Archive for July 27th, 2009

NEW YORK (Reuters) — Time Warner Inc. paid 283 million for Google Inc.’s 5% stake in AOL, the Internet company said in a U.S. regulatory filing Monday.Time Warner (TWX, Fortune 500), which plans to spin off AOL by the end of the year, bought the stake from Google (GOOG, Fortune 500) on July 8, AOL said in the filing with the U.S. Securities and Exchange Commission.The price that the company paid for Google’s stake implies that AOL has a total value of about 5.7 billion.The filing is a registration statement with the government that AOL must file before its long-expected separation from Time Warner, and brings the company one step closer to ending a troublesome eight-year-old merger.0:00
/5:09AOL CEO: Why I took the jobCurrent Time Warner shareholders are expected to be holders of the new AOL shares once the company is separated. Time Warner is the parent company of CNNMoney.com. AOL Chief Executive Tim Armstrong told Reuters last week the company will focus primarily on being a Web advertising business.In its registration statement, AOL said that it expects to incur up to about 90 million of additional restructuring charges in the last nine months of 2009.The company already incurred 58.3 million in restructuring charges during the first quarter of 2009, which it said were related primarily to layoffs and closing facilities.Time Warner shares rose 2 cents to close at 27.60 on the New York Stock Exchange. Google shares fell 1.92 to close at 444.80 on the Nasdaq stock market.

Source:CNN

(CNNMoney.com) — Matthew and Marnie Brannon, co-owners of Midwest Fiat in Columbus, Ohio, have run their vintage Italian car parts and service shop for five years. Late last year, they were offered the chance to buy a competitor and expand their business — but no bank would lend them the money to do it. After a grueling six months of hacking through red tape and warding off scam lenders, the Brannons finally get their financing. Here’s how they did it.December 2008: We had been interested in acquiring a Georgia-based Fiat parts company for months. Between Christmas and the New Year, the owners of that company offered us a purchase price on terms we liked. But the offer, they said, would expire in 90 days.We got to work right away, running the numbers for their company and ours, locating a property in our area that would support a much larger company, and putting together a presentation for lenders. The binder we assembled was 300 pages, opening with our elevator pitch. We also included a PowerPoint presentation on our business, spreadsheets full of our company and personal financial data, and a detailed financial forecast. We knew we’d need to borrow about 110,000 to both make the purchase and operate the business for the first few months after the deal.February 2009: Our first major mistake was assuming that the loan process would be as easy as getting a mortgage. We thought it would be quick, because we were so well-prepared.We approached one bank at a time, waiting weeks in between each for an answer. Every time, the result was the same: A loan officer explaining that although our presentation was the best they’d seen, they weren’t willing to work with us.March: The deadline was looming. After being rejected by three banks, we e-mailed the company in Georgia to explain that we were working very diligently to secure lending, in the hopes that they’d keep the offer on the table. Then we took a shotgun approach and sent the binder to two more banks at once. One rejected us, but the other took interest. We went in for a meeting and the loan officer said he could try to get us a Small Business Administration (SBA) loan.At the very end of the month, CNNMoney.com interviewed us and ran a story describing our situation.April: About 30 individuals contacted us following that story claiming to be able to help us. Some emailed, some called. But none were known, reputable lenders. For starters, they came from far and wide. Why would we want to work with someone from Nevada or L.A.? And also, their means of getting us money — from a reverse mortgage on our house to attaching liens to our merchant services — were too unconventional for our tastes.As far as we could tell, they were all snake oil salesmen — with the exception of one guy from Columbus who facilitates loans and financing at much larger companies. He had connections at a bank that he thought would be interested in our business. He wanted to meet for lunch to discuss — no strings or personal involvement attached. It’s beyond us why he took the time to introduce himself, but we were thrilled that he did. After a lunch meeting, where we of course presented our trusty binder, he pulled out his phone. It took only one phone call for us to get our foot in the door at a commercial financing institution in Columbus. It was a small lender that had been around for five years or so, but we hadn’t heard of it before.They were much more responsive to us, and moved faster, than any other potential lender that we’d talked with. The rest of the month was full of meetings. We filled out paperwork and answered detailed questions from the lender. The loan officer even came by our shop to survey how we operate. We always made sure that when there was a request for a document, we got it to him immediately.May: We got written and verbal approval for the loan on May 5. The company we wanted to buy was still game to move forward with the sale, but because it had been so long since the original offer, we had to go back and renegotiate for the inventory — they’d kept selling while we were hunting for the financing, so what remained for us to buy had changed.The owners pushed back and were reluctant to update their profit and loss statements. That delayed the process. Plus, a number of new searches had to be done to ensure our potential acquisition didn’t have any outstanding debts.The following six weeks was the most gut-wrenching period for us. All the pieces hung in a delicate balance.The bank kept asking us when we were ready to close. The other bank, the one that was working on an SBA-based solution, contacted us mid-May to announce approval as well, and also began asking when we were ready to sign. We had to finalize the sales contract by gently marshalling all of the stakeholders — the sellers, counsel on both sides, accountants, and so on — some of whom seemed to have little sense of urgency. Because of the delays, we had to continue paying non-refundable deposits on the property for the new warehouse, while persuading the landlord that we were close to sealing the deal. We also needed to line up new insurance policies and perform lien searches to satisfy the lenders.We worried that if any of the main components — the sales contract, the loan, or the property — fell through, all our work would have been for naught.Finally, the sale was completed.June: As we prepared the loan documents, the bank’s lending officers were wringing their hands over the collateralization. In the end, everything but our wedding rings was on the line, from our properties to our life insurance. Our friends thought we were crazy, but we decided to take the leap.On June 22, we signed on the dotted line and got a loan that would both cover the purchase and carry us through our nascent months.Oh, and that day we were finally able to withdraw our application from the bank that had expressed an interest in giving us an SBA loan in March. We had kept it open as a backup option in case our current deal went kablooey.July: Our epic journey hasn’t ended — it has just begun.As tired as we are, we’re running on adrenaline to get the shop up on its feet. We just finished transferring inventory from Georgia to Ohio. In a few days, we’ll be hiring two new employees, and we plan to add another three by the end of the year. We also plan on making our Web site more professional to reflect our new company.Our friends who doubted us now rethink our decisions when they see the sheer amount of stuff we have and the new, amazing space. They finally see the vision that we had all along.

Source:CNN

HOUSTON (Reuters) — Allen Stanford, the Texas financier accused of a 7 billion fraud, should be transferred to another detention facility because there has been no air conditioning in the jail cell where he is being held, his lawyer said in a court filing.”For at least a week, during the hottest part of the summer, with outside temperatures of 100 degrees (38 Celsius) or more, the place where Allen Stanford is being held as a pretrial detainee has had no air conditioning and for part of that time was without power altogether,” Stanford’s attorney, Dick DeGuerin, said in a court filing Sunday.Stanford, who has been in custody since his arrest on June 18, is being housed in a single cell that he shares with between eight and 10 other men, according to the filing.A representative of the federal detention center located about 40 miles north of Houston said in an e-mail that he had no comment on DeGuerin’s specific allegations but said that the facility has full power and air conditioning.Stanford, whose net worth was estimated at 2.2 billion by Forbes magazine in 2008, faces criminal charges related to an alleged Ponzi scheme centered around his offshore bank in Antigua.U.S. District Judge David Hittner, who ruled that Stanford should stay in jail until trial, has denied a previous request from DeGuerin to move his client to downtown Houston.The criminal case, USA v. Stanford et al, is filed under case 4:09-cr-00342 in federal court in Houston.

Source:CNN

NEW YORK (Fortune) — Most forecasts of future performance in the auto industry tend to be variations of tea-leaf reading. Analysts take a look at what companies are planning in the way of future models, make a guess about sales volumes, and lay that over a macroeconomic outlook. The results are compromised by too many hard-to-quantify variables.However, one study, Merrill Lynch’s “Car Wars,” which has been produced annually for a decade, has proved remarkably accurate in forecasting future trends.Its premise is a simple one: The percentage of a manufacturer’s sales volume to be replaced with new models drives market share, profitability, and stock price. In other words, new models equal success. Manufacturers with the youngest showroom age relative to the industry will perform the best.0:00
/6:45GM refocuses on productThe results have been consistent. For at least ten years, General Motors, Ford (F, Fortune 500), and Chrysler have been slower to renew their fleet, and they have lost the most share. Japanese and Korean manufacturers have more rapidly turned over their fleets and gained the most share.The latest edition of Car Wars that looks at new models due in 2010 through 2013 tells a similar story — with one glaring exception. Once again, the Asians are at the head of the pack. Hyundai and Kia lead in new model replacement, with Honda in third place, Toyota (TM) in fourth, and Nissan ranked fifth.The big surprise is the company in second place: Ford. It gained three-tenths of a point of market share in the first half of 2009 to 16.1%, and Merrill Lynch expects it to build on those gains because of a burst of new models.Ford is adding the small Fiesta, along with the Focus, to its lineup in 2010 and a new crossover known as the C-Max in the 2012 model year. A long-overdue replacement for the Ford Ranger small pickup is also coming in 2012.The news isn’t so good at GM and Chrysler. GM’s lagging rate of model renewal means that market share losses “are likely to be greater than expected and more severe” this year and next, according to Merrill Lynch. It believes that GM’s 18%-19% market share target is too optimistic, and that a more realistic range is 15% to 16%.Despite GM’s burst of new models like the Cruze and the Volt, it is replacing only 9% of its volume in the 2010 model year and 12% in 2011. The Koreans, by comparison, are replacing 15% of their volume next year and a stunning 44% in 2011.If GM looks like it’s lagging, then Chrysler’s condition looks perilous. It is replacing only 5% of its volume next year, 9% in 2011, and 3% in 2012. Merrill Lynch calls this “an ominous sign,” adding: “This is a result of a lack of investment by Chrysler’s last two owners [Daimler and Cerberus] and the dubious potential for Fiat products in the U.S. market.”Merrill’s bottom line: “We anticipate that Chrysler will be roughly half its current size in a few years creating room for other automakers to gain market share.”

Source:CNN

SAN FRANCISCO (Reuters) — EBay Inc will slash fees by 20% for its top-rated sellers and push their listings higher up in the search queue, part of steps to try to rev up its long-stagnant Marketplaces arm.The online giant is trying to revive growth in its main retail unit, whose auctions and fixed-price sales connect buyers and sellers. Its latest move, announced Monday, is aimed at rewarding the most reputable sellers, who drive shoppers to the site and give top customer service.San Jose, California-based eBay (EBAY, Fortune 500) also said it would bestow on approximately 150,000 top sellers a “Top-Rated Seller” designation that buyers can search for on the site as they choose to conduct business with the most reputable.Sellers eligible for that program, which launches in October in the United States, the United Kingdom and Germany, must conduct 100 transactions a year and post at least 3,000 in annual sales volume.Those sellers must have a detailed seller rating of at least 4.6 out of a possible 5 — a measure that encompasses criteria such as whether an item is described accurately, shipping time and cost.0:00
/5:11Tech earnings strength”We’ve raised the bar on quality but we’ve lowered the volume requirements,” said eBay spokesman Usher Lieberman. “With the lowered volume requirements we’re able to welcome in a whole lot more smaller sellers.”Some 57% of the 150,000 to be designated top sellers did not previously qualify due to earlier volume requirements, Lieberman said.EBay has been trying to improve its feedback system in which buyers bestow a customer service rating on a seller with whom they have just conducted a transaction.Yet some sellers complain that system is unfairly skewed to buyers, who have the power to bestow a negative rating even if unmerited, which will hurt future sales.EBay said that in gauging sellers’ ratings, it will now place a greater emphasis on a seller’s lack of negative ratings rather than the difference between a good or stellar rating such as a 4 or a 5, which eBay concedes can be an arbitrary distinction.Other changes eBay is making include a more streamlined claims process when winning auction bidders do not pay, an easier system for editing listings of bulk items and a tool that allows sellers to see the factors affecting the placement of their items on eBay’s site.The lingering slump in consumer spending has taken a bite out of eBay’s sales. Stalled growth in Marketplaces has concerned investors and kept shares under pressure.But the company — which also owns fast-growing online payments unit PayPal — posted better-than-expected second-quarter results last week, providing some relief to investors anxious for a turnaround.Shares of eBay were up 2.1% at 21.68 Monday afternoon on the Nasdaq.

Source:CNN

NEW YORK: This question seemed unthinkable to ask just a few months ago, but here goes: Did the economy actually grow during the past three months?A few brave economists actually think it did. But we’ll find out for certain on Friday when the government unveils its first take on gross domestic product (GDP) for the second quarter. Still, even the average forecast is for a drop of just 1.5%, significantly better than the previous two quarters.GDP plunged 6% in the fourth quarter of 2008 and 5.5% in this year’s first quarter.”The pace of decline has slowed way down and we are seeing signs of stability. I expect a negative number in the second quarter but maybe zero growth or better for the third quarter,” said Chris Probyn, chief economist with State Street Global Advisors in Boston.Probyn argues that the recent improvement in home sales, consumer spending and exports is evidence that the recession may soon be nearing an end.Talk back: Do you believe that the economy is really stabilizing or do you think the numbers don’t tell the true story of the economy? Leave your comments at the bottom of this story. Zach Pandl, an economist with Nomura Securities in New York, also thinks that the second quarter GDP report will reflect a stabilization in the economy and early stages of a recovery.”The big story in terms of the second quarter is that contraction is getting close to zero. I wouldn’t rule out a positive number,” Pandl said. He said the primary reasons that the economy is getting closer to actually resuming growth are that businesses are finally showing a greater degree of confidence that the worst may be over.Pandl expects a smaller decline in business investment during the quarter as well as a slower level of inventory reduction as companies begin to realize that economic conditions are slowly returning to normal after last fall’s credit crunch paralyzed the financial markets.”Companies are going through an adjustment from the shocks hitting the economy late last year,” Pandl said.Not everyone shares such a rosy view though. “There has been an abatement of bad news rather than emergence of good news,” said Diane Swonk, chief economist with Mesirow Financial, a diversified financial services firm based in Chicago. “Stabilization in a deep hole is not something to pop champagne corks over.”Swonk said she remains concerned about the effect that lingering job losses and high unemployment could have on consumers. A weak labor market, coupled with banks continuing to tighten credit standards, could mean that even if the economy technically emerges from recession this year, a recovery could be dampened by anemic consumer spending.Kurt Karl, chief U.S. economist with Swiss Re, agreed that consumers may still be a little cautious and that until consumers turn the corner, it’s tough to imagine how the economy can show overall growth.0:00
/3:02How strong is the bull?Karl said that there isn’t likely to be as much of a boost to consumer spending from tax breaks in this year’s stimulus package as there was from tax rebates a year ago. Last year, the economy grew at a nearly 3% annual rate in the second quarter, but that turned out to be a short-term sugar rush. “Stimulus didn’t dribble out much as it did last year and some of that money was saved,” he said, adding that he believes personal spending dipped slightly in the second quarter and that GDP fell at a 1.8% rate.Finally, both Pandl and Probyn noted that the second quarter report may need to be looked at a lot more closely than most. That’s because the Commerce Department will be including so-called benchmark revisions to much of the data used to calculate GDP, particularly to the savings rate and personal income. This revision is the first since the end of 2003 and the changes could very well wind up showing that the economy was in worse shape a year ago than originally reported.”The comprehensive revisions are going to be a bit of a wild card since it could change our view of recent history,” Probyn said. “The changes will affect every quarter, and I bet that the gains in the second quarter of last year will be revised away.”While it may seem that changing the numbers from prior quarters is something that only matters to academics, that’s not the case. If it turns out, for example, that the savings rate is higher than once thought, that could be further proof that consumers are really changing their behavior. And even though that’s good news for the long-term, it could make it tougher for the economy to grow at a robust pace over the next year or so.Talkback: Do you believe that the economy is really stabilizing or do you think the numbers don’t tell the true story of the economy?

NEW YORK (Fortune) — If the credit markets have been an iceberg over the past year, the private equity business has been frozen as solid as a prehistoric glacier. Buyout giants like KKR, Blackstone, and Bain Capital — who just a couple of years ago were vying to one-up each other on a monthly basis with new mega-deals — have been in a virtual hibernation for months.In the first half of 2009, just 24 billion in deals were completed globally. That compares to 131 billion last year and an astounding 528 billion in deal volume in 2007. This year’s first-half total is the lowest since 1996, when the buyout industry was much smaller. There were only three loans extended to fund leveraged buyouts through June, the fewest number since 1985 according to Dealogic.In recent weeks, though, the stock market has begun to rally and the cost of borrowing has begun to fall. So it’s natural to wonder: Is the buyout market about to heat up again?Don’t be on it, say industry insiders. Private equity is still in the early stages of a long thaw.Digesting last cycle’s dealsThe problem is not that firms don’t have money to spend. In fact, according to private equity research firm PitchBook, the industry is sitting on an estimated 400 billion worth of so-called dry powder, or money raised but not yet invested.No, the reason that dealmaking isn’t going to come roaring back is that private-equity firms are simply still too busy trying to digest the companies they swallowed during the boom years.0:00
/5:36Private equity meets cheap eats”The business has changed radically,” says John Howard, head of Irving Place Capital, the former Bear Stearns Merchant Banking unit, which he helped rescue from the wreckage of Bear. “What was essentially a business of creating financial options is becoming more concerned with growth and enhancing profitability.”A survey earlier this year by the Association for Corporate Growth, a buyout industry group for consultants, found that 89% of private-equity executives said they were planning on spending a lot more time than before focusing on their portfolio companies.Of course, private equity investors have always claimed that their business was all about “improving” the companies they buy through streamlining operations. (At least enough to service the huge debt loads they pile on in the acquisition.)But in reality, the velocity of the business — fueled by cheap debt to buy companies and hungry equity markets to resell them to — typically discouraged much more than blunt-force cost-cutting. Only the very biggest firms have ever paid much attention to teaching management skills or thinking about ways to share costs among portfolio companies.”We saw people talk a lot about building platforms,” says Andrew Wilson, managing partner in divestiture services at Deloitte & Touche, referring to the industry’s term for buying companies and working to combine them in creative ways. “But we didn’t see so many execute them.”Despite the stock market’s rally, firms don’t expect much demand for their holdings any time soon. Part of the reason is that newly skeptical investors wouldn’t think about investing in the debt-laden companies they own. According to Standard and Poor’s, an astonishing half of all defaulting companies this year as of June were owned by private-equity firms.”The environment has changed, and the holding period is expected to be a lot longer,” says Blackstone’s senior managing director in charge of portfolio management, James Quella. “The ability to use financial engineering for enhancing returns has been curtailed and limited on existing portfolios.”A survey by Coller Capital, which invests in stakes in private equity deals, found that two-thirds of people in the industry believe the environment will stay the same or even get worse next year.Learning to manageSo in an attempt to generate some kind of returns for their investors in that time, firms are turning more aggressively to the time-honored tradition of creating value through cost savings. Such savings are being achieved by running their portfolio companies more like divisions of a parent, cutting costs across businesses and getting all the top managements in a room together more often.It’s an ironic turn of events, given that the earliest private equity deals were a response to the conglomerate booms of the 1960s and ’70s, when bloated, unmanageable behemoths like Gulf + Western and ITT were built.Gary Stiebel, founder and CEO of the New England Consulting Group, has been working with private-equity firms since those days. “Traditionally, firms delegated that kind of management stuff to advisory partners, or just didn’t really pay much attention,” he says. “Now they’re focusing on it and doing it more themselves.”One increasingly popular practice is called “leveraged sourcing,” in which the many companies owned by a firm will pool their buying orders from suppliers — ranging from telecom services to temp workers — to get bigger bulk discounts.”We’re getting a ton of phone calls on this,” says Richard Jenkins, a managing director at turnaround advisory firm Alvarez & Marsal, which recently launched a group dedicated to private-equity consulting. “Each week, we get another two or three calls asking us about what they can do to cut costs and manage more centrally.”Even mega firms that have done this in some form in the past are expanding. Blackstone (BX) has long had a group, called CoreTrust, that purchases across its businesses. It is the single largest U.S. customer to Staples (SPLS, Fortune 500), for example.Quella recently led Blackstone into a new area for leveraged sourcing: health care. Since January, Blackstone has asked companies to participate in a group plan that is now Aetna’s fifth-largest and Anthem’s ninth-largest customer. The health group also runs prevention and wellness programs across its companies.Still about sellingThere are limits to the process, however. Not all business functions can be merged. Howard of Irving Place Capital says that advertising in particular is a touchy area.”I’ve learned from the experience of buying an ad agency to use for all the businesses,” he says, “For the head of marketing, choosing an agency is one of their most important decisions. It was emasculating to them.”Will cost savings single-handedly save private equity’s returns? Consider that Blackstone’s two most recent funds raised nearly 30 billion. A 10% reduction in health-care costs of 2 billion would save 200 million, or create about 1.4 billion in value, assuming they can sell the companies for seven times their earnings. Using some rough, unscientific math, that’s about a 5% return on those funds.So while private-equity firms may make a virtue of their focus on growth, it is still the selling of those assets — not the managing of them — that defines them.”Private equity will always be the business of selling companies,” says Stiebel. “Exit timing and strategy is significantly more important for overall returns. More important than even the companies.” Meanwhile, they have to manage the best they can.

Source:CNN

NEW YORK (Reuters) — Aetna Inc. sharply cut its full-year earnings forecast on Monday because of higher-than-projected medical costs, sending shares down as much as 12% as the health insurer also posted a 28% drop in second-quarter net income.Aetna, one of the largest providers of employer-based insurance, has boosted its enrollment while rivals struggle with such gains, but some analysts have worried that the gains could be a sign the company is underpricing and sacrificing profit margins.The lower earnings reflect “the consequences of Aetna’s aggressive market share strategy,” Goldman Sachs analyst Matthew Borsch said in a research note.The No. 3 U.S. health insurer expects 2009 operating earnings of 2.75 to 2.90 per share. In June, Aetna lowered its full-year outlook to 3.55 to 3.70 per share from an initial forecast of 3.85 to 3.95.Even after Aetna cut its forecast in June, some on Wall Street expected the health insurer would slash its forecast again as industry-wide concerns over medical costs and underpricing catch up to the company.Second-quarter net income fell to 346.6 million, or 77 cents per share, from 480.5 million, or 97 cents per share, a year earlier.Excluding items, earnings of 68 cents per share fell 10 cents short of the average estimate of analysts, according to Reuters Estimates.Revenue rose 10% to nearly 8.7 billion, compared to the analyst estimate of about 8.6 billion.Hartford, Connecticut-based Aetna said higher medical costs stemmed from use of more services in the emergency room, laboratory and preventive services, which is a continuation of issues cited earlier this year.0:00
/5:47The great health care challenge”We continue to see upward pressure on medical costs beyond what we projected in early June, which we believe is driven in part by changing provider behavior in the face of a deep recession,” Chief Executive Officer Ron Williams said in a statement. “We did not fully capture the impact of these forces in our 2009 pricing.”The company spent 86.8% of its premium revenue on medical costs in the quarter, up from 81.9% a year ago. It had to spend 65 million pre-tax to cover claims from prior periods, mostly in 2008.For its commercial plans serving employers, it expects to spend between 84% and 84.5% of its premiums on medical costs for the full year.Aetna’s total membership stood at 19.05 million at the end of June, up 9% from a year ago.An Aetna spokesman declined to comment on a report in the Wall Street Journal that said the company was shopping its pharmacy benefit business, citing unnamed sources.Rival insurer WellPoint Inc. (WLP, Fortune 500) announced plans to sell its pharmacy benefit unit to Express Scripts Inc. for 4.68 billion in April, sparking speculation that other insurers would follow suit.Aetna (AET, Fortune 500) shares were down 7.6%, or 2.04, at 24.40 in premarket trading, after falling as much as 12% earlier in morning.Through Friday, Aetna shares had fallen 7% this year, underperforming most rivals. Aetna also reported higher-than-expected medical costs for the first quarter.

BOSTON (Reuters) — Diversified U.S. manufacturer Honeywell International Inc. reported a 38% drop in earnings that matched Wall Street’s forecasts and cut its full-year profit forecast to the bottom of its prior range.The world’s largest maker of cockpit electronics, which is facing a downturn in its core aviation and construction markets, said Monday it expects no economic recovery this year.Honeywell now looks for full-year earnings of 2.85 per share, at the low end of its prior forecast of 2.85 to 3.20. It cut its revenue forecast to 31.5 billion, below its prior range of 32.3 billion to 33.2 billion.”Economic conditions … remain challenging and we are not planning for any recovery in 2009,” said Chairman and Chief Executive Dave Cote, in a statement.Honeywell, which also makes systems to manage the temperature and security of large buildings, said second-quarter income came to 450 million, or 60 cents per diluted share, compared with 723 million, or 96 cents per diluted share, a year earlier.Revenue at the Morris Township, New Jersey-based company fell 22% to 7.57 billion.Analysts, on average, had looked for earnings of 60 cents per share on revenue of 7.68 billion, according to Reuters Estimates.For the year, Wall Street had looked for profit of 2.83 per share.So far this year, Honeywell (HON, Fortune 500) shares are up 3.5%, while the Standard & Poor’s capital goods industry group is down 3.4%.Its competitors include United Technologies Corp. (UTC) in aerospace and building control systems, Goodrich Corp. (GR, Fortune 500) in aviation and DuPont Co. (DFT) in specialty materials.

BEIJING (Reuters) — On the surface, China presents a fiscal study in contrast with the United States, keeping a remarkably low ceiling on debt even as it spends its way out of the financial crisis.But when Chinese leaders meet their U.S. counterparts this week, they should pause for reflection before venting any criticism, because hidden liabilities mean China’s books are uglier — potentially much uglier — than at first sight.Thanks to successive years of fast economic growth and even faster government revenue growth, the official debt-to-GDP ratio was 17.7% at the end of last year, far lower than almost any other major economy.The trouble is that excludes local government borrowing, the current surge in loans backstopped by Beijing and bad assets cleared from the banking system but still floating about.When all are thrown into the pot, analysts estimate that China’s debt may be closer to 60% of GDP, putting it in virtually the same league as the United States, which was at 70% at the end of 2008 before it launched its massive economic stimulus program.To be sure, Washington is now set on a path of exploding debt that Beijing will largely avoid. The United States budgeted for a federal deficit of 12.9% of GDP this year, whereas China is aiming for just 2.9%.But China’s finances are deteriorating more quickly than the government expected, fueling a rise in the stock of both explicit and disguised debt that will constrict its wriggle room.”It is serious because, one, much of it is hidden and, two, local governments are currently doubling down on their bets,” said Stephen Green, economist at Standard Chartered Bank in Shanghai. “As with all fiscal deficits, it limits space for further stimulus.”This is probably a moot point, for now. With China’s economy back on track and private-sector investment kicking in, few think Beijing will need to ramp up spending beyond its existing 4 trillion yuan (585 billion), two-year stimulus plan. But the narrowing of options still discomfits Chinese leaders.”Our fiscal work is very grim,” Chinese Premier Wen Jiabao told officials last week.Eroding financesGovernment revenues declined 2.4% in the first half compared to a year earlier, well shy of the official goal of an 8% rise. Expenditures were ahead of target and set to surge in the second half on the back of infrastructure projects.Tax intakes are, of course, closely tied to economic activity, so China’s upturn should deliver cash to government coffers. But improvement in June came mainly from land sales, a one-off revenue source that masks the difficult road ahead.”Even when we are already factoring in relatively optimistic revenue growth due to the economic recovery, the deficit is quite sticky at around 5 % per year for the next three years,” said Isaac Meng, economist at BNP Paribas in Beijing.But the real worry is the thickening morass of indirect debt.Officials at the Ministry of Finance estimated earlier this year that local government debt already topped 4 trillion yuan, or 16.5% of GDP, much more than previously assumed.0:00
/0:49Strong growth in ChinaAbove and beyond that are 400 billion yuan in bad loans in banks’ hands and at least 1 trillion yuan in non-performing debt hived off their books and assigned to asset management companies. The buck stops with Beijing on all of these.The record surge in bank lending this year means that its sum of liabilities is about to swell in size.Banks have showered money on infrastructure projects that are seen as having iron-clad government guarantees. Green said he “conservatively” estimates that Beijing’s bill for covering loans issued this year alone will be 1.75 trillion yuan, enough to push its 2009 deficit to 10% of GDP.”Debt bomb”Most troublesome of all is the potential for a “debt bomb”, in the words of China’s Economic Observer newspaper, at lower levels of government as officials engage in financial engineering that is both opaque and highly leveraged.Rules prevent Chinese banks from lending to governments the equity capital which they need to obtain further loans for investment. But local officials and banks are now exploiting a vast loophole thanks to intermediaries known as trust companies.The process is simple enough. Trusts create specially designed “wealth products”, which banks sell to their clients. Banks then give the funds to the trusts and they, in turn, funnel them to governments as equity capital.Local authorities, in short, are piling debt on top of debt. The Chinese banking regulator has started to warn trusts and banks of the growing risks, state media recently reported.It was not long ago that bad loans in China’s banking system seemed to pose a massive debt threat to the wider economy. The core solution over the past decade was sustained double-digit growth, vastly expanding the denominator in debt-to-GDP ratios and generating the taxes to pay down the numerator.Beijing is already looking to raise taxes where it can — increasing the levy on cigarettes, for example — but a return to super-charged growth is again its principal debt reduction plan.In the meantime, China needs to fund its rising deficit.On that front, at least, the government can be supremely confident, even if it has to issue more than the planned 950 billion yuan in bonds this year and yet more to cover shortfalls in coming years.”There is so much saving and so much liquidity, so there is definitely not a problem that China will not be able to finance its deficit,” said Tao Wang, UBS economist in Beijing.

Source:CNN