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2008 > USA > Economy (VIII)
David G. Klein
Editorial cartoon
Three Strikes Against Consumers
NYT
3.8.2008
http://www.nytimes.com/2008/08/03/business/03view.html
Editorial
No One Lives There Anymore
August 31, 2008
The New York Times
Across the United States, neighborhoods are littered with an estimated
900,000 vacant homes, the result of foreclosures, bank repossessions and
abandonment. And with defaults rising nationwide, the number is expected to grow
well into next year.
Such blight is contagious. Empty houses pose fire and health hazards, attract
crime and prolong the housing slump by depressing the value of nearby homes and
adding to the nation’s already bloated unsold inventory. No one is immune. Even
if your neighborhood looks fine — and you are financially secure — foreclosures
in your metropolitan area mean less property tax revenue and, as the downturn
deepens, less state sales tax revenue.
If the hardest-hit communities do not get help soon, the damage may be
irreparable. Most foreclosed houses would sell eventually, but not in time to
halt the decline in the quality of life that is already under way, or the
fracturing of the areas’ tax base.
The federal government is only limping to the rescue. The Department of Housing
and Urban Development is expected to release a plan next month for funneling
nearly $4 billion to states and cities, mainly to buy and redevelop foreclosed
homes.
The sum is far too small to have a broad impact. Properly targeted, it could
stanch the decline in some of the neediest areas, and ideally, begin to revive
them by attracting private investment. Success stories could serve as examples
for other communities, when, as is likely, a future Congress has to provide more
relief.
Success is not assured. The White House opposed the redevelopment effort as a
bailout of speculators. It finally dropped its objection, but Congress must
guard against delay or any other political games.
HUD must avoid the temptation to spread the money far and wide, an approach that
would score points with varied constituencies but would fail to target the
neediest areas. To make sure the money goes where it is needed most, HUD should
share the data it is using to devise the distribution formula. State and local
officials must also carefully target the money they receive.
Even if government officials perform well, the redevelopment effort could still
fail. The law requires that the local governments buy up foreclosed houses at a
price that is below the current market value. That could still be a good deal
for sellers — generally lenders or mortgage firms — since property values are
continuing to decline. But if lenders are not willing to take a loss upfront,
the sales will not go through and the unspent money will revert to the Treasury.
If the mortgage industry is not ready to deal, Congress and state and local
officials should assert the public interest, giving homeowners and communities
more leeway to counter the industry’s stance. Localities could raise the costs
for registering empty homes and the charges and fines for maintaining them,
increasing the incentive for a quick sale.
The best outcome would be for government officials and lenders to make deals,
soon, that strike a balance between the best possible prices and the highest
possible public good.
No One Lives There
Anymore, NYT, 31.8.2008,
http://www.nytimes.com/2008/08/31/opinion/31sun1.html
Economic View
Three Strikes
Against Consumers
August 3, 2008
The New York Times
By PETER L. BERNSTEIN
ONE of the spookiest features of the current economic crisis is the way
everything seemed to go wrong at the same time. In 2007, as if some kind of
secret signal went out among them, housing prices accelerated their decline
while the prices of oil and food rocketed higher. These changes were abrupt, as
they slammed into the economy with little forewarning of even bigger price
shocks just ahead.
The pain from any one of these price increases would have been bad enough. But
experiencing all three simultaneously doomed the business expansion under way
since the end of 2001. That the housing crisis also served to ignite the
calamities in the world of credit made the problems only harder to overcome.
The numbers are striking. From May 2007 to May 2008, the price of food jumped by
5.1 percent, double the annual rate from 1991 to 2006. Home prices show a
similar disconnect. During the two years ended in December 2006, home prices
jumped 43 percent. But in 2007, home prices fell 10 percent, and the pace of
decline has accelerated this year. In the case of oil, the price at the end of
2006, at $62 a barrel, was only $3 more than it was a year earlier. Over the
course of 2007, however, oil zoomed to $92 from $62; by mid-2008, it was up an
additional $40.
These extraordinary shifts in tempo were, for the most part, unanticipated. Yes,
the explanation for the explosion in food and oil prices — global demand
exceeding the growth in global supplies — was apparent in the three or four
years that preceded this crisis. Yet why were there no price shocks then?
At least the moves in oil and food prices share a common explanation, but what
in the world do they have to do with the end of the boom in home prices? One
could contend that increases in gasoline prices caused the demand for homes to
weaken, but the argument is not very compelling, and I do not recall a single
mention of that possibility during 2007.
In fact, the timing among these price movements seems a weird coincidence, not a
development linked by cause and effect. And this suggests the most unusual
feature of our current problems: the primary impact of all of them has been on
consumers, not on businesses. Even the credit crisis centers on the home
mortgage problem — though the jolly time investors had in risk-taking en route
to the edge of this abyss made a significant contribution to the distress in the
banking system and other financial markets.
This combination of events explains why it is so hard to find solutions that can
bring the economy back into the light. Past recessions and economic crises
typically developed in the business sector, where companies have a habit during
good times of running to excess in inventory accumulation or in expanding
employment and capacity. This time, businesses generally have been well financed
and conservative in their decision-making. Even the stock market, although at
high levels in 2007, has not been in the kind of speculative fever that has led
to past crashes.
As a result of these exceptional conditions, we have no guidelines to follow. We
are in uncharted territory.
Most of the attention has focused on the cracks and groans from the financial
sector, as banks totter at the edge of failure and where credit has been so hard
to come by. Some banks are even uneasy about lending to one another — an
astonishing rupture of normal conditions.
Nevertheless, the therapy must focus on the household sector, wrestling with the
triple blows of high home prices, oil prices and food prices. Nothing will turn
the economy around until we can restore some sense of hope and security among
consumers — perhaps even as food and oil remain painfully expensive.
Today, a halt in the decline of home prices seems the necessary condition to
transform the system from despair to hope and to turn the financial sector, now
embattled and disorganized, back into the functioning organism the economy needs
so badly. Indeed, here is where economic policy can have some influence on the
outcome. (In the case of food and oil, the forces are too strong for government
to intervene with any success.)
These steps would involve more effort by Washington — including financial
incentives —to persuade mortgage lenders to be patient about repayments instead
of foreclosing and making matters worse. After all, every participant in the
mortgage business will breathe more easily when the decline in home prices comes
to an end.
ASSISTANCE to individuals and institutions in trouble always raises concerns
about the moral hazards of bailouts, especially when a case can be made that
people underrated risks or were blindsided in their decision-making. But we have
no choice here. The economy teeters on the edge of not just a recession, but
also a more profound decline where trouble in any single sector can spread
breakdowns throughout the system, driving unemployment to intolerable levels. To
sit back and let nature take its course is to risk the end of a civil society.
Until we move more decisively in this direction, other efforts are likely to be
frustrating at best and counterproductive at worst. The household is the key to
the puzzle.
Peter L. Bernstein, a financial consultant and economic historian, is the editor
of the Economics & Portfolio Strategy newsletter.
Three Strikes Against
Consumers, NYT, 3.8.2008,
http://www.nytimes.com/2008/08/03/business/03view.html
Editorial
The Banks and Private Equity
August 3, 2008
The New York Times
Many banks are ailing, lamed by hundreds of billions of dollars in bad loans
and poor investments and hamstrung by the prospect of continued multibillion-
dollar losses.
There is no painless solution. If banks retrench by making fewer loans, families
and businesses are hurt and with them, the broader economy. If banks cope by
building bigger cushions against losses, shareholders take the hit in the form
of lower dividends, lower earnings per share, lower stock prices or some
combination.
Yet, for the past month, some private equity firms have been promoting what they
claim would be a relatively pain-free fix of the nation’s banks. And the Federal
Reserve — which must know that if it sounds too good to be true, it probably is
— has yet to say no, as it should.
Private equity firms say they are ready to invest huge amounts in ailing banks —
provided the Fed eases up on the regulations that would otherwise apply to such
large investments. The firms’ desire to jump in makes perfect sense. Bank shares
are cheap now, but for the most part, are likely to rebound when the economy
improves. The firms’ push for easier rules, however, is a dangerous power grab,
and should be rejected.
Under current rules, if an investment firm owns 25 percent or more of a bank, it
is considered, properly, a bank holding company, subject to the same federal
requirements and responsibilities as a fully regulated bank. If a firm owns
between 10 percent and 25 percent of a bank, it is typically barred from
controlling the bank’s management. To place a director on a bank’s board, an
investor’s ownership stake must be less than 10 percent. The rules exist to
prevent conflicts of interest and concentration of economic power. They protect
consumers and businesses who rely on well-regulated banks, as well as taxpayers,
who stand behind the government’s various subsidies and guarantees to banks.
To maximize their profits, private equity firms want to own more than 9.9
percent of the banks they have their eye on and they want more managerial
control — and they want it all without regulation. They argue that because they
tend to be shorter-term investors, problems that the rules address are unlikely
to occur on their watch. That is a weak argument. It does not necessarily take a
great deal of time to do damage. And as the financial crisis demonstrates daily,
decisions and actions taken by unregulated and poorly supervised firms can prove
disastrous years later.
Worse, the private equity firms are exploiting the desperation of banks and
regulators. They know that banks are desperate to raise capital and that doing
so is a painful process bankers would rather avoid. They also know that
regulators and other government officials, many of whom where asleep on the job
as the financial crisis developed, want to avoid the political fallout and
economic pain of bank weakness and failure.
Federal regulators would be wrong to cave. Now, when there is great uncertainty
about which institutions are too big or too interconnected to fail, is exactly
the wrong time to allow less transparency and less regulation. And with
confidence in the financial system badly shaken, it would be a mistake to signal
to global markets and American citizens that the government is willing to put
expediency above long-term stability.
Held to the same rules as other investors, private equity firms may choose to
invest less. Some banks may have a tougher time repairing the damage to their
institutions. Some banks will fail. That, unfortunately, is what happens in a
financial crisis.
The Banks and Private
Equity, NYT, 3.8.2008,
http://www.nytimes.com/2008/08/03/opinion/03sun1.html
The Chips Are Down in Vegas,
but Steve Wynn Is Betting Big
August 3, 2008
The New York Times
By JULIE CRESWELL
Las Vegas
STEVE WYNN casually plops a 231-carat, plum-size, pear-shaped diamond into my
greedy little paw. Seated in his office in the Wynn casino resort here, and
flanked by two German shepherds, he won’t tell me how much he paid for his rock.
But he quickly points out that it’s better than a 218-carat diamond that the
godfather of Chinese gambling, Stanley Ho, displays in one of his casinos in
Macao.
“I turned that diamond down,” Mr. Wynn allows, before asking if I’ve toyed with
his bauble long enough and prying it from my hands.
The give and the take. The grand gesture. The over-the-top glitz. The invocation
of magic in a brew of 24/7 gambling, resort excess, ultrahigh-end shopping, fine
dining and routine pampering. These are all part and parcel of a toolkit toted
around for decades by the man credited with changing the landscape of the Strip
and bringing a semblance of class to Sin City.
Later this year, Mr. Wynn, 66, will open his latest project: the $2.3 billion
Encore casino resort, a fantasy land featuring 2,034 luxury suites, a
glass-encased casino overlooking several pools, and penthouse baccarat tables
for high rollers.
The Encore is also an outsize gamble by a man who has made a lucrative,
freewheeling career out of such moves, and it comes just as an economic malaise
that has been seeping across the country is starting to slam the gambling
industry.
Like other businesses dependent on consumers and consumption to make a fast
buck, the gambling trade looks particularly vulnerable.
While revelers still fill the streets here and can be found even on a hot summer
afternoon pulling slot machine levers, conventioneers are spending much less
time in the city and vacationers are shelling out less on restaurants,
nightclubs and gambling than they did last year.
“The recession we’re seeing in the United States is affecting Las Vegas more
this time around than in any previous cycle,” says Dennis I. Forst, a gambling
analyst at KeyBanc Capital Markets.
Nervous investors have already pummeled casino stocks. The share price of the
largest publicly traded casino company, Las Vegas Sands, headed by Sheldon
Adelson, has plunged almost 70 percent from its 52-week high. The stock of
another big company, MGM Mirage (which, along with its majority shareholder,
Kirk Kerkorian, bought Mr. Wynn’s old company eight years ago), has fallen by
almost exactly the same amount.
Las Vegas Sands and MGM Mirage are also hobbled by the fact that they are
undertaking huge and expensive hotel casino developments in China and Las Vegas,
respectively, that have investors worried about rising debt levels on their
balance sheets.
MGM, for example, has its $9.2 billion CityCenter development under way here. It
boasts as many as 8,000 construction workers erecting seven high-rise buildings
on 76 acres. Projected to be completed late next year, CityCenter is to be a
densely organized “city within a city” with a casino, luxury hotel properties,
numerous luxury retailers and about 2,650 condominium residences — yet another
megaproject in a town that is already bursting at the seams and has led the
nation’s housing downturn.
On Friday, Boyd Gaming, which owns several middle-market casinos here and
co-owns the more upscale Borgata in Atlantic City, said it was delaying
construction of a partially built, multibillion-dollar casino on the Strip. The
Boyd development is a sprawling endeavor undertaken in partnership with the
Morgans Hotel Group. Boyd cited the credit crisis and the “challenging economic
conditions” as reasons for the delay. Boyd’s stock is down 73 percent over the
last year.
But even smaller companies operating in Atlantic City and elsewhere are hurting:
shares of Pinnacle Entertainment are down 62 percent over the last year, Riviera
Holdings is down 73 percent and Trump Entertainment Resorts is off 83 percent.
Although the stock of Mr. Wynn’s company, Wynn Resorts, has fallen 45 percent,
it is faring much better than those of his rivals. And despite the bleak times
facing Las Vegas, Mr. Wynn has a rather devil-may-care demeanor when asked about
the economy.
“What am I doing opening one of these places in a bad economy?” he asks, leaning
forward in his chair. He answers his own question by strumming his lips like a
banjo, making a noise that one of his seven grandchildren might make if they
were confused, before laughing uproariously.
Joking aside, Mr. Wynn, one of the most magnetic and polarizing figures in the
gambling industry, has always thrown himself into his ventures with passion and
purpose. And even when embellishing his thoughts with Hollywood-like bravado, he
is a wily, singular competitor who, after making hundreds of millions of dollars
here, rolled the dice again. He now owns stock valued at about $2.3 billion.
“You saw all of these other people come out to Las Vegas and say, ‘We’ll just
knock off a fully integrated destination resort. Nothing to it; I’ve done other
businesses,’ ” he says, snapping his fingers blithely. Then he brings his voice
down to a stage whisper worthy of Dirty Harry. “Uh, not so fast, Rodriguez. I
don’t think so.”
ASKED whether Las Vegas, in its pell-mell rush to court the more
recession-resistant luxury market, could be building too many luxury properties
like CityCenter, Mr. Wynn stops the conversation cold.
“Whoa, whoa, whoa, whoa, whoa. Who said that is the luxury market?” he asks, his
voice rising. “The luxury market in Las Vegas is Bellagio and Wynn. Period. You
can look at the average room rate. We’re in one category, and they’re a notch
down.”
“Everybody says they’re fancy and beautiful, but the question is, who is
delivering five-star service?” he adds.
At a cost of $2.7 billion, the Wynn, which opened in 2005, is all about opulent
grandeur. It has 2,716 rooms, 18 restaurants, a 45-foot waterfall cascading down
a massive artificial mountain, and a shopping promenade featuring upscale brands
like Chanel, Dior and Louis Vuitton as well as a Ferrari and Maserati
dealership. (The company says the site sells 70 Maseratis each year.)
Nearly everything — from the undulating parasols overlooking a bar to the
chandeliers and the chairs — is designed especially for the hotel, says Roger
Thomas, who has created the interior of many of Mr. Wynn’s hotels.
“I don’t even like color out of a box,” Mr. Thomas says. So he customized the
wall colors. When he was told he couldn’t put chandeliers over the gambling
tables because they would block security cameras, he figured out a way to fit
cameras inside the chandeliers.
For his part, Mr. Wynn may be sanguine about the challenges facing Las Vegas and
the economic downturn looming over the town because he has faced down naysayers
and financial challenges before.
When he opened the Mirage in 1989, the country’s economy was struggling and
critics predicted he would lose his shirt. Instead, the Mirage, with white
tigers, a shark tank and an erupting volcano, became an instant tourist draw and
a financial success.
Some Wall Street analysts say Mr. Wynn is in the catbird seat because his
company’s debt hasn’t mounted as his rivals’ has, and because his focus on the
jet set has so far insulated his bottom line.
“Unlike Sands and MGM, investors aren’t really that concerned about Wynn’s
balance sheet,” says Bill Lerner, an equity analyst at Deutsche Bank. Wynn
Resorts doesn’t need to raise money to finish current projects in Las Vegas or
China, he says, adding that the company is “underleveraged, relatively
speaking.” Unlike MGM and Sands, Wynn Resorts doesn’t have “big development
pipelines” in the works, he says.
What does worry investors about Wynn Resorts, Mr. Lerner says, is the concern
“that the high-end consumer may ultimately crack,” he says. “We don’t see much
evidence of that yet.”
Still, the numbers might be troubling. Wynn Resorts recently reported a steep
drop in net casino revenue in Las Vegas, while revenue per available room, a
much-watched gauge, slipped 3 percent. Those results were offset by huge casino
revenue gains in Macao, where Mr. Wynn expects to open his second casino hotel,
Encore at Wynn Macau, in early 2010.
“Sure, I wish it was a boom time. You like to open up when everybody is ripping
and roaring,” says Mr. Wynn, speaking of the Encore’s Las Vegas opening later
this year. But, he adds, his properties are meant to last for decades. “Who
cares if the opening is slow?”
BEFORE he opens Encore, Mr. Wynn is still fussing over details at the flagship
hotel. He fumes at a Wynn Resorts ad in a local newspaper because it’s not the
right shade of red. “Tell them we won’t pay for it,” he snarls at an employee.
In a meeting with his chief architect, DeRuyter Butler, he scrutinizes a
prototype of a fence he wants to build around the Wynn Resorts property to keep
gawkers from sitting on the grass or, even worse, changing babies’ diapers there
(which they’ve been know to do, he says).
And the wind: It’s whistling through the elevators in his lobby and driving him
nuts. Alternating between pounding his fist on the desk and grumbling under his
breath, Mr. Wynn makes his point: how can we be a top-notch hotel and have our
guests being blown all over the place?
He doesn’t brook the notion that he might be a micromanager, because all the
little things add up when it comes to serving and pleasing his customers.
“Attention to detail? This is what we do,” he says, crediting his fellow
“dreamers and schemers” who work with him for sharing his vision and corporate
culture — most notably his wife, Elaine, to whom he’s been married for most of
the last 45 years. (They briefly divorced but remarried.) Among her duties is
overseeing special events for the company.
Mr. Wynn leans on Elaine figuratively and literally, often throwing an arm
around her as she guides him through the property; a degenerative eye disease is
causing him to go progressively blind.
“What I’ve realized in the years that I’ve been married to him is that if you
don’t share his life, you get left behind,” says Ms. Wynn, who is a member of
the Wynn Resorts board. “A guy like Steve doesn’t mellow out. He still has his
explosions. But they pass quickly.”
“Steve is an Aquarius; his feet are off the ground,” she says. “The thrill for
him is still creating. He loves the design element of this, and he is quite
brilliant at inspiring the staff.”
MR. WYNN first came to Las Vegas as a young boy with his father, Mike Wynn, an
East Coast bingo parlor operator and a compulsive gambler. After his father
died, Mr. Wynn and his new bride, Elaine Pascal, a former Miss Miami Beach, took
over the bingo business. Steve called out the numbers; Elaine counted the cash.
The Wynns eventually made their way to Las Vegas, where, in 1967, Mr. Wynn
bought a 3 percent stake in the Frontier casino. Three months later, several
partners were accused of being fronts for a group of Detroit mobsters. Mr. Wynn
was cleared of any mob connections in the investigation, which resulted in some
convictions of partners and led to the sale of the Frontier to Howard Hughes.
With the help of his mentor, E. Parry Thomas (Roger Thomas’s father), Mr. Wynn
got a second chance. Mr. Thomas, who headed the only bank willing to lend money
to casinos at the time, backed Mr. Wynn in some early land deals and set him up
in a liquor distributorship. Mr. Thomas became known as a main conduit for the
Teamster pension fund money that was pumped into the city during the Jimmy Hoffa
era.
Later, again with Mr. Thomas’s counsel, Mr. Wynn started accumulating stock in
the publicly traded company Golden Nugget, owner of what was then a rundown
casino in downtown Las Vegas. Over time, he staged a takeover of the company,
eventually renovating and expanding the casino. His burgeoning profile subjected
him to repeated and routine regulatory investigations for possible ties to
organized crime, all of which, Mr. Wynn is quick to point out, found him to be
squeaky clean.
He later built a Golden Nugget in Atlantic City, before selling that and turning
his focus to Las Vegas to build the Mirage. The Mirage’s popularity ignited a
new boom here, and Mr. Wynn followed up with the Treasure Island.
His pièce de résistance was the Bellagio, a $1.6 billion Italianate resort that
opened in 1998. It featured luxury retailers, high-end restaurants and a gallery
of art collected by Mr. Wynn. It became the linchpin of Mirage Resorts, a
publicly traded company with Mr. Wynn at the helm.
But by early 2000, Mirage’s stock was getting clobbered. Investors were alarmed
at ballooning costs, an expensive development on the Gulf Coast and Mr. Wynn’s
sometimes odd behavior, which included serenading Wall Street analysts with show
tunes.
MGM Grand made a bid for Mirage — whether it was a hostile or friendly overture
has been a point of contention between the two sides — eventually agreeing to
buy the company for $4.4 billion and to assume about $2 billion of Mirage debt.
Mr. Wynn was 58 at the time, and he walked away from the deal with about $500
million. He could have retired and lived comfortably off of his winnings, but,
ever the entrepreneur, he began staging his comeback.
Even before the Mirage-MGM sale closed, Mr. Wynn had agreed to buy the old
Desert Inn, a beaten-down Strip property, for $270 million. He spent a further
$70 million or so snapping up nearby homes so that he could create a golf
course. Then he snared a coveted casino license in Macao.
When Wynn Resorts went public in 2002, Mr. Wynn says, he had about $250 million
invested in the company. Since then, he has received about $300 million in
distributions from his 24 percent stake, which is currently worth about $2.3
billion.
Taking some not-so-subtle jabs at his competitors, he defends his current
projects as being well within his comfort zone. “We didn’t overreach. We’re not
building 12 hotels at once,” he states, his voice again rising. “I think we’ve
bitten off something we can chew. How it shakes out, only time will tell.”
THESE days, there are any number of casinos here offering deluxe rooms,
restaurants with name-brand chefs, Rodeo Drive-equivalent shopping, steakhouses,
booming nightclubs and, of course, the latest must-have: an all-day pool club
party with a D.J.
“At this point, everyone has essentially the same product,” says Anthony Curtis,
who publishes the Las Vegas Advisor, a newsletter. “So the trick is finding a
way to differentiate yourself.”
Mr. Curtis is sitting on a lounge chair at the edge of the “Brazilian Pool” at
the Rio casino hotel. Exotic dancers from the Sapphire Gentlemen’s Club play
topless volleyball in the pool with men who pay a $30 cover charge ($10 for
women). Everybody needs a gimmick, concludes Mr. Curtis.
Indeed, Las Vegas may need all the gimmicks it can find.
The number of visitors through May was flat compared with last year, but hotels
and casinos are offering discounts on room rates to attract tourists. Analysts
at Citigroup estimate that room rates fell 12.4 percent in the second quarter
and 18.4 percent in the early part of the third quarter, compared with the same
periods last year.
Still, those visitors are gambling less; wagering revenues on the Strip are down
5.6 percent this year through May, according to the Las Vegas Convention and
Visitors Authority.
Operators here say they’re seeing a significant difference between the low- and
middle-end casinos and those catering to wealthier consumers. MGM, which owns
the high-end Mirage and Bellagio as well as casinos like Excalibur and Circus
Circus, which cater to less affluent travelers, says its overall revenue per
room on the Strip fell 4 percent in the first quarter.
“Our lower-end properties were down much lower,” says James J. Murren, MGM’s
president and chief operating officer. “They were 5 percent to 12 percent below
a year ago.”
Several projects here, meanwhile, face uncertain futures as they struggle to
secure financing in one of the worst credit crises in decades. Deutsche Bank,
for instance, is foreclosing on the $3.5 billion Cosmopolitan casino after the
New York developer Ian Bruce Eichner defaulted on a $760 million loan.
MGM has a joint venture to build CityCenter with Dubai World, the Middle Eastern
investment fund, which put $2.7 billion into the project. They’re now trying to
raise a further $3 billion. Analysts and investors say they’re worried about
MGM’s unsold condominiums because the condo market has been hit particularly
hard in Las Vegas.
Amid such uncertainty, the city’s push over the last two decades to diversify is
also providing cause for worry. About 59 percent of the Strip’s revenue now
comes from nongambling activities like restaurants, hotels and leases on retail
space, compared with 42 percent in 1990, says William Eadington, director of the
Institute for the Study of Gambling and Commercial Gaming at the University of
Nevada, Reno.
That’s one reason the big gambling companies are feeling this economic downturn
more than they have in the past. “What we’re seeing is discretionary spending
take a hit,” Mr. Eadington says. “People may still come to Vegas, but they don’t
have to spend $300 a plate on a dinner or hotel room.”
With the Encore opening about five months away, Mr. Wynn continues to wave off
fears of an economic downturn. Instead, he launches into a long conversation
about politics and foreign affairs, having just returned from a weekend at the
secretive Bohemian Grove gathering in California. There, he explains, he
interacted with such political heavyweights as George P. Shultz, Henry A.
Kissinger and Colin L. Powell.
When asked where he fit in, exactly, with that crowd, the showman, ever
self-aware, spreads his hands and laughs.
“Me?” he asks, thumping his chest. “I’m over here hustling craps!”
The Chips Are Down in
Vegas, but Steve Wynn Is Betting Big, NYT, 3.8.2008,
http://www.nytimes.com/2008/08/03/business/03wynn.html
Jobless
Rate Climbs to 5.7%
as 51,000 Jobs Are Lost in July
August 2,
2008
The New York Times
By LOUIS UCHITELLE
The
unemployment rate spiked again in July, to 5.7 percent, its highest level in
more than four years and a strong signal that come Election Day millions of
Americans will still be hunting for work.
“We are not seeing a catastrophic collapse in the job market, like you often see
in recessions,” said James Glassman, senior domestic economist for JPMorgan
Chase. “What we are seeing instead is a steady hemorrhaging of jobs, and that is
going to continue until housing stabilizes and stops dragging down the rest of
the economy.”
The nation’s employers cut their payrolls for the seventh consecutive month,
this time by 51,000 jobs, the government reported Friday. For millions still at
work, hours were reduced, a hidden form of unemployment, and the average raise
was less than enough to keep up with inflation.
The steady erosion in payrolls — 463,000 jobs have disappeared since January —
cut across nearly every sector in July. Teenagers, 16 to 19, trying to land
work, were particularly hard hit. Their unemployment rate, 20.3 percent, up 2.2
percentage points in just a month, was the highest since 1992, contributing
significantly to the jump in the overall unemployment rate. That rate jumped
from 5.5 percent in June and 5 percent in April.
“Parents don’t push their kids to go to work in good times,” Mr. Glassman said,
“but they probably are doing so now with gasoline and food prices squeezing
family budgets.”
The weak jobs report and the Commerce Department’s finding on Thursday that the
economy was growing sluggishly, at best, led Senator Barack Obama, the
presumptive Democratic presidential candidate, to declare in a stump speech in
Florida that “anxieties are getting worse, not better,” for many families.
Senator John McCain, the presumptive Republican candidate, said the latest jobs
report was “a reminder of the economic challenges we face.”
The Bush administration offered a more upbeat assessment. “We are concerned
about continued job losses,” Elaine L. Chao, the labor secretary, said in a
statement, but “the long-term fundamentals of the economy remain solid.”
The Federal Reserve’s policy makers, who have cut the key short-term interest
rate they control to a low 2 percent, in an effort to stimulate the economy, are
almost certain to leave the rate at that level when they meet in Washington on
Tuesday.
Neither the jobs report nor the persistently weak economic growth suggests that
the surge in fuel and food prices will spread soon to a multitude of other items
— a prospect that would push the Fed to raise rates to suppress inflation.
“If you are the Federal Reserve, this jobs report might even be enough to
convince you to cut rates again,” said Jared Bernstein, a senior economist at
the labor-oriented Economic Policy Institute.
The weak economy coincides with a sharp increase in labor productivity in the
second quarter, which helps to explain why employers have been shedding workers.
The latter are increasingly producing more in a day’s work than their employers
can sell. That is partly because their employers prod them to do so, or
introduce labor-saving devices.
In either case, employers are laying off excess staff or reducing their hours or
holding back on weekly raises, which rose at an annual rate of only 2.8 percent
in July for the typical white-collar or blue-collar worker. That is well below
the inflation rate of more than 4 percent.
The layoffs and staff cutbacks were evident throughout the private sector, with
only health care, oil production and computer design showing more employment,
the Bureau of Labor Statistics reported. Manufacturing and construction lost the
most workers, a total of 57,000. Nearly 30,000 temporary workers across many
industries also disappeared.
“When the economy barely grows but labor productivity does, you are inevitably
putting people out of work,” said Jan Hatzius, chief domestic economist at
Goldman Sachs.
In that environment, the percentage of 16-to-19-year-olds holding jobs fell to
32.5 percent in July from 33.1, the lowest level since the Bureau of Labor
Statistics started collecting this data, in 1948.
Young people often seek work in retailing, construction and food service, and
all of these industries have either been shedding workers or not adding them at
their usual pace, said Tom Nardone, an assistant commissioner at the bureau.
Teenagers were not the only ones hit. The unemployment rate for men in their
prime working years, 25 to 54, jumped three-tenths of a point, to 4.9 percent.
James McCambridge, a 54-year-old widower living in Park Ridge, Ill., with his
three children, is among the victims. In May, he lost his $120,000-a-year job as
a salesman for the Chicago Convention and Tourism Bureau and has been painting
houses since then while responding to 100 job postings on the Internet — so far
without success.
“Painting helps me to blow off some energy, and some anger,” he said. Next week,
he plans to apply for a charter school teaching job on the West Side of Chicago.
He would accept it, he said, even though the $53,000 salary is less than half
his old pay. “It will mean major lifestyle changes for my family,” he said.
Dino Helke, 38, of Dayton, Ohio, on the other hand, has joined the swelling
ranks of those who would like to work but are discouraged from doing so or
cannot get full-time employment.
Add these people to the ranks of the officially unemployed, like Mr.
McCambridge, and the 5.7 percent unemployment rate swells to 10.3 percent, up
from 9.9 percent in June, the bureau reported.
Mr. Helke made $80,000 a year, including overtime, as a production worker at a
General Motors plant near his home in Dayton until the plant was shut recently
and he was laid off. Since then, he said, he has been unable to find work that
pays more than $8 an hour, and he prefers not to work for that wage.
“Who can do anything with so little money?” he said.
Jobless Rate Climbs to 5.7% as 51,000 Jobs Are Lost in
July, 2.8.2008,
http://www.nytimes.com/2008/08/02/business/02econ.html
News
Analysis
Automakers Race Time
as Their Cash Runs Low
August 2,
2008
The New York Times
By BILL VLASIC
DETROIT —
The downturn in the American auto industry is rapidly becoming a full-blown
fight for survival among Detroit’s big automakers.
With the combination of high gas prices and a weak economy crippling vehicle
sales, the resources of General Motors and the Ford Motor Company are being
stretched to the limit.
Both companies have undergone major revampings in recent years, yet they
continue to post huge losses. And even as they burn through their cash reserves
and slash more costs to stay afloat, the future looks tenuous.
In the latest sign of the deepening troubles, G.M. reported a stunning
second-quarter loss of $15.5 billion on Friday because of a continuing fall in
United States sales and charges for job cuts, plant closings and the falling
value of trucks and sport utility vehicles.
That followed a loss of $8.7 billion reported last week by Ford. Overall sales
fell by 13 percent in July.
Chrysler, the smallest of the three Detroit auto companies, is privately owned
by Cerberus Capital Management and does not report financial results.
The losses stem from a freefall in sales and a shift by consumers away from
bigger vehicles that were once G.M.’s and Ford’s most profitable products.
G.M. and Ford had expected economic conditions to improve in the second half of
this year, but now are forecasting an even more dismal sales environment.
Neither company appears in immediate danger of failure. But analysts say Detroit
is in a race against time.
“Things are pretty bad, and the river is getting deeper, faster and wider,” said
David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.
“The question is, can they get to other side before the cash runs out?”
American automakers have decided — critics would say, belatedly — to shift
production from trucks and sport utility vehicles to smaller, more gas-efficient
cars, including hybrids. But it takes time to switch equipment for production.
And it is unclear whether the automakers have sufficient cash to remain solvent
until their new vehicle lines are ready for customers.
The overall United States auto industry is headed for its worst year in more
than a decade. Sales so far this year have fallen 10 percent from 2007,
including a 13 percent decline in the month of July.
The market has been tough for nearly every automaker including Toyota, whose
sales fell 11.9 percent in July. But the Detroit companies have been hit the
hardest.
Sales at G.M. dropped 26.1 percent in July, 14.7 percent at Ford, and 28.8
percent at Chrysler. And the three companies’ combined United States market
share hit an all-time low of about 43 percent during the month.
G.M. ended the quarter with $21 billion in cash reserves, which would be
considered a healthy financial cushion in normal times.
But the automaker is burning through more than $1 billion in cash each month, a
worrisome indicator that has prompted some investors to speculate about the
potential for G.M. to go bankrupt. One indication of a loss of faith is that the
company’s bonds were trading on Friday at 48 cents on the dollar.
Trying to fight such doubts on Wall Street and elsewhere, Rick Wagoner, G.M.’s
chairman, last month outlined a broad program of cost cuts, asset sales and debt
offerings intended to increase the company’s liquidity by $15 billion.
The moves temporarily calmed fears on Wall Street about a possible bankruptcy
filing, and injected a renewed sense of urgency among G.M. executives.
Compounding Detroit’s problems is the rush by consumers to buy small cars and
the collapse in sales of pickups and sport utility vehicles that historically
provided the bulk of the profits at G.M., Ford and Chrysler.
Ford last week announced that it would radically shift much of its North
American production from trucks to cars, and bring six of its European models to
the United States market.
G.M. had already laid plans to make more cars and car-based crossover vehicles,
while downsizing its truck production.
But the question facing Detroit is how it can continue to finance its operations
and product programs until the market rebounds and its new models hit the
showrooms.
“This is almost like evolution, and the survival of the fittest,” said Jesse
Toprak, chief industry analyst for the automobile research Web site Edmunds.com.
“They are on the right path to make fuel-efficient cars, but it’s going to take
time.”
G.M., Ford and Chrysler have already gone through wrenching revampings and
eliminated more than 100,000 manufacturing jobs in the United States since 2006.
The three companies are also in the process of cutting about 10,000 salaried
workers from their payrolls this year.
But even as they shrink their employment and close unneeded factories, the
automakers still need enormous capital budgets to develop new products. G.M. and
Ford have also invested heavily to build their businesses in global markets like
China, Brazil and India.
And while they have successfully expanded their international operations,
Detroit is paying a heavy price for relying on trucks and S.U.V.’s in the United
States.
Sales of truck-based products have fallen 23 percent this year at G.M. and 19
percent at Ford. Both companies have drastically cut production of those
vehicles, and temporarily laid off thousands of workers to reduce inventories.
However, the companies have been forced to take big financial charges to account
for the declining value of used S.U.V.’s coming off leases. Chrysler is dropping
leases entirely and G.M. and Ford will be scaling back their lease programs.
Analysts said the pullback on leases, which helped fuel the growth of the market
previously, could further hurt sales going forward.
G.M.’s quarterly loss reported Friday, the third-worst in its 100-year history,
encapsulated the range of troubles it faces.
The company’s revenues in North America declined by a third, and it lost $4.4
billion on operations. Because of the decline in profitable truck sales, G.M.’s
revenue-per-unit sold dropped almost $4,000 from the first quarter of this year.
The company also took write-downs of $9.1 billion. Included in the charges were
$3.3 billion to buy out 19,000 of its hourly workers and $2.8 billion related to
the bankruptcy of Delphi, its former parts-making division.
“I do not see any panic here,” Ray Young, G.M.’s chief financial officer, said
in an interview Friday. “I do see more of a resolve. We need to take these
actions and focus on what we can control.”
Frederick A. Henderson, G.M.’s president, said the company was accelerating
plans to bring more fuel-efficient vehicles to market. The key, he said, was to
increase G.M.’s sales and revenues as quickly as possible.
“The most important thing we need to do is rebuild our revenue base,” Mr.
Henderson said. “We understand the market is decidedly weaker, but it is what it
is.”
Automakers Race Time as Their Cash Runs Low, NYT,
2.8.2008,
http://www.nytimes.com/2008/08/02/business/02gm.html
More
Arrows Seen
Pointing to a Recession
August 1,
2008
The New York Times
By PETER S. GOODMAN
The
American economy expanded more slowly than expected from April to June, the
government reported Thursday, while numbers for the last three months of 2007
were revised downward to show a contraction — the first official slide backward
since the last recession in 2001.
Economists construed the tepid growth in the second quarter, combined with a
surge in claims for unemployment benefits, as a clear indication that the
economy remains mired in the weeds of a downturn. Many said the data increased
the likelihood that a recession began late last year.
The next major piece of data comes Friday, when the government is to release its
monthly snapshot of the job market. Analysts expect the report to show a loss of
75,000 jobs, signifying the seventh straight month of declines.
“We already knew the economy was weak, and now you have both a negative growth
number coupled with job losses,” said Dean Baker, a director of the liberal
Center for Economic and Policy Research. “There’s a lot of real bad times to
come.”
President Bush zeroed in on the positive growth in the second quarter — a 1.9
percent annual rate of expansion, compared with an anticipated 2.3 percent rate.
That follows growth of 0.9 percent in the first quarter. He claimed success for
the $100 billion in tax rebates sent out by the government this year in a bid to
spur spending, along with $52 billion in tax cuts for businesses.
“We got some positive news today,” the president said in West Virginia,
addressing a coal industry trade association. “It’s not as good as we’d like it
to be but I want to remind you a few months ago, there were predictions, and —
that the economy would shrink this quarter, not grow.”
But the snapshot of disappointing economic growth released by the Bureau of
Economic Analysis on Thursday morning provided no comfort to Wall Street, where
a broad sell-off commenced. By the end of business, the Dow Jones industrial
average was down 206 points to close at 11,378, a drop of nearly 2 percent.
The rout may have been explained in part by significant changes the government
made to historical data on the profitability of American businesses. According
to the revised numbers, corporate profits earned in the United States by
American companies rose much more swiftly than previously recorded from 2005
through 2007, making the recent decline appear much steeper.
That the economy grew at all this spring is a testament to two bright spots —
increased consumer spending fueled by the tax rebates, and the continuing
expansion of American exports.
Consumer spending, which amounts to 70 percent of the economy, grew at a 1.5
percent annual rate between April and June, after growing at a meager 0.9
percent clip in the previous quarter.
“Clearly the tax rebates did give some oomph to the economy,” said Robert
Barbera, chief economist at the research and trading firm ITG.
Exports expanded at a 9.2 percent annual pace in the second quarter, up from 5.1
percent in the first three months of the year. Foreign sales have been
lubricated by the weak dollar, which makes American-made goods cheaper on world
markets.
Adding to the improving trade picture, imports dropped by 6.6 percent, as
Americans tightened their spending. Imports are subtracted from economic growth,
so the effect was positive.
Over all, trade added 2.42 percentage points to the growth rate from April to
June. Without that contribution, the economy would have contracted.
But many economists are dubious that consumer spending and exports can keep
growing robustly in the face of substantial challenges that are now entrenched
in the United States and are gathering force in many other major economies.
Japan and much of Europe appear headed into downturns, damping demand for
American-made products.
“The trade improvement doesn’t look sustainable,” said Jan Hatzius, an economist
at Goldman Sachs in New York. “In an environment where the global economy is
clearly slowing, you’re not being able to get that export growth in future
quarters.”
Economists said the sharp drop in imports was largely a function of retailers
delaying wholesale purchases in the midst of acute fears about declining
American spending power — a dynamic that will eventually give way to new
spending.
“This reflects sheer panic by retailers about what the next Christmas buying
season is going to look like,” said Mark Zandi, chief economist at Moody’s
Economy.com.
The tax rebates have mostly been distributed. While the checks appear to have
bolstered spending, they have failed to generate activity that is likely to
carry on even after the cash has cycled through the economy, say economists.
“They slowed the downturn, but it’s clear they didn’t really provide any spark,”
Mr. Baker said.
Employers have not hired much, even as shopping has picked up, cognizant that
the rebate checks are a one-time event. Businesses have not shelled out for new
machinery. Indeed, investment for equipment fell 3.4 percent in the spring
months, dropping for the second consecutive quarter.
Rather than stockpile more goods, businesses generally tried to sell what they
already had on hand. Business inventories declined in the second quarter by $62
billion, a factor that shaved nearly 2 percent off the overall rate of economic
growth.
As the impact of the rebate checks continues to wear off in the coming weeks,
households will be left confronting the same set of troubles that have been
dragging on the economy for many months: a deteriorating job market, rising
prices for food and gas and plummeting housing values.
Tens of millions of Americans have in recent years borrowed aggressively against
the value of their homes to finance trips to the mall, dinners out, vacations
and new cars. As housing values continue to fall, that artery of finance is
rapidly constricting.
Since last summer, when the mortgage crisis provoked panic on Wall Street and
many Americans saw access to credit diminish, consumer spending on so-called
durable goods like appliances, cars and furniture has been sliding. This
spending barely grew in the last three months of 2007, fell at a 4.3 percent
clip in the first three months of this year and dropped at a 3 percent pace in
the second quarter.
Meanwhile, joblessness is growing, with new unemployment claims filed in the
week that ended July 26 swelling to 448,000 — up 44,000 from the previous week.
And the purchasing power of wages is being eroded by higher prices for food and
energy. Prices paid for goods by Americans surged at a 4.2 percent annual rate
in the second quarter, after climbing at a 3.5 percent annual clip over the
first three months of the year, according to the report on Thursday.
Higher prices, fewer paychecks and less household wealth: It is not a recipe for
free-spending abandon.
“Now, consumers have to sing for their supper,” said Alan D. Levenson, chief
economist at T. Rowe Price Associates in Baltimore. “Spending growth is slowing
and income growth is slowing.”
Democrats in Congress have begun devising a second package of measures to
stimulate the economy, centered on aid to struggling states. But the Bush
administration has resisted such proposals, and the political stakes of a
presidential election year make compromise especially tricky.
The Federal Reserve has lowered interest rates in recent months to encourage
businesses to invest and households to spend. But with concern growing about
high prices — a trend fueled by lower interest rates — the Fed may not be able
to deliver another round, even if growth slows further.
“Looking forward, I don’t think there’s anything to change the lousy trend for
the domestic economy,” said Joshua Shapiro, chief domestic economist at MFR, a
research firm.
With the last three months of 2007 now officially revised down — from an initial
0.6 percent annual rate of growth to a 0.2 percent decline — many economists
expect that these tough times will officially be declared a recession. That
label is affixed by a panel of economists at a private research institution, the
National Bureau of Economic Research, though typically well after the fact.
President Bush derided such characterizations, along with the academic
discipline known as the dismal science.
“You can listen to these economists,” Mr. Bush said in West Virginia. “On the
one hand, they’ll say, and then on the other hand. If they had three hands, it
would be on the one hand, the second hand and the third hand.”
But for many, the old debate about whether this is a recession has become purely
academic, and eclipsed by the troubles at hand.
“All my cousins already know it’s a recession,” said Mr. Barbera, the ITG
economist. “They have the luxury of not having Ph.D.’s. The auto companies are
in dire straits, the airlines have been shutting down flights and firing pilots.
The truckers are in near hysteria because of the price of diesel. If you round
up the usual suspects, this is a bad circumstance. And the word we usually use
for a bad circumstance is a recession.”
Michael M. Grynbaum and Floyd Norris contributed reporting.
More Arrows Seen Pointing to a Recession, NYT, 1.8.2008,
http://www.nytimes.com/2008/08/01/business/01econ.html?hp
Profit
Data May Explain U.S. Gloom
August 1,
2008
The New York Times
By FLOYD NORRIS
Corporate
profits earned in the United States rose much more rapidly from 2005 through
2007 than had been earlier reported, making the subsequent fall seem even more
precipitous, government figures showed Thursday.
The revised figures may help to explain the sense of pessimism that has been
reported in surveys of consumers and business executives, said Robert Barbera,
the chief economist of ITG, an economic research company. Pointing to the
previous profit figures, some commentators had suggested there was more gloom
than the economic data seemed to justify.
First-quarter profits earned in the United States by American companies have
fallen 18 percent from their peak, the revised figures show, rather than the 11
percent previously reported.
That decline has been partly offset by soaring overseas profits for American
companies. On Thursday, the government raised its estimate of those profits in
the first quarter, even as it reduced its estimate of profits earned in this
country.
By the latest measure, first-quarter overseas profits were the highest they have
ever been for American companies — up 25 percent from the third quarter of 2006,
when domestic profits peaked.
Overseas profits, while important to shareholders, do not reflect the
performance of the American economy or the prospects for employment in this
country. Surveys show that both business executives and consumers expect
declines in jobs in America in coming months.
The figures show that more than a third of profits earned by American companies
are now made overseas. In the first three months of this year, the proportion
was 35 percent, nearly twice what it was a decade ago.
The revised data shows that profits of American companies are down 7 percent
over all, rather than the 2 percent previously reported.
The revised figures were contained in the revisions of the gross domestic
product numbers issued Thursday by the Bureau of Economic Analysis, a part of
the Commerce Department.
Brent R. Moulton, the bureau’s associate director for national economic
accounts, said the new figures reflected preliminary data from the Internal
Revenue Service for 2006, and revised figures for 2005. For 2007 and 2008, the
changes reflect assorted revisions in estimates of the performance of various
industries.
Because the figures are largely based on tax returns, the eventual totals are
used as clear indicators of overall economic performance of American businesses,
both privately owned companies and those owned by shareholders.
The revised figures indicate that in the third quarter of 2006, when domestic
profits of American companies peaked, the annual rate of profits was $1.27
trillion, $100 billion more than had previously been estimated. That figure fell
to $1.04 trillion in the first quarter of this year, the lowest rate since the
third quarter of 2005.
By contrast, the overseas profits of American companies came in at an annual
rate of $557 billion in the first quarter of 2008, an increase of more than $100
billion from the 2006 quarter.
The profit figures in the government report represent operating profits, not
changes in the value of assets. That policy means that the profit figures for
financial industries estimated by the government are now far higher than the
ones being reported to shareholders. Mr. Moulton said that write-downs of the
value of securities, or write-offs of bad loans — which have cost banks tens of
billions of dollars — are not included.
Were they included, it seems certain that the decline in profits earned in the
United States by American companies would be even larger than was indicated by
the figures released Thursday.
Profit Data May Explain U.S. Gloom, NYT, 1.8.2008,
http://www.nytimes.com/2008/08/01/business/economy/01profit.html
Exxon’s
Second-Quarter Earnings
Set a Record
August 1,
2008
The New York Times
By CLIFFORD KRAUSS
HOUSTON —
Exxon Mobil reported the best quarterly profit ever for a corporation on
Thursday, beating its own record, but investors sold off shares as oil and
natural gas prices resumed their recent decline.
Record earnings for Exxon, the world’s largest publicly traded oil company, have
become routine as the surge of oil prices in recent years has filled its
coffers. The company’s income for the second quarter rose 14 percent, to $11.68
billion, compared to the same period a year ago. That beat the previous record
of $11.66 billion set by Exxon in the last three months of 2007.
Exxon’s profits were nearly $90,000 a minute over the quarter, but it was less
than Wall Street had expected. Exxon’s shares fell 4.6 percent, to close at
$80.43. (The company calculates that it pays $274,000 a minute in taxes and
spends $884,000 a minute to run the business.)
The disappointment from investors is bound to put added pressure on Exxon
Mobil’s chairman and chief executive, Rex Tillerson, to search for new fields in
politically precarious areas of Africa and the Middle East.
The sell-off in Exxon stock, as well as other oil company stocks, continued a
trend of recent weeks as oil and natural gas prices have fallen sharply from
record levels. But investor disappointment was also a response to problems that
surfaced in the company’s report, particularly a 10 percent drop in oil
production and a 3 percent decline in natural gas production from the second
quarter of 2007.
The production decrease, the second quarterly drop in a row, was viewed with
concern by energy analysts, especially since the company spent $7 billion to
find and produce from new fields, nearly 40 percent more than in the same
quarter last year.
“It raises the question of whether the company has been underinvesting the last
few years,” said Brian Youngberg, an energy analyst at Edward Jones, an
investment firm. “High commodity prices are driving the record earnings, not
growth in production volumes of oil and gas.”
Crude oil prices in the second quarter averaged more than $124 a barrel, 91
percent higher than the same quarter in 2007, according to a recent report by
Oppenheimer & Company, an investment bank. Natural gas prices averaged $10.80
for every thousand cubic feet, up 43 percent from the quarter a year ago. After
spiking even higher in early July, prices settled on Thursday at $124.08 for oil
and about $9.18 for natural gas.
Despite its production problems, Exxon earned $10 billion in the quarter from
exploration and production, up from $6 billion in the same period a year ago.
But the company’s $1.6 billion in profit from refining was less than half that
in last year’s quarter because of lower worldwide refining margins. Earnings
from its chemical business of $687 million were down $326 million from last
year.
Company officials said they were working hard to increase production with new
projects in Africa, the Middle East and the Gulf of Mexico. The company reported
that it intended to disburse $125 billion in capital spending over the next five
years in an effort to produce more oil and natural gas.
Royal Dutch Shell, Eni and Repsol, three of Europe’s largest oil companies, also
reported strong profits on Thursday, although their production results
disappointed analysts. Shell reported its output had declined by 1.6 percent in
the quarter, and Repsol’s production fell by nearly 20 percent. Eni’s production
was slightly higher.
Nevertheless Shell, Europe’s largest oil company, reported a 33 percent increase
in second-quarter profit, to $11.56 billion, from $8.67 billion in the period a
year ago.
Oil companies are under pressure to find new reserves as their traditional
fields age and they face increasing competition from state-run oil companies in
Russia and the Middle East. Shell is also looking to make up for production lost
in Nigeria, where militants attacked an offshore production vessel in June, and
in Russia, where it had to sell its share in the Sakhalin Island oil and natural
gas project to the state-controlled energy company Gazprom last year.
Adding together the output of all the major international oil companies,
including Chevron, Conoco, BP, Shell, Total and Exxon, this appears to be the
fourth straight quarter of production declines, according to Barclays Capital
analysts. Barclays said the total decline might exceed 600,000 barrels a day,
reflecting the difficulties the oil companies had in gaining access to new
regions to make up for the decline of mature fields. (Total will report its
results on Friday.)
Exxon’s oil and natural gas production tumbled in the second quarter because of
Venezuela’s expropriation of Exxon’s assets last year, labor and political
strife in Nigeria and declining production in many fields around the world.
Meanwhile, under the terms of Exxon’s contracts, governments in Russia, Angola
and other places where it operates gained a larger share of production from
Exxon and other international companies as crude oil prices rose. With prices
now declining, Exxon may show higher production levels in future quarters even
if profit is not as robust.
Democrats in Congress were quick to criticize Exxon’s profit, hoping that the
resentment felt by many drivers over high gasoline and diesel prices could help
them in an election year.
“Inside the boardrooms at the major oil companies, it’s Christmas in July,” said
Senator Charles E. Schumer, Democrat of New York. “What’s shocking is that Big
Oil is plowing these profits into stock buybacks instead of increasing
production or investing in alternative energy.”
The company purchased $8 billion of its own shares over the quarter, reducing
shares outstanding by 1.7 percent.
Kenneth Cohen, an Exxon vice president, said oil companies needed the profits to
search for more oil and gas. He also challenged Congress to open up waters in
the Gulf of Mexico and off the Atlantic and Pacific coasts to drilling, as well
as other federal lands where drilling is prohibited.
“Our Congress needs to give us access to those areas that are currently off
limits to the industry,” he said.
Exxon’s income of $2.22 a share compared with $10.26 billion, or $1.83 a share,
in the same quarter a year ago. Revenue rose 40 percent, to $138.1 billion, from
$98.4 billion in the quarter a year ago.
Julia Werdigier contributed reporting from London.
Exxon’s Second-Quarter Earnings Set a Record,
NYT,
1.8.2008,
http://www.nytimes.com/2008/08/01/business/01oil.html
|
