midday trading Wednesday.

In addition to paying Enron creditors $1.66 billion, Citi is waiving about $4 billion in claims it made against Enron. Citi said it agreed to a separate settlement resolving all disputes with the holders of Enron credit-linked notes. It would not disclose the amount of that settlement.

Before it filed for bankruptcy, Enron in its hey-day had been the seventh-largest company in the United States.

Enron's collapse into bankruptcy obliterated thousands of jobs, more than $2 billion in pension plans, and more than $60 billion in market value. It also resulted in the convictions of Enron's founder Kenneth Lay and former chief executive Jeffrey Skilling for fraud, conspiracy and other charges. Lay died in July 2006 of heart disease, and Skilling is serving a sentence of more than 24 years. Lay's death vacated his conviction.

AP Business Writer Lauren LaCapra in New York contributed to this report